| Mon 28 Feb 2005, 10:05 | | Old Mutual Plc - Preliminary results for the year |
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Old Mutual Plc - Preliminary results for the year ended 31 December 2004
OLD MUTUAL PLC
ISIN code: GB0007389926
JSE share code: OML
NSX share code: OLM
Issuer code: OLOML
PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2004
PROFITS RISE STRONGLY
* Adjusted operating profit* up 47% to GBP956 million (2003: GBP650 million) and
up 40% to R11,296 million (2003: R8,041 million). Operating profit GBP908
million (2003: GBP475 million), R10,711 million (2003: R5,884 million)
* Adjusted operating earnings per share* up 53% to 15.3p (2003: 10.0p) and up
46% to 181.1c (2003: 123.8c). Basic operating earnings per share: 14.1p (2003:
8.0p), 166.2c (2003: 99.1c)
* Total life assurance sales, on an Annual Premium Equivalent (APE) basis, of
GBP546 million, an increase of 3 per cent.
* Funds under management GBP140 billion (2003: GBP125 billion), an increase of
12 per cent. (R1,520 billion (2003: R1,495 billion))
* $12.3 billion fund inflows in the USA
* Adjusted Embedded Value per share 139.1p, R15.08 at 31 December 2004 (2003:
104.6p, R12.49)
* Return on equity 19.1 per cent. (2003: 14.4 per cent.**)
* Final dividend increased by 13 per cent. to 3.5p making 5.25p for the year***
Commenting on the results, Jim Sutcliffe, Chief Executive, said:
`These are strong results, with profits, earnings per share, assets under
management and embedded value all increased. A return on equity of 19.1 per
cent. and net cash inflow of $12.3 billion at our US business further
demonstrate the power underlying this performance.
We have established a momentum in our business that has the potential to take us
much further as we pursue our ambition to build a world class financial services
group.`
Full definitions of the items asterisked above are set out on page 4 of this
document.
Group Results
2004 has seen us make significant progress. Adjusted operating earnings per
share rose by 53 per cent. in Sterling and 46 per cent. in Rand, with each major
business making a significant contribution. Our South African life business
produced its usual strong profit contribution with return on capital of 24 per
cent. Nedcor made good progress in its recovery and a welcome return to
profitability while Mutual & Federal performed strongly as the short term
insurance cycle reached its peak. Our US businesses increased their combined
adjusted operating profit by 25 per cent. to $337 million.
Overall, our adjusted embedded value per share rose by 33% to 139.1p and by 21%
to R15.08. Good earnings, the recovery in Nedcor`s share price and rising equity
markets all contributed. The operating return on embedded value was 19.4 per
cent. and return on equity for our business rose from 14.4 per cent.
to 19.1 per cent. reflecting the progress in the business and tight capital
management.
Business Performance and Development
Our US life business now accounts for roughly half of our life new business.
Sales were up 29 per cent. on an APE basis to $501 million and, as a result,
assets under management in this business grew from $13.3 billion to $17.3
billion. Margins remained at historically high levels under helpful interest
rate conditions. We continued to innovate and adapt our product range to
changing customer needs, particularly in the equity index annuity and mortgage
term insurance markets. In order to bolster our ratings in support of this
growth, we added a further $200 million of capital in December, making a total
of $300 million for the year. We successfully finalised the transfer of our
outsourced back-office functions in order to reduce costs and improve service to
customers and agents. We expect our US life business to start paying dividends
in 2007.
South African life sales fell by 10 per cent. impacted by disappointing employee
benefit sales, and we did not recover as well as we hoped in the broker market.
More encouragingly, we grew our Personal Financial Advisors (PFA) sales force by
14 per cent. to over 2,600, individual single premium sales were up 16 per cent.
and unit trust sales up 52 per cent. to R5.0 billion. Group Schemes sales were
up 10 per cent. Our overall South African life margins remained unchanged at 25
per cent.
Investment performance at Old Mutual Asset Managers (OMAM) (SA) was good - we
came top in the Alexander Forbes Large Manager Watch survey and 50 per cent. of
our unit trusts performed in the top quartile of their comparator groups.
Our new investment product, Max Investments, which brings the best of the unit
trust and life insurance worlds to the customer, was the first product of its
type to be launched in the South African market in November. Total funds under
management at OMSA increased by 15 per cent. to R312 billion.
Nedcor achieved the milestones promised at the time of its rights issue.
Tier 1 solvency exceeded the 7.5 per cent. goal and new governance is working
effectively to control risks. The new management team is in place, with a
clearly defined strategy. Profits met our targets for the year and, although
growth was subdued overall, there were some notable successes - bancassurance
sales rose 57 per cent. for example. Our objective remains a 20 per cent. return
on equity at Nedcor by 2007.
Mutual & Federal had an excellent year, producing an outstanding 7.8 per cent.
underwriting ratio and a return on equity of 24 per cent. Its reputation for
quality service was maintained and it won the three most prestigious customer
service awards in the general insurance industry.
We have been working hard to complete the black economic empowerment (BEE)
ownership plans that are so important for the growth of all our South African
businesses, and expect to be able to make a firm announcement on our detailed
plans in this area in the near future.
