| Mon 23 Feb 2004, 9:16 | | RESULTS FOR THE YEAR ENDED 31 DECEMBER 2003 |
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OLD MUTUAL PLC - RESULTS FOR THE YEAR ENDED 31 DECEMBER 2003
OLD MUTUAL PLC
ISIN CODE: GB0007389926
JSE SHARE CODE: OML
NSX SHARE CODE: OLM
ISSUER CODE: OLOML
RESULTS FOR THE YEAR ENDED 31 DECEMBER 2003
HIGHLIGHTS
* Adjusted operating profit* GBP650 million (2002: GBP724 million), R8,041
million (2002: R11,431 million)
* Operating profit: GBP475 million (2002: GBP473 million**), R5,884 million
2002: R7,453 million**)
* Adjusted operating earnings per share* 10.0p (2002: 11.3p), 123.8c (2002:
179.0c)
* Basic operating earnings per share: 8.0p (2002: 5.9p**), 99.1c (2002:
93.5c**)
* Life sales of GBP529 million on an Annual Premium Equivalent basis
* Value of life assurance new business GBP105 (after tax)
* Net positive fund inflows of over $4.7 billion in the USA (including $1.8
billion from our US life operations)
* Adjusted embedded value: GBP4,124 million (2002: GBP3,928 million), R49,230
(2002: R54,267 million)
* Return on equity 13.9%
* Final dividend unchanged at 3.1p***
" Good results were achieved in five of our six businesses in 2003, and
important steps were taken towards our strategic goals. Our capital position
remains strong and our clients showed their approval of our products and skills
by giving us significantly more assets to manage. We have announced our plans to
lead Nedcor to recovery."
Jim Sutcliffe, Chief Executive, 23 February 2004
Wherever the items asterisked in the Highlights are used, whether in the
Highlights, the Chief Executive"s Statement or the Operating and Financial
Review, the following apply:
* Adjusted operating profit represents the directors" view of the underlying
performance of the Group. For life assurance and general insurance
businesses, adjusted operating profit is based on a long-term investment
return and includes investment returns on own shares held within the
policyholders" funds. For banking business, adjusted operating profit
excludes the loss on disposal of investment in Dimension Data Holdings plc,
Nedcor restructuring and integration costs and the transitional impact of
the change in credit provisioning methodology. For all businesses, adjusted
operating profit excludes goodwill amortisation and impairment.
Adjusted operating earnings per share are similarly based, but are stated after
tax and minority interests, with the calculation of the weighted average number
of shares including own shares held in policyholders" funds.
** Comparative figures have been restated to reflect the adoption of Urgent
Issues Taskforce Abstract 37 Purchases and sales of own shares.
*** The dividend recommended (final 3.1p per share, making 4.8p per share for
the year) will be converted, for payment to shareholders on the branch registers
and the Namibian section of the principal register, into local currencies at
exchange rates ruling on 1 April 2004.
Further enquiries:
Old Mutual plc, London:
James Poole, Director, Corporate Affairs Tel: +44 (0)20 7002 7000
Tel: +44 (0)7768 991096 (mobile)
Miranda Bellord, Media Relations Tel: +44 (0)20 7002 7133
Tel: +44 (0)7946 722381 (mobile)
Old Mutual plc, South Africa:
Nad Pillay, Head of Communications,
South Africa Tel: +27 (0)21 509 2446
Tel: +27 (0)82 553 7980 (mobile)
College Hill Associates, London:
Tony Friend Tel: +44 (0)20 7457 2020
Tel: +44 (0)7498 864995 (mobile)
Notes to Editors
A webcast of the analyst presentation and Q&A will be broadcast live at 09.00
(UK time) on our website at www.oldmutual.com
High resolution images are available for the media to view as a free of charge
download from http://media.oldmutual.com/om/media/library
An interview with Jim Sutcliffe, Chief Executive of Old Mutual plc, in video,
audio and text will be available from 07.15 (UK time) on Monday, 23 February
2004 on www.oldmutual.com and www.cantos.com. An interview with Tom Boardman,
Chief Executive of Nedcor Limited, in video, audio and text will be available
from 07.15 (UK time) on Monday, 23 February 2004 on www.nedcor.com and
www.cantos.com
A full copy of these results and the associated presentation to analysts,
together with photographs and biographical details of the Executive Directors of
Old Mutual plc, is available in electronic format. Alternatively they are
available for download from the Company"s website at www.oldmutual.com
Chief Executive"s Statement
Group adjusted operating profit for 2003 was GBP650 million, equivalent to 10.0p
per share (2002: GBP724 million and 11.3p respectively). Group adjusted perating
profit in Rand terms was R8,041 million, equivalent to 123.8c per share (2002:
R11,431 million and 179.0c respectively). Solid profits in our core South
African life assurance business, good profit growth in our US and UK businesses
and excellent results from some of our smaller units were offset by a collapse
in earnings at Nedcor. The strong Rand further boosted the Sterling results, but
adversely affected the results when expressed in South African currency terms.
Return on equity was disappointing at 13.9%.
Our embedded value increased by 5% to GBP4,124 billion at 31 December 2003,
equivalent to 107.5p per share.
Life assurance sales were 5% lower than in 2002 and the value of new business
(after tax) at 105 million pounds sterling was 19% lower. Low consumer
confidence led to a decline in the market for single premiums in South Africa,
and the demand for fixed interest-based products returned to more normal levels
in the USA. We are confident we retained our market shares in both countries,
and our US life sales were still more than double the level Fidelity & Guaranty
Life achieved prior to our ownership. Margins at our South African and US life
businesses improved strongly in the second half after a difficult first six
months.
