| Wed 10 Aug 2005, 9:28 | | Old Mutual Plc - Results For The Six Months Ended |
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Old Mutual Plc - Results For The Six Months Ended 30 June 2005 - Part 1
OLD MUTUAL PLC
ISIN: GB0007389926
JSE Share code: OML
NSX share code: OLM
Issuer code: OLOML
RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2005
Delivering organic growth
HIGHLIGHTS
# Adjusted operating profit* up 29% to GBP554 million
(30 June 2004: GBP428 million) and
(IFRS** basis): up 24% to R6,445 million
(30 June 2004: R5,194 million)
# Adjusted operating profit (European up 28% to GBP638 million
embedded value (EEV) basis): (30 June 2004: GBP497 million) and
up 23% to R7,420 million
(30 June 2004: R6,032 million)
# Profit for the period attributable
to equity holders GBP387 million
(30 June 2004: GBP141 million)
R4,509 million
(30 June 2004: R1,712 million)
# Adjusted operating earnings
per share* up 22% to 8.4p (30 June 2004: 6.9p) and
(IFRS basis): up 18% to 98.2c (30 June 2004: 83.1c)
# Adjusted operating earnings
per share up 25% to 10.1p (30 June 2004: 8.1p) and
(EEV basis): up 20% to 117.7c (30 June 2004: 97.7c)
# Basic earnings per share: 11.2p (30 June 2004: 4.1p), 130.2c
(30 June 2004: 50.1c)
# Total life assurance sales, on an Annual Premium Equivalent (APE)
basis, of GBP318 million, an increase of 12%
# Funds under management GBP158 billion (30 June 2004: GBP130 billion) an
increase of 22%, R1,896 billion (30 June 2004: R1,469 billion) with record $20
billion fund inflows in the USA.Selestia funds under management exceed
GBP1 billion
# Adjusted embedded value per share 137.5p, R16.45 at 30 June 2005
(30 June 2004: 114.0p,
(EEV basis): R12.88)
# Return on equity 17.8% (30 June 2004: 18.7%)
# Interim dividend increased by 5.7% to 1.85p (22.13 cents***)
Commenting on the results, Jim Sutcliffe, Chief Executive, said:
`All of our businesses have shown strong organic growth during the first half
of 2005, and returns on rising assets and embedded value are encouraging. We
have completed our BEE deals in South Africa, produced strong cash flows in the
USA and increased market recognition in the UK. Our strategy has delivered good
earnings growth and we are well placed to take market opportunities as they
arise.`
Wherever the items asterisked in the Highlights are used, whether in the
Highlights, the Chief Executive`s Statement or the Group Finance Director`s
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 life funds` investments in Group
equity and debt instruments. For all businesses, adjusted operating profit
excludes goodwill impairments, fines and penalties, and profit/(loss) on
disposal of investments in subsidiaries. Adjusted operating profit also
excludes income from hedging activities that do not qualify for hedge
accounting.
Adjusted operating earnings per share is calculated on the same basis as
adjusted operating profit, 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 financial information has been prepared on the basis of the
recognition and measurement requirements of International Financial
Reporting Standards as set out in the basis of preparation note on page 28
of this document.
*** Indicative only, being the Rand equivalent of 1.85p converted at the
exchange rate prevailing on 30 June 2005. The actual amount to be paid by
way of interim dividend to holders of shares on the South African branch
register will be calculated by reference to the exchange rate prevailing
at the close of business on 6 October 2005, as determined by the Company,
and will be announced on 7 October 2005.
Old Mutual plc
Results for the six months ended 30 June 2005 continued
ENQUIRIES:
Old Mutual plc UK
James Poole Tel: +44 (0) 20 7002 7000
Miranda Bellord Tel: +44 (0) 20 7002 7133
College Hill, Tony Friend 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), 10.30 a.m.(South African time), today on our website,
www.oldmutual.com. High-resolution images of Jim Sutcliffe and Julian Roberts
are available at
www.2.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 to download from the Company`s website
at www.oldmutual.com.
10 August 2005
Chief Executive`s Statement
The first half of 2005 has been a period of strong organic growth, with the
achievement of a number of significant milestones in the Group`s development.
Our three main business platforms - in South Africa, the US and the UK - have
all established a momentum which their management teams are confident of being
able to sustain.
Particular highlights in the period have been significantly improved life
assurance and unit trust sales in South Africa, substantial progress in the
recovery programme at Nedbank, and record cash flows from our US Asset
Management business.
All our earnings measures showed good progress. Our adjusted operating earnings
per share for the first half of 2005 improved to 8.4p/98.2c (2004: 6.9p/83.1c)
Basic earnings per share were 11.2p/130.2c (2004:4.1p/50.1c). Adjusted
operating earnings per share (EEV basis) for the period were also up at
10.1p/117.7c (2004: 8.1p/97.7c). As a result, the directors have declared an
increased interim dividend of 1.85p (2004:1.75p) per share, which will be paid
on 30 November 2005.
