| Fri 9 Mar 2012, 9:00 | | OML - Old Mutual Plc - Old Mutual plc preliminary results for the year ended |
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OLOML
OML - Old Mutual Plc - Old Mutual plc preliminary results for the year ended
31 December 2011 a year of strategic and operational delivery
OLD MUTUAL PLC
ISIN: GB0007389926
JSE SHARE CODE: OML
NSX SHARE CODE: OLM
ISSUER CODE: OLOML
Old Mutual plc
9 March 2012
Old Mutual plc preliminary results for the year ended 31 December 2011
A year of strategic and operational delivery
Financial Summary(1) 2011 Movement
Adjusted operating profit before tax (IFRS basis)* GBP1,515m 14%
Adjusted operating earnings per share (IFRS basis)** 15.7p 13%
Net client cash flows - LTS GBP3.2bn GBP(1.1)bn
Net client cash flows - USAM(2) GBP(4.2)bn GBP4.0bn
Funds under management GBP267.2bn (5)%
Group return on equity 14.6% +40bps
Dividend - Final 3.5p 21%
- Interim 1.5p 36%
Total profit after tax attributable to equity
holders of the parent GBP667m +GBP949m
Adjusted Group MCEV per share 194.1p (8.1)p
Surplus generated(3) GBP986m +GBP238m
1) Except for total profit after tax and adjusted Group MCEV per share, all
figures in the table are in respect of core continuing businesses only and the
2010 comparatives have been restated accordingly. Nordic was classified as a
discontinued business in 2011 as it is subject to a sale agreement. Percentage
movements are shown on a constant currency basis.
2) USAM excludes NCCF from Dwight, Lincluden and OMCAP, which were sold or
held for sale at 31 December 2011.
3) Surplus generated is the adjusted net worth of the operating business units
not required to support capital requirements.
Strong financial performance
- Profits up 14% at GBP1,515 million
- EPS up 13% to 15.7p
- Ordinary dividend up 25% to 5.0p
Positive foundation for growth
- Selected, high-return emerging markets: increasing Africa presence anchored
by three strong South African businesses
- Low-risk, modern European business: leading UK platform, GBP20.1 billion FUM
at 29 February, well positioned for Retail Distribution Review
- Our FGD surplus of GBP2.0 billion and liquidity headroom of GBP1.5 billion
enables us to invest for profitable growth and reward shareholders
Strategic activities continue to pay dividends for shareholders
- Disposal of Nordic and Finnish businesses; closure of Switzerland to new
business; disposal of Dwight and OMCAP
- Proposed special dividend of 18p; 7 for 8 share consolidation
- On track to meet or exceed all our 2012 targets
Julian Roberts, Group Chief Executive, commented:
"This has been a year of strategic and operational delivery for Old Mutual
despite the tough macro-economic environment. We have produced strong
financial results and have taken significant steps in executing our strategic
plan.
"Old Mutual has a strong base from which to drive growth. We have exposure to
fast growing emerging markets, which we expect to continue to perform well in
2012, and specialist, low-risk businesses in Europe where we also anticipate
growth albeit in tougher market conditions. These are markets in which we have
significant expertise and where we see the opportunity for profitable growth,
and together with our financial strength and flexibility, will allow us to
continue to deliver value to our shareholders."
Patrick O`Sullivan, Chairman, commented:
"Old Mutual now has a stronger balance sheet, a simpler structure and a
greater strategic focus. These changes have led to significant value creation
for our shareholders and are down to the hard work of this company`s
management and staff, and are reflected in a Total Shareholder Return of 160%
over the past three years."
Old Mutual plc
Preliminary results for the year ended 31 December 2011
Enquiries
External Communications
Patrick Bowes UK +44 (0)20 7002 7440
Kelly de Kock SA +27 (0)21 509 8709
Media
William Baldwin-Charles +44 (0)20 7002 7133
Sponsor:
Merrill Lynch SA (Pty) Limited
Notes
Unless otherwise stated, wherever the terms asterisked in the Financial
Summary on the front page of this announcement are used, whether in the
Financial Summary, the Group Chief Executive`s Statement, the Group Finance
Director`s Review or the Business Review, the following definitions apply:
* For core life assurance and general insurance businesses, adjusted operating
profit is based on a long-term investment return, including investment returns
on life funds` investments in Group equity and debt instruments, and is stated
net of income tax attributable to policyholder returns. For the US Asset
Management business it includes compensation costs in respect of certain long-
term incentive schemes defined as non-controlling interests in accordance with
IFRS. For all core businesses, adjusted operating profit excludes goodwill
impairment, the impact of acquisition accounting, revaluations of put options
related to long-term incentive schemes, profit/(loss) on acquisition/disposal
of subsidiaries, associated undertakings and strategic investments, and fair
value profits/(losses) on certain Group debt movements but includes dividends
declared to holders of perpetual preferred callable securities. Bermuda, which
is non-core and Nordic and US Life which are discontinued and non-core, are
not included in adjusted operating profit.
** Adjusted operating earnings per share is calculated on the same basis as
adjusted operating profit. It is stated after tax attributable to adjusted
operating profit and non-controlling interests. It excludes income
attributable to Black Economic Empowerment trusts of listed subsidiaries. The
calculation of the adjusted weighted average number of shares includes own
shares held in policyholders` funds and Black Economic Empowerment trusts.
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 relating 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
out in its forward-looking statements. Old Mutual plc undertakes no obligation
to update any forward-looking statements contained in this announcement or any
other forward-looking statements that it may make.
Notes to editors:
A webcast of the presentation and Q&A will be broadcast live at 9:00am (GMT),
(10:00am (CET)/11:00am (South African time)) today on the Company`s website
www.oldmutual.com. Analysts and investors who wish to participate in the call
should dial the following numbers and quote the pass-code 693086#:
UK/International +44 (0)20 3140 0668
US +1 631 510 7490
Sweden +46 (0)8 5661 9353
South Africa +27 (0)11 019 7051
Playback (available for 14 days from 9 March), using pass-code 382367#:
UK/International +44 (0)20 3140 0698
US +1 877 846 3918
Copies of these results, together with high-resolution images and biographical
details of the executive directors of Old Mutual plc, are available in
electronic format to download from the Company`s website at www.oldmutual.com.
A Financial Disclosure Supplement relating to the Company`s Preliminary
Results can be found on the website. This contains key financial data for 2011
and 2010.
Foreign exchange rates
GBP/ZAR exchange rates
Average Closing
exchange exchange
rate rate
FY2011 11.64 12.56
FY2010 11.31 10.28
GBP/SEK exchange rates
Average Closing
exchange exchange
rate rate
FY2011 10.41 10.68
FY2010 11.14 10.42
GBP/EUR exchange rates
Average Closing
exchange exchange
rate rate
FY2011 1.15 1.20
FY2010 1.16 1.16
GBP/USD exchange rates
Average Closing
exchange exchange
rate rate
FY2011 1.60 1.56
FY2010 1.55 1.55
Group Chief Executive`s Review
Review of Operations
Introduction
A year of delivery
This has been a year of both operational and strategic delivery for Old
Mutual, including the sale of our Nordic operations which is not included in
the 2011 adjusted operating results. Our IFRS basis adjusted operating profit
(IFRS AOP or AOP) was up 14% due to improved trading and the operational
improvements implemented by management over the last few years. Group return
on equity (ROE) was up 40 basis points at 14.6%.
This excellent performance was delivered against a backdrop of testing macro
economic conditions and continued economic uncertainty in a number of our
markets. We have continued to focus on delivering our strategy and remain on
track to meet, and in some cases exceed, our 2012 targets.
The Group is in a strong financial position. At 31 December 2011, our FGD
surplus was GBP2.0 billion and we had total liquidity headroom of GBP1.5
billion. On 21 March we expect to receive GBP2.1 billion in cash from the
disposal of the Nordic business.
Streamlining and simplifying the business
In 2011, we made significant progress in delivering our strategy: to build a
long-term savings, protection and investment group by leveraging the strength
of our people and capabilities in South Africa and the rest of the world,
which will enhance value for both our custom ers and shareholders, and enhance
our overall ROE.
When we announced the strategy in March 2010, we undertook to create value for
both shareholders and policyholders. In 2011, we have made significant
progress in this regard. We continued to streamline and simplify our business:
- Concluded the sale of US Life for US$350 million;
- Closed Switzerland to new business;
- Agreed the sale of our Nordic business to Skandia Liv for GBP2.1 billion;
- Announced the sale of our Finnish business to OP-Pohjola Group; and
- Decided to consolidate our other European businesses under one management
team.
We continue to explore a partial IPO of the US Asset Management (USAM)
business in line with our stated strategy, but we remain focused on building
margins, improving investment performance and driving growth in the business.
While we have already taken considerable steps in restructuring the Group, we
will continue to evaluate the optimum shape of the business and will consider
all options in the pursuit of creating value for shareholders and
policyholders alike. We will continue to be guided by our strict criteria for
keeping businesses within the Group.
Meeting our targets
In March 2010, we set ourselves challenging targets: two thirds of the way
through our three year strategy, we have either met, exceeded or are well on
track to achieve these goals. We set ourselves a target for reducing GBP100
million of costs across the Group and at the 2011 year end had delivered
GBP111 million in run-rate savings. Our Long-Term Savings (LTS) business was
tasked with improving its ROE to between 16% and 18%; in 2011, it achieved an
ROE of 20% (18% including Nordic). We said we would reduce our Group net debt
by GBP1.5 billion by the end of 2012 and with the proposed disposal of the
Nordic business, we will achieve this target and now intend to repay debt of
GBP1.7 billion, having achieved a GBP0.6 billion reduction so far.
Focusing the business
Our strategic imperative is to become more customer focused and to leverage
our strengths across our businesses. We have refocused our LTS businesses to
ensure that they are aligned with customer needs and have identified four key
customer segments which we will serve: the Retail Mass market in the Emerging
Markets; the Retail Affluent market primarily in Europe and South Africa; the
International Affluent; and the Institutional market.
We are rolling out a measure of customer advocacy, the Net Promoter Score,
across our Group to monitor how satisfied our customers are with our service.
Our businesses in South Africa, the UK, Sweden and the Skandia International
business all won various awards in 2011 for superior customer service. Nedbank
successfully launched mobile banking in South Africa with 652,000 customers
already signed up.
We have continued to seek ways of leveraging our strengths across our
businesses. We are looking to roll out our Greenlight protection product into
more territories this year, following its successful launch into Mexico in
2011. Our tied agency force in Mexico has benefited from the expertise we have
in South Africa. We launched a new product into Colombia with South Africa
providing the back office servicing, information technology (IT) and product
support.
IT is an area where we see significant scope to gain efficiencies by using our
combined Group purchasing power, and we have undertaken two initiatives. We
outsourced the South African IT, voice and data infrastructure network
services of Old Mutual, Nedbank and Mutual & Federal (M&F) to Dimension Data,
and we expect to generate significant local savings for the operating
businesses over the next five years. In addition, we have a seven year deal
with T-Systems for them to provide IT support services for Old Mutual South
Africa and M&F. We will look at rolling out this agreement to other Emerging
Markets businesses, including Rest of Africa, Colombia and Mexico. We have
plans for further IT efficiencies and operational improvements as we apply
best practice techniques, remove duplication and improve delivery standards
and customer service.
We will continue our restructuring programme with USAM working to achieve the
required operating margin and net client cash flow (NCCF) targets and we will
invest in M&F to strengthen the franchise.
We have further strengthened our operational management team across the Group.
Ian Gladman, previously Co-Head of Financial Institutions, EMEA for UBS
Investment Bank, was appointed Group Strategy Director and a member of the
Group Executive Committee (GEC). As part of the strategy portfolio handover,
Don Hope has now stepped down from the GEC and will retire at the end of 2012.
Sue Kean was appointed Group Risk Officer and has joined the GEC; Ralph Mupita
has been appointed Chief Executive of LTS`s Emerging Markets business; Paul
Feeney, formerly head of distribution of BNY Mellon, has been appointed Chief
Executive of LTS`s Asset Management business; and Peter Todd has been
appointed Managing Director of M&F.
Looking forward
We now have an attractive and resilient business portfolio. We have three
excellent businesses in South Africa: the life and savings business of Old
Mutual; Nedbank; and M&F. We have significant presence in selected emerging
markets which have sizeable populations, under-penetrated financial services
markets and strong gross domestic product (GDP) growth. We also have
specialist, low-risk businesses in European markets, which includes the
leading platform in the UK. The new management team at USAM is addressing the
issues of margin, investment performance and growth.
While there has been a significant amount of change over the past two years,
we remain committed to building a long-term savings, protection and investment
Group and to drive and support Nedbank to become Africa`s most admired bank.
We will continue to put the customer at the centre of the business and provide
them with innovative, transparent and flexible products. We will maintain
tight control on costs; a disciplined approach to risk management, governance
and allocation of capital; we will seek to ensure that everything we do
improves the businesses we own and will provide value to our shareholders and
our customers.
Our vision, strategy and strategic priorities remain unchanged. We will
continue to deliver shareholder value by putting the customer first in
everything we do, building high performance businesses, sharing our core
competencies across the Group, embedding our culture of excellence and
simplifying the Group`s structure to unlock shareholder value.
Dividend
Given the continued progress in achieving our debt repayment programme, the
Board has considered the position in respect of a final dividend for 2011, and
is recommending the payment of a final 2011 dividend of 3.5p per share (or its
equivalent in other applicable currencies). In February 2012, we announced we
would pay a GBP1.0 billion special dividend, 18p per share, subject to
shareholder approval of the Nordic disposal and its completion, and
shareholder approval of the related share consolidation.
The Board intends to pursue a progressive dividend policy consistent with our
strategy, having regard to overall capital requirements, liquidity and
profitability, and targeting dividend cover of at least 2.5 times IFRS AOP
earnings over time. In future, we expect to set interim dividends routinely as
30% of the prior year`s full dividend.
Review of Operations
Long-Term Savings
Our LTS division delivered strong results for the year with operating profits
of GBP793 million up 3% on a constant currency basis. This was driven by
strong profit growth in our Emerging Markets business. We have strengthened
the capabilities of these businesses and are seeing cohesion in the management
of business units across geographies.
Emerging Markets
This has been another good year for Emerging Markets with the business
continuing its growth momentum and showing an increasing breadth across its
geographic and customer footprints. Local currency sales were up and NCCF
showed a particularly good uplift from the prior year.
In 2011 South Africa delivered another good performance with AOP growing by
5%. The Mass Foundation Cluster, which sits within the Retail Mass customer
segment and is a key area of growth for us, has had another excellent year and
we expect this strong growth to continue. In Retail Affluent we saw double
digit profit growth in the year. This market grew in excess of 15% from 2007
to 2010, with the growth skewed to the younger age group and previously
disadvantaged communities. We believe that the retail affluent market in South
Africa will continue to show good growth potential for us. Our South African
Corporate business had an excellent second half. Our South African business is
managing the issue of regulatory examinations very carefully and we have
extensive training plans and other measures to help our representatives pass
their exams ahead of the 30 June 2012 deadline. Additionally, the Group
created more than 1,500 jobs in 2011.
We see exciting growth opportunities across sub-Saharan Africa for Old Mutual
and we are actively exploring means for organic and inorganic growth on the
continent. As part of this growth plan, and as we announced in February 2012,
a non-binding offer has been accepted by Ecobank Transnational Incorporated
(ETI) for the purchase of Oceanic Life, a Nigerian life assurance company
acquired by ETI when it bought the Oceanic Group in November 2011. Oceanic
Life has a Net Asset Value of $16 million and approximately 2% of the Nigerian
life assurance market. ETI, with whom Nedbank has a strategic alliance, is the
leading independent regional banking group in Africa, with operations in 32
countries across the continent. We have signed a 10 year agreement with ETI in
Nigeria to distribute our products through their branch network.
We already have a management team in Nigeria and Nigeria will act as a hub for
our expansion into West Africa. Similarly we plan to expand into East Africa
from our established base in Kenya and into other countries where we see value
creating opportunities. This expansion will be via our `business in a box
model` which uses common products, IT, systems and processes that can be
replicated across markets, after allowing for local market requirements, with
limited customisation and increases the speed to market, reduces costs and in-
country risk. We are on track to meet our target of the Rest of Africa
recording profits equal to 10% of South Africa`s profits by the end of 2012
and 15% by the end of 2015.
Wealth Management
Wealth Management performed well building on 2010`s momentum, despite the
effects of the eurozone crisis which have squeezed incomes and lowered
investment confidence which was particularly noticeable in the final quarter
of the year. In the UK, we saw a continuation of the real trend of Independent
Financial Advisers (IFAs) transferring their business to platforms and we now
have around 9,000 advisers using our platform with our assets increasing by
13% on the year end to approximately GBP19 billion with NCCF of a pleasing
GBP3.3 billion. Over the last three years, assets held on UK platforms have
more than doubled to more than GBP170 billion and while currently around 33%
of the UK`s retail long-term savings is conducted via platforms we expect that
to become more than two thirds by the end of the decade.
We see a number of areas of growth for the platform which we are actively
working on: increasing decumulation options, alternative investment options
and passive investments. It is apparent that our platform customers would like
to have more online access to their investments on our platform and we are
working with IFAs to determine the level of demand for them being able to
authorise wider access to the platform for their customers. We are excited
about the opportunities we believe that the Retail Distribution Review will
present to our business and we are confident that we are well placed to
succeed through: our size, as the platform with the most funds under
management (FUM); our financial strength and stability; and our effective
technology. Skandia International is also developing a market-leading end-to-
end wealth management service called "Wealth Interactive", which will also be
RDR compliant for UK clients.