Our US asset management business continued to produce excellent investment
performance, with 72 per cent. of assets outperforming their customer benchmarks
on a three-year basis. The developing strength of our distribution effort,
combined with the underlying investment performance, delivered $12.3 billion in
net client cash flow which, together with positive equity markets, boosted
assets under management by 20 per cent. to $185 billion. Almost two-thirds of
group assets under management are now for the account of US clients.
Our UK start-up businesses produced positive results. Selestia, in only its
third year of operation, had sales of GBP423 million, and continued to win
awards for its South African built systems and service to independent financial
advisors. OMAM (UK) again won accolades for its investment performance, and
attracted high margin hedge fund investors to replace unit trust funds withdrawn
by Gerrard clients.
Our fledgling business in India is making steady progress and we now have over
40 branches. We have also established a representative office in Beijing to
facilitate a Chinese life joint venture in due course.
Outlook
Market conditions in our industry are favourable at present, and the South
African economy is strong. The momentum we have built up is expected to continue
into 2005, although we will spend further amounts on the growth of our US asset
management business and SA life distribution systems. We expect Nedcor to make
steady progress towards its 2007 goal for return on equity. Old Mutual has shown
that it is well able to prosper as an international financial services company,
and we look forward to the next phase of our journey with confidence.
28 February 2005
Notes.
Whenever the items asterisked are used anywhere on pages 1-16 of this document,
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, 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, and fines and penalties.
Adjusted operating earnings per share is similarly based, but is stated after
tax and minority interests, with the calculation of the weighted average number
of shares including own shares held in policyholders` funds.
The segmental analysis has been prepared on a gross of inter-segment
transactions basis.
** Comparative figures have been restated to reflect the adoption of Urgent
Issues Taskforce Abstract 38 `Accounting for ESOP Trusts`.
*** The dividend recommended (final 3.5p per share, making 5.25p 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 at the close of business on 31 March 2005.
Further enquiries
Old Mutual plc UK
James Poole Tel: +44 (0) 20 7002 7000
Miranda Bellord Tel: +44 (0) 20 7002 7133
Gareth David, College Hill Tel: +44 (0) 20 7457 2020
Old Mutual plc SA
Nad Pillay Tel: +27 (0) 21 504 8026
Notes to editors:
A webcast of the analysts presentation and Q&A will be broadcast live at 9.30
a.m. (UK time) today on our website at www.oldmutual.com.
High-resolution images of Jim Sutcliffe and Julian Roberts are available at
www2.oldmutual.com/Media/media_resources/photo_library/js_jr.jsp. Copies of
these results and the associated analysts presentation, together with
photographs and biographical details of the executive Directors of Old Mutual
plc, are available in electronic format. Alternatively they are available to
download from the Company`s website at www.oldmutual.com.
Group Business Review
Group Finance Director`s Review
BUSINESS REVIEW - SOUTH AFRICA
LIFE ASSURANCE & ASSET MANAGEMENT - OLD MUTUAL SOUTH AFRICA (OMSA)
Strong returns continue
Highlights (Rm) 2004 2003
Life assurance technical result 3,697 3,210
LTIR 1,974 2,198
Asset management 544 554
Adjusted operating profit 6,215 5,962
ROC (Life business) 26% 23%
Client funds (Rbn) 312 270
Adjusted operating profit comprises the life assurance technical result, the
Long Term Investment Return (LTIR) of the shareholders` funds and the adjusted
operating profit of the asset management businesses. Life assurance technical
result increased by 15% to R3,697 million reflecting the positive impact of the
strong South African equity market, favourable experience variances and the
positive effect of assumption changes predominantly relating to mortality.
The LTIR of R1,974 million declined by 10% from R2,198 million in 2003. This
reduction reflects our participation (R2.6 billion) in the Nedcor rights issue
and the net impact (R0.6 billion) of our additional stake in Mutual & Federal,
both of which were funded from OMSA`s existing financial resources, thus
negatively impacting the average shareholder assets used in the calculation.
In addition, an increase in the cash component of the portfolio coupled with the
lower rates on cash contributed towards the reduction of the LTIR.
Adjusted operating profit for the asset management businesses, excluding Nedcor,
decreased to R544 million in 2004, from R554 million in 2003. Higher asset
levels driven largely by the better performing South African equity market
contributed positively. This has been offset by lower trading profit in the unit
trust company resulting from changes in industry guidelines regarding trading in
units, charges relating to the accounting treatment of share incentive
arrangements, the cost of the acquisition of Quaystone mandates and the
development of administration infrastructure.
Adjusted operating profit for OMSA increased by 4% to R6,215 million in 2004.
The efficient use of capital and performance improvement of the life business,
has resulted in the return on life allocated capital increasing to 26%.
Funds under management continue to grow
Client funds under management for the business increased by 15% from R270
billion to R312 billion. Within this, life assets were 9% higher, reflecting the
equity market uplift partly offset by negative cash flows, whilst asset
management assets were 31% higher, driven by strong market returns and positive
client cash flow.
