| Mon 27 Feb 2006, 9:00 | | Old Mutual plc - Results for the year ended 31 Dec |
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OML
OLOML
Old Mutual plc - Results for the year ended 31 December 2005
Old Mutual plc
ISIN CODE: GB0007389926
JSE SHARE CODE: OML
NSX SHARE CODE: OLM
ISSUER CODE: OLOML
Results for the year ended 31 December 2005
HIGHLIGHTS
- Adjusted operating profit* up 30% to GBP1,244 million
(IFRS basis): (2004: GBP954 million) and
up 28% to R14,431 million
(2004: R11,254 million)
- Adjusted operating profit (European up 23% to GBP1,387 million
Embedded Value (EEV) basis): (2004: GBP1,124 million) and
up 21% to R16,067 million
(2004: R13,249 million)
- Profit for the financial year GBP867 million (2004:
attributable to equity holders of the GBP559 million) R10,041 million
parent (IFRS basis): (2004: R6,571 million)
- Adjusted operating earnings per up 22% to 18.2p (2004: 14.9p)
share* (IFRS basis): and up 20% to 211.2c
(2004: 175.8c)
- Adjusted operating earnings per up 10% to 20.7p (2004: 18.9p)
share (EEV basis): and up 8% to 240.0c
(2004: 222.8c)
- Basic earnings per share (IFRS
basis): 25.1p (2004: 16.3p), 290.5c
(2004: 192.0c)
- Funds under management GBP183 billion (2004: GBP140 billion) an increase of
31%, R1,992 billion (2004: R1,520 billion) with record $26 billion fund inflows
in the USA. Selestia funds under management exceed GBP1.5 billion
- Total life assurance sales, on an EEV Annual Premium Equivalent (APE) basis,
of GBP648 million, an increase of 10% (2004: GBP587 million)
- Adjusted embedded value per
share (EEV basis): 175.6p, 1,912c at 31 December
2005 (2004: 139.7p, 1,515c)
- Return on equity** 18.5% (2004: 18.8%)
Return on adjusted embedded value** 15.6% (2004: 17.8%)
- Final dividend increased by 4% to 3.65p, 39.8 cents***
Commenting on the results, Jim Sutcliffe, Chief Executive, said:
"This has been a defining period for Old Mutual, marked by these very
satisfactory results that show our organic growth is coming through strongly.
The acquisition of Skandia represents a step change in the business profile of
the Group. We are determined to deliver on the exciting potential of the
international business we are building."
Wherever the items asterisked in the Highlights are used, whether in the
Highlights, the Chief Executive"s Statement or the Group Business Review, the
definitions set out on page 2 apply.
ENQUIRIES:
Old Mutual plc
Media:
Miranda Bellord (UK) Tel: +44 (0) 20 7002 7133
Nad Pillay (SA) Tel: +27 (0) 21 504 8026
Investors:
Malcolm Bell (UK) Tel: + 44 (0) 20 7002 7166
Deward Serfontein (SA) Tel: +27 (0) 21 509 8709
College Hill (UK)
Tony Friend Tel: +44 (0) 20 7457 2020
Alex Sandberg
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. (Swedish time), and 11.30 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.oldmutual.com/vpage.jsp?page_id=7004. 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. An interview with Jim
Sutcliffe, Chief Executive, Old Mutual in video/audio and text is now available
on the Company"s website and on http://www.cantos.com.
The full release of the 2005 preliminary results, together with the Financial
Disclosure Supplement, can be found on the website at www.oldmutual.com. This
document contains a summary of key financial data for 2005 and 2004.
27 February 2006
* 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, includes investment returns on investments in Group equity and debt
instruments held in life funds and is stated net of income tax attributable
to policyholder returns. For all businesses, adjusted operating profit
excludes goodwill impairment, fines and penalties, initial costs of Black
Economic Empowerment schemes, and profit/(loss) on disposal of subsidiaries,
associated undertakings and strategic investments. Adjusted operating profit
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
and excluding income attributable to Black Economic Empowerment trusts of
listed subsidiaries. The calculation of the weighted average number of
shares includes own shares held in policyholders" funds and Black Economic
Empowerment trusts of the parent company.
** Return on equity is calculated using adjusted operating profit after tax
and minority interests on an IFRS basis with allowance for accrued coupon
payments on the Group"s hybrid capital. The average shareholders" equity
used in the calculation excludes hybrid capital.
***Indicative only, being the Rand equivalent of 3.65p converted at the
exchange rate prevailing on 30 December 2005. The actual amount to be paid
by way of final 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 28 March 2006, as determined by the Company,
and will be announced on 29 March 2006.
Chief Executive"s Statement
A year of achievement
2005 was a year of significant transformation of the Old Mutual Group and one
which I believe we can look back on with considerable satisfaction.