We are combining our Wealth Management Continental Europe business, which
comprises France and Italy, with Skandia Retail Europe (Germany, Austria,
Poland and Switzerland) to create Wealth Management Europe. This new business
unit will increasingly focus on the Retail Affluent market which is comprised
of 30 million households, holding EUR2.3 trillion of assets, growing at 5% per
annum and is a market we believe is currently underserved. These customers are
active and highly demanding: they are looking for transparent, flexible and
modern products and are increasingly looking to e-channels to service them.
The new business unit brings together 736,000 customers, over EUR11 billion
FUM and 800 employees. The integration will continue throughout 2012 and we
will be implementing further plans to improve our product offering and
customer service. Wealth Management Europe will be reported as part of Wealth
Management going forward.
Asset Management
We have appointed Paul Feeney as Chief Executive of the LTS Asset Management
business, which primarily comprises Old Mutual Investment Group South Africa
(OMIGSA) and Skandia Investment Group (SIG). In line with our client-centric
business philosophy, OMIGSA is splitting its central research team to better
align the research analysts with specific equity boutiques and their unique
philosophies. This means that two equity boutiques, Toros and Value, fall
away, and the remaining equity boutiques now comprise complete investment
teams, each with substantial experience and appropriate investment skills, in
order to achieve even better equity returns for our clients.
During the period, OMIGSA raised R9.3 billion for its housing impact fund,
which aims to provide 120,000 new low cost houses, and a further R1.2 billion
for a schools and education fund in South Africa. In total across Old Mutual,
we had GBP2.8 billion FUM in social, environmental and transformation related
investments, including: OMIGSA`s Housing and Impact Fund, the South African
Schools and Education fund, Futuregrowths` Agri fund in South Africa, the
African Infrastructure Investment Managers fund and Skandia`s Ideas for Life
fund.
Nedbank
Nedbank performed well for the year ended 31 December 2011, reflecting the
benefits of disciplined execution of its business plans and excellent progress
with key strategic initiatives. Headline earnings growth were strong at 26.2%
to R6,184 million for the year (2010: R4,900 million), driven primarily by
16.6% growth in non-interest revenue (NIR), net interest margin expansion and
continued improvement in the Nedbank Retail credit loss ratio.
These results were underpinned by continued delivery on our key strategic
focus areas of repositioning Nedbank Retail, growing NIR and implementing the
portfolio tilt strategy. In the rest of Africa we deepened our strategic
alliance with ETI by providing a facility in support of ETI`s corporate
development programmes, including its transformational banking acquisition in
Nigeria, and as a result secured rights to acquire up to 20% of ETI within two
to three years.
Mutual & Federal
M&F delivered a sound underwriting result in 2011 with results reflecting a
more normalised year compared to the very favourable trading conditions and
benign claims environment in 2010. Management is focused on managing its
expense base and on driving premium growth through alternative distribution
channels including: direct through iWyze; underwriting management agencies;
and niche businesses. iWyze continues to meet its premium growth targets and
is performing in line with our expectations.
As part of the Group`s ongoing capital management programme, M&F restructured
its capital base and paid nearly R1 billion in ordinary and special dividends
in 2011.
US Asset Management
The new management team at USAM are focused on building the multi-boutique
business around long-term, institutionally driven, active asset management to
generate alpha for our clients. This focus has led to the announcement of the
disposal of the Dwight, Old Mutual Capital (OMCAP) and Lincluden affiliates.
Building our global distribution capability is key for USAM`s future growth
and we have appointed Julian Ide, who was previously Head of Institutional
Business at BBVA Asset Management, to lead OMAM UK and the global distribution
effort. We have appointed Olivier Lebleu as Head of non-U.S. Distribution.
Olivier was previously a partner and member of the investment advisory
committee at Stenham (Montier & Partners).
In USAM`s continuing operations we are seeing improving margins and an
improvement in investment performance at the affiliates. For the year ended 31
December 2011, 62% of assets outperformed benchmarks, compared to 57% at 31
December 2010. Over the three- and five-year periods to 31 December 2011, 68%
and 67% of assets outperformed benchmarks, compared to 49% and 65% at 31
December 2010. The increase was driven by improving performance in
International Equity and Global Fixed Income. There are early signs of an
improvement in NCCF and we believe that this trend will continue providing we
maintain good investment performance.
Board changes
We are pleased to welcome Nonkululeko Nyembezi-Heita (Nku) to the Board as an
independent non-executive director. Ms Nyembezi-Heita is currently CEO of
ArcelorMittal South Africa, and has been an independent non-executive director
of Old Mutual`s wholly-owned life subsidiary, Old Mutual Life Assurance
Company (South Africa) Limited (OMLACSA), and will be stepping down from that
position as part of her arrangements for joining the Old Mutual Board.
Following the Annual General Meeting on 12 May 2011, the following changes to
the Board came into effect:
- Rudi Bogni and Nigel Andrews, who had both served on the Board as non-
executive directors for nine years, retired from the Board;
- Alan Gillespie succeeded Rudi Bogni as the Company`s Senior Independent
Director; and
- Russell Edey succeeded Rudi Bogni as Chairman of the Remuneration Committee.
South African Empowerment
In South Africa in 2011, OMSA and Nedbank maintained a Level 2 rating status
and M&F a Level 3 rating status as Broad Based Black Economic Empowerment
contributors.
Outlook
While we remain cautious over the timing of any end to the current uncertain
and volatile economic climate, we are confident that our unique mix of
businesses, and our financial strength and flexibility, will allow us to
continue to deliver value to our shareholders.
Julian Roberts
Group Chief Executive
9 March 2012
Group Finance Director`s Review
GROUP RESULTS
Overview of FY 2011 results
GBPm
2010
(constant
Group highlights(1) 2011 currency) % change
Adjusted operating profit (IFRS basis,
pre-tax) 1,515 1,333 14%
Adjusted operating earnings per share (IFRS
basis) 15.7 13.9p 13%
Group net margin(2) 46bps
Return on equity(3) 14.6%
Life assurance sales - APE basis 1,207 1,277 (6)%
Unit trust/mutual fund sales(4) 14,374 12,766 13%
LTS net client cash flow (GBPbn) 3.2 4.3 (26)%
Net client cash flows (GBPbn)(5) (0.2) (2.5) 91%
Funds under management (GBPbn) 267.2 282.3 (5)%
Full dividend for the year 5.0p
Total profit/(loss) after tax attributable
to equity holders of the parent 667
GBPm
2010
Group highlights(1) (as reported) % change
Adjusted operating profit (IFRS basis, pre-tax) 1,371 11%
Adjusted operating earnings per share (IFRS basis) 14.3p 10%
Group net margin(2) 42bps 4bps
Return on equity(3) 14.2% 40bps
Life assurance sales - APE basis 1,290 (6)%
Unit trust/mutual fund sales(4) 13,018 10%
LTS net client cash flow (GBPbn) 4.3 (26)%
Net client cash flows (GBPbn)(5) (2.8) 92%
Funds under management (GBPbn) 295.2 (9)%
Full dividend for the year 4.0p 25%
Total profit/(loss) after tax attributable to
equity holders of the parent (282)
1) The figures in the table are in respect of core continuing businesses only
and the 2010 comparatives have been restated accordingly, Nordic was
classified as discontinued business in 2011 as it is subject to a sale
agreement.
2) Ratio of AOP before tax to average assets under management in the period
3) ROE is calculated as core business IFRS AOP (post-tax) divided by average
shareholders` equity (excluding the perpetual preferred callable securities)
4) Includes all non-covered business sales
5) Total NCCF excludes NCCF from USAM`s Dwight, Lincluden and OMCAP
affiliates, which were sold or held for sale at 31 December 2011.
Overview
Following the proposed sale of the Nordic business, Nordic has been classified
as a discontinued operation and its profits have been excluded from AOP. Seed
capital investment in strategies managed by USAM affiliates and seed capital
investment returns previously recognised within USAM were recorded at Group
level for 2011. Comparatives were restated accordingly. USAM`s Dwight,
Lincluden and OMCAP affiliates were included in all reported results unless
otherwise stated. Nordic, US Life and Bermuda results are included in the
Group`s MCEV results.
During the year to 31 December 2011 (`2011` or `the year`) Old Mutual showed
strong growth in profits compared to the year to 31 December 2010 (`2010`).
AOP earnings per share were up 10% to 15.7p for 2011 (2010: 14.3p). Pre-tax
AOP was GBP1,515 million, an increase of GBP144 million on 2010. On a constant
currency basis profits increased by GBP182 million, with notable improvements
in profitability in the Mass Foundation Cluster (MFC) and Retail Affluent in
our Emerging Markets business and increased non-interest revenue income in our
South African banking business. Including Nordic, AOP earnings per share were
up 9% to 17.5p (2010: 16.0p).
Group net margin (measured as profit before tax on average assets) increased
by 4 basis points over the year from 42 basis points (excluding Nordic) to 46
basis points. The increase was driven by a strong improvement in the net
margin at Nedbank. In Wealth Management the net margin, excluding the
previously reported smoothing for policyholder tax, has improved from 23 basis
points to 27 basis points as a result of the business gaining operational
leverage, with increased UK Platform FUM and a more efficient expense base
following the cost reduction programme; administrative expenses are now GBP42
million below the prior year.
ROE increased to 14.6% from 14.2%, as a result of the increased profits,
particularly in Nedbank, offsetting an increase in the Group`s equity base,
which included the net assets of Zimbabwe, Kenya, Malawi and Swaziland for the
first time.
While life assurance annual premium equivalent (APE) sales were down 6% to
GBP1,207 million, Emerging Markets APE sales increased, driven by continued
strong protection sales in MFC and Retail Affluent. Wealth Management
continued to grow its single premium Platform sales but APE sales were down
overall, with lower UK Legacy sales reflecting the reduction in the range of
Legacy products being offered in 2011 and weakened European sentiment.
Non-covered business sales, including unit trust and mutual fund sales, were
up 13%, driven by pension sales in the Colombian business of Emerging Markets.
Strong sales continued in Wealth Management, up 4% on 2010.
All of our LTS businesses saw positive NCCF during the year. The Group had a
small net client cash outflow of GBP0.2 billion (2010: GBP2.5 billion
outflow), excluding GBP11.2 billion of net outflows from USAM`s affiliates
which were sold or held for sale at 31 December 2011. The improvement was
primarily due to improved NCCF in USAM`s continuing business, reflecting
markedly improved investment performance on a number of key strategies.
On a constant currency basis closing FUM decreased by 5% driven by negative
market movements in H2 and net client cash outflows in USAM. Over the year the
FTSE and MSCI World indices fell by 6% and 8% respectively, the JSE All Share
and S&P 500 indices were broadly flat and the Dow Jones rose by 6%.
The rand weakened by 3% against sterling, on an average rate, negatively
impacting sterling earnings from our South African businesses. The 31 December
2011 rand closing rate was down 22% against 31 December 2010, negatively
impacting sterling FUM from our South African businesses. The US dollar
weakened by 4% on an average rate negatively impacting sterling earnings from
USAM but was flat at closing rate.
Proposed Nordic sale
On 15 December 2011 we announced the sale of our Skandia Nordic business,
which operates in Sweden, Norway and Denmark, to Skandia Liv for net cash
proceeds of GBP2.1 billion. Following shareholder approval at the
Extraordinary General Meeting on 14 March 2012, completion is expected on or
around 21 March 2012. The necessary competition authority and regulatory
approvals have been obtained.
The total return on the Skandia Investment
Since purchasing the Skandia businesses in 2006 the Group has made a total
return on investment from the acquisition of about GBP1.8 billion or 45%,
giving an internal rate of return of 8%.
GBPbn
Net cash flows from Skandia BU`s 0.8
Proposed net sales proceeds 2.1
Remaining business valued at MCEV 31/12/2011 2.9
Total proceeds from and remaining value of Skandia BU`s 5.8
Purchase price (4.0)
Surplus 1.8
Internal rate of return 8%
Net cash inflows, including proceeds from disposals, from the Skandia
businesses to the Group since acquisition have amounted to GBP0.8 billion; the
proposed net sales proceeds for the Nordic elements of the Skandia businesses
are GBP2.1 billion and the MCEV of the remaining Skandia businesses within the
Group (which ignores the value of future new business) is GBP2.9 billion. The
bulk of the GBP4.0 billion consideration for the Skandia businesses was paid
in February 2006, resulting in an implied surplus for shareholders of GBP1.8
billion from the acquisition.
Dividends and consolidation of shares
Special dividend
Following the proposed Nordic sale the Board intends to return approximately
GBP1.0 billion of net proceeds from the disposal to Ordinary Shareholders by
means of a special dividend, equivalent to 18p per Ordinary Share (or its
equivalent in other applicable currencies), which we expect to be paid in June
2012. We are also proposing a consolidation of shares following the special
dividend of 7 new shares of 11 3/7p nominal per share for every 8 existing
shares of 10p nominal. Reported earnings per share for 2012 and 2011 will be
restated accordingly.
No scrip alternative to the 18p per Ordinary Share special dividend will be
offered.
Final dividend for 2011
Given the continued progress in achieving our debt repayment programme, the
Board has considered the position in respect of the final dividend for 2011
and is recommending the payment of a final dividend for 2011 of 3.5p per
Ordinary Share (or its equivalent in other applicable currencies), amounting
to about GBP195 million. This is equivalent to 4.0p per new ordinary share
once the existing shares are consolidated. Based on this recommendation the
full year Ordinary dividend would be 5.0p, up 25% on 2010.
A scrip dividend alternative is not being made available in relation to this
dividend in view of the complexities involved in the share consolidation, and
the Board will consider later in 2012 whether to reinstate a scrip dividend
alternative for the interim dividend for the current year.
Dividend policy
The Board intends to pursue a progressive dividend policy consistent with our
strategy, having regard to overall capital requirements, liquidity and
profitability, and targeting dividend cover of at least 2.5 times IFRS AOP
earnings over time. In future we expect to set interim dividends routinely at
30% of the prior year`s full dividend.
Management discussion and analysis of results for FY 2011
The principal businesses of the Group are the LTS division, Nedbank, M&F and
USAM. The results for each of the LTS businesses, Nedbank, M&F and USAM are
discussed separately in the Business Review which follows this report.
Sources of earnings
GBPm
2011 2010(1) % change
Revenue
Fees 2,075 1,976 5%
Underwriting(2) 1,471 1,419 4%
Nedbank net interest income(3) 1,120 943 19%
Nedbank non-interest revenues 1,268 1,145 11%
Net other revenue 402 405 -
Total revenues 6,336 5,888 8%
Expenses
Debt costs (128) (128) -
Administration expenses & other expenses (3,676) (3,460) (6)%
Acquisition expenses (1,017) (929) (9)%
Total expenses (4,821) (4,517) (7)%
AOP before tax and non-controlling interests 1,515 1,371 11%
1) The year ended 31 December 2010 has been restated to reflect Nordic as
discontinued
2) Underwriting includes net income from writing insurance products
(protection, annuity and general insurance)
3) Presented net of impairments
Fees increased 5% to GBP2,075 million. Fees include asset based fees,
transactional fees, performance fees and premium based fees, earned on unit
linked investment contracts and Asset Management revenues.
The increase in fees was driven by Wealth Management and Emerging Markets,
reflecting significantly higher average FUM - up some 7% on 2010.
Underwriting increased 4% to GBP1,471 million. The increase was driven by
Emerging Markets, which benefited from improved retail mortality and morbidity
experience as well as more favourable retail persistency experience.
Nedbank net interest income (NII) was up 19% to GBP1,120 million, due to an
increase in the NII margin, an increase in interest earning assets and a
reduction in impairment provisions.
Nedbank non-interest revenue (NIR) was up 11% to GBP1,268 million. NIR
included service charges, trading income, commission and transactional fees.
The increase was due to higher commission and fees, higher derivative and
dividend income and increased transactional volumes.
Net other revenue was flat, with reduced inter-company interest paid to
Bermuda and small increases in other revenues in Nedbank and Emerging Markets,
offset by a reduction in long-term investment return (LTIR) in Wealth
Management.
Administration expenses increased by 6% to GBP3,676 million, with increased
costs in Nedbank (primarily due to higher staff costs) and Emerging Markets
(driven by one-off project costs). Wealth Management reduced its costs,
reflecting the underlying savings achieved as part of its transformation
programme. Across the business GBP11 million was spent in 2011 on
transformation costs associated with cost saving initiatives and GBP15 million
on LTS IT transformation.
Acquisition expenses increased by 9% to GBP1,017 million, primarily in Wealth
Management, which saw increased trail commission as a result of higher average
FUM.
Operating profit analysis
GBPm
2010
(constant
AOP analysis 2011 currency) % change
Long-Term Savings 793 772 3%
Nedbank 755 584 29%
Mutual & Federal 89 100 (11)%
US Asset Management 67 69 (3)%
1,704 1,525 12%
Finance costs (128) (128) -
LTIR on excess assets 37 31 19%
Net interest payable to non-core operations (23) (39) 41%
Corporate costs (57) (60) 5%
Other net (expenses)/income (18) 4 n/a
AOP 1,515 1,333 14%
GBPm
2010*
AOP analysis (as reported) % change
Long-Term Savings 787 1%
Nedbank 601 26%
Mutual & Federal 103 (14)%
US Asset Management 72 (7)%
1,563 9%
Finance costs (128) -
LTIR on excess assets 31 19%
Net interest payable to non-core operations (39) 41%
Corporate costs (60) 5%
Other net (expenses)/income 4 n/a
AOP 1,371 11%
* The year ended 31 December 2010 has been restated to reflect Nordic as
discontinued
AOP from operating units increased 12%, primarily as a result of a 29%
increase in Nedbank`s AOP, driven by higher non-interest revenues, a moderate
improvement in net interest margin and lower retail credit losses. LTS was 3%
up on 2010, driven by a 9% increase in Emerging Markets following strong
results in MFC and Retail Affluent. AOP in Wealth Management was down GBP18
million to GBP179 million, with 2010 benefiting from policyholder tax
smoothing of GBP76 million compared to GBP32 million in 2011. Excluding the
benefit of policyholder tax smoothing for prior years, underlying AOP grew by
21%, driven by higher FUM balances and reduced absolute levels of expenses.