In South Africa, our life business produced a return on capital of 24%, despite
profits having been struck after making a provision of R225 million for the
improved terms offered to customers following the Pension Fund Adjudicator`s
rulings on paid-up retirement annuities. We have also reduced the rate at which
the Long Term Investment Return accrues, which gave rise to a R250 million
negative impact on earnings.
Adjusted embedded value stood at a similar level to the year end at
137.5p/R16.45, with the Rand having been at a significantly higher level at the
start of the year.
Our Black Economic Empowerment (BEE) ownership proposals at Old Mutual South
Africa (OMSA), Nedbank Group and Mutual & Federal have been approved by the
three companies` shareholders, confirmed by the UK High Court in terms of a
related scheme of arrangement in the case of OMSA, and implemented by each
company during the last few days. I am delighted to welcome our new black
business partners and look forward to working with them to accelerate the
transformation of each of the businesses. I am also glad that our staff in
South Africa will have a major participation in the company through the
employee ownership schemes that have been established.
Although the financial impact of the BEE deals will only be seen in the second
half of the year, the benefits of our BEE proposals on our sales have already
started to come through. Life and unit trust sales at OMSA were well ahead of
the equivalent period in 2004, benefiting from a marked upturn between the
first and second quarters at Individual Life, while Group Business sales were
up 19% on the equivalent period last year.
Nedbank Group has continued to hit the required milestones on its path to
recovery, with results slightly ahead of expectations. Meanwhile Mutual &
Federal reported another excellent result for the half, despite the tougher
pricing environment, aided by disciplined underwriting, good claims management
and close control of expenses.
Net cash flow at our US Asset Management business was very positive, with a
record net total of $20 billion, including $5.4 billion of cash collateral
assets at our securities lending business, eSecLending. Our South African asset
management business experienced a net outflow of R17 billion, largely as a
result of withdrawal of funds by the Public Investment Commissioners as it
corporatised. This was despite OMAM(SA)`s excellent investment performance
record over the past 18 months.
Chief Executive`s Statement continued
We have continued to take steps during the six months to develop our US asset
management retail channel through Old Mutual Capital and alternative investment
capabilities through our new business, 2100 Capital, and anticipate that we
shall continue to make further strategic investments to support our US asset
management firms in achieving organic growth and meeting clients` objectives.
Our US life business had very good levels of sales (up 10% to $276 million APE)
during the first half, and it remains on track to achieve our stated target of
paying dividends in 2007. Record sales of variable annuity products have been
recorded at OMNIA Bermuda, which reached $1 billion of assets under management.
In the UK, we passed another major milestone during the period at Selestia, by
achieving over GBP1 billion of funds under management. OMAM(UK) continued to
attract funds and to deliver excellent investment performance, particularly in
its hedge funds.
Outlook
Over the past five years, we have made substantial strides in using our
powerful South African base to build an international franchise, with over half
our life sales and more than 70% of our asset management clients now in the US
and UK. Our flexible, multi-brand strategy plays well in the market place, both
in the US and elsewhere, as open architecture/multi-manager has become an
increasingly powerful trend in life assurance and asset management industries.
Conditions remain broadly favourable, particularly in South Africa, and while
markets can always affect the outcome, our operational robustness is now well
established.
Each of our businesses is now on a positive trajectory and well placed to seize
opportunities for growth in our marketplaces. I believe we are well set to
maintain the strong performance of the first half during the rest of 2005.
Jim Sutcliffe
Chief Executive
10 August 2005
Group Finance Director`s Review
Business Review
SOUTH AFRICA
LIFE ASSURANCE & ASSET MANAGEMENT - OLD MUTUAL SOUTH AFRICA (OMSA)
Earnings impacted by one-offs
H1 H1
Highlights (Rm) 2005 2004 Var %
Life assurance 1,758 1,811 (3%)
Long term investment return (LTIR) 646 911 (29%)
Asset management 361 230 57%
Adjusted operating profit 2,765 2,952 (6%)
Return on Capital (Life business) 24% 26%
Client funds (Rbn) 316 271 17%
The life assurance result reduced by 3% to R1,758 million compared to the first
half of 2004.This was largely as a result of the R225 million charge,
recognised as a result of management`s response to Pension Funds Adjudicator
determinations, together with the impact of increased new business strain. This
increased strain arises particularly due to the introduction of International
Financial Reporting Standards (IFRS), more competitive product pricing and the
costs of increasing our distribution capability, especially Group Schemes.
The LTIR of R646 million declined by 29% from R911 million in the first half of
2004. This reduction reflects lower rates applied across all asset classes,
combined with an increase in the cash component of the portfolio since June
2004 and lower investible assets as a result of an increased investment of R1.4
billion in Nedbank to retain our controlling interest post BEE.