Net fund inflows were strong. Our US asset management business produced a good
result ($4.7 billion net inflow) and our two UK development businesses Selestia
and OMAM(UK) made a significant impact for the first time, with GBP340 million
of net inflow. In South Africa, we were able to reduce the outflow within our
Employee Benefits business, and the maturity bubble of the last few years
started to reduce. With stronger equity markets and these net inflows, total
assets under management, which form the basis for much of our revenue, grew 12%.
Our 51% owned South African general insurance business, Mutual & Federal, had a
very good year, assisted by strong underwriting margins and positive claims
experience.
Nedcor, our 52% owned South African banking subsidiary, produced very poor
results in 2003, heavily impacted by the cost of holding excess US dollars as
the Rand strengthened. Margins were affected by fixed rate debt and deposits,
which were expensive as interest rates declined. Tom Boardman was installed as
Chief Executive in December and we deployed Bob Head, our director of Group
Strategy, as acting Chief Financial Officer pending recruitment of a permanent
replacement. Seven new Executive Committee members were also appointed.
Together with the new management team at Nedcor, we have conducted a thorough
review of Nedcor"s balance sheet, the results of which have impacted Nedcor"s
and Old Mutual"s profits for the year.
Nedcor"s new management has focused its energies on plans to ensure Nedcor
returns to producing results commensurate with its status as a premier South
African bank. These include achieving world-class service and expense
benchmarks. To ensure the problems of 2003 are not repeated, plans are being put
in place to address all areas of the business.
For Nedcor to trade optimally, it needs capital on a par with its peers, and we
have therefore agreed to support its underwritten R5 billion rights issue
announced today. That issue will be priced not later than 25 March 2004.
Nedcor is an important part of Old Mutual: decisive action has been taken to
address its problems and management will not countenance any shortfall from the
highest standards of integrity and transparency. New governance procedures have
been introduced to ensure stronger oversight of the bank"s affairs and to ensure
the coherence of Nedcor with Old Mutual standards and strategy.
Chief Executive"s Statement (continued)
In December we presented to London-based investors our view on the South African
Financial Sector Charter, which sets out objectives for involving previously
disadvantaged individuals in that country in financial services businesses. We
see many opportunities for South Africa and for Old Mutual arising from that
Charter and will continue to inform the markets on our progress in addressing
its objectives during 2004.
We took some important strategic steps during the year. Gerrard, having been put
back on the path to profitability, was sold for an attractive price. We acquired
Sage Life, a variable annuity provider based in Bermuda, for a nominal amount,
and it produced $165 million in sales in eight months. In addition we provided
capital to support the organic growth of our US life business, where assets grew
by 27%, and our UK development businesses did well. In South Africa, we
announced plans to acquire a further 37.5% of Mutual & Federal through a
mechanism that includes an offer to all minority shareholders.
During 2003, we discovered the personal involvement of the principals of Pilgrim
Baxter in market timing that had been halted in 2001 and they left the business.
This matter remains the subject of legal process.
Our capital position at 31 December 2003 was strong. We raised preference
capital during the year and this had a positive impact on our gearing, which was
19.4% at year-end, well inside our limits.
Strong South African equity markets in the second half provided additional
capital, which has allowed us to support the Nedcor rights issue comfortably.
The Board is recommending an unchanged final dividend of 3.1p per share, making
a total of 4.8p for the year.
Outlook
We have much to do to recover from poor 2003 results, but we enter 2004 with
renewed determination, and with equity markets around the world at higher levels
than last year. We have taken the necessary steps to put Nedcor on the path to
recovery
.
We will continue to apply top quality investment skills, be they in equity,
lending, real estate or elsewhere, to help our clients build and protect their
savings and investments. We expect our industry to grow as those savings
accumulate and as investments grow to secure retirements, and we intend to
provide a correspondingly growing stream of earnings to our shareholders.
Jim Sutcliffe
Chief Executive
23 February 2004
Operating and Financial Review
BUSINESS REVIEW
SOUTH AFRICA
LIFE ASSURANCE
Financial performance
Adjusted operating profit, excluding long term investment return, of R3,124
million at the Group"s South African life business was 5% down on the R3,283
million achieved in 2002. Individual Business and Group Business contributed
R2,260 million (2002: R2,352 million) and R864 million (2002: R931 million)
respectively to this result. Reduced capital charges on lower levels of average
policyholders" funds and assumption changes adversely impacted adjusted
operating profit, but were offset by favourable mortality and retention
experience.
Total life sales on an Annual Premium Equivalent (APE) basis for the year were
R3,329 million, 10% lower than in 2002, reflecting reduced single premium sales.
The overall low savings ratio and stagnant pensions market resulted in low
inflows from these sources and competition for fund inflows remained intense.
However, APE in the second half of the year improved to R1,753 million, up 11%
from the first half. Individual Business recurring premiums (R1,045 million) and
Group Business single premiums (R3,197 million) increased 18% and 22%
respectively between the first half and the second half.
Poor Individual Business single premiums were offset by recurring premium sales,
up 7% from 2002.
Sales of the market-leading Greenlight risk product were particularly strong and
market reaction to repriced products in Group Schemes was favourable. BoE Life,
a joint venture with Nedcor, contributed 2% to new business APE.