M&F saw higher claims in H2 as underwriting conditions normalised. USAM`s
profits were broadly flat despite lower average FUM in H2 and restructuring
charges.
AOP for 2011 increased by GBP144 million on a reported basis, this variance
includes a positive currency impact on the 2010 result of GBP38 million, on a
constant currency basis AOP increased by GBP182 million.
Finance costs were flat, with reduced debt levels offset by the 8% coupon
costs of the GBP500m 10 year bond that was issued in June 2011. We anticipate
lower finance charges in the future as the Group debt reduction programme
continues.
LTIR on excess assets increased due to an increase in the average asset base,
offset by a marginal decline in the long-term rate from 9.4% in 2010 to 9.0%
in 2011.
Corporate costs were reduced 5% to GBP57 million. Around 10% of these costs
were incurred in South Africa in respect of activities which support the
corporate centre. A further 10% were unavoidable listed holding company costs
including, amongst other things, corporate insurances, audit fees and other
recurring professional fees.
The other net expenses increased to GBP(18) million (2010: GBP4 million
income), primarily due to lower seed capital gains from USAM affiliates and
interest paid to business units for cash balances held on their behalf at the
centre. Associated interest income is recorded at the business unit level.
Group cost savings and ROE and margin targets
At the 2009 Preliminary Results and Strategy Update, the Group introduced
three-year ROE and cost saving targets.
ROE and margin targets 2011 2010 Target
Long-Term Savings(1) 24% 25% 20%-25%
Emerging Markets(2) 15% 20% 15%-18%
Retail Europe 16% 14% 12%-15%
Wealth Management
LTS Total 20% 20%(3) 16%-18%
USAM operating margin(4) 15% 15% 25%-30%
Nordic 10% 11% 12%-15%
1) ROE is calculated as IFRS AOP (post tax) divided by average shareholders`
equity, excluding goodwill, PVIF and other acquired intangibles.
2) Within Emerging Markets, OMSA is calculated as return on allocated capital.
3) The LTS 2010 ROE has been restated to exclude Nordic
4) USAM margin is stated after non-controlling interests and excluding
gains/losses on seed capital but makes no adjustment for affiliates held for
sale or disposed in the period. The results for the comparative period have
been restated accordingly to exclude gains on seed capital.
Wealth Management exceeded its target assisted by a reduced effective tax rate
increasing post-tax returns. Emerging Markets ROE decreased to 24% but remains
at the upper level of the target range, with increased after tax profit more
than offset by increased allocated capital supporting growth and expansion
plans in Africa. Retail Europe`s ROE reduced, reflecting a reduction in
profits and an increased equity base primarily as a result of foreign exchange
movements.
USAM operating margin was flat on 2010. However, the new USAM management team
has taken steps to refocus the business. As part of that effort several
affiliate firms are being divested to improve longer-term financial
performance. Excluding the operating results of affiliates being divested and
certain restructuring costs the operating margin increased to 19% from 17% in
2010.
GBPm
Cumulative 2011
Cost reduction targets run-rate savings cost incurred
Long-Term Savings
Emerging Markets 4 -
Retail Europe 9 5
Wealth Management 50 6
LTS Total 63 11
USAM 15 -
Group-wide corporate costs 11 -
Total 89 11
Nordic 22 13
GBPm
Cumulative cost 2012 run-rate
Cost reduction targets incurred to date target
Long-Term Savings
Emerging Markets - 5
Retail Europe 10 15
Wealth Management 46 45
LTS Total 56 65
USAM 20 10
Group-wide corporate costs - 15
Total 76 90
Nordic 18 10
We are well advanced in delivering the reduction in our cost base announced in
March 2010, with GBP89 million of the targeted GBP90 million run- rate savings
already achieved. The original GBP100 million target has been re-stated to
exclude Nordic following the proposed Nordic sale.
Wealth Management had substantially delivered its 2012 cost saving target of
GBP45 million by July 2011 and has delivered an additional GBP5 million since
then. Retail Europe achieved a further GBP3 million of run-rate savings in the
year, including savings generated from its Skandia branch in South Africa. The
LTS IT transformation programme has made significant steps forward and is
expected to generate material savings; benefits from the programme are
expected to accrue from 2012. USAM delivered around GBP15 million of savings
in 2009 and 2010.
We identified run-rate savings of GBP11 million in 2011 in respect of Group
wide corporate costs and continue to look for cost efficiencies including,
where practical and cost-effective, utilising the Group`s South African head
office branch.
The GBP11 million cost of executing the cost reduction programme restricted
2011 profits in Retail Europe and Wealth Management. Retail Europe`s costs
incurred include an element of dual running costs while activity was
transitioned to South Africa. The costs incurred in executing the programmes
will continue to restrict profits until the programmes are completed.
Summary MCEV results
p
Adjusted Group MCEV per share at 31 December 2010* 202.2
Covered business 13.4
Non-covered business 6.0
Adjusted operating Group MCEV earnings per share (including
Nordic)* 19.4
Economic variances and other earnings (7.0)
Foreign exchange and other movements (20.9)
Dividends paid to ordinary and preferred shareholders (2.6)
Nedbank market value adjustment (1.1)
BEE and ESOP adjustments 0.6
Mark to market of debt (0.7)
Effect of sale of US Life 8.3
Impact of issue of new shares (4.1)
Below the line effects (27.5)
Adjusted Group MCEV per share at 31 December 2011* 194.1
* The weighted average number of shares used to calculate adjusted Group MCEV
per share and adjusted operating Group MCEV earnings per share do not include
preference shares.
The adjusted Group MCEV per share decreased by 4.0% (or 8.1p) from 202.2p at
31 December 2010 to 194.1p at 31 December 2011, largely reflecting foreign
exchange losses as a result of the weakening of the South African rand and
adverse market movements. This was partially offset by the effect of the sale
of US Life.
The adjusted operating Group MCEV earnings per share increased by 3.3p from
13.5p in 2010 (15.5p including US Life and Nordic) to 16.8p for 2011 (19.4p
including Nordic).
Covered business operating MCEV earnings per share increased by 1.3p from 9.7p
for 2010 (11.0p including Nordic and US Life) to 11.0p for 2011 (13.4p
including Nordic), as a result of:
- A strong positive contribution from experience variances, largely
attributable to favourable mortality and persistency experience
- An improved contribution from new business
- An adverse contribution from methodology changes.
Non-covered business operating earnings per share increased by 1.5p from 4.5p
for 2010 to 6.0p for 2011 as a result of:
- Higher sterling profits in the banking business due to greater fee income
and lower bad debt charges
- Slightly lower profits in the asset management businesses, arising from
reduced FUM at USAM and fall in OMIGSA asset management profits.
During the year Old Mutual owned on average 54% of Nedbank. At 31 December
2011 the market capitalisation of Nedbank was R69.6 billion equivalent to
GBP5.5 billion (2010: R63.7 billion; GBP6.2 billion). On a constant currency
basis Nedbank market capitalisation increased by GBP0.4 billion from GBP5.1
billion in 2010, due to an 11% increase in share price over the year.
Free surplus generation
The Group generated GBP986 million of free surplus in the year (2010: GBP748
million) of which GBP554 million (2010: GBP423 million) was generated by the
LTS division. Covered business (which included Nordic, US Life and Bermuda)
generated GBP555 million (2010: GB P519 million).
We expect the value of our in-force business (VIF) will generate about GBP1.5
billion over the next three years. Over 60% of this surplus is expected to
come from non-Emerging Market entities. Non-covered business generated GBP431
million (2010: GBP229 million) with the improvement largely from banking but
also gains in short-term insurance and asset management.
Sources and uses of free surplus
Gross inflows from core and continuing operations were GBP1,165 million (2010:
GBP903 million) and new business investment was GBP390 million (2010: GBP370
million). Total free surplus generated from core operations of GBP931 million
was significantly higher than the GBP555 million in 2010 due to higher
transfers from the VIF and positive experience in the life businesses,
improved profits in the non-covered businesses and lower transfer to capital
requirements in Nedbank.
Capital, liquidity and leverage
Debt strategy, activity profile and maturities
In H2, the Group successfully tendered for EUR550 million of the EUR750
million euro bond. In addition the Group repaid a further $50 million of
senior debt in September 2011 and the remaining EUR200 million of the EUR750
million euro bond was called in January 2012.
At 31 January 2012 the Group had repaid GBP0.6 billion of the GBP1.5 billion
debt repayment target, including GBP110 million of debt (net of debt raised)
in 2010, GBP339 million of debt (net of debt raised) in 2011 and a further
GBP144 million in January 2012.
We intend to use GBP1.1 billion of the net proceeds of the proposed Nordic
sale to reduce indebtedness. This will increase the Group`s debt repayment
plan to a total of GBP1.7 billion. Any decisions regarding the repayment of
debt will take account of capital treatment and the economic impact of the
repayment and will, where appropriate, be subject to regulatory approval. We
do not intend to repay further debt until after the payment of the 18p special
dividend to Ordinary Shareholders.
In the medium term the Group has further first calls on debt instruments
amounting to GBP656 million in 2015, GBP500 million maturing in 2016 and a
$750 million retail preferred instrument, which is callable quarterly. In 2020
the Group has a call on a further GBP350 million instrument. The GBP500
million 10 year bond issued in June 2011 matures in 2021.
Liquidity
In April 2011 we renewed the Group`s bank facilities by negotiating a five-
year, GBP1.2 billion, syndicated revolving credit facility, which was strongly
supported by 17 banks.
At 31 December 2011, the Group had available cash and undrawn committed
facilities of GBP1.5 billion (31 December 2010: GBP1.4 billion). Of this, cash
on hand at the holding company was GBP0.4 billion (31 December 2010: GBP0.4
billion); a proportion of this was used to settle the remaining EUR200 million
repayment of the EUR750 million euro bond in early January 2012.
We anticipate that the use of GBP1.1 billion of the net proceeds from the
disposal of the Nordic business to reduce indebtedness will allow Old Mutual
to retain an increased proportion of cash flows generated from operational
activity and other corporate actions. This will enhance Old Mutual`s capital
flexibility and liquidity going forward.
In addition to the cash and available resources referred to above at the
holding company, each of the individual businesses also maintains liquidity to
support its normal trading operations. During the year a total of GBP84
million (R938 million) of special and ordinary dividends were paid by M&F
under its revised capital management strategy. Nedbank paid GBP120 million of
cash dividends to the South African holding company entities and following the
preliminary results for Nedbank announced on 29 February 2012, further cash
dividends for 2011 of R891 million (equivalent to GBP71 million at 31 December
closing rate) are expected to be paid to the South African holding company in
April 2012.
Group (excluding Nedbank) debt movements (IFRS basis) net of holding company
cash
GBPm
2011 2010
Opening debt (net of holding company
cash) (2,436) (2,273)
Inflows from businesses 684 433
Outflows to businesses (57) -
Holding company expenses and interest
costs (233) (210)
Change in cash from net repayment /
issue of debt (339) (110)
Gross debt raised (500) (10)
Gross debt repaid 839 120
Debt repaid net of debt raised 339 110
Ordinary dividends paid (net of scrip
dividend elections) (48) (65)
Other movements 88 (321)
Closing debt (net of holding company cash) (2,002) (2,436)
Decrease/(increase) in debt (net of
holding company cash) 434 (163)
At a Group holding company level, net inflows from businesses improved from
GBP433 million in 2010 to GBP684 million in 2011. The inflow in the year
included remittances arising from the sale of US Life of GBP288 million. There
was a net outflow of GBP57 million from the parent company to Bermuda relating
to the repayment of inter-company loans. Holding company expenses and interest
costs increased predominantly as a result of a non-reoccurrence of the SDRT
remittance in 2010. The holding company made ordinary dividend payments in the
year of GBP48 million and offered a scrip dividend election. The GBP321
million of negative other movements in 2010 resulted primarily from the
tightening of credit spreads and the weakening pound increasing the value of
Group IFRS debt in sterling terms; this was not repeated to the same extent in
2011.
Financial Groups Directive results
The Group`s regulatory capital surplus, calculated under the EU Financial
Groups Directive, at 31 December 2011 was GBP2.0 billion. Following the notice
given to the FSA of the right to call the remaining EUR200 million of the
EUR750 million euro bond that was partially redeemed in July 2011, we followed
the FSA`s requirements and excluded the instrument from the regulatory capital
surplus calculations at 31 December 2011. If this instrument had been included
in the calculation the surplus would have been GBP2.2 billion, and on a like-
for-like basis the surplus was GBP2.4 billion at 31 December 2010 and GBP1.5
billion at 31 December 2009. The reported GBP2.0 billion FGD surplus
represented a coverage ratio of 155%, compared to 146% at 31 December 2010.
The Group comfortably met the recent stress tests required under the EU-wide
Solvency II project.
The like-for-like decrease since 31 December 2010 was primarily a result of
the impact of the US Life sale (approximately GBP100 million), the weakening
of the rand, the payment of Group ordinary and preferred dividends and the
redemption of subordinated debt offset by statutory profits in Emerging
Markets and Nedbank and the issue of the GBP500 million bond in June.
The proposed Nordic sale will increase the Group`s FGD surplus by about GBP1.5
billion on completion, before the payment of the special dividend and the
planned repayment of debt.
The Group`s FGD surplus is calculated using the `deduction and aggregation`
method, which determines the Group`s capital resources less the Group`s
capital resources requirement. Group capital resources is the sum of all the
business units` net capital resources, calculated as each business unit`s
stand-alone capital resources less the book value of the Group`s investment;
the Group capital resources requirement is the sum of all the business units`
capital requirements. The contribution made by each business unit to the
Group`s regulatory surplus will, therefore, be different from its locally
reported surplus since the latter is determined without the deduction for the
book value of the Group`s investment. Thus, although all the Group`s major
business units have robust local solvency surpluses, a number of them do not
make a positive contribution to the Group`s FGD position. The Group regulatory
capital was calculated in line with the FSA`s prudential guidelines.
The Group`s subsidiary businesses continue to have strong local statutory
capital cover. There was a small decrease in cover for the UK business
following the purchase of two entities from the parent and the conversion of a
loan to the parent to a dividend. Nordic also saw a decrease in cover with the
old Skandia UK Holding Company paid up to the parent as a dividend.
Exposure to sovereign debt in Portugal, Italy, Ireland, Greece, Spain and
France
The Group`s direct exposure to the sovereign debt of Portugal, Italy, Ireland,
Greece and Spain remains very low. At December 2011 the Group had less than
GBP2 million exposure to bonds issued by the Italian Government and no
exposure to the debt issued by the Greek, Irish, Portuguese or Spanish
governments. The exposure to French sovereign debt is GBP2 million.
Corporate disposals and acquisitions and related party transactions
During 2011 and the early part of 2012 we have continued to focus on
streamlining the Old Mutual business to focus on key competencies, competitive
strength and operational improvements. In the 2011 interim results we reported
the completion of the sale of US Life, the closure to new business of our
Retail Europe Swiss business and the proposed legal transfer of some of our
emerging markets businesses to reflect their operational management.
Since then we have taken further steps to simplify the business structure. In
addition to the proposed Nordic sale we have also announced the sale of Wealth
Management`s Finnish branch and a number of USAM affiliates.
The sale of the Finnish branch was announced in December 2011. The transaction
is subject to regulatory approvals and other customary conditions and is
expected to close by the end of H1 2012.
The new management team at USAM has taken steps to refine strategy and refocus
the business. As part of that effort, several affiliate firms have been or are
being divested to improve USAM`s longer-term financial performance and move
towards the margin targets announced to the market in 2010.
- In September 2011 USAM announced the sale of Lincluden Management to its
existing management team. The sale was completed in December 2011.
- In October 2011 USAM announced the sale of OMCAP its US Retail affiliate, to
Touchstone Investments. The sale is expected to close in H1 2012. USAM will
continue to act in a sub-advisory capacity and retain a substantial portion of
the assets under management. Through the transaction USAM will dispose of its
retail administration centre in Denver and the significant costs associated
with it.
- On 7 February 2012 we announced the sale of Dwight Asset Management to
Goldman Sachs Asset Management. Subject to certain conditions, the sale is
expected to be completed in Q2 2012. Dwight managed $30.7 billion of FUM at 31
December 2011, largely of stable-value asset mandates.
Subject to the approval of the relevant authorities in South Africa and
Zimbabwe, the legal transfer of the ownership of the Zimbabwean business from
Old Mutual Zimbabwe Limited to Old Mutual Africa Holdings and to local
Zimbabweans, including staff and pensioners, as part of the Old Mutual
response to Zimbabwe indigenisation legislation, is expected to be completed
in H1 2012.