Total net client cash flow was a negative R4 billion, primarily due to net
negative flows of R10 billion in Group Life business. This was offset by
positive net cash flows of R6 billion in asset management, with Individual Life
Business Flows being broadly neutral.
OMAM delivered strong investment performance, being ranked first out of the
eleven institutional asset managers in the Alexander Forbes Global Manager Watch
(Large) Survey over the year ended December 2004. This represents an improvement
from third position in the 2003 survey. Over three years OMAM was ranked third.
Rapid growth in unit trust sales
Unit trust sales increased by 52% from R3.3 billion to R5.0 billion in 2004,
reflecting more positive consumer sentiment towards unit trusts as investment
vehicles. Unit trust investment performance was good, with eleven funds
positioned in the top quartile of their respective peer groups and seven of
these funds being top in their respective categories.
Total life sales impacted by weak Group Business
Total life sales, including Old Mutual International (OMI), on an Annual Premium
Equivalent (APE) basis for the period were R3,084 million, 10% lower than the
comparative period in 2003 as Group Business sales continued to disappoint
throughout the year. Individual Life Business sales were at similar levels to
2003 and Group Business significantly lower. Individual Business and Group
Business contributed R2,662 million (2003: R2,632 million) and R422 million
(2003: R809 million) respectively to this result.
Individual Life Business sales mixed
Individual APE (Rm)
2004 2003 Var %
Savings 1,075 1,138 (6%)
Protection 651 701 (7%)
Immediate annuity 164 125 31%
Group Schemes 612 556 10%
Total excl. OMI 2,502 2,520 (1%)
OMI 160 112 43%
Total incl. OMI 2,662 2,632 1%
Single 792 686 16%
Recurring 1,870 1,946 (4%)
Whilst Individual Life Business sales were at similar levels overall to 2003,
the mix was different. Single premium sales were R792 million, 16% ahead of
prior year, driven by strong sales growth in savings and annuity products. OMI`s
new international product range also led to significant growth in its single
premium sales. Single premium sales growth was similar in both the agency and
broker channels.
Recurring premium sales were R1,870 million, 4% below 2003, with sales through
brokers, particularly of savings products, being markedly lower than in 2003.
Reasons for the reduction in broker channel recurring premiums included the
impact of regulatory changes, the establishment of broker networks, as well as
media perceptions regarding the value provided by recurring investment products.
In the case of recurring premium sales the performance in the agency channel was
much stronger in the second half of the year, reflecting growth in agent
manpower. Group Schemes sales were 10% higher overall than the prior year,
although the second half sales were adversely affected by attrition in the sales
force headcount, which finished the year some 12% lower than in June 2004.
Group Business sales disappoint
Group APE (Rm) 2004 2003 Var %
Savings 260 495 (47%)
Protection 120 86 41%
Annuity 42 228 (82%)
Total 422 809 (48%)
Single 240 582 (59%)
Recurring 182 227 (20%)
A low level of Group Business sales continued throughout 2004 with no material
single premium flows, the exception being the protection business which
increased by 41% to R120 million. Group Business single premiums fell 59% to
R240 million; recurring premiums also decreased by 20% to R182 million. Group
Business single premium sales arise principally from restructuring of benefit
plans or the movement of existing assets between different providers. The time-
consuming nature of pension fund surplus apportionments (a legislative
requirement) and a slow response by companies to provide for post-retirement
medical aid liabilities meant that few opportunities crystallised in 2004 for
Group Business single premium sales.
Lower value of new business but steady margins
The after-tax value of new business, excluding OMI, was 13% down on 2003 to R719
million. Growth of 18% in the value of Individual Life Business, reflecting the
positive impact of economic and assumption changes, was offset by a 65%
reduction in the value of Group Business. The overall new business margin
remained stable at 25%. Higher margins were recorded on Individual Life Business
following assumption changes and offset the shortfall in Employee Benefits
margins.
The value of in-force business (VIF) of R10,903 million at 31 December 2004
increased from R9,832 million at 31 December 2003. Within this total, the VIF
for Individual Life Business increased by 25% due largely to the positive effect
of economic and operating assumption changes primarily reflecting positive
mortality experience and the valuation of some sources of profit that were not
previously valued. The Group Business VIF declined by 12% on account of the
relatively low new business value added, the negative impact of operating
assumption changes and the increase in the cost of solvency capital.
Management action showing returns
OMSA has increased its Personal Financial Advisors (PFA) sales force from 2,314
at 31 December 2003 to 2,643 at 31 December 2004. More than 50% of the Advisor
sales force is now on a new remuneration model and benefits are starting to be
seen in increasing sales arising from this channel.
Our new investment product Max Investments was successfully launched in
November. This product uses both life and non-life investment structures to
offer investors a cost- and tax-efficient wrapper in one investment and aims to
address the need for lower client charges in a low inflation environment.
Encouraging sales were achieved in the last two months of 2004 and these have
continued into 2005. This has been one of the fastest new product take-ups ever
in the PFA distribution channel, confirming the positive market response.
The Masthead independent broker network has helped to protect the independent
broker market with over 2,200 brokers signed up in 2004.