Bancassurance contributed R662 million of gross sales during 2003, an increase
of 15% from 2002 (R575 million).
Group Business APE was down 22% from 2002, when single premiums benefited from
one particularly large deal of R2 billion. Good with-profit annuity sales were
achieved in the last quarter of 2003.
The value of new business declined by 26% as a consequence of APE being down 10%
and the after- tax margin decreasing from 30% to 25%. The lower overall margin
was due to a decrease in Group Business margin, as the proportion of with-profit
annuity business returned to pre 2002 levels. Group Business"s sales mix changed
in 2003 from higher margin with-profit annuity business to lower margin,
interest-bearing products and lower margin, less capital intensive, multi-
manager business. New business margins remained stable at product level.
However, improved margins increased the value of new business after tax from
R285 million in the first half to R543 million in the second half of the year.
Individual Business"s new business volumes increased and Group Business sold
more higher margin with-profit annuities in the second half of the year.
The value of in-force business of R9,832 million at 31 December 2003 increased
by 4% from R9,419 million at 31 December 2002. The life business cash outflow of
R3.8 billion (R4.4 billion outflow during 2002) benefited from reductions in
Individual Business maturities and Group Business terminations, but this
positive effect was largely negated by the decrease in single premium sales.
Operating and Financial Review (continued)
Funds under management at the Group"s South African life business at 31 December
2003 totalled R244 billion, an increase of 5% from 31 December 2002.
The life company remains well capitalised at 2.4 times the required statutory
capital. A satisfactory return on internal capital allocated of 22% was achieved
and was at the same level as in 2002.
Business development
The Symmetry multi-manager offering was extended after the closure of NIB
Investments and Edge Investments. New structured and preferred risk products
were also launched. Investment in new administration systems continued in 2003,
with migration of clients on to the new systems platform progressing in line
with expectations.
Outlook
In 2004, management focus is being directed towards maintaining market share
while continuing to grow the distribution force and assets under management.
Following the customer segmentation initiative, the retail business is being
restructured to create a single marketing team, product and service delivery
business and product development team. The client-facing structure will enable
the business to deliver an improved service to external clients.
In addition to supporting organic growth and generating sustainable and growing
profits, the life business is creating the capacity to service administration
contracts from selected offshore jurisdictions. The market recovery is expected
to provide a better background for the Group"s life business in 2004.
ASSET MANAGEMENT
Financial performance
Adjusted operating profit for the South African asset management business
increased to R532 million (excluding Nedcor) in 2003, compared to R441 million
in 2002. Operating profit was negatively impacted by lower average levels of
funds under management, but this was more than offset by a movement to higher
margin products and tight expense control.
Funds under management totalled R299 billion at 31 December 2003, which
represented an increase of 18% over the position at 31 December 2002.
Total net fund inflows to the asset management businesses (Old Mutual Asset
Managers (South Africa) (OMAM(SA)), Old Mutual Unit Trusts and Fairbairn
Capital) were R1.7 billion during 2003.
Flows were lower than expected, particularly due to the decision of the Mines
Pension Fund to redistribute its Fixed Income Fund among a greater number of
asset managers, which resulted in an outflow of R1.2 billion. Fund inflows
included a R2.1 billion investment from Mutual & Federal Insurance Company Ltd
(Mutual & Federal) and a R1.5 billion investment following the acquisition of a
share of the Community Growth Fund.
OMAM(SA)"s performance in 2003 sustained the good relative investment results
achieved towards the end of 2002. Specialist equity mandates continued to
perform well, with the majority being ahead of their respective benchmarks for
the year ended 31 December 2003.
Adjusted operating profit of R124 million relating to Nedcor Unit Trusts and
Portfolio Management was reclassified from banking to asset management business
in 2003.
Operating and Financial Review (continued)
BANKING
NEDCOR
The results of Nedcor Limited (Nedcor), the Group"s 52% owned banking
subsidiary, have been incorporated into the Group"s accounts in accordance with
UK GAAP. Nedcor has adopted a new accounting standard on the recognition and
measurement of financial instruments (AC133) for local reporting requirements.
The AC133 adjustments have been excluded, except in relation to changes in
credit provisioning methodology, which are acceptable under UK GAAP. This has
led to a one-off increase of R1.1 billion in specific provisions, resulting from
the discounting of future cash flows from advances.
This charge been taken to the profit and loss account, but excluded from
adjusted operating profit. In addition, the opportunity was taken to strengthen
specific provisions, resulting in a R626 million charge to adjusted operating
profit. Nedcor"s financial results for the years ended 31 December 2002 and 2003
are not directly comparable, as the 2002 results included BoE Limited (BoE) only
for six months.
Financial performance
Nedcor"s financial performance during 2003 was very disappointing.
The formal consolidation of the banking licences of BoE, Nedcor Investment Bank
and Cape of Good Hope Bank into Nedbank and Peoples Bank took place on 1 January
2003. While the merger and restructuring process is progressing to plan, the
long term funding raised since the acquisition of BoE had a negative impact on
Nedcor"s 2003 financial results.
The banking adjusted operating loss of R70 million was a substantially lower
outturn than the R3,489 million adjusted operating profit in 2002. The key
factors influencing the result were the interest margin squeeze, lower profits
from investment banking, expenses (which grew at a higher rate than revenues)
and the strengthening of the Rand.