Statutory results
Reconciliation of Group AOP and IFRS profits
GBPm
2011 2010*
Adjusted operating profit 1,515 1,371
Adjusting items (329) (392)
Non-core operations (including Bermuda**) (183) 15
Profit before tax (net of policyholder tax) 1,003 994
Income tax attributable to policyholder returns (9) 101
Profit before tax 994 1,095
Total tax expense (225) (391)
Profit from continuing operations after tax 769 704
Profit/(loss) from discontinued operations
after tax 198 (728)
Profit/(loss) after tax for the financial year 967 (24)
Other comprehensive income (1,400) 1,151
Total comprehensive income (433) 1,127
Attributable to
Equity holders of the parent (408) 594
Non-controlling interests
Ordinary shares (87) 428
Preferred securities 62 105
Total Non-controlling interests (25) 533
Total comprehensive income (433) 1,127
* The year ended 31 December 2010 has been restated to reflect Nordic as
discontinued
** Non-core operations relates to Bermuda with the exception of GBP17 million
of inter-segment revenue and expenses.
Adjusting items
The key adjusting items for 2011 excluded from AOP but included in IFRS
profits were:
- A GBP264 million goodwill impairment charge for the USAM business, resulting
from a reduction in growth rate assumptions reflecting the outlook for US
nominal GDP growth and net cash outflows experienced by USAM in 2011. The
impairment charge has been partially offset by a reduction in the risk-
adjusted discount rate;
- A GBP129 million charge in respect of other acquisition accounting
adjustments relating to Skandia (mainly the amortisation of acquired present
value of in-force business);
- A GBP171 million charge for short-term fluctuations in investment return,
largely as a result of Wealth Management policyholder tax and lower returns on
cash and bonds;
- A GBP249 million profit for the African businesses in Zimbabwe, Kenya,
Malawi, Swaziland and Nigeria under the control of Emerging Markets. Following
a period of greater political and currency stability in Zimbabwe and an
expectation that the Group will be able to extract benefits from its
Zimbabwean business the Group`s Zimbabwean business has been consolidated for
the first time together with operations in Kenya, Malawi, Swaziland and
Nigeria. The acquisition has been accounted for at the net asset value of the
underlying businesses at 1 January 2011, being the fair value of the Group`s
investment in these operations for the assets and liabilities acquired. Deemed
consideration for the acquisition is the fair value of the Group`s investment
immediately prior to control. The result was a gain for the Group in these
businesses that is accounted for as a profit on acquisition in the year. This
profit has been excluded from adjusted operating profit. The trading results
of the other African businesses for the year ending 31 December 2011 have been
included in the Group`s income statement and adjusted operating profit.
Non-core business units - Bermuda
Bermuda remains a non-core business. Its results are excluded from the Group`s
IFRS AOP, although the interest charged on internal loans from Bermuda to
Group Head Office is charged to AOP.
The IFRS post-tax loss was $286 million (2010: $41 million gain), driven by
the Guaranteed Minimum Accumulation Benefits (GMAB) performance, arising
primarily from equity market declines in H2 and a reduction in US interest
rates. The impact of the dynamic hedging programme over the course of 2011 was
beneficial in reducing losses in respect of the variable annuity guarantees.
Notwithstanding the hedging programme, given current equity market conditions,
the business expects volatility in earnings in the medium term. At 31 December
2011 hedge coverage was 54% over equities (2010: 58%) and 53% over foreign
exchange (2010: 39%), with interest rates remaining unhedged (2010: nil).
Of total insurance liabilities of $4,831 million, $3,130 million was held in a
separate account relating to variable annuity investments. Of the remaining
reserves, $1,061 million relates to guarantee liabilities on the variable
annuity business, and $640 million relates to policyholder liabilities (these
liabilities include deferred and fixed indexed annuity business as well as
variable annuity fixed credited interest investments).
The GMAB reserve in respect of universal guarantee option (UGO) contracts has
been set-up for the full period of the contract length, including the five-
year anniversary top-up of 105% of total premiums, the 10-year 120% top-up of
total premiums and any high water mark contracts.
At 31 December 2011, the total cost of fifth-anniversary top-up payments to
policyholders in respect of the GMAB liabilities over the next two years was
estimated at $689 million (30 September 2011: $738 million; 30 June 2011: $346
million; 31 December 2010: $334 million). The actual cash cost will be
affected by any changes in policyholders` account values until the fifth-
anniversary date of each policy, offset by hedge gains or losses. At 29
February 2012 rising equity markets had reduced the cash cost of top-up
payments required to meet fifth-anniversary guarantees to $426 million and the
GMAB reserve to $791 million. At the level of hedging in place at 29 February
2012, a 1% fall in equity market levels would have increased the net cash cost
of meeting policyholder guarantees by approximately $11 million.
In March 2012 Bermuda enhanced its hedging strategy by implementing an option
based hedging arrangement. This strategy will protect against downside risk
from further equity market declines relating to meeting the cash-cost of the
fifth-year anniversary of UGO contract top-up obligations, while maintaining
the potential to realise gains if equity markets move higher. The existing
futures based dynamic hedging strategy will remain in place for the variable
annuity book exposure beyond five years. Also, the exposure to currency
movements impacting the UGO top-ups will continue to be dynamically hedged.
Fifth-anniversary payments began on 5 January 2012 but the bulk of the
payments will be made between 1 October 2012 and 31 January 2013. The enhanced
hedging strategy aims to provide greater cash flow certainty over the period
when the fifth-year anniversary UGO top-up payments fall due. We remain
confident that the fifth-anniversary top-ups can be met within the estimated
cost as at 31 December 2011 and expect the cash cost to be met from Bermuda`s
own resources. Further information on Bermuda is included in the Business
Review Appendix.
Income tax attributable to policyholder returns
Under IFRS, tax on policyholder investment returns is included in the Group`s
IFRS tax charge rather than being offset against the related income. The
impact is to increase IFRS profit before tax with a corresponding increase to
the IFRS tax charge. In 2011 policyholder investment return generated a tax
credit of GBP9 million (2010 restated to exclude Nordic: GBP101 million
charge) due mainly to a credit in Wealth Management offsetting a charge in
Emerging Markets.
The 2011 AOP result benefited from the structural tax efficiency applicable to
UK companies writing unit-linked business in the UK, together with the
smoothing of previous years` deferred tax assets. These assets arose in
2008/09 from the significant market volatility where falls in the value of
policyholder assets resulted in the recognition of significant deferred tax
assets in the IFRS income statement, which were spread forward under AOP. The
final pre-tax smoothing adjustment in respect of previous years` deferred tax
assets made in 2011 gave rise to a profit of GBP32 million, a significant
reduction from GBP76 million in 2010. Going forward we expect the structural
tax efficiency to continue.
Total tax expense
The effective tax rate on AOP was 23% (2010: 24%, restated to exclude Nordic).
The decrease from 2010 was due to fewer unutilised tax losses, partially
offset by increased Secondary Tax on Companies (STC) on dividends from South
Africa and a decreased proportion of low-taxed dividend and capital profits.
In addition no further provision strengthening was required in 2011.
Looking forward, and depending on market conditions and profit mix, we would
expect the effective tax rate on AOP in future periods to tend towards 25%-
27%.
Discontinued operations - Nordic & US Life
Profit from discontinued business after tax was GBP198 million (2010: GBP728
million loss), comprised of US Life profits of GBP130 million (2010: GBP713
million loss) and Nordic profits of GBP68 million (2010: GBP15 million loss).
Despite the turbulent stock markets in H2 and one-off restructuring costs, the
Nordic business performed well, with good product development and the
successful delivery of a number of cost reduction programmes during the year.
The Nordic business is well placed to meet profitability targets in 2012 and
the voluntary staff redundancy programme and other restructuring projects have
prepared the business for a sustainable future. Further information on Nordic
is included in the Business Review Appendix.
US Life profits were driven by the recycling of the `available for sale`
reserve and foreign exchange to the income statement. The 2010 loss reflected
the impairment of the US Life business in anticipation of its sale at the
terms agreed with the purchaser.
Other comprehensive income
Other comprehensive income for the year was a loss of GBP1,400 million driven
by unrealised foreign exchange losses, primarily from the translation impact
of the lower year-end rand to sterling exchange rates on the net asset value
of the South African businesses.
Non-controlling interests
Non-controlling interests share of total comprehensive income was a GBP(25)
million loss (2010: GBP533 million profit), reflecting non-controlling
interests` share of the unrealised losses generated on the translation of
Nedbank.
Risk allocation, Solvency II and iCRaFT and financial controls initiative
update
The Group`s economic capital models form the basis of the risk appetite and
limit-setting framework. Our economic capital approach applies market
consistent valuation methodologies and assumption setting processes to ensure
that risk appetite and exposures are based on a risk-neutral benchmark. This
approach adds value by ensuring that the Group makes explicit decisions
regarding risk when writing new business and in the management of the in-force
book. We believe that this disciplined approach facilitated better risk
acceptance decisions during the period.
We have developed our economic capital models to meet Solvency II requirements
in our integrated Capital, Risk and Finance Transformation (iCRaFT) project.
These models were embedded during the period and will add value to risk
decision making by formally quantifying risk exposures, and hence ensuring
that decision-making is better informed. We conducted the recent EIOPA stress
test on a QIS5 basis and this showed a comfortable level of solvency over the
Group SCR floor. In tests there was no scenario when the Group`s capital
reduced below the SCR level.
The three key matters for the Group in respect of its regulatory capital
position under Solvency II are:
- Discussions on the treatment of EPIFP (Expected Profits In Future Premiums)
have moved in a positive direction and we believe they are likely to be
eligible as Tier 1 capital under Solvency II.
- Bermuda was included in the first of three groups of non-EEA jurisdiction
equivalence assessments. EIOPA`s findings from this assessment were
inconclusive and will be revisited this year. The equivalence of South Africa
will be reviewed in 2012 as part of the second group of assessments.
- The latest draft regulations have suggested that a short contract boundary
may be applied to some of the Group`s long-term unit-linked insurance
business. We believe this proposal is not aligned with an economic balance
sheet valuation of this business and we have raised concerns about this
definition with the FSA and other bodies.
In addition to delivering the economic capital model developments, the iCRaFT
project is progressing well on embedding Pillar I, II and III. We are working
towards a submission to the FSA`s internal model approval process and are on
track to deliver all requirements for Solvency II compliance. We were the
first major UK retail group to submit Group QIS5 results and the Self
Assessment Questionnaire on the internal model to the FSA. In 2011, we
formally entered a `use test` phase, using an internally developed Use
Framework to translate Solvency II requirements into practical business
applications and to provide a structured approach in assessing use across the
Group. Development and embedding of the Own Risk and Solvency Assessment
(ORSA) processes is progressing alongside the use framework and continued
development of enterprise risk management, bringing further insight to key
risk decisions.
In 2011 we embedded our internal financial controls framework across the
Group. The control framework is designed to mitigate the risk of material
misstatement in the Group`s financial reporting. The control environment
continues to be assessed by management to ensure there is reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial information across all the relevant reporting units.
Risks and uncertainties
A number of potential risks and uncertainties could have a material impact on
Group performance and cause actual results to differ materially from expected
and historical results.
During 2011, global economic activity weakened against initial expectations
and became more uneven, confidence fell sharply, and downside risks grew.
Against a backdrop of unresolved structural fragilities, a number of shocks
hit the international economy, including the devastating Japanese earthquake
and tsunami, unrest in some oil-producing countries and the major financial
turbulence in the eurozone. Two of the forces now shaping the global economy
are high and rising commodity prices and the need for many economies to
address large budget deficits. Financial volatility has increased drastically
at the year-end, driven by concerns about developments in the eurozone and the
strength of global activity.
Southern Africa and Emerging Markets generally have strong GDP growth,
increasing population sizes, a growing middle class, stable unemployment
levels and moderate inflation. The impact of the financial crisis on these
economies was generally less severe than in the more developed countries.
However, the current economic environment remains a threat with unstable and
volatile equity markets, currency risk and unemployment challenges -
particularly in South Africa.
Regulatory changes in the UK - the Retail Distribution Review (RDR) and
Solvency II - are likely to have significant effects on the industry as a
whole. The RDR has continued to provide opportunities for the UK Platform to
grow, but may accelerate the run-off of the more profitable legacy book. UK
Platforms are expecting margins to be squeezed both in the lead up to and RDR
and afterwards. The implementation of Solvency II requirements continues to
occupy the industry and there is still uncertainty about both the
implementation timetable and the details of the directive, particularly the
issue of contract boundaries, which could materially affect our Solvency II
position.
We monitor the external factors and uncertainties, such as market and
regulatory developments that could adversely affect our ability to create
value and continue meeting the capital requirements and day to day liquidity
needs of the Group and individual entities. Overall risk trends are going down
and Old Mutual is in a solid position to withstand the threat of further
economic recession. In this respect we compare favourably to our peers; this
is reflected in our Solvency II capital requirement which we believe is less
demanding than those faced by some of our peers. The risks we face in our
Bermuda business, although significant, are being effectively managed and
closely monitored.
We continue to strengthen and embed our risk management framework. We attach
increasing importance on ensuring business decisions are within our risk
appetite, and that risk exposures are monitored against appetite, allocated
limits and budgets.
The Board of Directors believe that the Group has adequate resources to
continue in operational existence for the foreseeable future. Accordingly,
they continue to adopt the going concern basis in preparing the financial
statements contained in this announcement.
Philip Broadley
Group Finance Director
9 March 2012
Summarised financial information
GBPm
Summarised financial information IFRS results
(as reported) 2011 2010 1 % Change
Basic earnings per share 12.9 (6.5)p
IFRS profit/(loss) after tax attributable to
equity holders of the parent 667 (282)
Sales statistics
Life assurance sales - APE basis 1,207 1,290 (6)%
Life assurance sales - PVNBP basis 9,113 10,162 (10)%
Value of new business 177 159 11%
Unit trust/mutual fund sales 2 14,374 13,018 10%
MCEV results 3
Adjusted Group MCEV (GBPbn) 10.8 11.0
Adjusted Group MCEV per share 194.1 202.2p
AOP Group MCEV earnings (post-tax and
non-controlling interests) 1,055 830 27%
Adjusted operating Group MCEV earnings per share 19.4p 15.5p 25%
Financial metrics
Return on equity 4 14.6% 14.2%
Return on Group MCEV 3 10.7% 10.9%
Net client cash flows (GBPbn) (11.4) (6.7) (70)%
Funds under management (GBPbn) 267.2 295.2 (9)%
Interim dividend 1.5p 1.1p 36%
Final dividend 3.5p 2.9p 21%
FGD(5)(GBPbn) 2.0 2.1 (5)%
Net asset value per share 140p 151p
1 The year ended 31 December 2010 has been restated to reflect Nordic as
discontinued
2 Includes all non-covered business sales
3 Includes Nordic and US Life
4 ROE is calculated as core business IFRS AOP (post-tax) divided by average
shareholders` equity (excluding the perpetual preferred callable securities)
5 The Group`s regulatory capital surplus, calculated under the EU Financial
Groups Directive, was GBP2.0 billion at 31 December 2011. The Group followed
the FSA`s requirements, and gave six months advance notice of its right in
January 2012 to call the remaining EUR200 million of the EUR750 million Lower
Tier 2 euro bond that was partially redeemed in July 2011. As a result of that
notice, the Lower Tier 2 instrument was excluded from the regulatory capital
surplus calculations as at 31 December 2011.
GBPm
Group return on equity* 2011 2010
AOP including accrued hybrid dividends - core operations 855 765
Opening shareholders` equity excluding hybrid capital - core
operations 5,788 5,055
Half-year shareholders` equity excluding hybrid capital - core
operations 5,987 5,337
Closing shareholders` equity excluding hybrid capital - core
operations 5,857 5,788
Average shareholders` equity - core operations 5,877 5,393
Return on average equity 14.6% 14.2%
* ROE is calculated as core business IFRS AOP (post-tax) divided by average
shareholders` equity (excluding the perpetual preferred callable securities)
GBPm
Group debt summary 2010
2011
Debt securities in issue at book value 507 550
Liquid assets held centrally (441) (438)
Senior debt 66 112
Hybrid capital and preferred securities 1,146 1,146
Subordinated debt 876 1,198
Derivative (asset)/liability related to hybrid capital (86) (20)
Total subordinated debt 1,936 2,324
Total net debt 2,002 2,436
Adjusted Group MCEV 10,794 11,030
Senior gearing 0.5% 0.8%
Total gearing 15.6% 18.1%
GBPm
Debt 2011 2010
MCEV basis 2,515 2,829
Total IFRS book value of debt 2,529 2,894
GBPm
Interest cover* 2011 2010
Total interest cover 8.3 times 8.1 times
Hard interest cover 2.3 times 2.6 times
* Total interest cover and hard interest cover ratios include Nordic profits
in 2011 and 2010.
Business local statutory capital
cover 2011 2010
OMLAC(SA) 4.0x 3.9x
Mutual & Federal 1.5x 2.0x
UK 2.0x 2.8x
Core Tier 1: 11.0% Core Tier 1: 10.1%
Tier 1: 12.6% Tier 1: 11.7%
Nedbank* Total: 15.3% Total: 15.0%
Nordic 6.3x 9.8x
Bermuda (estimated)** 2.3x n/a
* This includes unappropriated profits.
** The new BMA regulatory framework is in effect from 2011. Bermuda has not
submitted its regulatory return for the year-ended 31 December 2011 but
statutory capital cover is estimated to be 2.3x.