Adjusted operating profit for the asset management businesses, excluding
Nedbank, increased strongly by 57% to R361 million in the first half of 2005,
from R230 million for the first half of 2004. Higher asset levels, driven
largely by the good performance of the South African equity market, contributed
positively. Further benefit came through higher income from performance fees in
Old Mutual Asset Managers (South Africa) (OMAM), growth in unit trust funds,
and a large one-off profit in our Specialised Finance company from a single
transaction.
The combination of the above has resulted in the adjusted operating profit for
OMSA reducing by 6% to R2,765 million. The return on life allocated capital
has, as a consequence, reduced to 24%, which remains very satisfactory.
Funds under management increased slightly
Client funds under management for the business increased slightly from R312
billion as at 31 December 2004 to R316 billion at 30 June 2005.
The uplift from market movements was largely offset by negative net client cash
flows. These have been disappointing, with total net client cash flow being
negative R17 billion. Within the Life business, Group Business flows were a
negative R4 billion as a result of normal fund benefit payments and higher
terminations.
Within OMAM, the largest single factor was a withdrawal by the Public
Investment Corporation of R10 billion. In addition, OMAM saw outflows as a
result of clients rebalancing their portfolios, shifting from balanced mandates
to specialised mandates, fragmenting portfolios into smaller pieces, and some
smaller funds switching into balanced multi-manager offerings.
Group Finance Director`s Review Business Review continued
OMAM continued to deliver strong investment performance, being ranked second
out of the eleven institutional asset managers in the Alexander Forbes Global
Manager Watch (Large) Survey over the year to the end of June 2005. Over three
years OMAM was ranked fourth. In addition, 80% of the funds managed by OMAM
(weighted by value) outperformed their benchmarks over the one-year period to
30 June 2005. Over 3 years, 94% of funds outperformed their benchmarks.
Both life and non-life sales increase
Total life sales for the period on an Annual Premium Equivalent (APE) basis,
including Old Mutual International (OMI) sales out of South Africa, were R1,900
million, 13% higher than the comparative period in 2004. Both Individual Life
and Group Business sales were higher, the latter showing particularly strong
growth from a low base in 2004.
Non-life sales in both our broker and agency channels grew strongly and
contributed towards the increase in unit trust sales of 81% from R2,027 million
in the first six months of 2004 to a record R3,666 million for this period.
Individual Life Business sales up 10%
Individual APE (Rm) H1 H1
2005 2004 Var %
Savings 574 520 10%
Protection 305 267 14%
Immediate annuity 82 76 8%
Group Schemes 310 295 5%
Total excl. OMI 1,271 1,158 10%
OMI 67 54 24%
Total incl. OMI 1,338 1,212 10%
Single 399 358 11%
Recurring 940 856 10%
Individual Life Business sales increased by 10% over the comparative period in
2004. Within this, recurring premiums were up 10%, single premiums were up 11%,
and good growth was seen across all product groupings. Group Schemes sales,
whilst only 5% higher for the period in total, recorded strong growth in the
second quarter as the strengthening of their distribution gathered pace (with a
16% growth in sales force headcount since the end of 2004).
Within single premium sales, bancassurance saw particularly strong growth, with
total Old Mutual life sales through the Nedbank channel being up 52% on an APE
basis for the first six months compared to the same period last year.
Within recurring premiums, sales through brokers were slightly down, whereas
sales through our agency channel grew strongly, reflecting our continuing
investment in growing our advisor headcount. Our advisor force totalled 3,112
at the end of June 2005 - some 440 higher than a year earlier and 150 higher
than at the start of the year.
Group Business sales recovering
H1 H1
Group APE (Rm) 2005 2004 Var %
Savings 148 115 29%
Protection 81 67 21%
Annuity 54 16 238%
Healthcare 278 275 1%
Total 561 473 19%
Single 182 105 73%
Recurring 379 368 3%
Total Group Business sales increased by 19% over the comparative period in
2004. Note that this total includes for the first time Healthcare sales, which
have been brought in following our move to EEV methodology. Healthcare sales
maintained the high level achieved in 2004. Excluding Healthcare business,
Group business sales grew by 43% to R283 million over the comparative period in
2004.
Group Finance Director`s Review
Business Review continued
This reflects our efforts in restructuring our sales management, processes and
capability. The result was underpinned by growth in single premium sales, with
recurring premium sales being slower to pick up. Annuity sales showed
particularly strong growth, albeit off a low base, with solid growth rates
also being achieved in savings and protection product sales.
In 2004 there was very little activity in pension fund outsourcing. This year
has seen a general increase in outsourcing (especially for post-retirement
medical aid liabilities), leading to higher annuity sales. The increase in
protection sales is attributable to the securing of two large Group Life
Assurance schemes.Increased opportunities in the post-retirement medical aid
market resulted in customised products being offered for the first time, which
was also a significant driver of savings product sales.