Low asset growth, combined with a squeeze in interest margins caused by the
lower interest rate environment, funding issues relating to the acquisition of
BoE and more conservative accounting estimates resulted in Nedcor"s net interest
income of R6,754 million only reflecting a 6% increase over 2002.
Non-interest revenue at R6,917 million was flat compared to 2002 (R6,931
million). This was impacted by a decline in exchange and securities trading
revenues and by the reclassification of asset management income.
Operating expenses of R10,976 million, including translation losses of R1,356
million (2002: R1,011 million), were 28% higher than in 2002 (R8,573 million).
The strengthening of the Rand:US$ exchange rate from R8.60 to R6.62 during 2003
resulted in the recognition of unrealised translation losses in the profit and
loss account. These losses primarily reflected the effect of translating the net
assets of Nedcor"s integrated foreign operations into Rand on consolidation of
its financial investments. A significant amount of this increase was due to the
inclusion of BoE for the whole of 2003. As a result of changes to employee
incentive schemes during the year, a charge of R165 million was included in
operating expenses. Several one-off items, expenses from subsidiaries
consolidated for the first time and increased expenses in divisions with high-
income growth also contributed to higher operating expenses.
The credit climate held steady during the first half of 2003, despite the high
interest rate environment, and improved during the second half following
decreases in interest rates totalling 550 basis points.
Operating and Financial Review (continued)
The tax charge was impacted primarily by a provision of R261 million that was
raised against specific tax industry issues. In addition, an amount of R583
million was raised for tax contingencies in respect of BoE acquisition items,
which resulted in an increase in goodwill of this amount.
A review of the balance sheet, initiated by Old Mutual, also affected both
earnings and capital.
Capital
In September 2003, Nedcor raised R500 million in subordinated debt and R500
million in unsecured subordinated callable notes that qualified as Tier 3 and
Tier 2 capital respectively. In October, the bank raised a further R825 million
of qualifying Tier 1 preference share capital. Following the review of Nedcor"s
balance sheet, Old Mutual injected R2 billion of additional Tier 2 capital in
the form of subordinated debt in December. This brought total statutory capital
to R21.6 billion (2002: R27.7 billion) representing an overall capital adequacy
ratio of 10.1% (2002: 11.0%), slightly above the statutory requirement of 10.0%.
On 23 February 2004, Nedcor launched a rights issue1 to raise R5 billion of
additional ordinary share capital. Part of the net proceeds will be used to
repay the R2 billion advanced by Old Mutual in December and other short term
financing of R0.5 billion. This capital raising, together with active balance
sheet management, is intended to enable Nedcor to meet the proposed 7.5%
regulatory minimum for primary (Tier 1) capital by 31 December 2004.
Merger and restructuring
The process of merging and restructuring Nedcor"s various divisions, following
its acquisitions in 2002, is proceeding according to plan and many of the
targeted synergy benefits are being realised earlier than originally projected.
The annual target for these benefits of R700 million is expected to be realized
from 2006. Total integration expenditure incurred to the end of 2003 was R868
million.
Business development
After Tom Boardman was appointed Chief Executive designate to Nedcor in October,
its board endorsed a recovery programme to restore Nedcor on a sustainable
growth path. The key elements included the appointment of a new executive team,
a strategic review of the business, the successful implementation of the merger
and reorganisation programme, improved transparency and a clear focus on client
service.
The relationship between Old Mutual and Nedcor strengthened over the past year,
as seen by the Group"s support for Nedcor"s recovery programme, the provision of
the R2 billion of additional capital in December, the secondment of Bob Head as
acting Chief Financial Officer, and the support by Old Mutual for Nedcor"s
rights issue. Old Mutual and Nedcor have also recently entered into a formal
relationship agreement for the first time, which sets out various details of the
way in which the relationship will be conducted in the future.
1The securities offered in the rights issue will not be registered under the US
Securities Act of 1933, and may not be offered or sold without registration or
an applicable exemption from the registration requirements.
Prices and values of, and income from, Nedcor"s shares may go down, as well as
up, and an investor may not get back the amount invested. It should be noted
that past performance is no guide to future performance. Persons needing advice
should consult an independent adviser.
This announcement does not constitute an offering of securities in the United
States, Canada, Australia or Japan or otherwise constitute an invitation to any
person to acquire securities in any company within the Group.
Outlook
Nedcor"s strategic focus in 2004 will be on the operational performance of its
core business. The newly appointed management team is actively addressing the
structural and cultural issues and implementing measures to prevent a recurrence
of the problems of the past. Nedcor"s management also recognises the imperative
to reduce costs, and intends to provide stakeholders with a detailed plan to
achieve a significant reduction in expenses when Nedcor announces its 2004
interim results.
The Group is confident that the newly appointed Nedcor executive team has the
ability to deliver the desired results from the strategic recovery programme and
to complete the merger and restructuring process successfully.
GENERAL INSURANCE
MUTUAL & FEDERAL
Financial performance
Adjusted operating profit of R909 million, including long term investment
return, from the Group"s 51% owned South African general insurance subsidiary,
Mutual & Federal, represented an increase of 63% from R556 million in 2002.
This strong performance was mainly attributable to an improvement in the
underwriting surplus to R329 million (2002: R2 million), representing an
underwriting ratio of 6% to net earned premiums. The improvement followed
corrective action taken on poorly performing portfolios during 2002 and a
favourable trading environment in 2003, combined with an absence of severe
weather-related claims.