2011 2010*
Regulatory capital GBPm % GBPm %
Ordinary Equity 4,602 80 5,269 77
Other Tier 1 Equity 593 10 653 10
Tier 1 Capital 5,195 90 5,922 87
Tier 2 1,893 34 2,336 35
Deductions from total capital (1,355) (24) (1,502) (22)
Total capital resources 5,733 100 6,756 100
* Capital as reported to FSA. Numbers may vary slightly to those reported in
Annual Report and Accounts 2010.
Long-Term Savings
Continued operational delivery despite difficult markets
Key performance statistics:
GBPm
Emerging Wealth Retail
2011 Markets Management Europe Total
AOP (IFRS basis, pre-tax) 570 179 44 793
NCCF (GBPbn) 0.4 2.5 0.3 3.2
FUM (GBPbn) 49.9 54.4 4.2 108.5
Life assurance sales (APE) 524 611 72 1,207
PVNBP 3,295(1) 5,269 549 9,113
Non-covered sales(2) 8,147 4,669 20 12,836
Value of new business 99(1) 70 8 177
Operating MCEV earnings (covered
business, post-tax) 349 184 19 552
Adjusted MCEV per share (covered
business) 56.9p 35.2p 10.6p 102.7p
Return on Embedded Value(4) 11.9%(1) 9.3% 3.0% 9.3%
(VNB + Experience variance)/MCEV
(covered business)(4) 6.8%(1) 5.0% 1.1% 5.2%
GBPm
Emerging Wealth Retail
2010 (constant currency)(3) Markets Management Europe Total
AOP (IFRS basis, pre-tax) 524 197 51 772
NCCF (GBPbn) - 3.9 0.4 4.3
FUM (GBPbn) 46.6 55.9 4.8 107.3
Life assurance sales (APE) 473 734 70 1,277
PVNBP 3,175(1) 6,380 519 10,074
Non-covered sales(2) 6,762 4,507 23 11,292
Value of new business 83(1) 66 7 156
Operating MCEV earnings (covered
business, post-tax) 333 112 67 512
Adjusted MCEV per share (covered
business) 49.7p(1) 36.2p 11.1p 97.0p
Return on Embedded Value(4) 13.2%(1) 6.1% 12.8% 10.8%
(VNB + Experience variance)/MCEV
(covered business)(4) 4.7%(1) 3.1% 2.2% 3.9%
GBPm
Emerging Wealth Retail
2010 (as reported)(3) Markets Management Europe Total
AOP (IFRS basis, pre-tax) 539 197 51 787
NCCF (GBPbn) - 3.9 0.4 4.3
FUM (GBPbn) 57.0 55.9 5.0 117.9
Life assurance sales (APE) 487 734 69 1,290
PVNBP 3,269(1) 6,380 513 10,162
Non-covered sales(2) 6,962 4,507 23 11,492
Value of new business 86(1) 66 7 159
Operating MCEV earnings (covered
business, post-tax) 344 112 66 522
Adjusted MCEV per share (covered
business) 60.7p(1) 36.2p 11.4p 108.3p
Return on Embedded Value(4) 13.2%(1) 6.1% 12.8% 10.8%
(VNB + Experience Variance)/MCEV
(covered business)(4) 4.7%(1) 3.1% 2.2% 3.9%
1) PVNBP and value of new business excluded Zimbabwe, Kenya, Malawi and
Swaziland (the other African countries) in 2011 and 2010. The other African
countries were excluded from Adjusted MCEV per share in 2010. The return on
embedded value and (VNB + Exp Var)/MCEV metrics for 2011 and 2010 excluded the
other African countries from opening MCEV when calculated.
2) Includes unit trust/mutual fund sales
3) The year ended 31 December 2010 has been restated to reflect Nordic as
discontinued
4) RoEV and (VNB + Experience Variance)/MCEV (covered business) were
calculated in local currency, except for LTS where they were calculated on a
reporting currency basis
On a reported basis the Emerging Markets business accounts for: 72% of the LTS
IFRS AOP earnings, 46% of LTS FUM, 43% of LTS APE sales; 63% of LTS operating
MCEV earnings (covered business, post tax); and 55% of LTS MCEV per share
(covered business).
The analysis below is presented on a constant currency basis.
IFRS AOP results
- Overall LTS AOP increased 3% to GBP793 million.
- Emerging Markets improved by 9% to GBP570 million with strong growth in
profits in Retail Affluent and Mass Foundation Cluster (MFC). The
consolidation of Zimbabwe, Kenya, Malawi and Swaziland for the first time
increased AOP by GBP24 million.
- Wealth Management decreased by GBP18 million to GBP179 million, with 2010
benefiting from policyholder tax prior year smoothing of GBP76 million
compared to GBP32 million in 2011. Excluding the impact of prior year
policyholder tax smoothing underlying AOP grew by 21%, driven by higher
average FUM balances and reduced absolute levels of expenses.
- Retail Europe was down GBP7 million, impacted by non-recurring costs
associated with the transfer of some of the business operations to South
Africa and higher commissions reflecting increased new business in Poland and
Switzerland.
Net client cash flow (NCCF)
- Overall LTS NCCF decreased by GBP1.1 billion to GBP3.2 billion. H2 flows
were below H1, reflecting worsening investor sentiment in Europe.
- Emerging Markets increased to GBP0.4 billion, with strong inflows in MFC and
Retail Affluent and a large transaction in Colombia. OMIGSA benefited from
lower PIC outflows and there were improved flows across a number of its
boutiques.
- Wealth Management decreased by GBP1.4 billion, with reduced inflows from
Continental Europe following the end of the Italian tax shield that generated
a sales boost in 2010. UK Platform NCCF was GBP3.3 billion (2010: GBP3.6
billion), with continued strong positive contributions from both covered and
non-covered business.
- Retail Europe saw a decrease of GBP0.1 billion as improved persistency was
offset by higher surrender values.
Funds under management
- Overall LTS FUM at 31 December 2011 was up 1% to GBP108.5 billion.
- Emerging Markets increased by 7% to GBP49.9 billion, due mainly to
consolidation of the other African countries for the first time. Some 85% of
total Emerging Markets FUM is in South Africa.
- Wealth Management was down 3% to GBP54.4 billion despite strong NCCF, with
markets lower than 31 December 2010. FUM included UK assets of GBP33.4 billion
(2010: GBP33.9 billion). Of the UK assets, UK Platform assets totalled GBP18.8
billion, a 13% rise from the 31 December 2010 level, further solidifying
Wealth Management`s position as one of the largest participants in this
market. As of 29 February 2012, UK Platform assets were GBP20.1 billion.
- Retail Europe closed slightly below 31 December 2010. Decreases in the
market value of investments were partially offset by net client cash inflows.
Life sales summary
- Overall LTS APE sales decreased by 6% to GBP1,207 million.
- In Emerging Markets South African regular premium sales grew by 14%.
Continued momentum in MFC sales delivered excellent growth of 28%. Retail
Affluent sales increased by 4%, with more advisers, improved sales
productivity and focused initiatives for the Greenlight protection product.
- South African single premium sales decreased by 10% with lower sales in
Retail Affluent and OMIGSA. Retail Affluent sales were muted as management
focused on product mix and completing training for the regulatory exams; sales
volumes in 2010 were exceptional due to competitive Fixed Bond pricing. OMIGSA
sales declined by 32% due to clients delaying investment decisions and some
sales are now being reported as Corporate business.
- Rest of Africa sales more than doubled, with strong Namibian sales. The
consolidation of the other African countries for the first time increased APE
sales by GBP17 million.
- Sales in Asia & Latin America increased by 9%, benefiting from an increase
in financial planner numbers and improved productivity in Mexico.
- Sales in Emerging Markets` Chinese joint venture, Old Mutual-Guodian,
increased by 77% due to strong regular premium sales and continued growth in
telemarketing sales.
- Wealth Management continued to grow its single premium business on the UK
Platform. Platform sales totalled GBP244 million of the GBP312 million total
UK sales.
- Sales in the UK Legacy market were GBP68 million, a decrease of GBP45
million reflecting the managed reduction in product range available in 2011.
- In the offshore International market, sales decreased by 8% to GBP208
million as Wealth Management reduced lower margin regular premium business
across the International markets.
- Sales in Wealth Management`s Continental Europe business decreased by 43% to
GBP91 million, reflecting worsening investor sentiment in H2 2011 and the
ending of the one-off tax shield in Italy in 2010.
- Retail Europe sales increased by 4% to GBP72 million driven by increased
regular premiums in the Polish business, which benefited from additional sales
from new distribution partners in the IFA and bank channels.
Non-covered sales, including unit trust and mutual fund sales
- Overall LTS non-covered sales were up 14% to GBP12,836 million.
- In Emerging Markets there was strong sales growth in Colombian voluntary and
mandatory pension sales, including a large public sector transaction concluded
in the third quarter. There was strong growth in new client business in acsis
and OMIGSA in South Africa and the inclusion of Zimbabwean CABS deposits in
2011.
- In Wealth Management, UK mutual fund sales grew strongly - up 10%. As in the
prior year, Wealth Management benefited from the seasonality of the tax year-
end along with increased ISA allowances. International unit trust sales were
down as market volatility impacted customer sentiment.
Margins and value of new business
- Across LTS as a whole, new business APE margins improved to 15% (2010: 13%)
and present value of new business premiums (PVNBP) margin improved to 1.9%
(2010: 1.6%). The bulk of the improvement was in Wealth Management. Value of
new business (VNB) increased by 13% to GBP177 million, driven by a combination
of increased sales volumes and new business margins in Emerging Markets.
- APE margins improved from 18% to 20% in Emerging Markets mainly as a result
of improved persistency rates, favourable changes in economic assumptions, an
improved product mix and the positive impact of the new dividend withholding
tax replacing the current Secondary Tax on Companies (STC). Improved product
mix and expense control in Retail Affluent in H2 lifted margins from 3% in H1
to 10% for the full year. Corporate margins reduced in 2011 mainly due to a
change in product mix and a reduction in sales volumes. The value of new
business in Emerging Markets increased by 19% to GBP99 million, with increased
sales volumes and improved new business margins.
- The increase in margins in Wealth Management was driven largely by a more
beneficial product mix in International with increased focus on higher-margin
portfolio bond products and lower acquisition costs. The International APE
margin improved to 23% (2010: 19%). The value of new business in Wealth
Management increased by GBP4 million to GBP70 million and the APE margin and
PVNBP margin increased to 11% (2010: 9%) and 1.3% (2010: 1.0%) respectively.
- In Retail Europe the value of new business and APE margin were in line with
2010.
Operating MCEV earnings
- Overall LTS operating MCEV earnings increased by 8% to GBP552 million.
- In Emerging Markets operating MCEV earnings (post-tax) increased by 5% to
GBP349 million. Operating experience variances increased due to improved
persistency and mortality experience, partially offset by expense assumption
changes and increased central provisions for project costs. Adjusted MCEV per
share was up 14% to 56.9p, benefiting from a large positive impact from the
replacement of STC with dividend withholding tax and a positive impact from
economic variances. Return on Embedded Value (RoEV) reduced from 13.2% to
11.9% reflecting the significant uplift in MCEV during 2010.
- In Wealth Management MCEV operating earnings post tax increased by GBP72
million to GBP184 million for the period, driven by improved new business
value, positive experience variances and a number of net positive assumption
changes. Adjusted MCEV per share decreased to 35.2p (31 December 2010:
36.2p), with strong MCEV earnings more than offset by high capital and
dividend flows to Group and negative economic variances. RoEV increased
from 6.1% to 9.3% due to increased MCEV operating earnings.
- In Retail Europe operating MCEV earnings after tax decreased to GBP19
million. On a comparable basis MCEV earnings after tax were in line with 2010,
which benefited from positive assumption changes for rebates and persistency
in 2010. MCEV per share was down 0.5p to 10.6p, due to economic variances,
foreign exchange and dividend flows. RoEV decreased to 3.0%, with increased
opening MCEV and decreased operating MCEV earnings.
Value creation
- A key metric by which we judge the performance of the business is Group
Value Creation for the LTS covered business. It measures the contribution to
return on embedded value from management actions of writing profitable new
business and managing expenses, persistency, risk and other experience
compared to what had been assumed. This metric improved from 3.9% to 5.2% in
LTS (excluding Nordic), driven by strong sales of high margin protection
products in Emerging Markets` MFC and favourable persistency and rebate
experience in Wealth Management.
Outlook
- On 24 January 2012 we announced that we planned to bring together Wealth
Management`s Continental Europe business (France, Italy) and Retail Europe
(Germany, Austria, Poland, Switzerland) to form one new business: Wealth
Management Europe. The combined business brings together 736,000 customers
across Europe and over 11 billion FUM. Wealth Management Europe will be
reported under the Wealth Management business unit in future.
- We will proceed with the integration of the Retail Europe business during
2012. The product portfolio and customer service offering will be improved and
organisational structures amended accordingly.
- Job creation in South Africa, particularly in the public sector, is likely
to see good growth in the medium term, underpinned by the Government`s planned
infrastructure spending.
- In South Africa we anticipate that the full potential impacts of the FAIS
regulatory exams will only emerge in 2012 and 2013. We have implemented
extensive training plans and other measures to help our representatives pass
the exams ahead of the revised 30 June 2012 deadline.
- Together with other companies in the Group Emerging Markets will continue to
actively explore means for organic and inorganic growth in Africa. We are well
positioned to grow into the rest of Africa by leveraging our established
business bases in South Africa, Namibia and Zimbabwe. Using our expertise in
these businesses we are able to design and export relevant products and low
cost IT infrastructure into new markets.
- Our distribution capacity and use of technology to increase customer reach
and reduce costs will accelerate in 2012. In particular we expect continued
growth in our tied agency operations, with growth in the number of advisers
and productivity. Higher new business standards will be the additional drivers
of expected premium growth and the quality of new business.
- The European government debt crisis diminished investor confidence,
particularly in the fourth quarter of 2011, reducing European investment
market demand in the short-term. There was a particularly strong impact in the
weaker European economies such as Italy. However, we expect steady progress
for 2012 as a whole.
- Our early and decisive management action in the UK positioned us well to
deal with the impending changes to the industry brought about by the Retail
Distribution Review (RDR). With the potential ban on cash rebates and the
development in operating margins for legacy businesses we believe our plan for
a fully unbundled charging structure, under which we will pass on rebates to
customers, would give us an advantage over our peers. We are actively
developing new protection and asset management products in anticipation of the
new market structures. We are also testing new forms of interaction with
customers that help their advisers provide services more efficiently.
- Total gross sales on the UK Platform were GBP4.9 billion (2010: GBP4.9
billion), reflecting challenging markets especially in Q4, however, we believe
our share of the Platform market continued to grow over the period. Taxation
uncertainty and regulatory delays may impede our ability to act as swiftly as
we wish but we are confident that reform will be implemented in line with our
expectations. UK sales growth may be constrained in 2012 by the lead up to the
RDR announcement and resulting investor uncertainty.
- We anticipate the completion of the sale of our Finnish business in mid-
2012. Post-tax profits for the business were approximately GBP12 million and
were included in Wealth Management for 2011.
Nedbank
Well positioned to build on the momentum from
2011
Rm
Highlights 2011 2010 % Change
AOP (IFRS basis, pre-tax) 8,791 6,799 29%
AOP (IFRS basis) (pre-tax) (GBPm) 755 601 26%
Headline earnings* 6,184 4,900 26%
Net interest income* 18,034 16,608 9%
Non-interest revenue* 15,412 13,215 17%
Net interest margin* 3.46% 3.35%
Credit loss ratio* 1.14% 1.36%
Cost to income ratio* 56.6% 55.7%
Return on Equity* 13.6% 11.8%
Return on Equity (excluding goodwill)* 15.3% 13.4%
Core Tier 1 ratio* 11.0% 10.1%
* As reported by Nedbank in its report to shareholders for the year-ended 31
December 2011.
The full text of Nedbank`s results for the year ended 31 December 2011,
released on 29 February 2012, can be accessed on our website
http://www.oldmutual.com/mediacentre/pressReleases/viewPressRelease.jsp?pressI
tem_id=16311. The following is an edited extract:
Banking and economic environment
The global economic environment deteriorated in 2011 as the European sovereign
debt crisis continued to unfold, leading to a loss of economic growth momentum
in both developed and emerging markets.
For South Africa GDP growth is expected to end at 3.2% for the 2011 year and
interest rates remained unchanged at 37-year lows.
Household demand for credit remained stable and transactional demand continued
to strengthen, supported by real wage increases.
Business confidence remained at low levels for most of 2011, with corporate
credit demand gaining some traction towards the end of the year as both
private and public sector fixed-investment activity increased off a low base.
Review of results
Nedbank performed well for the year ended 31 December 2011, reflecting the
benefits of disciplined execution of its business plans and excellent progress
with key strategic initiatives.
Nedbank recorded strong headline earnings growth of 26.2% to R6,184 million
for the year (2010: R4,900 million), driven primarily by 16.6% growth in NIR,
net interest margin (NIM) expansion and continued improvement in the Nedbank
Retail credit loss ratio.
Diluted headline earnings per share increased 25.4% to 1,340 cents (2010:
1,069 cents) and diluted earnings per share 27.7% to 1,341 cents (2010: 1,050
cents) in line with Nedbank`s trading statement issued on 6 February 2012.
Return on average ordinary shareholders` equity (ROE), excluding goodwill,
increased to 15.3% (2010: 13.4%) and ROE to 13.6% (2010: 11.8%), with the
benefit of return on assets (ROA) improving to 0.99% (2010: 0.82%), partially
offset by a reduction in gearing. Nedbank generated economic profit (EP) of
R924m (2010: economic loss of R289m).