Margins reduced reflecting investment in growth
New business margins have reduced from 19% on an APE basis for the first half
of 2004 to 15% for the first half of 2005, reflecting our efforts to grow the
business and improve value for customers. The Individual business margin has
reduced from 17% to 12% reflecting more competitive product pricing, as well as
the initial expense strains relating to re-building the Group Schemes sales
force. The Group business margin reduced marginally from 22% to 20%, reflecting
some changes in the mix of new business.
Solid capital position
The South African life company remains strongly capitalised, as is demonstrated
by the 2.4 times coverage of the Statutory Capital Adequacy Requirement (SCAR),
after allowing for statutory limitations on the value of certain assets. This
compares to coverage of 2.6 times at 31 December 2004 and 2.1 times at 30 June
2004. The decrease since December 2004 is primarily due to the full phasing in
of the Financial Services Board`s regulations relating to limits on Group
undertakings, which result in R7.5 billion of our investment in Nedbank and M&F
being disallowed for the purposes of SCAR coverage.
Uncertainty around Pension Funds Adjudicator determinations
The Pension Funds Adjudicator has made several determinations in recent months
against retirement annuity funds, including Old Mutual`s retirement annuity
fund. While these determinations only apply to the particular client and fund
to which each determination relates, they do set a precedent for subsequent
determinations. The Adjudicator`s rulings are subject to appeal to the High
Court which decides a matter anew and may replace the Adjudicator`s ruling with
its own judgement. Considering the changing needs of investors that have
developed over recent years, in the second half of 2004 Old Mutual introduced
its new Max Investments product, which features greater flexibility to
accommodate the changing needs of clients, as well as lower policy charges. In
April 2005 Old Mutual announced its intention to offer existing clients with
paid-up retirement annuities the option to have their premiums managed in the
style of the Max Investments product. This option will result in enhanced
retirement values for certain clients who have ceased or reduced their
contributions.
The value of policyholder liabilities has been increased by R225 million at 30
June 2005 to reflect the estimated cost of providing this option to
policyholders. We believe that this is a significant step aimed at
strengthening our customer franchise, and ensuring we provide good value for
money.
Discussions are currently being held between the industry and the regulator
about these issues. Since at this stage it is not possible to foresee the
outcome of these discussions, no further provision has been made for subsequent
developments that may occur.
Group Finance Director`s Review
Business Review continued
BANKING - NEDBANK GROUP (NEDBANK)
Recovery on track
Nedbank`s financial performance for the first six months of 2005 is in line
with management`s expectations, with the benefits of the recovery programme
gaining momentum.
Highlights (Rm) H1 2005 H1 2004 Var %
Adjusted operating profit 2,112 898 135%
Net interest income* 4,024 3,319 21%
Non-interest revenue* 3,716 3,771 (1%)
NII margin* 3.45% 2.99%
Cost to income ratio* 68.6% 77.9%
* As reported by Nedbank Group
Nedbank`s adjusted operating profit, for both its banking and asset management
operations, of R2,112 million increased by 135% compared to the same period
last year, outperforming the previous two half year performances. Nedbank
continues to deliver on its commitments made to shareholders since the
inception of the recovery programme in late 2003 with the resultant benefits
being increasingly reflected in its financial performance. This has manifested
itself with both growth in operating income and the containment of expenses,
improving the efficiency ratio from a high of 77.9% for the first half of 2004
to 68.6% for the first half of 2005.
Net interest income (NII) increased by 21% to R4,024 million compared to the
same period last year. The margin has improved from 2.99% to 3.45% for the six
months ended 30 June 2005, having benefited from 2004 initiatives undertaken.
These included the uplift created from the rights offer cash received in May
2004, reduced funding drag following the revised hedging strategy, income from
the sale of non-core investments and the repatriation of certain foreign
capital. The settlement of expensive empowerment funding for Peoples Bank in
April 2005 has also contributed to the increase. Margins were negatively
impacted by the 1% reduction in the taxation rate and were slightly compressed
from the impact of the lower interest environment and the resultant drop in
endowment income.
Non-interest revenue (NIR) growth was negatively impacted by the sale of
subsidiaries during 2004. NIR decreased by 1% from R3,771 million to R3,716
million for the six months ended 30 June 2005. Deal flow has continued to
improve and the pipeline remains strong with core business of commissions and
fees showing good growth. In order to more accurately reflect the banking
margin on banking assets by excluding trading activities and to facilitate
easier peer group comparison, Nedbank has reclassified certain trading revenue
from NII to NIR.
Retail earnings more than doubled in the period, and the rate of market share
loss reduced. Bancassurance premiums rose both through Nedbank and Old Mutual
branded products.
Cost to income ratio drops to 68.6%
Total expenses for the period totalled R5,311 million, 3.9% lower than in the
first half of 2004, contributing to an improvement in the cost to income ratio
to 68.6% from 77.9% for the first six months of 2004. Income growth was 13.2%
higher than expense growth for the period, which exceeded the target of 9%.