Gross premium income of R6,486 million was 16% higher than in 2002 (R5,603
million). Organic growth in portfolios, primarily as a result of rate increases
implemented during 2002 and 2003, contributed to this satisfactory performance.
Net claims rose by 10%, reflecting the impact of inflation. Most portfolios
returned satisfactory results, but corrective action on large fire and
engineering risks will continue to be needed due to increased reinsurance costs
in recent years.
The solvency margin, being the ratio of net assets to net premiums, remained
high and was in excess of 61%, well above the minimum required to support
current operations.
Outlook
Looking to the year ahead, management of Mutual & Federal is cautiously
optimistic, as market conditions remain conducive to achieving underwriting
surpluses. The improvements to rating systems are expected to assist Mutual &
Federal in continuing to produce a top rated return on equity. An inflationary
increase in claims costs requires ongoing focus on responsible underwriting
standards.
Mutual & Federal remains committed to conducting business through the
intermediary channel.
Old Mutual is looking forward to working more closely with Mutual & Federal
subsequent to the Group"s offer to acquire Royal & Sun Alliance"s 37.5%
shareholding in Mutual & Federal and believes it will be in the best interests
of the business, customers and staff.
Operating and Financial Review (continued)
UNITED STATES
US LIFE
Financial performance
The macro-economic environment presented a number of challenges to the US life
businesses during 2003, with interest rates falling to historic lows. These low
interest rates, combined with improving equity return expectations, resulted in
some movement of savings from fixed interest to equity-based products. US life
had anticipated these challenges by developing a multiple distribution and
product strategy aimed at stabilising sales volumes and holding profitability.
The US life business"s adjusted operating profit of $143 million was 15% up on
the $124 million achieved in 2002. This increase was driven by the impact of
profits from the strong sales of fixed annuities in 2002, and by improving
spreads and continued growth in life sales in 2003.
Total APE for 2003, at $389 million, was 14% lower than that achieved in 2002
($451 million). Gross sales of $3.1 billion (2002: $4.0 billion) in 2003 for US
life were, however, higher than in any year prior to its acquisition by Old
Mutual. The value of new business at $59 million was 30% lower than in 2002 ($84
million). The average margin on new business after tax reduced from 19% in 2002
to 15% of APE in 2003, which excludes the value added from the block of business
acquired for a nominal amount when Sage Life (renamed OMNIA Life (Bermuda)) was
purchased. While interest rate spread compression negatively impacted the
margin, this was partly offset by profitability and sales volumes being
stabilised through the establishment of an alternative corporate to corporate
channel.
The business continued to grow strongly, as new life assurance products launched
during 2003 were positively received by the market and attracted significant
premiums. Lower fixed annuity sales were offset by the favourable response to a
new range of equity-indexed annuity products. As a result, Fidelity & Guaranty
Life maintained its position as one of the top ten providers of fixed and equity
indexed annuity products in the USA. OMNIA Life (Bermuda) is an important new
conduit to large international banks, offering US-style products to an
international customer base and giving direct exposure to variable annuity
products.
The value of in-force business of $701 million at the end of 2003 increased by
28% from $549 million at the beginning of the year. Funds under management
totalled $13.3 billion at 31 December 2003, an increase of 27% over the year.
$110 million of capital was injected into US life during the year to support new
business written, in line with plans.
Business development and outlook
Having successfully stabilised sales volumes and profitability through
competitive positioning, US life will continue to build on its strong
relationships with key distributors and its multi-distribution channel strategy.
The transition of policy administration to a lower unit cost outsourcer is
progressing and is designed to improve customer service levels. By year-end, the
new third party administrator was issuing 90% of all new policies.
Economies of scale and planned process improvements should be evident in the
financial results from 2005, after complete conversion of in-force and all new
business.
The business"s bond portfolio, which is largely managed by fellow asset
management subsidiary, Dwight, will continue to be managed actively, with tight
controls on matching assets and liabilities, and no more than 10% concentrated
in the high-yield corporate bond sector.
Operating and Financial Review (continued)
US ASSET MANAGEMENT
The Group"s US asset management business delivered adjusted operating profit of
$134 million in 2003, a decrease of 6% on 2002 ($142 million). However, when
comparing the results on a like-for-like basis, after adjusting for the impact
of disposed entities, adjusted operating profit increased by 6% from $126
million. The equity market rally in the second half of 2003 and strong net cash
inflows were the key factors driving this positive result. Average asset levels
for 2003 were $136 billion, compared to $126 billion, adjusted for the disposed
entities. The improvement in the equity-related component of total funds under
management also had a positive impact on revenue margins.
Funds under management increased during 2003 by 21% from $127 billion to $154
billion. Affiliate divestitures of $3.3 billion were offset by net client
inflows of $4.7 billion and positive market movements of $25.7 billion. The net
client inflows were spread across the large majority of the affiliates,
highlighting the attractiveness and strength of the diverse range of products.
These inflows included $1.8 billion from the Group"s US life business, and were
achieved despite the loss of $1.7 billion at Pilgrim Baxter & Associates (PBA)
in December, following the resignations of the founders of that firm for
allegations of improper practice.
Good investment performance was maintained for institutional mandates, which
outperformed their respective benchmarks over three and five years by 83% and
94% respectively. Top quartile performance, relative to their peers over the
same periods, was achieved by 73% of these funds.
Investment performance by the business"s mutual funds improved during 2003, with
72% delivering top quartile performance over the three-year period. On an asset-
weighted basis, four- and five-star funds, as rated by Morningstar Inc.,
comprised 76% of the mutual fund portfolio at year-end.