Firstly, we achieved strong organic growth in our major business platforms in
South Africa, the USA and the UK, with significantly improved life assurance
and unit trust sales in South Africa, substantial progress in the recovery
programme at Nedbank, record cash flows at our US asset management business and
impressive growth at both of our UK businesses.
Secondly, we completed innovative and broad-based Black Economic Empowerment
(BEE) ownership proposals at each of Old Mutual South Africa (OMSA), Nedbank
Group and Mutual & Federal. The benefits of these transactions, in terms of
accelerating the transformation of each of the businesses, are already becoming
apparent.
Lastly, we have now completed our acquisition of Skandia and thereby broadened
the revenue base of the Old Mutual Group significantly, which has been one of
our strategic objectives for some years. Julian Roberts, who has served us so
well as Finance Director, has agreed to take up the reins as CEO of Skandia.
I know he will do a great job.
In South Africa, we have made progress in aligning our life assurance, banking
and general insurance businesses more closely so as to exploit bancassurance
and other benefits of working together.
Bancassurance business nearly doubled in 2005 compared to 2004, but I believe
there are still great opportunities for additional synergies to be achieved in
this area. Bob Head was appointed as Group Director, Southern Africa, towards
the end of the year, with one of his specific objectives being to promote a
more integrated product offering among the businesses and to catalyse the
necessary changes to address the rapidly developing financial services market
in South Africa.
We have made progress with our brand rationalisation and modernisation, with
OMSA now using the "new" Old Mutual brand, as used by Old Mutual plc itself, in
replacement of the more familiar "tablet" version of the name. Nedbank has
continued its rebranding, with its change of parent company name from Nedcor
Limited to Nedbank Group Limited and completion of the transformation of former
Peoples Bank branches into Nedbank branches.
In the USA, we have continued to develop our portfolio of asset managers, with
a number of acquisitions and disposals during the year. Copper Rock, 2100
Capital and Larch Lane have added to our alternative investments capability,
whilst we have said farewell to L&B Realty, Integra Global Advisors and UAM
(Japan). Funds under management continued to grow strongly throughout 2005,
albeit less strongly in the last quarter following the loss of some mandates at
Pacific Financial Research. Overall funds under management by the US asset
managers at the end of the year stood at $226 billion, including $15 billion of
cash collateral assets for our securities lending business, eSecLending, an
increase of 23% over the position at 31 December 2004.
At US Life, strong sales were achieved, particularly in the first three
quarters of the year, with equity index annuities making a particularly strong
showing. We have been enhancing our systems at this business to manage a
company that is now three times as large as when we bought it in 2001. As a
consequence, we have made some reserve adjustments, which have caused earnings
in 2005 to be lower than 2004, but the underlying trends have remained steady
as a percentage of assets managed. This business is becoming more mature and is
on track to deliver a dividend by the end of 2007. There are a number of
strategic opportunities open to us to develop US Life further over the next few
years. One of these will be to develop products and sales strategies to appeal
to the large Hispanic market.
Our profile in the UK and the rest of the world will be much more significant
from 2006 onwards as a result of our ownership of Skandia. Skandia"s business
has a strong focus on modern, open architecture life and investment products,
which are likely to appeal to baby-boomers in developed markets as they age. It
therefore fits very well with our existing UK businesses, Selestia and
OMAM(UK), as well as extending the Group"s presence into a large number of
other new territories. We also expect Skandia"s presence in China to accelerate
the Group"s push into that fast-growing economy.
Future outlook
Concerted management action taken during 2005 has contributed to the creation
of a strong platform for sustainable growth across each of our geographies.
Our African businesses will continue in 2006 to focus on strengthening their
brand and distribution capabilities and on working closely together to leverage
opportunities for cross-selling and creating efficiency savings. OMSA"s focus
is on building sales volumes and stabilising cash flows in the face of
increased industry margin pressure, whilst Nedbank will continue to focus on
growing its retail and corporate transactional business. The softer
underwriting cycle and increased pressure on premium rates is expected to
result in more normal trading conditions for Mutual & Federal in 2006.
Our US Life business is still aiming to become capital self-sufficient by the
end of 2007, whilst our US asset management business is continuing to focus on
building its retail distribution network and actively managing its affiliate
relationships. Growth looks set to continue at our UK and Rest of World
businesses.
As a result of a successful year in 2005 and our acquisition of Skandia, we now
have a much higher profile among international investors. We are committed to
ensuring that not only do we deliver the prospective returns from Skandia
factored into our acquisition planning, but also that our other businesses
continue to make good progress. We believe that, in 2005, we have taken an
important step along the path to achieving our objective of being a world-class
financial services group. We look to the future with confidence that we can
create something special through Old Mutual and its family of companies.