This improvement can be attributed to improved efficiencies across the
business, as well as a reduction in one-off strategic recovery programme and
BoE merger costs.
Group Finance Director`s Review
Business Review continued
Return on equity (ROE) on track
Nedbank has achieved ROE (excluding foreign exchange) of 12.9% for the period
ended 30 June 2005, compared to 13.2% in the equivalent period in 2004, with
the decline due to the impact of the 2004 rights issue. Nedbank remains
committed to meeting 20% ROE and 55% cost to income ratio target by 2007
despite the dilutive aspects of BEE and impacts of IFRS.
Capital
Nedbank continues to be well capitalised, with tier 1 capital being above 8.5%
at 30 June 2005 (December 2004: 8.1%). Nedbank`s capital adequacy ratio has
remained stable at 12.2% (31 December 2004: 12.1%).
GENERAL INSURANCE - MUTUAL & FEDERAL
Continued strong performance, but pressure on margins
Mutual & Federal continued to perform strongly during the first six months in
2005 in a softening insurance market, with an adjusted operating profit of R573
million, although this is down on the comparable period last year.
Highlights (Rm) H1 2005 H1 2004 Var %
Adjusted operating profit 573 639 (10%)
Underwriting ratio 8.6% 10.7%
Gross premiums 3,962 3,592 10%
This excellent performance was largely attributable to a favourable
underwriting cycle, which continued into the first quarter of 2005, and the
inclusion for the first time of the results of Credit Guarantee Insurance
Corporation (CGIC).
Strong premium growth up 10%
Gross premiums for the period ended 30 June 2005 increased to R3,962 million,
an increase of 10% from the comparable period last year. This result was
substantially impacted by the inclusion of CGIC. Excluding CGIC, the growth
would have been 5%, which reflects the intense levels of competition being
experienced in the market.
Claims
Trading conditions for the short term insurance industry remained favourable
for the first six months of 2005.
The general level of commercial and industrial claims remained relatively low
and this positively influenced the commercial portfolio. However, the personal
division has been impacted by adverse weather conditions and a noticeable
decline in the profitability of the motor account, which continued to be
affected by an increase in motor vehicle accidents.
Healthy underwriting surplus maintained - 8.6%
The underwriting surplus for the period ended 30 June 2005 was R301 million, a
decrease of R34 million from the underwriting surplus of R335 million for the
period ended 30 June 2004. This reduction reflects the exceptionally strong
general insurance cycle of 2004, which we believe has now peaked. Nevertheless,
the 2005 surplus continues to reflect good claims management and close control
of expenses. The underwriting ratio was 8.6% for the first half of 2005, down
from 10.7% in the equivalent period last year.
Group Finance Director`s Review
Business Review continued
UNITED STATES
US LIFE
Strong profits continue, up 27%
Highlights ($m) H1 2005 H1 2004 Var %
Adjusted operating profit 93 73 27%
Funds under management ($bn) 19.8 15.3 29%
APE sales 276 251 10%
Value of New Business 55 38 45%
New Business margin 20% 15%
Our US life business`s adjusted operating profit of $93 million for the period
ended 30 June 2005 was 27% up on the comparable period in 2004. This reflects
the continued growth in assets and in-force business, the benefits of which
have more than offset the strain from increasing volumes of new business. We
continue to manage growth in profitable product areas and to drive towards
capital self-sufficiency in 2007.
Funds under management have increased by 29% to $19.8 billion - an increase of
$4.5 billion since the first half last year and $2.5 billion since the start of
the year. This increase reflects strong sales inflows, and we are now only just
below our $20 - $25 billion critical mass.
Sales up 10%
Total sales on an APE basis for the first six months of 2005 were $276 million,
an increase of 10% from $251 million in first six months of 2004. This growth
was driven by particularly strong sales of life products as well as offshore
annuity products through OMNIA Bermuda (soon to be rebranded Old Mutual
Bermuda). Life sales grew by 51% and OMNIA Bermuda sales grew by 102% over the
equivalent period in 2004.
The continued growth in life sales reflects strengthening relationships and
increases to the number of distributors, as well as strong market growth in the
middle income sector on which we focus. We also benefit from our efficient use
of outsourcing of underwriting and administration services. We are now ranked
18 overall for sales in the life market, and remain the market leader for
mortgage protection term insurance.
OMNIA Bermuda sales continue to reflect the benefits of the stability we have
provided the business since we purchased it in May 2003. Our product offering
has been expanded beyond the original variable annuity to include a fixed
annuity and an equity indexed product modeled closely on our onshore products.
The strong growth in sales reflects these product extensions, as well as growth
in our bank distribution network.
Our US retail annuity businesses also continue to grow as our distribution
broadens and our product offerings are expanded. Corporate sales have been kept
at low levels due to the strength of retail sales.