Addressing the sales performance of our Group Business, we continue to work
towards the delivery of an integrated distribution approach. Furthermore, the
implementation of the Compass administration platform will provide increased
efficiency and service benefits for administration clients.
Solid capital position
The capital strength of the life company has been demonstrated through Statutory
Capital Adequacy Requirement (SCAR) coverage of 2.6 times, after allowing for
statutory limitations on the value of certain assets. In addition, the
proportion of cash in shareholders` funds backing statutory capital requirements
increased from 20% in 2003 to 43% in 2004. During 2004 R2.6 billion was invested
in Nedcor to support its recapitalisation and a net R0.6 billion was invested to
acquire our increased holding in Mutual & Federal.
BANKING - NEDCOR
Nedcor has been stabilised
Nedcor has been stabilised and the balance sheet significantly de-risked. The
Nedcor rights issue completed in May 2004 was a success, raising R5.2 billion of
additional ordinary capital. The capital injection, together with the active
management of assets, including the disposal of non-core assets, the
repatriation of R5.1 billion of foreign capital and the improving attributable
profits by Nedcor, have all strengthened capital. This improved the mix between
the bank`s tier 1 and tier 2 capital. Nedcor`s capital adequacy (which is
defined as regulatory capital as a percentage of risk-weighted assets) was 12.1%
at 31 December 2004 (2003: 10.1%), with tier 1 capital at 8.1% (2003: 5.0%).
A formal relationship agreement has been put in place. We have finalised the
appointment of the executive team and we have introduced the Old Mutual Group
Enterprise Risk Management framework.
Foreign exchange translation risk has been substantially reduced by the
repatriation and hedging of part of the foreign capital, which has been reduced
to R4.5 billion as at 31 December 2004 from R9.3 billion at 31 December 2003.
Nedcor continues to be exposed to foreign exchange rate movements on the
remaining capital, which is held offshore to support foreign operations. During
2004 the translation losses on the remaining foreign capital amounted to R372
million, substantially lower than the comparative period in 2003 (R1,356
million).
Recovery is on track
Nedcor`s adjusted operating profit, including asset management operations, of
R2,423 million was a substantial increase on the disappointing year in 2003 (R67
million). This reflects moderate revenue growth in both net interest income
(NII) and non-interest revenue (NIR). Revenue was enhanced through margin
improvement and controlled asset growth at the expense in some areas of market
share.
Nedcor`s NII, on a UK GAAP basis, increased by 11% to R7,529 million over the
comparative period in 2003, driven by improved margins. This margin increase
resulted from improved funding and hedging strategies, offshore capital being
repatriated and the positive endowment effects of the rights issue.
NIR at R7,580 million reflected an upturn in the second half of the year due to
improved deal flow in investment banking, increasing 10% over the comparative
period in 2003. NIR throughout the year was adversely affected by strategic
disposals, and exchange and securities dealing revenue remaining muted.
The cost income ratio at 74.5% (2003: 72.5%) was adversely affected by the
merger and recovery programme costs while not yet fully recognising the benefits
of these programmes realised towards the latter part of 2004. During 2004,
management actively reduced headcount by 13% from 24,205 to 21,103. The full
effect of headcount reductions will be reflected in 2005. Nedcor
continues to focus on improving its cost to income ratio and is on track to
achieve its goal of 20% return on equity in 2007.
GENERAL INSURANCE - MUTUAL & FEDERAL
Mutual & Federal achieves exceptional results
Mutual & Federal had an exceptional year with an adjusted operating profit (on a
UK GAAP basis) of R1,057 million, increasing 16% from R909 million in 2003. This
excellent performance was largely attributable to the continued favourable
underwriting cycle, which is reflected in the increase in the underwriting
surplus of R527 million in 2004, up 60% from R329 million in 2003. The Group now
owns 88% of Mutual & Federal following the acquisition of the 37% previously
owned by Royal & Sun Alliance.
Strong premium growth up 13%
Gross premiums (on a UK GAAP basis) increased to R7,360 million in 2004, an
increase of 13%, reflecting new business acquired plus corrective action and
rating adjustments in less profitable segments of the business. An overall
reduction in claims frequency and severity resulted in one of the strongest
cycles the general insurance industry has experienced.
Underwriting ratio climbs to 9.8% (SA GAAP)
The underwriting surplus of R527 million compared to 2003 (R329 million)
reflects the exceptional insurance cycle, improved claims management and close
control of management expenses. The strong underwriting ratio (the ratio of the
underwriting surplus to net earned premiums) was accordingly 7.8%, up from 5.8%
last year. The corresponding SA GAAP ratio was 9.8% for 2004, up from 6.9% in
2003.
Insurance cycle softening
Although conditions remain conducive to underwriting profitability, the softer
cycle and pressure on rates indicate more normal trading conditions are likely
to prevail in 2005.
BUSINESS REVIEW - UNITED STATES
US LIFE
Growth in assets delivers improved profits up 25%
Our US life business`s adjusted operating profit of $174 million was 25% up on
the $139 million achieved in 2003 as our strategy to manage growth in profitable
product areas and to drive towards capital self-sufficiency in 2007 made good
progress. The impact of the continued growth in scale of the business is shown
by funds under management increasing by 30% to $17 billion during 2004.