Jim Sutcliffe
Chief Executive
27 February 2006
Group Business Review
Group Finance Director"s Review
GROUP RESULTS
Basis of reporting
International Financial Reporting Standards (IFRS)
The Group has adopted IFRS from 1 January 2004, including a restatement of 2004
comparatives. Details of all transitional impacts, including the
reconciliations required by IFRS and the Group"s IFRS accounting policies are
contained in our IFRS announcement released on 3 May 2005. This can be found on
our website. Our 2005 interim results announcement released on 10 August 2005
was prepared on the basis of these accounting policies. The Group has
subsequently early adopted the IAS 39 Fair Value Option amendments which
removed the impact of the European Union (EU) `carve-out". Updated details of
the Group"s significant accounting policies will be included in the 2005 Annual
Report.
European Embedded Value (EEV)
The 2005 embedded value numbers have been prepared in accordance with the EEV
principles issued in May 2004 by the European Chief Financial Officers" Forum,
with all 2004 comparative figures also restated on this basis. Risk margins
have been calculated using a market consistent approach, reflecting the
distinctive product risks in the individual businesses.
Adjusted operating profit
Adjusted operating profit represents the directors" view of the underlying
performance of the Group. For life assurance and general insurance business,
adjusted operating profit is based on a long term investment return, includes
investment returns on investments in Group equity and debt instruments held in
life funds and is stated net of income tax attributable to policyholder
returns. For all businesses, adjusted operating profit excludes goodwill
impairments, fines and penalties, initial costs of Black Economic Empowerment
(BEE) schemes, and profit/(loss) on disposal of investments in subsidiaries,
associated undertakings and strategic investments. Adjusted operating profit
also excludes income from hedging activities that do not qualify for hedge
accounting.
Black Economic Empowerment (BEE) accounting implications
One of the key differences between the adjusted operating profit and profit
before tax attributable to equity holders relates to the accounting treatment
of our BEE transactions announced on 19 April 2005.
In accordance with the latest technical interpretations of BEE accounting,
shares issued under these schemes are treated in accordance with IFRS2. On this
basis, the effective interest reflected in the consolidated income statement
and balance sheet for Nedbank and Mutual & Federal is 55% and 88% respectively
and excludes the impact of the Group"s BEE schemes.
Under IFRS 2, share-based payment charges are recognised over the vesting
period of the schemes and apply to employee and non-employee arrangements where
the Group receives benefits in respect of the issue of these shares.
The amounts calculated in respect of certain schemes, principally the
broad-based employee schemes and black business partners arrangements, vest
immediately such that the total charge is recognised upfront within the
consolidated income statement.
The initial share-based payment charges, in addition to professional fees
incurred in respect of the establishment of the BEE schemes, have, however,
been excluded from adjusted operating profit as these large, one-off charges
distort the underlying performance of the Group.
The shares issued in respect of the BEE schemes are legally issued on the basis
that the BEE beneficiaries have full voting rights over the shares and receive
all dividends, in essence obtaining full economic benefits attaching to equity
ownership.
In recognition of this, the Summary consolidated income statement reflects the
legal ownership of these shares following implementation of the BEE schemes,
with the minority interest on adjusted operating profit based on a weighted
average effective interest in Nedbank and Mutual & Federal of 52% and 83%
respectively. The weighted average shares used in the calculation of adjusted
operating earnings per share include those Old Mutual plc shares issued as part
of the BEE schemes.
In determining the Group"s embedded value, contributions received under the BEE
schemes are recognised within adjusted net worth. In order to ensure that the
Group"s adjusted embedded value reflects the total contributions to be
received, an adjustment is made to incorporate the present value of future BEE
payments. Consequently the adjusted embedded value per share calculation is
based upon the Company"s total number of shares on issue, including shares in
issue to BEE scheme beneficiaries.
Strong growth in basic EPS up 54% to 25.1p and adjusted operating EPS up by
22% to 18.2p
Group profit attributable to equity holders increased by 55% from
GBP559 million in 2004, to GBP867 million in 2005, contributing to the 54%
increase in basic earnings per share to 25.1p.
The strong organic growth in sales and assets across all regions contributed to
an increase of 30% in adjusted operating profit before tax to GBP1,244 million.
Adjusted operating profit after tax and minority interests increased by 25%
from GBP557 million in 2004 to GBP699 million in 2005, resulting in an increase
in adjusted operating earnings per share to 18.2p for 2005.
Adjusted Embedded Value profit up 23%
The Group"s adjusted operating profit on an EEV basis of GBP1,387 million
increased by 23% from GBP1,124 million for the year ended 31 December 2004,
primarily reflecting a strong increase in banking and asset management profits
in addition to life profits in North America. Adjusted embedded value operating
profit for life assurance of GBP701 million was down by 4% from GBP733 million
for the year ended 31 December 2004, with African embedded value profit being
down 13% due primarily to the impact of lower interest rates and reduced equity
exposure in shareholder funds on the expected return on adjusted net worth.