Group Finance Director`s Review
Business Review continued
Margins healthy
The average margin on new business after tax increased from 15% at 30 June 2004
to 20% of APE for the period ended 30 June 2005. The value of new business
after tax increased sharply from $38 million last year to $55 million this
year.
The achieved margin of 20% of APE is at the upper end of our expected range of
results for new business margin under EEV methodology, reflecting strengthening
of our pricing disciplines, strong stock selection by our asset managers and
favourable product mix.
US ASSET MANAGEMENT
H1 H1
Highlights ($m) 2005 2004 Var %
Adjusted operating profit 94 85 11%
Funds under management ($bn) 209 163 28%
Net client cashflow ($bn) 20 5 300%
The Group`s US Asset Management business achieved adjusted operating profit of
$94 million in the first half of 2005, which was an increase of 11% on the
comparative period in 2004. The combined effects of improving equity markets
last year and record net cash inflows of $20 billion led to a 28% increase in
funds under management to $209 billion. The net cash inflows were achieved
across a broad range of asset classes, with fixed income, value equity and
quantitative strategies particularly attracting new funds. Profitability
improved although we continue to spend money building the retail channel
through Old Mutual Capital, and into the alternative investments market through
our interest in 2100 Capital.
Funds under management benefit from record net fund inflows of $20bn
Funds under management increased 13% to $209 billion, from $185 billion at 31
December 2004. Cashflows for the first half of 2005 achieved a record $20
billion net inflow, including cash collateral assets of $5.4 billion,
accounting for 11% of the increase. The remaining 2% increase resulted from
market action and fund investment performance. Our retail initiative continues
to gather momentum, with gross sales of $497 million in the first half of 2005.
Managing the portfolio
In addition to our strategic partnership with Copper Rock Capital Partners and
the launch of 2100 Capital announced earlier this year, US Asset Management has
actively worked to manage its portfolio of businesses by enhancing the
diversification of asset management capabilities and through divestiture of
non-core operations. We sold our business based in Japan at the end of the
first quarter of 2005. Going forward, we will continue to make strategic
investments in order to support our firms in achieving organic growth and
meeting the objectives of our clients.
Group Finance Director`s Review
Business Review continued
UK & REST OF WORLD
H1 H1
Highlights (GBPm) 2005 2004 Var %
Adjusted operating profit 9 0
Fund under management(GBPbn) 4.9 4.0 23%
Selestia sales 305 197 55%
Adjusted operating profit from the Group`s UK and Rest of World asset
management and life assurance businesses, excluding Nedbank, was GBP9 million
in 2005. This result includes the adjusted operating profit from the UK, Old
Mutual International (OMI) and the Far East. The success of the organic growth
strategy of the UK businesses is reflected in the growth in adjusted operating
profit during this year, with Old Mutual Asset Managers (UK) (OMAM(UK)) in
particular producing a good result as a consequence of excellent hedge fund
performance. The UK businesses contributed GBP3 million of adjusted operating
profit in the first half of 2005, compared to a break even position for the
comparable period in 2004.
Total funds under management in the UK grew by 17% from GBP4.2 billion at 31
December 2004 to GBP4.9 billion at 30 June 2005. OMAM(UK)`s hedge fund products
continued to attract strong inflows and generate strong fund performance.
Selestia funds under management exceed GBP1 billion
New business sales at Selestia continued to grow, with sales of GBP305 million
achieved in the first half of 2005, an increase of 55% on the comparative
period in 2004. Funds under management increased from GBP730 million at 31
December 2004 to GBP1,051 million at 30 June 2005.
GROUP RESULTS
H1 2005 Adjusted EPS up by 22% to 8.4p
The Old Mutual Group has had a positive start to 2005, with a 29% increase in
adjusted operating profit before tax to GBP554 million. Adjusted operating
profit after tax and minority interests increased by 24% from GBP256 million
for the period ending 30 June 2004 to GBP317 million for the first six months
of 2005, leading to an increase in adjusted operating earnings per share to
8.4p for the period ending 30 June 2005, from 6.9p for the comparative period
in 2004. The basic earnings per share is 11.2p, representing a 173% increase.
Profit for the financial period attributable to equity holders increased to
GBP387 million during the first half of 2005 compared to GBP141 million during
the first half of 2004.
Funds under management and fund flows
During 2005, funds under management increased by 13% from GBP140 billion as at
31 December 2004 to GBP158 billion at 30 June 2005. Our international diversity
has delivered strong net cash inflows of GBP9.6 billion, an increase of GBP5.6
billion when compared to the first half of last year, as strong performances by
our US and UK businesses more than offset weak flows in South Africa.