Strong APE growth continues - up 29%
Total APE for 2004 was $501 million, an increase of 29% from $389 million in
2003, with the business reaping the benefits of successfully diversifying from
fixed to equity linked products during 2004, coupled with the maturing of the
offshore and corporate channels. Total premiums exceeded $4 billion. OMNIA and
Corporate channels continue to mature, with 44% growth of APE over 2003 ($41
million to $59 million). Life assurance sales grew by 25% from $85 million in
2003 to $106 million in 2004.
Managing product mix enhances margin to 23%
Over the past year the business has demonstrated its flexibility to seize new
opportunities in changing market conditions by rapid product development. We
succeeded in producing profitable equity index annuity and term life products,
both of which achieved second place market share nationally for the period for
our Managing General Agents channel. The average margin on new business after
tax increased from 15% to 23% of APE and the value of new business after tax at
$113 million increased by 92% on the comparative period in 2003, reflecting the
positive movements in interest rates and changes in product mix.
Capital position strengthened
We continue to manage the capital position carefully. In order to support our
ratings, we decided to increase the target risk based capital (RBC) ratio to
300%. Consequently, the capital base was strengthened by a one-off injection of
$200 million (making a total of $300 million for the year). At the same time we
repatriated to the US a significant block of annuity business from Old Mutual Re
(Ireland). This repatriation improved our Group solvency position, but had one-
off negative impacts of $39 million on our consolidated embedded value and $43
million on our statutory profit before tax for Fidelity & Guaranty Life
Insurance Company. The US life business continues to mature and is expected to
begin releasing capital from 2007.
US ASSET MANAGEMENT
Adjusted operating profit up 22%
The Group`s US asset management business delivered adjusted operating profit of
$163 million, an increase of 22% on the comparative period in 2003. The
combination of increased client inflows and strong equity markets in the latter
half of 2004 led to a 21% improvement in average asset levels to $165 billion
for 2004. Management fees increased from $497 million in 2003 to $570 million in
2004, significantly improving adjusted operating profit. Strong performance
fees, transaction fees and improved revenues from securities lending also
contributed to the overall growth in revenue. Offsetting this improvement,
expenses increased by 17%, as a result of costs associated with our retail
initiative ($6 million) and increased variable compensation costs together with
one-off expenses, including the cost of restructuring the Dwight Stable Value
Fund ($7 million).
Funds under management up 20%
Funds under management increased 20% overall during 2004, from $154 billion at
31 December 2003 to $185 billion at 31 December 2004. Investment returns in the
funds under management accounted for 12% of the increase, while net inflows of
client assets, including $3.2 billion in cash collateral assets, contributed a
total of $12.3 billion, or 8% of the increase for the year. 2004 marks the
fourth consecutive year of net inflows of client assets to our member firms.
Strong fund performance
The inflows reflect the continuing strong investment performance achieved by our
member firms. At 31 December 2004, 72% and 95% of assets were outperforming
their benchmarks over three and five years respectively. Over the same periods,
61% and 73% of assets ranked in the first quartile of their peer group.
Retail initiative launched
In October, Old Mutual Capital launched the Old Mutual Advisor Funds,
establishing the foundation for a full-scale retail distribution initiative.
These funds utilise the diverse asset management capabilities of our affiliates
to construct asset allocation mutual fund products tailored to different
investor risk profiles. This initiative is targeted to increase our presence in
the mutual fund market and is designed to give our affiliates access to a higher
margin market, further diversifying revenue-generating sources for the Group.
Managing the portfolio
The US asset management group continually assesses its business position and
ability to maintain product leadership. In line with this strategy, several
adjustments were made to the manager group in 2004. We reached agreement with
the principals of one of our remaining revenue-sharing firms, First Pacific
Advisors, under which they have an option to acquire certain of the firm`s
assets and liabilities with effect from October 2006. Its assets under
management at 31 December 2004 were $8.4 billion (31 December 2003: $5.5
billion). At the end of 2004 we discontinued the operations of another member
firm, Sirach Capital Management. The firm, predominantly a growth equity
manager, had suffered steep asset declines since 2000. Funds under management at
the beginning of 2004 were $1.6 billion, and management has taken the decision
to return the remaining funds to clients. The resultant non-operating loss to
the Group was $14 million, principally the write-off of goodwill.
In June 2004, Liberty Ridge Capital (LRC) (formerly Pilgrim Baxter & Associates)
reached agreement with the Securities and Exchange Commission and the Office of
the New York Attorney General to settle regulatory action against the firm.
Total fines and penalties agreed were $90 million and have been disclosed as a
non-operating loss. LRC has also committed to future fee reductions of $10
million. During 2004, all outstanding class action lawsuits filed against Old
Mutual in relation to these activities were consolidated into a single lawsuit
along with all other cases against US parties alleging market timing and late
trading violations. Proceedings in this case are at the preliminary stage.
Following the resolution of regulatory matters and reflecting new company
management, LRC underwent a firm-wide revitalisation, revising its product
strategy, enhancing its investment processes and rebranding under its new name.