North America life embedded value profits increased by 58% reflecting the
significant value of new business sold in 2004.
Adjusted Embedded Value per share up by 26%
Adjusted Group Embedded Value (EV) (adjusted for own shares held in
policyholders" funds and to bring listed Group subsidiaries to market value)
has increased by 33% to GBP7.2 billion, increasing adjusted Group EV per share
by 26% to 175.6p. Return on Adjusted Group EV was strong at 15.6%.
The significant increase in equity prices in South Africa in 2005 has been a
key driver of the strong growth in EV, resulting in large positive investment
variances in the African life business and increases in the Nedbank and Mutual
& Federal share prices. Return on EV for the life businesses was 14% before
investment variances and 27% including investment variances.
The value of new life business grew by 5%, with 13% growth in North America,
offset by a 5% decline in Africa. Good new business volume growth of 14% in
Africa was offset by a conscious reduction in new business margins.
Funds under management up 31%
During 2005, funds under management increased to GBP183 billion up 31% from
GBP140 billion at 31 December 2004 and GBP158 billion at 30 June 2005. Our
international diversity delivered strong net cash inflows of GBP13 billion, an
increase of GBP8 billion when compared to last year, as strong performances by
our US and UK businesses more than offset weak flows in Africa.
Capital position strengthened in readiness for Skandia acquisition
2005 2004
Highlights
Senior debt gearing 5.2% 11.4%
Total gearing 14.6% 17.1%
In March 2005 the Group issued GBP350 million of Tier 1 Perpetual Preferred
Callable Securities. In May 2005 the Group"s $636 million of outstanding 3.625%
Convertible Bonds matured and were repaid in full at par value. In November the
Group issued EUR500 million of Upper Tier 2 Perpetual Preferred Callable
Securities, followed by a further issue of GBP300 million of lower Tier 2
Perpetual Preferred Callable Securities in January 2006 as part of the public
debt raising associated with the Skandia acquisition.
The Group"s gearing level remains comfortably within our target range, with
senior debt gearing of 5.2% (11.4% at 31 December 2004) and total gearing,
including hybrid capital, of 14.6% (17.1% 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 and the GBP350 million and EUR500
million of Perpetual Securities issued in 2005, which are both reported as part
of equity shareholders" funds.
Senior debt gearing is defined as senior debt over total debt plus Adjusted EV
on an EEV basis. Senior debt excludes debt from banking activities and is net
of cash and short-term investments that 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.
Our economic capital position continued to strengthen in 2005 as the Group
further developed its economic capital programme, with our estimate of
available financial resources now significantly in excess of the capital
required to meet the Group"s target `A" credit rating.
The Group is in compliance with the Financial Groups Directive capital
requirements, which apply to all EU-based financial conglomerates.
Taxation
The Group"s effective tax rate of 25% (based on the tax charge excluding income
tax attributable to policyholder returns as a proportion of adjusted operating
profit) for the year ended 31 December 2005 decreased from 26% for the
corresponding period in 2004. This was primarily as a result of the 1%
reduction in the South African corporate tax rate.
Dividend
The directors of Old Mutual plc are recommending a final dividend for the year
ended 31 December 2005 of 3.65p per share (making a total of 5.5p per share for
the year, an increase of 5% over 2004). The indicative Rand equivalent of this
final dividend is 39.8c (making a total of 60.3c for the year, an increase of
3%).
The record date for this dividend payment is the close of business on Friday,
21 April 2006 for all the Exchanges where the Company"s shares are listed. The
last day to trade cum-dividend on the JSE and on the Namibian, Zimbabwe and the
Malawi Stock Exchanges will be Wednesday, 12 April 2006 and on the London and
Stockholm Stock Exchanges, Tuesday, 18 April 2006. The shares will trade
ex-dividend from the opening of business on Thursday, 13 April 2006 on the JSE
and the Namibian, Zimbabwe and Malawi Stock Exchanges, and from the opening of
business on Wednesday, 19 April 2006 on the London and Stockholm Stock
Exchanges.
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. Shareholders who hold their shares through VPC AB,
the Swedish nominee, will be paid the equivalent of the dividend in Swedish
Kronor (SEK). Local currency equivalents of the dividend for all five
territories will be determined by the Company using exchange rates prevailing
at close of business on Tuesday, 28 March 2006 and will be announced by the
Company on Wednesday, 29 March 2006.
Share certificates may not be dematerialised or rematerialised on the South
African branch register between Thursday, 13 April and Friday, 21 April 2006,
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, 10 May 2006. Subject to
being so approved, the final dividend will be paid on Wednesday, 31 May 2006.