Business development
A successful year in executing an organic growth strategy was soured by the
discovery of the personal involvement of the two founding members in alleged
market timing irregularities at PBA during the period from 1999 to 2001. Old
Mutual management took decisive steps immediately upon discovery of these
matters to ensure that current and future interests of PBA"s clients and
shareholders were upheld, including the departure of the founders, and also
conducted a review at the other US mutual funds to ensure adherence to best
practice governance policies. Succession plans at PBA, which had already been
put in place, were accelerated and these have ensured business continuity and
the prospect of future growth once all outstanding regulatory and legal matters
are resolved.
Outlook
Strengthening the presence in the higher margin retail market remains a key
strategic objective for the Group"s US asset management business. The diversity
of styles and the strength of the individual firms" branding with third party
distributors are being leveraged to provide institutional-quality products to
retail investors.
Institutional fund management remains the core business. New investment
performance systems, developed in 2003, will allow a broader range of product
development opportunities to be pursued and will provide targeted marketing
strategies to the sales teams. New opportunities to distribute alternative
products and closed-end funds are being pursued, while the focus on sub-advisory
investment mandate relationships continues.
Operating and Financial Review (continued)
UK AND REST OF WORLD
Adjusted operating profit from the Group"s UK and Rest of World life assurance,
asset management and banking businesses was GBP24 million in 2003, compared to
GBP55 million in 2002. This result includes the adjusted operating profit of the
Group"s operations in the UK (GBP15 million loss), offshore operations (GBP19
million which include Old Mutual International, Old Mutual Fund Managers and Old
Mutual Asset Managers (Bermuda) (OMAM(Bermuda)), southern Africa (excluding
South Africa) (15 GBP million) and Nedcor"s offshore banking and asset
management operations (GBP5 million ).
ASSET MANAGEMENT
Adjusted operating losses from the Group"s UK and Rest of World asset management
businesses of GBP4 million compared to a profit of
GBP2 million in 2002.
These include the results of Gerrard for the ten months to 31 October 2003, as
well as full year results for OMAM(UK), Selestia, Palladyne Asset Management BV,
OMAM (Bermuda), Bright Capital and Nedcor"s off shore asset management
operations.
The Group realised GBP240 million, including a GBP30 million release of capital,
from the sale of Gerrard, following a successful restructuring of the business.
The Group"s remaining UK and Rest of World asset management businesses continued
to grow and develop through further penetration of their respective markets.
OMAM(UK) delivered excellent investment performance and strong new client fund
flows, particularly in hedge fund products. Selestia achieved excellent momentum
in attracting fund flows through its online offering during the year, and in
November 2003 won the Best Fund Supermarket award in the B2B category of the
2003 Online Finance Awards. OMAM(UK) and Selestia generated positive fund flows
of 0.4 billion pound sterling between them, a very solid performance.
LIFE ASSURANCE
The Group"s life assurance operations in southern Africa (excluding South
Africa) and Old Mutual International contributed GBP15 million and GBP9 million
respectively to the UK and Rest of World results in 2003 (2002: GBP3 million
loss). The increase was largely due to the sale of Old Mutual International"s
International Personal Portfolio Bond book, which released GBP4 million to
profit.
Selestia"s adjusted operating losses of GBP14 million were included in the 2002
result.
Operating and Financial Review (continued)
GROUP FINANCIAL REVIEW
Operating profit and earnings per share (EPS) Asset growth and net fund inflows
contributed to Old Mutual"s solid performance during 2003, but there were
disappointing results from the Group"s 52% owned banking subsidiary, Nedcor.
Adjusted operating profit was GBP650, down 10% from 2002 (GBP724 million).
After adjusting for goodwill amortisation and impairment, loss on dispoal of the
investment in Dimension Data Holdings plc, Nedcor restructuring and integration
costs, the change in credit provisioning methodology, short term fluctuations in
investment return and the investment return adjustment for own shares held in
policyholders" funds, operating profit on ordinary activities before tax was
GBP475 million compared with GBP473 million restated to reflect the adoption of
Urgent Issues Taskforce (UITF) Abstract 37 Purchases and sales of own shares) in
2002.
The goodwill amortisation and impairment includes normal amortisation as well as
GBP49 million relating to goodwill arising on the acquisition of BoE.
Adjusted operating profit in Sterling terms was improved by the stronger
Rand:Sterling average exchange rate (12.35 in 2003 compared to 15.79 in 2002),
although marginally reduced by the US$:Sterling average exchange rate (1.64 in
2003 compared to 1.50 in 2002).
The Group"s results benefited from the market recovery in the second half of the
year, particularly in the USA, where the S&P 500 and Nasdaq Composite indices
rose 26% and 50% respectively during the year. In the Group"s other markets, the
FTSE 100 index increased by 14% and the FTSE/ JSE Africa ALSI by 12% during the
year, although the South African recovery came too late to boost consumer
confidence significantly.
The Group"s basic earnings per share (EPS) was 8.0p in 2003 compared with 5.9p
(restated to reflect the adoption of UITF Abstract 37) in 2002. Adjusted
operating EPS of 10.0p in 2003 declined from 11.3p in 2002. Adjusted operating
profit in the second half of the year of GBP255 million (adjusted operating EPS
4.4p) was down marginally on the same period last year (5.5p) and the first half
of 2003 (5.6p). The second half result was adversely affected by Nedcor"s poor
performance. The Group"s remaining businesses produced sound profit growth in
2003.