Despite net outflows of $2.4 billion in 2004, funds under management remain
robust, and management continues to focus on rebuilding the franchise.
Early in 2005, we created a strategic alliance with Copper Rock Capital
Partners. This is a small cap growth firm, and the alliance is designed to
supplement our capability in this product area.
Clients benefit from diversity and focus
Looking ahead, we are committed to derive business growth organically,
leveraging off the diversity and styles of the individual firms. We are
currently in negotiations to add a hedge fund capability and will continue to
seek targeted investment opportunities in other areas to strengthen and broaden
product capability.
BUSINESS REVIEW - UK & REST OF WORLD
Adjusted operating profit from the Group`s UK and Rest of World asset management
and life assurance businesses, excluding Nedcor, was GBP22 million in 2004,
higher than the GBP12 million earned in the equivalent period in 2003. This
result includes the adjusted operating profit from the UK, African countries
other than South Africa, OMI and the Far East.
Total funds under management in the UK grew by 9% to GBP4.3 billion. Strong net
cash inflows into our hedge fund products continued, offset by funds withdrawn
by Gerrard clients. During the year, the operations of Bright Capital were
merged into OMAM (UK).
Selestia continued to grow, with funds under management increasing from GBP289
million to GBP730 million, predominantly through new business sales of GBP423
million (2003: GBP218 million). Selestia reduced its adjusted operating loss to
GBP5 million from GBP9 million in 2003.
GROUP RESULTS
2004 EPS up by 53% to 15.3p
Strong delivery across all businesses contributed to an increase of 47% in
adjusted operating profit before tax to GBP956 million. Adjusted operating
profit after tax and minority interests increased by 54% from 2003 to GBP574
million in 2004 resulting in a 53% increase in adjusted operating earnings per
share to 15.3p for 2004. The basic earnings per share is 14.1p (2003: 8.0p),
representing a 76% increase.
Operating profit on ordinary activities before tax increased to GBP908 million
compared to a profit of GBP475 million in 2003.
Funds under management and fund flows
During 2004 funds under management increased by 12% from GBP125 billion to
GBP140 billion. Our international diversity has delivered strong net cash flows
(increased from GBP1.8 billion in 2003 to GBP5.3 billion in 2004) as strong
performances of our US and UK businesses more than offset weak flows in South
Africa.
Achieved profits
The Group`s adjusted operating profit on an achieved profits basis of GBP1,111
million increased by 57% from GBP707 million in 2003. Adjusted operating profit
for life assurance of GBP749 million was up by 25% from GBP600 million in 2003,
driven by increased new business in the US and improved experience variances in
South Africa. Adjusted operating earnings per share on an achieved profits basis
rose from 10.8p to 19.1p. Achieved profits equity shareholders` funds (adjusted
for own shares held in policyholders` funds and to bring listed Group
subsidiaries to market value) of GBP5,359 million at 31 December 2004 increased
by 33% from GBP4,015 million at 31 December 2003. This benefited from an
improvement in the Rand exchange rate, an increase in the share prices of Nedcor
and Mutual & Federal and the impact of the Nedcor rights issue.
Adjusted embedded value per share (before dividends) up by 37%
Adjusted embedded value (EV) per share at 31 December 2004 was 139.1p after
dividends (143.8p before dividends) representing a growth in EV per share before
dividends of 37% over 2003. EV per share has benefited from the strong result
for the year including the recovery at Nedcor, increased Group net cash flows,
higher market levels and a stronger Rand offset by a weaker US Dollar.
Capital
The Group`s gearing level remains favourable, with senior debt gearing at 31
December 2004 of 11.0% (14.7% at 31 December 2003) and total gearing, including
hybrid capital, of 16.5% (21.7% at 31 December 2003). Hybrid capital excludes
hybrid debt from banking activities and includes the $750 million of Guaranteed
Cumulative Perpetual Preferred Securities issued during 2003 that are reported
as part of non-equity minority interests in the financial statements.
Senior debt gearing is defined as senior debt over senior debt plus adjusted
embedded value on an achieved profits basis. Senior debt excludes debt from
banking activities and is net of cash and short term investments which are
immediately available to repay debt. Total gearing is similarly based, but
includes hybrid capital instruments within debt.
Strong support from Old Mutual ensured that the Nedcor rights issue completed in
May 2004 was a success, raising R5.2 billion that together with repatriation of
surplus foreign capital and other management actions has strengthened Nedcor`s
capital base resulting in a capital adequacy ratio at 31 December 2004 of 12.1%
(10.1% at 31 December 2003).
The Group`s investment in Mutual & Federal increased to 88% in 2004 as a result
of the offer to acquire the outstanding minority interests, which resulted in
acceptances representing 37% of Mutual & Federal`s issued share capital.
Following that transaction, Mutual & Federal paid a special dividend of R860
million, reducing its solvency margin, being the ratio of net assets to net
premiums, to 53% at 31 December 2004 (61% at December 2003). This remains
comfortably above the minimum required to support current operations and to
facilitate the future growth of the business.