Change in role
I move to my role as Chief Executive Officer of Skandia, confident in the
knowledge that management action taken across all our businesses has created a
platform for long-term, sustainable growth.
I would like to take this opportunity to thank management and employees in each
of our businesses for their support during my five years as Group Finance
Director of Old Mutual. Richard Hoskins takes over as Acting Group Finance
Director from 1 March, and I look forward to working with him in my new role.
Julian V F Roberts
Group Finance Director
27 February 2006
AFRICA
Strong growth in profits and sales
%
Highlights (GBPm) 2005 2004 Change
Adjusted operating profit 1,049 825 27%
Life assurance sales (APE inc OMI) 341 299 14%
Funds under management (GBPbn) 44 39 13%
%
Highlights (Rm) 2005 2004 Change
Adjusted operating profit 12,136 9,719 25%
Life assurance sales (APE inc OMI) 3,947 3,536 12%
Funds under management (Rbn) 480 421 14%
Adjusted operating profit for the African businesses has increased by 25% from
R9,719 million to R12,136 million in 2005, principally driven by the
significant increase in Nedbank"s results as the momentum of the strategic
recovery programme continued. OMSA delivered good growth in life and unit trust
sales, with life sales on an Annual Premium Equivalent (APE) basis up 12% and
unit trust sales up 87% on the prior year. The increase in funds under
management of 14% to R480 billion at 31 December 2005 reflects the impact of
buoyant markets offset by significant fund outflows in OMSA.
Benefits emerging from Black Economic Empowerment (BEE) transactions
The BEE transactions were implemented in August 2005 following approval by
shareholders of Old Mutual, Nedbank and Mutual & Federal, and confirmation of a
related scheme of arrangement by the UK High Court. The transactions were
implemented in accordance with the detailed proposals described in circulars
sent to the companies" respective shareholders earlier in 2005 (the Company"s
own circular was dated 27 May 2005) and will ultimately result in the
introduction of direct black ownership of 12.75% of the value of Old Mutual"s
South African businesses, with a total value of black shareholding of R7.1
billion at the time of implementation.
As previously discussed, the adjusted operating profit impact is calculated
after tax and minority interests, and reflects the dilutive impact on earnings
as a result of our reduced stake in Mutual & Federal and the decrease in the
long term investment return at OMSA due to additional Nedbank shares held to
maintain our controlling interest.
The cost impact of these arrangements on adjusted operating profit and profit
attributable to equity holders is a decrease of R172 million and R776 million
respectively.
The businesses are already experiencing tangible benefits from these
transactions, with the Nedbank Eyethu scheme attracting 47,523 retail client
participants with a total value invested of R741 million (market value at
investment date of R987 million), making it the largest retail share scheme by
value ever in South Africa. The Nedbank corporate scheme involved 76 black
corporate and business banking clients. The working relationships with the
strategic Black Business Partners (BBPs), namely the Brimstone consortium, the
Wiphold consortium and Aka Capital, are progressing well, with numerous deals
having been introduced by these partners to the Group.
Within Mutual & Federal the focus has been on the acceleration of
transformation within the company, with BBPs having been active in drafting a
Transformation Strategy and related action plans.
OMSA"s BEE transaction, worth approximately R3.4 billion, saw a broad range of
black stakeholders acquire direct ownership at that time worth 13.48% of the
value of Old Mutual"s South African business, excluding the value of Nedbank
and Mutual & Federal. In October 2005, more than 11,000 staff members received
their offer to participate in the Old Mutual South Africa Broad-Based Scheme,
thus making them owners of shares in Old Mutual plc.
Significant progress has been made in the establishment of the Black
Distributors Trust - one of the key broad-based elements of the transaction.
This will be officially launched in March 2006, with some 150 beneficiaries in
the first year. The Old Mutual Education Trust has five participating trade
unions, with the first bursaries funded by this trust to be awarded to
participating union members and their beneficiaries during 2006, for studies
commencing in 2007. Transformation has been a central pillar of the OMSA
business strategy, with significant strides having been made in all areas of
transformation including employment equity, skills development, procurement and
social responsibility. The relationship with the strategic BBPs provides
further impetus to our transformation initiatives.
Outlook
The South African economy is in a growth phase, with strong equity markets,
Rand stability and a low inflationary and interest rate environment. Our
businesses continue to benefit from these conditions, with OMSA"s and Mutual &
Federal"s 2005 results reflecting the substantial growth in the JSE during the
year, whilst Nedbank profited from the positive credit environment through
lower impairment levels and increased retail advances growth following higher
levels of consumer spending.