Margins started to recover after a difficult first half, particularly in the
Group"s US life business, where sales volumes were boosted by expansion of its
range of equity-indexed annuity products.
Funds under management and fund flows
Strong net fund inflows, particularly in the USA, and improved equity markets
have grown funds under management to GBP125 billion at 31 December 2003 from
GBP123 billion at 31 December 2002, even though GBP12 billion was sold with
Gerrard.
The US asset management business benefited from the market upturn in the second
half of 2003 and generated $4.7 billion of net fund inflows ($1.8 billion from
US life) overall during 2003 compared to $1.9 billion in the first half. This
was achieved despite outflows of $1.7 billion at Pilgrim Baxter. Net fund
inflows were spread across the rest of the other affiliates, reflecting the
group"s diverse product offerings and strengthened distribution capabilities.
The US life business experienced a successful last quarter in 2003. New products
attracted a favourable market response and significant premiums. Total life
sales, on an APE basis were $389 million (2002: $451 million).
Operating and Financial Review (continued)
Disappointing sales in the South African life business began to recover in the
second half of the year, as local equity markets improved. Net customer fund
outflows of R3.8 billion compared favourably to the R4.4 billion outflow during
2002 as a result of increased levels of retention and reinvestment.
Achieved profits
The Group"s adjusted operating profit on an achieved profits basis of GBP707
million decreased by 18% from GBP862 million in 2002.
Adjusted operating EPS on an achieved profits basis of 10.8p declined from 14.1p
in 2002. Embedded value (adjusted for the market value uplift of listed
subsidiaries and own shares) of GBP4,124 million at 31 December 2003 improved by
5% from GBP3,928 million at 31 December 2002.
Embedded value per share was 108p at 31 December 2003 compared to 104p at 31
December 2002.
Acquisitions and disposals
On 20 January 2004, the Group announced that it had made an offer to acquire
37.5% of the issued shares of Mutual & Federal, together with an offer for the
remaining minority shareholdings. The total consideration payable is R1.9
billion.
The sale of the Group"s private client stockbroking business Gerrard, to
Barclays plc, was concluded in the fourth quarter for a consideration of GBP210
million payable in cash, generating a loss on sale of GBP3 million. At the date
of disposal, Gerrard had GBP12 billion of funds under management.
Capital
The capital position of the Group benefited from the strength of the Rand, the
sale proceeds of Gerrard and diversified funding sources. The Group"s return on
equity of 14% in 2003 compared to 18% in 2002. The lower return on equity
reflects the disappointing performance at Nedcor during the year. Nedcor"s
recovery plan is focused on improving return on its equity to above 20%.
Capital is closely managed in each of the Group"s businesses and there is
sufficient capital in South Africa to meet local capital and funding
requirements associated with the acquisition of the minority interests in Mutual
& Federal, as well as the Group"s commitment to the rights issue at Nedcor.
The Group"s gearing (core debt2 over core debt2 plus equity shareholders" funds)
was 19% at 31 December 2003, compared with 32% (restated to reflect the adoption
of UITF 37) at 31 December 2002. Gearing was improved by the issue of $750
million of Guaranteed Cumulative Perpetual Preferred Securities in May 2003. The
securities, which are redeemable at the Group"s election from December 2008,
provide core long term funding. The positive impact of the securities issue and
the strong Rand on the Group"s gearing was offset by impairments at Nedcor, a
reduction in shareholders" equity as a result of own shares held by the
policyholders" fund and a short term timing issue which means the cash proceeds
of the Gerrard sale were not deducted from gross debt.
The Group"s gearing level remains strong, below its maximum level of 35%, with
headroom available for potential opportunities in 2004.
The solvency ratios, all of which are above the minimum statutory requirements,
of the Group"s key businesses at 31 December 2003 were as follows: excess assets
equivalent to 2.4 and 2.7 times statutory capital at the South African and US
life businesses respectively; a capital adequacy ratio of
2.Core debt excludes debt from banking activities and is net of cash and short-
term investments, which are immediately available to repay debt. Cash proceeds
of the Gerrard sale were not deducted from gross debt.
Operating and Financial Review (continued)
10.1% at Nedcor after a R2 billion injection in December, and a solvency margin
in excess of 61% at Mutual & Federal.
$14 million of the Group"s $650 million convertible bond issue was redeemed by
investors in May 2003. The balance of the issue is expected to remain
outstanding until maturity in May 2005.
The Group"s Euro Commercial Paper programme has continued to be well supported,
while significant committed undrawn bank facilities have been maintained. This
ensures that the Group retains a high degree of financial flexibility within an
efficient and balanced capital structure. In 2004, the Group"s financing
activity will be centred around the consolidation of primary bank finance
facilities.
On 23 February 2004, Nedcor announced a rights issue to raise R5 billion of
additional ordinary share capital to ensure that it has sufficient capital for
growth and to meet anticipated minimum capital requirements. Old Mutual has
undertaken to take up its rights under the rights issue. The balance of the new
shares to be issued has been fully underwritten.
Taxation
The Group"s effective tax rate (based on the tax charge as a proportion of
adjusted operating profit) of 34.5% in 2003 increased from 26.9% in 2002. The
increase in the effective rate is largely attributable to Nedcor, where non tax-
deductible expenses were incurred. South African secondary tax on dividends also
increased.