Group Finance Director`s Review
Business Review continued
Embedded Value (EV) - profits
Old Mutual published its 2004 embedded value figures restated in accordance
with EEV principles on 20 June 2005. The same approach has been taken to the
calculation of our June 2005 figures, and all 2004 comparatives are on the
restated EEV basis. The Group`s adjusted operating profit on an EEV basis of
GBP638 million increased by 28% from GBP497 million at June 2004. Adjusted
operating profit for life assurance of GBP345 million was up 3% from GBP334
million at June 2004, with African profit being down 7% and North American
profit being up 57%. The reduction in adjusted operating profit for Africa is
mainly due to lower expected return on capital and a provision for the expected
cost of the offer to policyholders that has been announced in respect of
paid-up retirement annuities. The increase in adjusted operating profit for
North America is mainly due to a significant increase in the value of new
business sold in 2005 and the consequential effect of new business sold in
2004.
Adjusted embedded value per share down by 2%
Adjusted embedded value (EV) (adjusted for own shares held in policyholders`
funds and to bring listed Group subsidiaries to market value) of GBP5,303
million at 30 June 2005 decreased by 2% from GBP5,384 million at 31 December
2004. Good Rand growth in African life embedded value (aided by good investment
returns) was partially offset by the depreciation of the Rand, good US dollar
growth in North American embedded value (driven by new business growth) was
enhanced by the strengthening of the US dollar, and a decline in the share
prices of Nedbank and Mutual & Federal was exacerbated by the weakening of the
Rand.
Adjusted EV per share at 30 June 2005 was 137.5p representing a decline in EV
per share of 2% over the 2004 result of 139.7p.
Capital
The Group`s gearing level remains favourable, with senior debt gearing at 30
June 2005 of 7.9% (10.8% at 31 December 2004) and total gearing, including
hybrid capital, of 19.0% (16.9% at 31 December 2004).
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 minority interests in the financial
statements and the GBP350 million of Perpetual Preferred Callable Securities
issued in March 2005 that are reported as part of equity holders` funds.
Senior debt gearing is defined as senior debt over senior debt plus adjusted
embedded value on an EEV basis. Senior debt excludes debt from banking
activities and is net of cash and short-term investments, which are immediately
available to repay debt, and derivative assets relating to swaps associated
with senior debt, so as to reflect debt valued on effective currency and
interest rate positions. Total gearing is similarly based, but includes hybrid
capital instruments within debt.
On 2 May 2005 the Group`s $636 million of outstanding 3.625 per cent
Convertible Bonds matured and were repaid in full at par value.
Old Mutual`s Group-wide Economic Capital (EC) Programme is progressing
according to plan. Once completed, it will significantly improve the Group`s
ability to measure risk and shareholder value creation. The early results
show the Group`s available financial resources to be well above the EC
required for our target external agency rating.
The Group exceeds the minimum capital resources requirement under the Financial
Groups Directive, which applies to UK-based financial conglomerates.
Group Finance Director`s Review
Business Review continued
Taxation
The Group`s effective tax rate (based on the tax charge excluding income tax
attributable to policyholder returns as a proportion of adjusted operating
profit) for the period ended 30 June 2005 of 24% decreased from 25% for the
corresponding period in 2004. This was primarily as a result of the recognition
of a previously unrecognised deferred tax asset in the US. Excluding the impact
of this adjustment, the tax rate would have increased to 27% as a result of a
decrease in the proportion of tax advantaged investment income earned in the
period.
BLACK ECONOMIC EMPOWERMENT
Over the past few years Old Mutual plc has been actively addressing various
aspects of Black Economic Empowerment (BEE). We believe that Black Economic
Empowerment (BEE) is a key requirement for the promotion of sustainable
economic growth and social development in South Africa and is therefore
fundamental to the interests of our employees, clients and shareholders.
Earlier this year we proposed three separate, but independent transactions
designed under a common set of principles, which introduce new broad-based
black ownership into each of our South African subsidiaries. These transactions
have now been completed and have resulted in the introduction of direct black
ownership worth 12.75% of the value of Old Mutual plc`s South African
businesses, with the total value of black shareholding being R7.1 billion. The
financial impact of these proposals will be incorporated into the Group`s
results for the second half of 2005.
Our BEE deal is very broad based and our South African employees now have share
interests in our companies with the incentivisation that share ownership
provides. Uniquely, many of our clients and distributors have also acquired an
interest in our shares, which supports our strategy. We believe that our black
business partners will add value to our businesses and are extremely pleased to
have the Wiphold and Brimstone Consortia as shareholders in our businesses, as
well as Mtha at Mutual & Federal. The transformation deal secures future
returns for all our stakeholders.
DIVIDEND
The directors have declared an interim dividend of 1.85p per share for the six
months ended 30 June 2005, to be paid on Wednesday, 30 November 2005.