The insurance industry in South Africa is facing significant pressure on
margins and costs, increased competition and pressure from regulatory and
consumer bodies. At OMSA we will continue to address these challenges by
driving sales volumes increases through our investments in distribution,
ensuring we have appropriate products that deliver good value for customers and
containing costs to enable improvements in value for money for customers. Going
forward the business will also focus on stabilising the net client cash flow
position.
Management actions taken at Nedbank have moved the business into the next stage
of its turnaround, with the majority of the strategic recovery benefits planned
for 2005 now firmly in place. Nedbank has become more outward-looking, with the
focus shifting to building a sustainable business through the delivery of
world- class service. The business is seeking to improve innovation and deliver
quality transactional banking growth, with a view to optimising risk and
capital management and creating profitable asset growth.
Although conditions remain conducive to maintaining underwriting profitability,
the pressure on rates is likely to continue to have an impact on Mutual &
Federal, with the ongoing softening of the short-term insurance cycle. Our
focus is on continuing to grow our share of the short-term insurance market and
on delivering unit growth through the maintenance of superior levels of client
service, whilst undertaking further product development to exploit current
market opportunities. Despite the aggressive competitor cutting of premium
rates, Mutual & Federal remains committed to responsible underwriting
standards, with market share not being pursued indiscriminately at the expense
of profitability.
Going forward Old Mutual is well placed to deliver cross-sales growth in its
African businesses and to bring its product offerings more closely together to
serve the growing black middle market and small business sectors.
LIFE ASSURANCE & ASSET MANAGEMENT- OLD MUTUAL SOUTH AFRICA (OMSA)
A year of strong growth
Markets rose significantly during the year driving demand for investment
products across the industry, despite some negative publicity from the Pension
Funds Adjudicator rulings. OMSA significantly strengthened its retail
distribution capability in relation to both independent brokers and tied agents
(increasing numbers of Personal Financial Advisers and Group Schemes Advisers)
to remain the clear market leader in distribution. This advantage, coupled with
strong investment performance from 2004, helped push unit trust sales up 87%
for 2005, whilst leading product development (Max Investments and Max Income)
contributed to good Individual Life sales in our core life market, with APE up
10%. It was pleasing to see our bancassurance efforts in both Old Mutual Bank
and through Nedbank continuing to bear fruit in 2005. Better-coordinated and
resourced approaches to distribution in the corporate sales environment saw
Group Business life sales up 16%.
%
Highlights (Rm) 2005 2004 Change
Life assurance* 3,819 3,754 2%
Long term investment return (LTIR) 1,453 1,668 (13%)
Asset management 801 542 48%
Adjusted operating profit 6,073 5,964 2%
Return on Allocated Capital 25% 27%
EV adjusted operating profit (after tax) 4,648 5,350 (13%)
Embedded Value 30,944 26,386 17%
Adjusted return on Embedded Value 17.6% 20.9%
Life assurance sales (APE inc. OMI) 3,932 3,519 12%
Unit trust sales 9,348 5,004 87%
Value of new business (excl. OMI) 614 698 (12%)
Life new business margin (excl. OMI) 16% 21%
SA client funds under management (Rbn) 362 312 16%
* Includes income from associated undertakings
Solid underlying earnings growth
Overall earnings have shown a small increase to R6,073 million from R5,964
million in 2004, with a significant increase in Asset Management profits and
modest growth in Life Assurance profits being offset by a 13% reduction in the
LTIR.
Life Assurance profits showed modest growth of 2% to R3,819 million from R3,754
million in 2004, largely as a result of the cost of initiatives undertaken to
improve value for money of our products for customers. The major items within
this are a charge of R716 million in respect of the industry-wide response to
the challenge of early termination values for retirement annuities and
endowment policies. Other significant items impacting on profit included an
increase of R115 million in the share-based payments charge to R270
million, driven by the increase in our share price and the impact of our
continuing investment in distribution.
These items were largely offset by the positive impact of basis changes. Whilst
our strategy of investing in distribution has increased acquisition costs
temporarily, we have at the same time been successful in reducing unit
maintenance costs for retail policies. This success has allowed us to reduce
our valuation assumptions in this area, which together with reduced expense
inflation assumptions have released R900 million of reserves. In addition, the
higher market level had a positive impact on asset-based charges and fees.
Significant investment gains on the shareholder portfolio arising from the
underlying market strength were masked by the smoothing effect of the LTIR. The
LTIR of R1,453 million was R215 million lower than 2004, reflecting the 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
following the increased investment in Nedbank Group.
The adjusted operating profit for the OMSA asset management businesses
increased by 48% to R801 million from R542 million in 2004. The strong
performance of the South African equity market, good performance fees earned by
Old Mutual Asset Managers (South Africa) ((OMAM) (SA)), combined with rapid
growth in unit trust funds and an investment revaluation gain in Old Mutual
Specialised Finance, all contributed to this result.