Financial/regulatory issues
During 2003, in response to enquiries initiated by the Securities and Exchange
Commission (SEC) and the office of the New York Attorney General (NYAG), one of
the Group"s US asset management affiliates, Pilgrim Baxter & Associates Ltd
(PBA), conducted an internal review which identified certain alleged market
timing activities that had previously occurred, and which ceased in 2001, in
some of the funds managed by PBA. During the course of its review, PBA learned
of certain activities, now alleged to be improper, involving the former
principals of that firm. PBA promptly notified the SEC and NYAG of its findings.
The SEC and the NYAG have filed civil suits against PBA and the two former
principals. In addition, there are several related private lawsuits arising from
the facts alleged by the SEC and the NYAG.
As discussions with the regulators are still continuing and the related
litigation is still at an early stage, it is not currently possible to say
whether or not the amount of ultimate liability to be borne by the Group will be
material. A provision of GBP10 million for legal, investigatory and other costs
has been made in the financial statements.
The UITF Abstract 37 Purchases and sales of own shares requires own shares
previously recognised as investment assets to be deducted from shareholders"
equity. The effect has been to reduce the number of shares in issue by the 316
million shares owned by southern African policyholders" funds.
Basic EPS has also increased by 0.7p due to the reduction in the weighted
average number of shares in issue used to calculate EPS, as well as the removal
of the investment return earned by policyholders on these shares.
The Group welcomed the publication in October 2003 of the Financial Sector
Charter in respect of Black Economic Empowerment (BEE) in South Africa. The
South African businesses were actively involved in the establishment of the
Charter, which sets out targets for the employment of black people in financial
services companies. They have developed a balanced scorecard approach to monitor
achievement against BEE targets and the Group foresees significant opportunities
to add to the ventures already concluded under this initiative.
Dividend
The Board recommends an unchanged final dividend of 3.1p per share, which will
bring the total dividend per share for the year to 4.8p. The proposed dividend
is covered 2.1 times by adjusted operating EPS (2002: 2.4 times).
The dividend, which is subject to shareholder approval at the Annual General
Meeting on 14 May 2004, will be paid on 28 May 2004 to shareholders on the
register at the close of business on 23 April 2004. The equivalent of this
dividend in the local currencies of South Africa, Malawi, Namibia and Zimbabwe
will be determined by the Company on 1 April 2004 and will be announced to the
markets on 2 April 2004. The Company"s shares will trade ex dividend from the
opening of business on 19 April 2004 on the JSE Securities Exchange South Africa
and on the Malawi, Namibian and Zimbabwe Stock Exchanges and from the opening of
business on 21 April 2004 on the London Stock Exchange. The last dates to trade
cum dividend will therefore be 16 April 2004 in South Africa, Malawi, Namibia
and Zimbabwe and 20 April 2004 in the UK.
No dematerialisation or rematerialisation of shares within the South African
STRATE system may take place between 19 April 2004 and 23 April 2004 (both dates
inclusive), nor may transfers between the South African registers and registers
in the other countries take place between those dates.
Outlook
The Group"s overall strategy of managing risk through diversity remains
unchanged. Capital has been strengthened by the sale of Gerrard, giving the
Group the flexibility to pursue opportunities as they become available. In 2004,
management will be focused on optimising performance in, as well as realising
synergies between, the Group"s businesses.
The Group remains committed to building on its strong base in South Africa to
create an international financial services company. It will be actively
supporting Nedcor in turning around its business. The Group is well positioned
to take advantage of, and benefit from, the market recovery and improved
consumer confidence in 2004.
Julian V F Roberts
Group Finance Director
23 February 2004
Operating and Financial Review
This preliminary announcement for the year ended 31 December 2003 is unaudited.
The financial information in this document does not constitute the Company"s
statutory accounts for the years ended 31 December 2002 or 2003. The financial
information for 2002 is derived from the statutory accounts for 2002, which have
been delivered to the Registrar of Companies. The auditors have reported on the
2002 accounts; their report was unqualified and did not contain a statement
under Section 237 (2) or (3) of the Companies Act 1985. The statutory accounts
for 2003 will be finalised on the basis of the financial information presented
by the Directors in this preliminary announcement and will be delivered to the
Registrar of Companies following the Company"s annual general meeting.
Summary Consolidated Profit and Loss Account
for the year ended 31 December 2003
Pound m Rm
Year to Year to Year to Year to
31 Dec 31 Dec 31 Dec 31 Dec
2003 2002 2003 2002
Notes (Restated)*** (Restated)***
South Africa
Technical result 253 208 3,124 3,283
Long term investment
return 178 135 2,198 2,131
Life assurance 431 343 5,322 5,414
3(b)(iii)
Asset management 53 28 656 441
3(c)(i)
Banking (10) 165 (118) 2,605
3(d)(i)
General insurance 73 35 909 556
3(e)(i)
547 571 6,769 9,016
United States
Life assurance 86 83 1,062 1,310
3(b)(iii)
Asset management 81 95 1,000 1,500
3(c)(i)
167 178 2,062 2,810
United Kingdom and
Rest of World
Life assurance 24 (3) 297 (47)
3(b)(iii)
Asset management (4) 2 (48) 31
3(c)(i)
Banking 4 56 48 884
3(d)(i)
24 55 297 868
738 804 9,128 12,694
Other shareholders"
income / (expenses) (40) (22) (494) (347)
3(f)
Debt service costs (48) (58) (593) (916)
Adjusted operating
profit* 650 724