Nedbank is well capitalised, with the core Tier 1 capital ratio at 11.0%
(2010: 10.1%). Funding and liquidity levels remain sound. Liquidity buffers
increased R18.0 billion to R24.0 billion and the long-term funding ratio
increased to Nedbank`s target level of 25.0%.
Net asset value per share continued to increase, growing by 9.4% to 10,753
cents at 31 December 2011 (2010: 9,831 cents).
During 2011 Nedbank continued to deliver on its vision of building Africa`s
most admired bank and its commitments to all stakeholders. Highlights for the
key stakeholders include:
- For staff: creating 969 additional job opportunities, investing R303 million
in leadership development programmes and continuing the positive shift in
corporate culture.
- For clients: paying out R116 billion in new loans; expanding the range of
distinctive client-centred offerings; launching various new product
innovations; keeping fee increases at or below inflation, with average retail
banking fees remaining at levels similar to those in 2005; increasing
footprint by 121 new staffed outlets and 389 ATMs; further extending banking
hours in 59 branches and Sunday banking in 49 branches and, through
restructures, having kept 13,900 families in their homes since 2009.
- For shareholders: generating a 15.3% total shareholder return, delivering
R924 million EP, declaring a total dividend up 26.0% as well as winning
numerous reporting awards and the Financial Times and Banker magazine`s Bank
of the Year in South Africa for 2011.
- For regulators: increasing capital levels and remaining well positioned for
Basel III and the Solvency Assessment and Management regime; being one of the
first South African banks to receive South African Reserve Bank (SARB)
approval for using the advanced approaches for all three applicable risk
types, and making cash contributions of R5.1 billion relating to direct,
indirect and other taxation.
- For communities: making banking more accessible for the entry-level market
and remote rural communities with initiatives such as Vodacom m- pesa;
extending R1.8 billion in loans to black small to medium enterprises with a
turnover of up to R35 million; assisting over 934 entrepreneurs under skills
development programmes, including the emerging agriculture sector;
contributing R78 million to social development; remaining a Department of
Trade and Industry (dti) level 2 contributor and increasing the dti score to
95.2 from 89.5; spending R6.6 billion on local procurement and playing a
leadership role in environmental sustainability through participation in the
Conference of the Parties 17 (COP17), maintaining our carbon neutrality,
leading in water stewardship and being a signatory to the CEO Water Mandate of
the United Nations Global Compact.
Cluster performance
The business clusters collectively reported an increased ROE of 18.6% (2010:
14.4%) and earnings growth of 30.8%.
Headline earnings (Rm) ROE (%)
2011 2010 % change 2011 2010
Nedbank Capital 1,225 1,202 1.9 23.0 23.5
Nedbank Corporate 1,672 1,496 11.8 25.0 19.7
Nedbank Business Banking 852 825 3.3 23.1 26.4
Nedbank Retail 2,002 760 163.4 11.8 4.6
Nedbank Wealth 625 592 5.6 38.7 41.0
Operating units 6,376 4,875 30.8 18.6 14.4
Centre (192) 25
Total 6,184 4,900 26.2 13.6 11.8
Nedbank Retail`s headline earnings growth and ROE improvement were achieved
through excellent progress strategically and financially in repositioning the
cluster. Delivering distinctive client-centred value propositions enabled
strong new-client growth and markedly increased sales. As a result, the
cluster`s NIR grew 17.3%, primarily driven by higher transactional and lending
volumes. In addition, improved risk-based pricing, effective collections and
rehabilitations resulted in reduced impairments, which contributed to the
robust performance.
The good performance from the wholesale clusters was supported by excellent
risk management, an increase in primary clients and higher usage of innovative
transactional banking offerings. Nedbank Capital navigated well through
difficult and volatile markets and ended the year with a small increase in its
headline earnings. Nedbank Wealth performed well and its 2009 acquisitions
continued to bear fruit, supporting its growth in earnings and embedded value,
while the insurance and asset management businesses contributed strongly.
The centre moved to a loss of R192 million primarily as a result of an
additional amount of R200 million before tax that was raised as a group
portfolio impairment and a R111 million after-tax share-based payments charge
for the Eyethu community share scheme.
Detailed segmental information is available on Nedbank`s website at
www.nedbankgroup.co.za under the `Financial information` section.
Financial performance
Net interest income (NII)
Net interest income (NII) grew 8.6% to R18,034 million (2010: R16,608
million), with NIM growing to 3.46% (2010: 3.35%). Average interest-earning
banking assets increased 5.1% (2010 growth: 3.0%).
The increase in NIM reflects:
- Asset margin expansion on new advances from risk-adjusted pricing and a
change in asset mix.
- The lower cost of term liquidity in 2011.
This was partially offset by:
- The impact of endowment, with average interest rates 90 basis points lower
than in 2010.
- The cost of enhancing Nedbank`s funding profile.
- The cost of carrying higher levels of lower-yielding liquid assets as
Nedbank proactively positions itself for the likely implications of Basel III.
Impairments charge on loans and advances
The credit loss ratio improved to 1.14% for the year (2010: 1.36%), while
further strengthening the portfolio impairment provision.
The credit loss ratio relating to specific impairments improved substantially
to 1.02% for the year (2010: 1.32%) as defaulted advances continued tracking
downwards to R23,073 million (2010: R26,765 million).
Credit loss ratio analysis Dec 2011 H2 2011 H1 2011 Dec 2010 (%)
Specific impairments 1.02 0.93 1.10 1.32
Portfolio impairments 0.12 0.13 0.11 0.04
Total credit loss ratio 1.14 1.06 1.21 1.36
Nedbank maintained a strong focus on credit risk management. The increased
level of portfolio impairments includes R159 million relating to lengthened-
emergence-period assumptions and R200 million in the centre for unknown events
that may have already occurred, but which will only be evident in the future.
Credit loss ratio Dec 2011 H2 2011 H1 2011
Nedbank Capital 1.23 1.57 0.86
Nedbank Corporate 0.29 0.24 0.34
Nedbank Business Banking 0.54 0.67 0.40
Nedbank Retail 1.98 1.73 2.24
Nedbank Wealth 0.25 0.09 0.41
Total 1.14 1.06 1.21
(%)
Through-the-
cycle target
Dec 2010 ranges
Credit loss ratio
Nedbank Capital 1.27 0.10 - 0.35
Nedbank Corporate 0.20 0.20 - 0.35
Nedbank Business Banking 0.40 0.55 - 0.75
Nedbank Retail 2.67 1.50 - 2.20
Nedbank Wealth 0.15 0.20 - 0.40
Total 1.36 0.60 - 1.00
Nedbank Retail`s credit loss ratio of 1.98% (2010: 2.67%) is now within the
cluster`s through-the-cycle target range of 1.50% to 2.20%. Nedbank Capital`s
credit loss ratio remained elevated at levels similar to those of 2010 mainly
due to impairment charges on increased non-performing loans. Credit loss
ratios in Nedbank Corporate, Nedbank Business Banking and Nedbank Wealth
remained within or better than the respective clusters` through-the-cycle
target ranges.
Non-interest revenue (NIR)
The momentum in NIR continued in the second half of 2011, resulting in strong
growth of 16.6% to R15,412 million (2010: R13,215 million) and the ratio of
NIR-to-expenses increasing to 81.5% (2010: 79.6%).
The continued trend of growth in commission and fee income, which was up 16.2%
to R11,335 million (2010: R9,758 million), arose from further primary-client
gains, robust transaction volumes and a good uptake of new products,
particularly in Nedbank Retail, as well as from increased volumes in
electronic channels in the rest of Nedbank.
Insurance income grew strongly at 22.4%, achieved through insurance sales into
the MFC, personal loans and card businesses, as well as an improved
underwriting performance.
Trading income increased by 3.4% to R2,168 million (2010: R2,096 million) in
difficult markets. Private equity income increased by 41.7% to R323 million
(2010: R228 million), mainly from improved realisations and dividends received
in the Nedbank Capital and Nedbank Corporate private equity investment
portfolios.
NIR was negatively impacted by R49 million loss (2010: R213 million loss) over
the year due to fair value adjustments of Nedbank`s subordinated- debt and
associated hedges resulting from the strengthening of Nedbank`s credit
spreads.
Expenses
Nedbank continued to manage core expenses while investing for growth,
resulting in an ongoing improvement in the NIR-to-expenses ratio. Expenses
increased 14.0% to R18,919 million (2010: R16,598 million), comprising expense
growth of 8.0% relating to `business-as-usual` activities, 3.0% relating to
investing for growth initiatives and 3.0% relating to variable compensation.
Overall the main drivers of expense growth were:
- Remuneration costs increasing 12.5%, driven by 3.4% headcount growth and
inflation-related annual increases of 6.5%.
- Short-term incentive costs increasing 35.8% on the back of strong headline
earnings and EP growth.
- Long-term incentive costs increasing R140 million to R262 million, as 2010
contained a reversal of costs when associated corporate performance targets
were not met.
- Volume-driven costs, such as fees and computer processing costs, continuing
to grow in support of revenue generating business activities.
- Investing for growth initiatives taking place across the clusters, which
included the repositioning of Nedbank Retail that entailed footprint rollout,
headcount growth in frontline and collections staff, and system enhancements.
The efficiency ratio increased to 56.6% (2010: 55.7%), reflecting the negative
endowment impact of lower interest rates on NII, compounded by slower growth
in interest-earning banking assets and the strategy of investing for growth.
Nedbank`s compound NIR growth of 10.2% since 2007 continues to exceed its
related compound expense growth of 8.8%.
Taxation
The tax charge increased 60.6% to R2,194 million (2010: R1,366 million), with
the effective tax rate increasing to a more normalised 25.2% (2010: 20.7%).
The increase resulted from:
- The 31.9% growth in income before tax.
- A lower proportion of dividend income relative to total income than in 2010.
- Secondary tax on companies (STC) savings in the first six months of 2010 due
to the take-up of the scrip dividend (81.5%) offered in that period.
- The reversal of certain tax provisions in 2010.
Statement of financial position
Capital
Nedbank`s capital adequacy ratios remain well above its internal targets in
preparation for Basel III and continue to be strengthened as a result of
ongoing risk and capital optimisation, strong growth in organic earnings and a
strategic focus on managing for value and portfolio tilt.
%
2011 2010
Basel II
Core Tier 1 ratio 11.0 10.1
Tier 1 ratio 12.6 11.7
Total capital ratio 15.3 15.0
(%)
Internal target Regulatory
range minimum
Basel II
Core Tier 1 ratio 7.5 to 9.0 5.25
Tier 1 ratio 8.5 to 10.0 7.00
Total capital ratio 11.5 to 13.0 9.75
(Ratios calculated include unappropriated profits.)
Given the predominant focus on the core Tier 1 ratio under Basel III and
considering Nedbank`s strong total capital adequacy ratio, it elected to call
the Nedbank Limited Tier 2 bond (Ned 5) amounting to R1.5 billion in April
2011 without replacing it.
Further detail on capital and risk management will be available in Nedbank`s
Pillar 3 Report to be published in April 2012 on Nedbank`s website at
www.nedbankgroup.co.za.
Risk methodologies and capital allocation
In 2011 Nedbank Limited received approval from the SARB to use, for regulatory
capital purposes, the Internal Model Approach for market trading risk. Nedbank
Limited now has approval for the advanced approaches in respect of all three
of the major Pillar 1 risk approaches under Basel II, having received approval
for using the Advanced Measurement Approach for operational risk, effective
from 2010, and to use the Advanced Internal Ratings-based Approach for credit
risk from the implementation date of Basel II in 2008. This makes Nedbank
Limited one of the first South African banks to operate under all three
advanced risk assessment approaches.
Further enhancements to the internal capital allocation to business clusters
occurred in 2011 to support the closer alignment of group and cluster ROEs.
These enhancements have no impact on Nedbank`s overall capital levels and ROE,
but have impacted the ROEs recorded by the business clusters. This is an
ongoing process born out of evolving regulatory developments such as Basel
III.
Basel III developments
The majority of the international Basel III proposals were finalised in
December 2010, although some significant aspects remain to be completed this
year. The details of how Basel III will be adopted in South Africa are
expected to be determined by the SARB during 2012.
Nedbank expects the impact of the new capital requirements to be manageable.
On a Basel III pro forma basis for 2011 Nedbank is in a position to absorb the
Basel III capital implications, with all capital adequacy ratios remaining
well above the upper end of current internal target ranges. These should
improve further into 2013 (the expected commencement date of Basel III
implementation) from projected earnings, continuing capital and risk
optimisation, and the impact of Nedbank`s strategic portfolio management.
Once Basel III has been finalised in South Africa Nedbank will review its
current target capital ratios.
Two new liquidity ratios have been proposed under Basel III, being the
liquidity coverage ratio (LCR) for implementation in 2015 and the net stable
funding ratio (NSFR) for implementation in 2018. The impact of compliance by
the South African banking industry with, particularly, the NSFR would be
punitive if implemented as it currently stands in the light of structural
constraints within the South African financial market. This is the case for
many jurisdictions around the world, and the negative effect on economic
growth and employment would be significant. Nedbank anticipates that a
pragmatic approach on this issue will be applied prior to implementation in
2018.
Loans and advances
Loans and advances grew 4.4% to R496 billion (2010: R475 billion), with growth
increasing, particularly in the wholesale portfolios, during the fourth
quarter.
Loans and advances by cluster are as follows:
Rm
2011 2010 % change
Banking activity 48,558 42,650 13.9
Trading activity 19,952 19,678 1.4
Nedbank Capital 68,510 62,328 9.9
Nedbank Corporate 164,754 157,703 4.5
Nedbank Business Banking 58,272 50,765 14.8
Nedbank Retail 183,663 187,334 (2.0)
Nedbank Wealth 19,625 16,869 16.3
Other 1,224 274 >100.0
Total 496,048 475,273 4.4
Advances totalling R9 billion were transferred from Nedbank Retail to Nedbank
Business Banking in 2011 to leverage its strong client and risk practices. On
a like-for-like basis the growth in Nedbank Retail was 2.7%, while Nedbank
Business Banking`s advances, excluding the full impact of the Imperial Bank
transfer and other client moves, remained flat.
Deposits
Deposits increased 6.3% to R521 billion (2010: R490 billion) and Nedbank`s
loan-to-deposit ratio strengthened to 95.2% (2010: 96.9%).
Optimising the mix of the deposit book remains a key focus in reducing the
high cost of longer-term and professional funding. This is critical as banks
compete more aggressively for lower-cost deposit pools with longer behavioural
duration as they position their balance sheets in preparation for the Basel
III liquidity ratios. Low interest rates, coupled with low domestic savings
levels and the deleveraging of consumers, led to modest growth in retail
deposits during 2011. Relatively higher deposit growth in commercial deposits
indicated increasing working capital and available capacity among corporate
clients.
Group strategic focus
Nedbank`s key strategic initiatives of repositioning Nedbank Retail, growing
non-interest revenue, implementing the portfolio tilt strategy and expanding
into the rest of Africa will continue to drive earnings growth.
Excellent progress was made in repositioning Nedbank Retail as a more client-
centred and integrated business while maintaining the growth momentum of the
product lines. Strong underlying business performance, growing the number and
quality of primary clients, embedding effective risk management practices and
strengthening balance sheet impairments while improving credit loss ratios,
particularly in home loans, all contributed to Nedbank Retail`s headline
earnings increasing by 163.4% and its ROE increasing from 4.6% in 2010 to
11.8%.
Nedbank`s NIR-to-expenses ratio target of 85% remains a key focus in the
medium term. The objective is to achieve this target by continuing to deliver
good quality annuity income through commission and fee growth from primary
client gains, volume growth, new innovative products and cross-sell across
clusters. Since 2009 Nedbank has added 58 branches, 229 in-retailer kiosks and
719 ATMs, and has refurbished 79 branches, representing an investment of R514
million.
The Optimise to Invest programme involving simplifying information technology
systems and rationalising costs will also benefit the NIR to- expenses ratio
in the medium term.
Nedbank`s portfolio tilt strategy continues to focus on strategically
important EP-rich, lower-capital and liquidity-consuming activities and at the
same time drives the efficient allocation of the bank`s resources while
positioning Nedbank strategically for Basel III. Insurance, asset management,
transactional banking products, selected asset categories and deposits are
important targeted areas for growth. In secured lending Nedbank continues to
focus on profitable business that falls within Nedbank`s board-approved risk
appetite.
In the short to medium term Nedbank`s primary focus on South Africa and the
five southern African countries in which it has a presence provides strong
upside for Nedbank as it increases its EP share in the largest EP pool for
financial services in Africa.
The deepening of the alliance with Ecobank through the granting of a $285
million loan facility and the subscription rights to acquire up to a 20%
shareholding in Ecobank Transnational Inc in two to three years creates a path
to provide a significant benefit to clients in the rest of Africa in a prudent
yet substantive manner and ultimately could provide shareholders with access
to higher economic growth in the rest of Africa.
Economic outlook
South Africa`s GDP is currently forecast to grow by 2.7% in 2012, but remains
dependent on international developments, particularly in Europe.
Given that confidence is anticipated to remain fragile, private sector fixed-
investment activity is expected to remain modest. However, government and
public corporations are forecast to escalate their infrastructure spending,
which should contribute to improved wholesale advances growth.
Consumer spending is anticipated to moderate as concerns about inflation,
house prices and job security prevail. Transactional demand should remain
robust, while credit demand is likely to improve slowly off a low base as
consumer balance sheets strengthen and debt levels decline.
Prospects
Nedbank is well set for continued growth in 2012, building on the earnings
momentum created in 2011 and the focus and success of the delivery on
Nedbank`s strategic initiatives.