The record date for this dividend payment is the close of business on Friday,
21 October 2005, for all the Exchanges where the Company`s shares are listed.
The last day to trade cum-dividend on the JSE Limited (`JSE`) and other African
Exchanges will be Friday, 14 October 2005. The shares will trade ex-dividend
from the opening of business on Monday, 17 October 2005 on the JSE and the
other African Exchanges and from the opening of business on Wednesday,
19 October 2005 on the London Stock Exchange.
Group Finance Director`s Review
Business Review continued
Shareholders on the South African, Zimbabwe and Malawi branch registers and the
Namibian section of the principal register will be paid the local currency
equivalents 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, 6 October 2005 and will be announced by the Company on Friday, 7
October 2005.
Share certificates may not be dematerialised or rematerialised on the South
African branch register between Monday, 17 October and Friday, 21 October 2005,
both dates inclusive, and transfers between the registers may not take place
during that period.
Julian V F Roberts
Group Finance Director
10 August 2005
Independent Review Report by KPMG Audit Plc to Old Mutual plc
Introduction
We have been engaged by the Company to review the financial information,
including the European Embedded Value supplementary information, set out on
pages 19 to 81 and supplementary financial information set out on pages 84 to
145. We have read the other information contained in the interim report and
considered whether it contains any apparent misstatements or material
inconsistencies with the financial information.
This report is made solely to the Company in accordance with the terms of our
engagement to assist the Company in meeting the requirements of the Listing
Rules of the Financial Services Authority. Our review has been undertaken so
that we might state to the Company those matters we are required to state to it
in this report and for no other purpose. To the fullest extent permitted by
law, we do not accept or assume responsibility to anyone other than the Company
for our review work, for this report, or for the conclusions we have reached.
Directors` responsibilities
The interim report, including the financial information contained therein, is
the responsibility of and has been approved by the directors. The directors are
responsible for preparing the interim report in accordance with the Listing
Rules which require that the accounting policies and presentation applied to
the interim figures should be consistent with those applied in preparing the
preceding annual financial statements except where any changes, and the reasons
for them, are disclosed.
As disclosed in note 1 to the financial information on page 28, the next annual
financial statements of the Group will be prepared in accordance with IFRSs
adopted for use in the European Union (EU). The accounting policies that have
been adopted in preparing the financial information are consistent with those
that the directors currently intend to use in the next annual financial
statements. There is, however, a possibility that the directors may determine
that some changes to these policies are necessary when preparing the full
annual financial statements for the first time in accordance with those IFRSs
adopted for use by the EU. This is because, as disclosed in note 1, the
directors have anticipated that certain standards, which have yet to be
formally adopted for use in the EU, will be so adopted in time to be applicable
to the next annual financial statements.
Review work performed
We conducted our review in accordance with guidance contained in Bulletin
1999/4 Review of interim financial information issued by the Auditing Practices
Board for use in the United Kingdom. A review consists principally of making
enquiries of Group management and applying analytical procedures to the
financial information and underlying financial data and, based thereon,
assessing whether the accounting policies and presentation have been
consistently applied unless otherwise disclosed. A review is substantially less
in scope than an audit performed in accordance with Auditing Standards and
therefore provides a lower level of assurance than an audit. Accordingly, we do
not express an audit opinion on the financial information.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 30 June 2005.
KPMG Audit Plc
Chartered Accountants
10 August 2005
8 Salisbury Square, London EC4Y 8BB
Summary Consolidated Income Statement
for the six months ended 30 June 2005
The following table summarises the Group`s results in the consolidated income
statement on page 19. Adjusted operating profit represents the directors` view
of the underlying performance of the Group. This summary does not form part of
the statutory financial statements.
GBPm
6 months 6 months Year to
to 30 June to 30 June 31 December
Notes 2005 2004 2004
Africa
Long term business 3(iv) 212 228 467
Asset management 3(vii) 37 22 54
Banking 3(vi) 162 54 203
General insurance 3(v) 49 52 101
460 356 825
North America
Long term business 3(iv) 50 40 97
Asset management 3(vii) 51 47 87
101 87 184
United Kingdom & Rest
of World
Long term business 3(iv) 2 - 6
Asset management 3(vii) 7 7 (5)
Banking 3(vi) 14 11 23
23 18 24
Debt service costs (19) (24) (49)
Other shareholders`
income / (expenses) 3(viii) (11) (9) (30)
Adjusted operating
profit* 554 428 954
Goodwill impairments 9 (2) (33) (33)
(Loss) / profit on
disposal of
investments in
subsidiaries (4) 12 (27)
Short term
fluctuations
in investment returns 4 133 (48) 197
Income from hedging
activities that do
not qualify for hedge
accounting - 5 31
Investment return
adjustment for Group
equity and debt
instruments held in
life
funds 3(iv) (28) (26) (99)
Fines and penalties 5 - (49) (49)
Profit before tax
(net of income tax
attributable to
policyholder returns) 653 289 974
Total income tax
expense 6 (181) (120) (344)
Less income tax
attributable
to policyholder
returns 21 23 62
Income tax
attributable
to equity holders (160) (97) (282)
Profit for the
financial period 493 192 69