The solvency ratios of the Group`s major life businesses at 31 December 2004
remain well above the minimum statutory requirements, with South Africa`s excess
assets (after regulatory asset limitations) equivalent to 2.6 times the
statutory minimum, and the US business at 299% of the risk-based capital
requirement.
At 31 December 2004, the Group had in issue US$636 million 3.625 per cent
Convertible Bonds maturing on 2 May 2005, which are guaranteed by and
convertible into ordinary shares in the Company at a conversion price of 190p
per share and an exchange rate of one US Dollar to 69.52p Sterling.
During 2004, Old Mutual plc entered into a new GBP1.1 billion five-year multi-
currency Revolving Credit Facility, which matures during May 2009, and cancelled
its existing GBP900 million, US$600 million and US$60 million Revolving Credit
Facilities. The new facility was undrawn at 31 December 2004.
Old Mutual is now twelve months into a Group-wide Economic Capital (EC)
Programme. Once completed, this will significantly improve the Group`s ability
to measure risk and business performance. It will also improve transparency and
communication with regulators, ratings agencies and investors. Early results are
highly encouraging, showing the Group`s available financial resources to be well
above the EC required for our target rating.
Since 1 January 2005 the Group has met the minimum capital resources requirement
under the Financial Groups Directive which applies to UK-based financial
conglomerates.
Taxation
The Group`s effective tax rate (based on the tax charge as a proportion of
adjusted operating profit) of 25% decreased from 34% in 2003. This is primarily
as a result of the much improved profitability in Nedcor. In 2003 the Group`s
effective rate was higher due to Nedcor`s non-tax deductible expenses which are
relatively fixed amounts on a very low profit base.
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)
Implementation of IFRS across the Group is currently nearing completion. We are
planning to publish a restatement of our 2004 year-end income statement and
balance sheet under IFRS in May 2005. The aspects of IFRS that will most impact
the Group, in common with our peers, are those that deal with financial
instruments and insurance and investment contracts. Currently there are a few
remaining points of clarity regarding the final version of certain elements of
IFRS and interpretation of a number of principles. We anticipate that these
points will be resolved before publication of our 2004 numbers restated under
IFRS in May.
EUROPEAN EMBEDDED VALUE (EEV)
The Group has continued to publish supplementary information on an achieved
profits basis for the 2004 financial year. We support the new EEV proposals that
have been developed by the European CFO Forum with the purpose of increasing
comparability and uniformity in EV reporting. We are currently assessing the
impact of those new proposals and for the 2005 interim announcement we will
discontinue publishing information on an achieved profits basis and commence
reporting in line with EEV. We continue to be committed to monitoring our
business on an EV basis as we see this as a key indicator of long-term value.
DIVIDEND
The Directors of Old Mutual plc are recommending a final dividend for the year
ended 31 December 2004 of 3.5p per share (making a total of 5.25p for the year,
an increase of 9.4% over 2003). The indicative Rand equivalent of this final
dividend is 38.0c*** (making a total of 58.5c*** for the year, an increase of
4.5%).
The record date for this dividend payment is the close of business on Friday, 22
April 2005 for all the Exchanges where the Company`s shares are listed. The last
day to trade cum-dividend on the JSE Securities Exchange South Africa (JSE), the
Namibian and the Malawi Exchanges will be Friday, 15 April 2005, and in
Zimbabwe, Thursday, 14 April 2005. The shares will trade ex-dividend from the
opening of business on Monday, 18 April 2005 on the JSE, the Namibian and the
Malawi Exchanges, from the opening of business on Friday, 15 April 2005 in
Zimbabwe, and from the opening of business on Wednesday, 20 April 2005 on the
London Stock Exchange.
Shareholders on the South African, Zimbabwe and Malawi branch registers and the
Namibian section of the principal register will be paid the local currency
equivalent of the dividend under the Dividend Access Trust arrangements
established in each country. Local currency equivalents of the dividend will be
determined by the Company using exchange rates prevailing at close of business
on Thursday, 31 March 2005 and will be announced by the Company on Friday, 1
April 2005.
Share certificates may not be dematerialised or rematerialised on the South
African branch register between Monday, 18 April and Friday, 22 April 2005, both
dates inclusive and transfers between the registers may not take place during
that period.
The final dividend is subject to approval at the Annual General Meeting of Old
Mutual plc, which is to be held in London on Wednesday, 11 May 2005. Subject to
being so approved, the final dividend will be paid on Tuesday, 31 May 2005.
Julian V F Roberts
Group Finance Director
28 February 2005
The financial information in this document does not constitute the Company`s
statutory accounts for the year ended 31 December 2004 but is derived from those
accounts. Statutory accounts for 2003 have been delivered to the Registrar of
Companies, and those for 2004 will be delivered following the Company`s Annual
General Meeting. The auditors have reported on those accounts:
their reports were unqualified and did not contain statements under Section 237
(2) or (3) of the Companies Act 1985.