In an uncertain global environment Nedbank`s qualities are attractive and
should support continued earnings growth. These qualities include:
- Being one of the big four South African banks (South African banks were
ranked second in the Soundness of Banks category in the World Economic Forum
Global Competitiveness Survey).
- A strong, well-capitalised balance sheet with a prudent funding structure
and sound liquidity.
- A strong wholesale banking franchise returning high ROEs.
- A strengthened and growing retail franchise.
- A growing wealth business returning high ROEs.
- A demonstrated ability to manage costs judiciously over time.
- A growing primary-client base.
- Sound risk management practices.
- A stable and experienced management team.
- Good staff morale and a values-based culture.
There is potential for further uplift from any acceleration of the economic
cycle, as Nedbank NIM should benefit from the positive effect of increased
interest rates on endowment income, improved levels of advances growth and the
prospect of lower credit loss ratios.
These drivers, along with Nedbank`s operational and financial gearing, are
likely to enable continued improvement in Nedbank`s ROA and ROE.
In the context of Nedbank`s 2012 forecast for GDP growth, inflation and
interest rates in South Africa, Nedbank`s guidance for 2012 is as follows:
- Advances to grow at mid single digits.
- NIM to remain at levels similar to those in 2011 and to benefit from
interest rate increases.
- The credit loss ratio to continue improving into the upper end of Nedbank`s
through-the-cycle target range.
- NIR (excluding fair value adjustments) to grow at low double digits,
maintaining Nedbank`s ongoing improvement in the NIR-to-expenses ratio.
- Expenses, including investing for growth, to increase by mid to upper single
digits.
- Nedbank to maintain strong capital ratios and continue to strengthen funding
and liquidity in preparation for Basel III.
Nedbank`s medium-to-long-term targets remain unchanged and are included in the
table below, with an outlook for performance against these targets for 2012:
Metric 2011 performance
ROE (excluding goodwill) 15.3%
Growth in diluted headline 25.4%
earnings per share
Credit loss ratio 1.14%
NIR-to-expenses ratio 81.5%
Efficiency ratio 56.6%
Core Tier 1 capital adequacy 11.0%
ratio (Basel II)
Economic capital
Dividend cover policy 2.26 times
Medium-to-long-term targets 2012 outlook
5% above average cost of ordinary
shareholders` Improving, remaining below target.
equity
>=consumer price index + GDP growth + 5% Above the target level.
Between 0.6% and 1.0% of average banking Improving into upper end of target.
advances
> 85% Improving, remaining below target.
< 50.0% Improving, remaining above target.
7.5% to 9.0% Strengthening, remaining above target.
2.25 to 2.75 times 2.25 to 2.75 times
Capitalised to 99.93% confidence interval on economic capital basis (target
debt rating A, including 10% buffer)
Business Review
Mutual & Federal
Solid performance while building a strong foundation for growth
Rm
Highlights 2011 2010 % Change
Underwriting margin 5.0% 7.6%
Underwriting result 354 519 (32)%
Long-term investment return (LTIR) 625 639 (2)%
AOP (IFRS basis, pre-tax) 1,039 1,162 (11)%
Gross premiums 8,865 8,442 5%
Earned premiums 7,039 6,859 3%
Claims ratio 65.2% 63.8%
Combined ratio 95.0% 92.4%
International Solvency ratio 66% 73%
Return on equity 14.9% 19.0%
Overview
- M&F delivered a sound underwriting result in 2011, with results reflecting a
more normalised year compared to the very favourable trading conditions and
benign claims environment in 2010.
- We increased our focus on achieving premium growth through alternative
distribution channels, including direct through iWyze, underwriting management
agencies and niche business.
- iWyze, M&F`s direct insurance joint venture with the Emerging Markets Mass
Foundation distribution team, is progressing well and continues to meet
premium growth targets. While there was continued investment in this start-up
phase, including an increased headcount from 52 in 2010 to 206 in 2011, we are
on track to deliver underwriting profitability in accordance with
expectations.
- As part of its ongoing capital management programme with the rest of the
Group, M&F restructured its capital base and paid almost R1.0 billion of
dividends in 2011. The company remains well capitalised with a 66%
international solvency ratio (the ratio of net assets to net premiums) at 31
December 2011. Working closely with the FSB and Group, M&F continues to make
good progress in its preparation for Solvency II and its South African
equivalent, Solvency Assessment and Management (SAM)
Underwriting and IFRS AOP results
- AOP was 11% down on 2010, due to a decrease in the underwriting result and a
marginal decrease in the LTIR due to the lower prescribed rate applied in
2011.
- ROE reduced from 19.0% to 14.9%, reflecting reduced after-tax profits
compared to 2010.
- Premiums increased modestly as softening rates offset unit growth. The
commercial portfolio performed well in terms of client retention and
underwriting profit. iWyze achieved outstanding premium growth in its first
full year of operation and already it has become a meaningful competitor in
the direct market for personal insurance.
- The underwriting result was 32% down on 2010, impacted by softening rates
and the expected normalisation in claims patterns which saw the claims ratio
increase from 63.8% in 2010 to 65.2%
- The 2010 claims ratio benefited from unusually benign claims conditions in
H2 2010 with abnormally low levels of commercial losses and very favourable
climatic conditions.
- Expenses increased, primarily due to investment in change management
initiatives to improve client service and drive operating efficiencies, as
well as development costs associated with iWyze.
- The Credit Guarantee operation performed particularly well over the period,
with other portfolios generating solid returns. The businesses in Namibia and
Botswana continued to deliver satisfactory contributions.
Outlook
- We anticipate real top-line growth in 2012, with increased contributions
from alternative channels including direct through iWyze and underwriting
management agencies.
- Our further investment in change management initiatives over the next two
years will directly improve the claims ratio while reducing the expense base
over the medium term. We expect this to lead to an underwriting margin that is
sustainable throughout the underwriting cycle in the long-term and in line
with the 2011 margin.
- We continue to partner Old Mutual Emerging Markets in the rest of Africa to
identify opportunities and exploit synergies.
US Asset Management
Continuing operations achieve improved financial results and reduced net
outflows despite challenging markets
$m
Highlights 2011 2010 Change
Reported results
AOP (IFRS basis, pre-tax) 107 111 (4)%
Operating margin, before non-controlling
interests 18% 18%
Operating margin, after non-controlling interests 15% 15%
Net client cash flows ($bn) (24.6) (18.4)* (34)%
Funds under management ($bn) 231.5 258.3* (10)%
$m
2011 2010 Change
Results from continuing operations
AOP (IFRS basis, pre-tax) 131 113 16%
Operating margin, before non-controlling
interests 22% 20%
Operating margin, after non-controlling interests 19% 17%
Net client cash flows ($bn) (6.7) (12.6)* 47%
Funds under management ($bn) 200.3 207.4* (3)%
* 2010 NCCF and FUM were restated to exclude some of Larch Lane`s funds, which
were also included in Emerging Markets NCCF and FUM
Overview
- USAM delivers institutionally-driven, active investment management through
its multi-boutique framework. Our 17 boutique firms (affiliates) offer a
diverse set of products to a wide range of institutions around the globe.
- USAM supports its affiliates from the centre by providing selected product
distribution, seed capital, risk management, technology, legal and internal
audit capabilities. With this strong support from a global wealth management
organisation, affiliates can remain focused on generating superior investment
performance for their clients.
- The new USAM management team has taken steps to refine strategy and refocus
the business. As part of that effort, several affiliate firms are being
divested to improve longer-term financial performance. We are therefore
presenting our results on two bases: reported results, and results from
continuing operations. Results from continuing operations exclude the
operating results of the affiliates being divested and certain restructuring
costs(1). The key impact of these strategic actions, reflected in the
continuing operations, is a reduction in net cash outflows from $24.6 billion
to $6.7 billion and an increase in operating margin from 18% to 22%. In
addition, fees on average assets under management increase from 28 basis
points to 31 basis points on a continuing basis.
IFRS AOP results and operating margin
Reported results
- IFRS AOP was down 4% to $107 million (2010: $111 million). These figures
exclude gains/losses on seed capital which have been captured at the Group
level for 2011 and comparative periods. Seed capital investment returns on
strategies managed by our affiliates were $(0.5) million (2010: $24.0
million).
- Overall revenue was down $3.6 million due to a 2% decrease in average FUM
and lower performance fees, partially offset by higher transaction fees.
- Management fees decreased by $11.6 million or 2% and performance fees were
down $2.7 million or 25%. However, transaction fees were up $7.3 million or
103% to $14.4 million for the period.
- AOP operating margin before non-controlling interests was consistent with
2010 at 18%.
Results from continuing operations
- Excluding operating results from affiliates held for sale or disposed of,
and adding back $12 million of restructuring costs, AOP was up 16% to $131
million (2010: $113 million). This was largely due to higher management fees,
lower DAC amortisation and impairments during 2012, and lower central costs.
- Management fees were up $6 million or 1% due to higher average FUM.
- AOP operating margin before non-controlling interests was 22%, up from 20%
in 2010. Improving operating margin continues to be an area of focus.
(1) Excludes results of OMCAP, Lincluden, and Dwight Asset Management, as well
as $12 million of restructuring costs in 2011.
Business Review
Investment Performance
Results from continuing operations
- Investment performance continued to improve during the period. For the one-
year period ended 31 December 2011, 62% of assets outperformed benchmarks,
compared to 57% at 31 December 2010.
- Over the three- and five-year periods to 31 December 2011, 68% and 67% of
assets outperformed benchmarks, compared to 49% and 65% at 31 December 2010.
The increase was driven by improving performance in International Equity and
Global Fixed Income.
Funds under management and net client cash flows
$bn
Flows from continuing
operations
2011 2010
Opening FUM 207.4 198.8
Gross inflows 25.6 25.9
Gross outflows (32.3) (38.5)
Net outflows (6.7) (12.6)
Market and other (0.4) 21.2
Closing FUM 200.3 207.4
Flows from disposed of
or held for sale affiliates
2011 2010
Opening FUM 50.9 61.9
Gross inflows 3.8 5.0
Gross outflows (21.7) (10.8)
Net outflows (17.9) (5.8)
Market and other (1.8) (5.2)
Closing FUM 31.2 50.9
Total
2011 2010
Opening FUM 258.3 260.7
Gross inflows 29.4 30.9
Gross outflows (54.0) (49.3)
Net outflows (24.6) (18.4)
Market and other (2.2) 16.0
Closing FUM 231.5 258.3
Reported results
- FUM ended the year at $231.5 billion (2010: $258.3 billion).
- The disposal of Lincluden Investment Management during the period reduced
FUM by $2.7 billion.
- Net client cash outflows totalled $24.6 billion (2010: $18.4 billion),
largely relating to low-fee stable value funds.
- Market volatility and weakness during the year contributed to withdrawals
and reallocations.
- Gross inflows during the period totalled $29.4 billion (2010: $30.9
billion), with $7.6 billion of gross inflows coming from new client accounts
during the period.
- Gross outflows totalled $54.0 billion (2010: $49.3 billion), with $18.8
billion of outflows relating to low fee stable value funds (2010: $8.2
billion).
Results from continuing operations
- FUM decreased 3% to $200.3 billion (31 December 2010: $207.4 billion)
reflecting flat markets overall and net client cash outflows.
- FUM was primarily long-term investment products diversified across equities
($113 billion, 56%), fixed income ($57 billion, 29%) and alternative
investments ($30 billion, 15%).
- Net client cash outflows of $6.7 billion showed improvement over the prior
year (2010: $12.6 billion), as enhanced investment performance stabilised
outflows in key products.
- Net outflows declined to $0.1 billion in Q4 2011, their lowest quarterly
level since Q2 2009.
- Gross inflows totalled $25.6 billion (2010: $25.9 billion). Top 2011 gross
sales were driven by Emerging Market Equity, Real Estate, Fixed Income and Low
Volatility Equity.
- Gross outflows totalled $32.3 billion (2010: $38.5 billion), driven by
outflows from US equities, particularly large cap. This is consistent with the
overall asset management industry`s experience in 2011.
- Non-US clients currently account for 34% of FUM. International, emerging
markets and global equity products account for 24% of the FUM.
Corporate developments
- The transaction transferring ownership of Lincluden Investment Management to
the affiliate`s management team closed on 30 December 2011.
- The previously announced sale of our domestic retail business, OMCAP, is
progressing as planned and is expected to close in April 2012.
- In February 2012, we announced that Goldman Sachs has entered into a
definitive agreement to acquire Dwight Asset Management Company LLC, an
institutional fixed income affiliate based in Burlington, Vermont. The
transaction is expected to close in Q2 2012.
- In Q4 2011 we announced organisational changes to support the strategic
expansion of our global distribution efforts.
Outlook
- We expect continued improvement in NCCF in 2012 as a result of enhanced
investment performance in a number of key products. The improved investment
performance over 2011 initially reduced outflows and subsequently increased
sales, we believe this trend could lead to positive flows in 2012.
- In 2012 and beyond, we expect to make investments in our global distribution
capabilities to further leverage Group capabilities and distribution
platforms. This will enable USAM to better leverage the affiliates` investment
expertise for clients around the world.
- We remain committed to achieving our financial goals of 25-30% operating
margin and expect continued improvement in USAM`s margin in 2012, particularly
if equity markets remain strong throughout the year and NCCF turn positive.
However, we will continue to invest in the business by incurring current
expenses which may partially inhibit margin growth in the short term but
achieve important financial and strategic objectives in future years.
Non-core business - Bermuda
Bermuda remains a non-core business. Its results are excluded from the Group`s
IFRS AOP, although the interest charged on internal loans from Bermuda to
Group Head Office is charged to AOP.
Overview
The business continued to implement its run-off strategy of risk reduction
while managing for value. Ongoing business service improvements, enhancements
to liability management and further de-risking initiatives, targeted
specifically at contracts that have elected the Guaranteed Minimum
Accumulation Benefits (GMABs), are designed to accelerate the run-off of the
in-force book.
IFRS results
The IFRS post-tax loss of $286 million (2010: $41 million gain) was driven by
the guarantee performance arising primarily from equity market declines in H2
and a reduction in US interest rates. There was an IFRS post-tax profit of $76
million in H1. The impact of the dynamic hedging programme over 2011 helped to
reduce the losses on the variable annuity guarantees. Notwithstanding the
hedging programme, given current equity market conditions the business expects
volatility in earnings in the short to medium term.
MCEV results
The 2011 operating MCEV earnings resulted in a gain after tax of $76 million
(2010: $36 million loss). Operating earnings include positive persistency
experience variance and assumption changes in 2011 compared to one-time
negative corrections from data migration and modelling changes in 2010.
Total MCEV earnings including economic variances and other non-operating
variances was a loss of $343 million, mainly due to significant under
performance of the variable annuity guarantee business.
The MCEV balance reflects the value of the reserve plus the other net assets
of the business including the collateral posted under the hedge programme, the
fee revenue to be collected and expenses to be paid to run-off the entire
business. Thus the VIF reflects the full market cost of providing an
instrument that matches the expected development of the liability. Changes in
the hedge programme from the levels actually used will not change the value of
the reserve itself but may change the value of the collateral posted under the
hedging programme and the adjusted net worth which together with the VIF
generate the MCEV for the business.
Reserve development
The development of the Bermuda business reserves are shown below:
$m
2011 2010
Variable annuity investments 3,130 4,495
Variable annuity guarantee liabilities 1,061 672
Deferred & fixed index annuities 640 939
Total insurance liabilities 4,831 6,106
The overall reduction in liabilities reflects the surrenders experienced in
the year and negative investment return earned, offset by the increase in the
guarantee reserve.
Of total insurance liabilities of $4,831 million, $3,130 million is held in a
separate account relating to variable annuity investments. Of the remaining
reserves $1,061 million relates to guarantee liabilities on the variable
annuity business and $640 million relates to other policyholder liabilities,
including deferred and fixed indexed annuity business.
The GMAB reserve in respect of universal guarantee option (UGO) contracts has
been set-up for the full period of the contract length, including the five-
year anniversary top-up of 105% of total premiums, the 10-year 120% top-up of
total premiums and any high water mark contracts.
At the year-end there were 27,820 UGO contracts, of which 720 had high water
marks over and above the 120% top up entitlements.
The $389 million increase in GMAB reserve during the period was largely
attributable to poor equity market performance, but lower interest rates
increased the reserve by almost $79 million.
Mapping of policyholder investment funds to hedgeable indices is performed at
least quarterly. This has improved the accuracy of the GMAB reserve
calculations and the effectiveness of hedging.
The sensitivity to capital markets on GMABs with UGO is highlighted in the
table below, showing quarterly GMAB reserves and estimated fifth-anniversary
guarantees over the past 18 months:
$m
Estimated top-up payment of meeting
Guarantee reserves for UGO GMAB UGO GMAB fifth-anniversary guarantees
Period
30 June 2010 996 775
30 September 2010 824 458
31 December 2010 660 334
31 March 2011 573 303
30 June 2011 620 346
30 September 2011 1,144 738
31 December 2011 1,035 689
Surrender development
Surrender activity is being proactively managed through further service
enhancements and fund expansion, with conservation strategies focused on the
non-GMAB book of business. The account values associated with GMAB and non-
GMAB for 2010 and 2011 are shown in the table below:
$m
Period Account Value: GMAB Account Value: Non-GMAB Total Account
Value
31 December 2011 2,858 912 3,770
31 December 2010 4,143 1,291 5,434
We continue to engage with distributors, developing the customer proposition
and experience through a strengthened adviser focused strategy. Bermuda is
maintaining high levels of customer service through continued operational and
service improvements.