Growth of 16% in funds under management
Client funds under management increased by 16% to R362 billion from R312
billion at 31 December 2004, driven primarily by higher equity markets.
Net client cash flows of negative R18 billion have continued to disappoint
despite positive investment performance during the year. R17 billion of this
outflow, including R10 billion of funds withdrawn by the Public Investment
Corporation, occurred in the first six months of the year, with cash flow for
the second half negative R1 billion. The main area of outflows has been OMAM
(SA), which has suffered from the widespread trend to break up balanced
mandates and direct funds into specialised investment mandates.
Employee Benefits" cash flows have also suffered from the trend away from
guaranteed benefits that led to outflows from the Guaranteed Fund. Significant
management effort continues to be taken to reduce the outflow of client funds
and improve inflows through our distribution initiatives.
OMAM (SA) continued to deliver strong investment performance, improving its
ranking from third to second out of the nine institutional asset managers in
the Alexander Forbes South African Global Manager Watch (Large) Survey over the
three years to the end of December 2005, although it dropped from first to
sixth out of eleven over one year. At 31 December 2005, 72% of funds managed by
OMAM (SA) weighted by value outperformed their benchmarks over three years (58%
over one year).
The acquisition of Marriott Properties and Marriott Asset Management, with R20
billion of funds under management, was announced in October 2005. The
transaction is still subject to approval by the Competition Commission.
Exceptional growth of 87% in non-life sales
Unit trust sales grew in both our broker and agency channels, with sales for
the year increasing by 87% to a record R9.3 billion. Net cash flows also
increased significantly to R4.0 billion from R1.3 billion in 2004. This result
moves us from sixth to fourth market position on a gross inflows basis, and
from seventh to second on a net inflows basis (both comparisons exclude money
market funds).
Unit trust investment performance remained strong, with 53% of funds positioned
in the top quartile of their respective peer groups over the three-year period
to 31 December 2005, and 35% placed in the top quartile over the 12 month
period.
Life sales continue to benefit from investment in distribution
Our focus on investing in our distribution capability has benefited growth in
life and non-life sales. Total life sales (including South African sales into
Old Mutual International (OMI)) on an APE basis for the year increased by 12%
to R3,932 million as compared with R3,519 million achieved last year. Both
Individual and Group Business life sales were higher, the latter showing strong
growth in all areas, with the exception of the Healthcare segment.
Individual Life sales up 10%, reflecting strong increase in bancassurance sales
%
Individual APE (Rm) 2005 2004 Change
Savings 1,165 1,076 8%
Protection 710 651 9%
Immediate annuity 175 164 7%
Group Schemes 685 611 12%
Total excl. OMI 2,735 2,502 9%
OMI (SA only) 148 114 30%
Total incl. OMI 2,883 2,616 10%
Single 851 750 13%
Recurring 2,032 1,866 9%
Individual Business Life sales increased by 10% over 2004, with good growth
experienced across all product categories. Within this, single premiums showed
growth of 13% positively impacted by a strong increase in bancassurance life
sales through the Nedbank channel, up 92% on an APE basis compared with 2004
and underpinned by strong demand for our low cost MAX product range and our
offshore products sold via OMI.
Individual Life recurring premiums increased by 9% to R2,032 million from
R1,866 million last year, reflecting the ongoing benefit from growing headcount
in both our own agency channel and our Group Schemes sales force. Our combined
sales force totalled 5,460 at the end of December 2005, some 10% higher than
the position at 31 December 2004. Sales of regular premium life savings
products through our Group Schemes channel showed particularly strong growth.
Strong growth in Group Business sales
%
Group APE (Rm) 2005 2004 Change
Savings 310 260 19%
Protection 157 120 31%
Annuity 162 42 286%
Healthcare 420 481 (13%)
Total 1,049 903 16%
Single 425 240 77%
Recurring 624 663 (6%)
Group Business life sales increased by 16% to R1,049 million compared with R903
million in 2004, with sales continuing to benefit from the investment in our
sales management processes and capability. This overall picture was driven by
strong single premium growth, 77% higher than last year, whilst sales of
recurring premium policies were 6% lower than last year.
The high growth in Group Business life single premiums was underpinned by
significantly higher demand for our annuity range of products than in 2004,
together with strong sales growth in savings products.
Group Business life recurring premiums suffered overall as a result of lower
Healthcare sales, which were 13% lower than 2004 due primarily to new customers
choosing lower levels of cover. Recurring premium protection sales, on the
other hand, increased strongly by 31%.
Lower value of new business as value for money for clients is improved
The after-tax value of new business (excluding OMI) was R614m, 12% lower than
in 2004. This reduction is a consequence of the initiatives we have taken to
improve value for money for customers as well as the investments we have made
to increase our distribution capacity.