Summary Consolidated Profit and Loss Account
for the year ended 31 December 2004
GBPm Rm
Year to Year to Year to Year to
31 Dec 31 Dec 31 Dec 31 Dec
2004 2003 2004 2003
Notes (Restated)* (Restated)*
South Africa
Technical result 313 260 3,697 3,210
Long term
investment return 167 178 1,974 2,198
Life assurance 3(b)(iii) 480 438 5,671 5,408
Asset management 3(c)(i) 53 55 639 678
Banking 3(d)(i) 177 (10) 2,099 (118)
General insurance 3(e) 89 73 1,057 909
799 556 9,466 6,877
United States
Life assurance 3(b)(iii) 96 85 1,126 1,050
Asset management 3(c)(i) 89 81 1,050 1,000
185 166 2,176 2,050
United Kingdom and
Rest of World
Life assurance 3(b)(iii) 18 20 206 248
Asset management 3(c)(i) 10 (8) 117 (95)
Banking 3(d)(i) 14 4 158 48
42 16 481 201
1,026 738 12,123 9,128
Other shareholders`
income / expenses 3(f) (33) (40) (390) (494)
Debt service costs (37) (48) (437) (593)
Adjusted operating profit** 956 650 11,296 8,041
Goodwill amortisation
and impairment 6 (110) (206) (1,290) (2,544)
Loss on disposal of
investment in
Dimension Data Holdings plc - (5) - (60)
Restructuring and
integration costs 3(a) (21) (32) (246) (394)
Change in credit
provisioning
methodology 3(d)(iii) - (87) - (1,074)
Fines and penalties (49) - (596) -
Short term fluctuations
in investment return 226 143 2,662 1,767
Investment return
adjustment for
own shares held
in policyholders` funds 3(b)(iv) (94) 12 (1,115) 148
Operating profit
on ordinary
activities before tax 908 475 10,711 5,884
Non-operating items 5(b) (35) (32) (418) (404)
Profit on
ordinary activities
before tax 873 443 10,293 5,480
Tax on profit on
ordinary activities 4(a) (286) (241) (3,374) (2,976)
Profit on ordinary
activities after
tax 587 202 6,919 2,504
Minority interests
- equity (44) 117 (519) 1,445
- non-equity (59) (46) (696) (568)
Profit for the financial year 484 273 5,704 3,381
Dividends paid and proposed (182) (166) (2,001) (2,006)
Retained profit for the
financial year 302 107 3,703 1,375
Summary Consolidated Profit and Loss Account continued
for the year ended 31 December 2004
GBPm Rm
Year to Year to Year to Year to
31 Dec 31 Dec 31 Dec 31 Dec
2004 2003 2004 2003
Notes (Restated)* (Restated)*
The adjusted operating
profit on an after-tax
and minority interests basis
is determined as follows:
Adjusted operating profit 956 650 11,296 8,041
Tax on adjusted
operating profit 4(a) (240) (224) (2,834) (2,763)
716 426 8,462 5,278
Minority interests
- equity (83) (7) (980) (96)
- non-equity (59) (46) (696) (568)
Adjusted operating
profit after tax
and minority interests 574 373 6,786 4,614
Earnings and dividend per share attributable to equity shareholders
P c
Year to Year to Year to Year to
31 Dec 31 Dec 31 Dec 31 Dec
Notes 2004 2003 2004 2003
Earnings per share
Adjusted operating
earnings per share** 2 15.3 10.0 181.1 123.8
Basic earnings per share 2 14.1 8.0 166.2 99.1
Diluted earnings per share 2 14.1 8.0 166.2 99.1
Dividend per share
(Rand dividend
indicative only for 2004)*** 5.25 4.8 58.5 56.0
Adjusted weighted average
number of
shares - millions 2 3,748 3,727 3,748 3,727
Weighted average
number of shares
- millions 2 3,432 3,411 3,432 3,411
* 2003 Comparatives have been restated to be consistent with the current year
segmental presentation.
** 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, 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 and fines and penalties.
Adjusted operating earnings per share is similarly based, but is stated after
tax and minority interests, with the calculation of the weighted average number
of shares including own shares held in policyholders` funds.
The segmental analysis within the consolidated profit and loss account has been
prepared on a gross of inter-segment transactions basis.
Details of the inter-segment revenue and expenses are set out in note 3.
*** Indicative only - the actual amount of the final dividend per share in Rand
will be determined by reference to the exchange rate prevailing on 31 March 2005
and will be announced by the Company on 1 April 2005.
Consolidated Profit and Loss Account
for the year ended 31 December 2004
GBPm Rm
Year to Year to Year to Year to
31 Dec 31 Dec 31 Dec 31 Dec
Notes 2004 2003 2004 2003
Technical account
- long term
business 309 376 3,635 4,645
Tax attributable to
shareholders`
profits on long
term business 202 185 2,383 2,284
511 561 6,018 6,929
Technical account
- general
business 89 73 1,057 909
Banking operating
profit / (loss) 121 (276) 1,436 (3,402)
Asset management
result before
goodwill amortisation
and fines
and penalties 3(c)(i) 135 120 1,603 1,485
Fines and penalties (49) - (596) -
Other non-technical
account
Investment income 46 41 543 506
Unrealised gains
on investments 52 15 614 186
Allocated investment
returns
transferred from
the technical