The $1.2 billion of surrenders across the whole Bermuda book during the period
amounted to some 22% of the total 31 December 2010 account value. This was
partially attributable to initiatives allowing UGO GMAB contract holders to
surrender their contracts without penalty charges. These initiatives increased
the rate, value and number of guarantee contract surrenders; overall surrender
activity across UGO GMAB was over two and a half times 2010 levels (2011:
2,175 policies; 2010: 796 policies). Management continues to assess demand for
similar offers to accelerate further the run-off of the UGO guaranteed book.
Future surrender behaviour will be influenced by the extent to which the
underlying fund values of the policyholders are close to or above the level of
the guarantee.
Risk management and investment portfolio update
No defaults or impairments were recorded during 2011. The portfolio has a
current average rating of A3 (Moody`s rating scale) with investment grade
quality holdings continuing to represent more than 80% of the portfolio.
The net unrealised position was a gain of $29 million at 31 December 2011
(2010: $31 million gain) as a result of continued de-risking efforts and the
decrease in US interest rates, offset somewhat by a widening of corporate
spreads. Overall, the book value of the portfolio reduced from $0.8 billion at
the end of 2010 to $0.6 billion at 31 December 2011, largely due to the sale
of investments to meet surrender activity and withdrawals.
The year-end book value of assets in the investment portfolio with a market
value to book value ratio of 80% or lower was zero (compared to $3 million at
31 December 2010). The bond portfolio which forms part of shareholder assets
is invested to match the duration of obligations to policyholders and has a
running yield of 5%, higher than the 3% interest credited to certain
policyholders.
Hedging
Over the period the business continued to dynamically manage the underlying
economics of the hedging programme to strike a balance between the potential
changes in the income statement, liquidity and transactional costs. At 31
December 2011 hedge coverage over equities was 54% (2010: 58%) and 53% over
foreign exchange (2010: 39%), with interest rates remaining unhedged (2010:
nil). The exposures are primarily to Asian equities and currencies versus the
US dollar.
At 31 December 2011, the total cost of fifth-anniversary top-up payments to
policyholders in respect of the GMAB liabilities over the next two years was
estimated at $689 million (30 September 2011: $738 million; 30 June 2011: $346
million; 31 December 2010: $334 million). The actual cash cost will be
affected by any changes in policyholders` account values until the fifth-
anniversary date of each policy, offset by hedge gains or losses. At 29
February 2012 rising equity markets had reduced the cash cost of top-up
payments required to meet fifth-anniversary guarantees to $426 million and the
GMAB reserve to $791 million. At the level of hedging in place at 29 February
2012, a 1% fall in equity market levels would have increased the net cash cost
of meeting policyholder guarantees by approximately $11 million.
In March 2012 Bermuda enhanced its hedging strategy by implementing an option
based hedging arrangement. This strategy will protect against downside risk
from further equity market declines relating to meeting the cash-cost of the
fifth-year anniversary of UGO contract top-up obligations, while maintaining
the potential to realise gains if equity markets move higher. The existing
futures based dynamic hedging strategy will remain in place for the variable
annuity book exposure beyond five years. Also, the exposure to currency
movements impacting the UGO top-ups will continue to be dynamically hedged.
Fifth-anniversary payments began on 5 January 2012 but the bulk of the
payments will be made between 1 October 2012 and 31 January 2013. The enhanced
hedging strategy aims to provide greater cash flow certainty over the period
when the fifth-year anniversary UGO top-up payments fall due. We remain
confident that the fifth-anniversary top-ups can be met within the estimated
cost as at 31 December 2011 and expect the cash cost to be met from Bermuda`s
own resources.
Statutory capital reduced to $291 million at 31 December 2011 reflecting the
IFRS loss for the year (2010: $625 million). Capital allocated to the business
on a local level takes into account the inter-company loan from the business
to the Group. At the end of December 2011, the Bermuda Class E prudential
rules had been signed into Bermuda law, so the new BMA regulatory framework is
in effect from 2011. The amount of Bermuda solvency required capital for
financial year 2011 is estimated at about $120 million under the current
transition rule. The business continues to maintain a sufficient statutory
capital surplus against such a requirement.
Treasury management of Bermuda business assets
The Bermuda business assets backing the liabilities include:
$m
2011 2010
Cash 256 114
Fixed income general account portfolio 543 839
Collateral for hedge assets 91 77
Intercompany loan 830 880
Separate Account assets 3,130 4,495
Other assets 309 384
Total Assets 5,160 6,789
As the most active period of the fifth-anniversary guarantee payments
approaches the business will seek to sell assets from its fixed income general
account portfolio and together with the other liquid assets of the business
meet the cash requirements of the top-ups as they fall due. Collateral posted
for the hedge assets will adjust as the liabilities develop and could be
released as the business evolves. The inter-company loan is structured in
tranches allowing capital and treasury management flexibility if this is
required from this source.
Discontinued business - Nordic
Despite the turbulent stock markets and a number of one-off costs, the Nordic
business had a robust underlying IFRS AOP result. A cost reduction programme
was implemented during the year and the management team has refocused the
business on delivering its key priorities, namely:
- Strengthening distribution power
- Improving the product offering to customers
- Stimulating future NCCF growth
- Increasing operational efficiency to secure profitable growth
- Optimising structures and risk frameworks to unlock value
Product development has been accelerated with the release of the Depa pension
product and a bank investment savings account.
According to customer surveys, Skandiabanken had the most satisfied banking
customers for the tenth year in a row and was also nominated for best customer
service in Norway in 2011.
Net client cash flow and funds under management
NCCF decreased 3% to SEK7.2 billion, driven by higher surrenders in the
occupational pension business and outflows from the bank offering. The
increased outflows in Skandiabanken were primarily driven by customers seeking
lower-risk investments, such as deposit accounts. Skandiabanken Sweden retail
deposits grew, which are not included in NCCF, to SEK33.1 billion.
FUM reduced by 8% to SEK134.3 billion at the year-end, with negative market
movements partially offset by positive NCCF. The stock market recovery during
the fourth quarter had a positive impact on FUM.
Sales
APE sales rose 6% to SEK2,381 million, driven by strong sales in Denmark as a
result of attractive products and continued distribution growth via the Tied
Agents sales force. Swedish APE sales were 5% down, with lower Corporate
sales. Corporate business growth was held back by the delay in launching the
occupational pension version of the Depa product and the current market
conditions, which favour products with guarantees.
Mutual fund sales were up 1% to SEK6,553 million, with customers transferring
assets to the low risk and popular Skandia interest-earning funds.
IFRS AOP results*
IFRS AOP (pre-tax) was down 16% to SEK1,036 million (2010:SEK1,227 million).
The 2010 result included one-off income of SEK126 million related to a
divestment of a private equity holding and restructuring costs of SEK49
million. The 2011 result includes several one-off costs totalling SEK281
million, including IT costs. Excluding all one-off items, the underlying
profit was SEK1,317 million (2010: SEK1,150 million) - a robust result in a
challenging economic climate.
MCEV results
Operating MCEV earnings after tax increased to SEK1,336 million (2010: SEK503
million), primarily due to growth in existing business contribution, strong
new business value and a strengthening of operating assumptions in 2010 that
negatively impacted 2010 earnings. Operating MCEV earnings included two one-
off effects, a restructuring expense from the ongoing redundancy programme and
a change in the modelling of tax on overhead expenses. Without these two non-
recurring effects, operating MCEV earnings after tax would have been SEK1,482
million.
The value of new business increased 27% to SEK584 million, driven by positive
new sales in Skandia Link Denmark. The APE margin increased from 20.6% to
24.5%, due to a more profitable product mix.
* As a non-core business the Nordic results are reported on an IFRS basis.
However, for the purpose of comparability with previous periods Nordic has
been included in the Business Review as if it is still being reported under
AOP.
Long-Term Savings - Emerging Markets
Highlights
Rm
Highlights 2011 2010 % Change
Net client cash flows (Rbn) 5.1 0.2
Funds under management (Rbn) 626.3 585.7 7%
Life assurance sales (APE) 6,098 5,505 11%
PVNBP ** 38,376 36,975 4%
Unit trust/mutual fund sales and other non-life
sales 94,825 78,736 20%
AOP (IFRS basis, pre-tax) 6,641 6,099 9%
Return on equity * 24% 25%
Return on allocated capital (OMSA only) 24% 25%
Value of new business ** 1,157 972 19%
APE margin ** 20% 18%
PVNBP margin ** 3.0% 2.6%
Operating MCEV earnings (covered business,
post-tax) 4,059 3,877 5%
Return on embedded value (covered business,
post-tax) ** 11.9% 13.2%
* ROE is calculated as IFRS AOP (post-tax) divided by average shareholders`
equity (excluding goodwill, PVIF and other acquired intangibles) for Asia &
Latin America, whilst for OMSA and Rest of Africa it is calculated as return
on allocated capital.
** PVNBP, value of new business, APE margin and PVNBP margin do not include
Zimbabwe, Kenya, Malawi and Swaziland (the other African countries) in 2011 or
2010. The return on embedded value (covered business, post tax) does not
include the other African countries in the opening MCEV in 2011 or 2010.
Adjusted operating profit
Rm
2011 2010 % Change
Retail Affluent 2,355 2,098 12%
Mass Foundation Cluster 1,529 1,196 28%
Corporate 693 1,066 (35)%
Rest of Africa * 404 248 63%
Asia & Latin America 225 172 31%
LTIR 1,308 1,221 7%
Life and Savings 6,514 6,001 9%
OMIGSA 950 1,109 (14)%
Central expenses and administration (823) (1,011) (19)%
AOP (IFRS basis, pre-tax) 6,641 6,099 9%
* 2011 includes Namibia, Zimbabwe, Kenya, Malawi and Swaziland. Prior year
comparatives represent Namibia only. Namibian AOP in 2011 was R188
million.
Business Review - Appendix
APE sales
Rm
Gross single premiums Gross regular premiums
By Cluster: 2011 2010 +/-% 2011 2010 +/-%
South Africa
MFC 26 14 86% 2,017 1,571 28%
Retail Affluent 8,622 9,620 (10)% 1,442 1,381 4%
Corporate 5,036 4,926 2% 427 454 (6)%
OMIGSA 2,016 2,966 (32)% - - n/a
Total South Africa 15,700 17,526 (10)% 3,886 3,406 14%
Rest of Africa* 1,230 475 159% 408 196 108%
Total Asia & Latin
America** 216 231 (6)% 89 79 13%
Total Emerging
Markets 17,146 18,232 (6)% 4,383 3,681 19%
By Product: 2011 2010 +/-% 2011 2010 +/-%
South Africa
Savings 12,462 14,068 (11)% 1,803 1,654 9%
Protection - - n/a 2,083 1,752 19%
Annuity 3,238 3,458 (6)% - - n/a
Total South Africa 15,700 17,526 (10)% 3,886 3,406 14%
Total APE Total PVNBP
By Cluster: 2011 2010 +/-% 2011 2010 +/-%
South Africa
MFC 2,020 1,572 28% 8,713 6,995 25%
Retail Affluent 2,304 2,343 (2)% 16,368 16,344 -
Corporate 930 947 (2)% 8,658 8,826 (2)%
OMIGSA 202 297 (32)% 2,016 2,962 (32)%
Total South Africa 5,456 5,159 6% 35,755 35,127 2%
Rest of Africa* 531 244 118% 2,123 1,363 56%
Total Asia & Latin
America** 111 102 9% 498 485 3%
Total Emerging
Markets 6,098 5,505 11% 38,376 36,975 4%
By Product: 2011 2010 +/-% 2011 2010 +/-%
South Africa
Savings 3,049 3,061 - 20,730 22,441 (8)%
Protection 2,083 1,752 19% 11,787 9,228 28%
Annuity 324 346 (6)% 3,238 3,458 (6)%
Total South Africa 5,456 5,159 6% 35,755 35,127 2%
* 2011 APE sales include Namibia, Zimbabwe, Kenya, Malawi and Swaziland,
whereas PVNBP includes Namibia only. Prior year comparatives represent
Namibia only. Total Namibian life APE sales in 2011 amount to R331
million.
** Asia & Latin America represents Mexico only.
Unit trust / mutual fund sales and other non-covered sales
Rm
New business 2011 2010 +/-%
OMSA 20,934 21,452 (2)%
Rest of Africa* 4,778 5,360 (11)%
Asia & Latin America 19,401 14,676 32%
Total unit trust & mutual fund sales 45,113 41,488 9%
Other non-life sales** 49,712 37,248 33%
Total Emerging Markets 94,825 78,736 20%
* 2011 Rest of Africa includes Namibia, Zimbabwe, Kenya, Malawi and
Swaziland. Prior year comparatives represent Namibia only. Total Namibian
unit trust & mutual fund sales in 2011 amount to R4,227 million.
** Other non-life sales for 2011 include Zimbabwe CABS flows which amount to
R6,800 million.
Long-Term Savings - Wealth Management
Highlights
GBPm
2011 2010 % Change
Net Client Cash Flows (GBPbn) 2.5 3.9 (36)%
Funds under management (GBPbn) 54.4 55.9 (3)%
Life assurance sales (APE) 611 734 (17)%
PVNBP 5,269 6,380 (17)%
Unit trust/mutual fund sales 4,669 4,507 4%
AOP (IFRS basis, pre-tax) 179 197 (9)%
Return on equity* 16% 14%
Value of new business (post-tax) 70 66 6%
APE margin 11% 9%
PVNBP margin 1.3% 1.0%
Operating MCEV earnings (covered business,
post-tax) 184 112 64%
Return on embedded value (covered business,
post-tax) 9.3% 6.1%
* Return on equity is IFRS AOP (post-tax) divided by average shareholders`
equity, excluding goodwill, PVIF and other acquired intangibles
APE sales
GBPm
Gross single premiums Gross regular premiums
Life new business 2011 2010 +/-% 2011 2010 +/-%
Total UK market
Pensions 1,871 2,021 (7)% 68 71 (4)%
Bonds 440 597 (26)% - -
Protection - - 8 10 (20)%
Savings - - 5 9 (44)%
Total UK 2,311 2,618 (12)% 81 90 (10)%
Of which UK Platform 2,056 2,033 1% 38 35 9%
Of which UK Legacy 255 585 (56)% 43 55 (22)%
International markets
Unit-linked 209 324 (35)% 26 44 (41)%
Bonds 1,350 1,253 8% 26 23 13%
Total International 1,559 1,577 (1)% 52 67 (22)%
Continental Europe
markets
Unit-linked 844 1,490 (43)% 7 9 (22)%
Total Wealth Management 4,714 5,685 (17)% 140 166 (16)%
Total APE Total PVNBP
Life new business 2011 2010 +/-% 2011 2010 +/-%
Total UK market
Pensions 255 273 (7)%
Bonds 44 60 (27)%
Protection 8 10 (20)%
Savings 5 9 (44)%
Total UK 312 352 (11)% 2,639 3,023 (13)%
Of which UK Platform 244 239 2% 2,227 2,234 -
Of which UK Legacy 68 113 (40)% 412 789 (48)%
International markets
Unit-linked 47 77 (39)%
Bonds 161 148 9%
Total International 208 225 (8)% 1,755 1,826 (4)%
Continental Europe
markets
Unit-linked 91 157 (42)% 875 1,531 (43)%
Total Wealth Management 611 734 (17)% 5,269 6,380 (17)%
Unit trust / mutual fund sales
GBPm
Mutual fund new business 2011 2010 +/-%
UK market 3,596 3,256 10%
International markets 1,044 1,228 (15)%
Continental Europe markets 29 23 26%
Total Wealth Management 4,669 4,507 4%
Business Review - Appendix
Long-Term Savings - Retail Europe
Highlights
EURm
2011 2010 % Change
Net client cash flows (bn) 0.4 0.5 (20)%
Funds under management (bn)* 5.5 5.8 (5)%
Life assurance sales (APE) 83 80 4%
PVNBP 632 597 6%
Unit trust/mutual fund sales 23 27 (15)%
AOP (IFRS basis) (pre-tax) 50 60 (17)%
Return on equity** 15% 20%
Value of new business 9 9 -
APE margin 11% 11%
PVNBP margin 1.5% 1.4%
Operating MCEV earnings (covered business,
post-tax) 21 77 (73)%
Return on embedded value (covered business,
post-tax) 3.0% 12.8%
* Funds under management are shown on a start manager basis
** Return on equity is IFRS AOP (post-tax) divided by average shareholders`
equity, excluding goodwill, PVIF and other acquired intangibles
APE sales
EURm
Gross Single Premiums
New business 2011 2010 +/-%
Germany 30 31 (3)%
Poland 15 21 (29)%
Austria 8 7 (14)%
Switzerland 11 14 (21)%
Total Retail Europe 64 73 (12)%
Gross Regular Premiums
New business 2011 2010 +/-%
Germany 29 29 -
Poland 22 18 22%
Austria 16 17 (6)%
Switzerland 10 9 11%
Total Retail Europe 77 73 5%
Total APE
New business 2011 2010 +/-%
Germany 32 32 -
Poland 23 20 15%
Austria 17 18 (6)%
Switzerland 11 10 10%
Total Retail Europe 83 80 4%
Total PVNBP
New business 2011 2010 +/-%
Germany 276 278 (1)%
Poland 125 114 10%
Austria 107 109 (2)%
Switzerland 124 96 29%
Total Retail Europe 632 597 6%
Date: 09/03/2012 09:00:01 Produced by the JSE SENS Department.
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