New business margins have decreased correspondingly to 16% overall from 21% for
2004. Whilst the Group Business margin has increased slightly from 17% to 18%,
benefiting from relatively stronger sales growth in higher margin products, the
Individual Business margin has reduced significantly from 22% to 16% as
expected. We continue to anticipate margins in the 15% to 20% range.
Strong capital position
The capital strength of the South African life company is demonstrated through
the 3 times coverage of the Statutory Capital Adequacy Requirement (SCAR),
after allowing for statutory limitations on the value of certain assets. This
compares with the coverage of 2.4 times at 30 June 2005 and 2.6 times at 31
December 2004. The significant strengthening in this position results from the
increase in value of our shareholdings in Nedbank and Mutual & Federal,
together with the issue of a R3 billion 8.92% callable subordinated note in
October 2005. This has contributed to the diversification and flexibility of
the business"s capital base, taking advantage of the current strong credit
appetite and low interest rate environment in South Africa.
Update on Pension Funds Adjudicator determinations
An industry-wide solution has been announced, in consultation with the South
African Finance Ministry, to resolve the challenge of poor early termination
values for retirement annuities and endowment policies in South Africa. The
life industry as a whole has estimated the cost of the solution at between
R2.5 billion and R3 billion, with OMSA"s results reflecting a charge of R716
million.
BANKING - NEDBANK GROUP (NEDBANK)
Strong results as benefits from strategic recovery programme continue
Nedbank"s financial performance in 2005 was ahead of management expectations as
the business continued to benefit from the strategic recovery programme in a
positive economic environment.
%
Highlights (Rm) 2005 2004 Change
Adjusted operating profit 5,034 2,828 78%
Headline earnings* 3,167 1,743 82%
Net interest income* 8,529 7,145 19%
Non-interest revenue* 8,483 8,379 1%
Net interest margin* 3.55% 3.18%
Cost to income ratio* 65.1% 71.8%
ROE* 15.5% 11.0%
* As reported by Nedbank
Nedbank"s adjusted operating profit, including asset management operations,
increased significantly by 78% to R5,034 million, compared with R2,828 million
in 2004. The continued positive banking and credit environment, resulting in a
relatively lower level of impairments, growth in Nedbank Retail"s net interest
income, favourable private equity investment realisations and revaluations in
the Property Finance division, as well as expense containment contributed to
this improved result.
Solid growth was experienced in all three key operating divisions, with
headline earnings increasing by 82% to R3,167 million compared with R1,743
million for 2004. Nedbank Retail"s results benefited from the turnaround
strategy implemented during 2004, with the rate of market share losses
decreasing in the key home loans market. Further benefits are expected now that
the integration of Peoples Bank into Nedbank has been completed. Nedbank Retail
continues to focus on building on its strategic objectives of generating
profitable asset growth and addressing the loss of market share as part of the
Retail `fix it, grow it, and win it" strategy.
Strong growth of 19% in net interest income (NII)
Positive growth of 19% in NII helped to increase the net interest margin to
3.55% from 3.18% for the year to 31 December 2004. The margin benefited from an
improved mix of advances from strong asset growth in Nedbank Retail and Nedbank
Corporate"s Business Banking divisions, the sale of non-core assets and from
the various initiatives undertaken in 2004. These initiatives include the
uplift created from the rights offer cash received in May 2004, reduced funding
drag following the revised hedging strategy, income from sale of non-core
investments and the repatriation of certain foreign capital during 2004. The
impact of these initiatives has more than offset the industry margin pressure
resulting from the lower interest rate environment.
Non-interest revenue (NIR) set to grow
The sale of certain subsidiaries in 2004 negatively impacted NIR which
increased by only 1% to R8,483 million compared with R8,379 million for 2004.
Deal flow, however, continues to improve with commissions and fees in the
existing businesses showing good growth of 6%. Nedbank"s long-term goal is to
grow transactional revenue through a range of initiatives implemented to
improve cross-selling, up-selling, client service, pricing and bancassurance.
Whilst Nedbank recognises that transactional revenue growth is a longer term
goal and the full benefits are only expected to be realised over the next few
years, an increase in bancassurance sales of new business premiums of 95% was
experienced in 2005.
Cost to income ratio improves to 65.1%
Cost savings were achieved through tight expense control and a reduction in
recovery programme and merger expenses, resulting in total expenses increasing
by only R218 million to R11,157 million and contributing to the improvement in
the cost to income ratio to 65.1% compared with 71.8% for the prior year.
Good progress has been made towards achieving our target cost to income ratio
of 55% by 2007, with income growth for the year excluding the cost of the BEE
transaction, of 11.2% higher than expense growth and exceeding the target of
9%.
Return on equity (ROE) on track
ROE of 15.5% for the year significantly improved from the 2004 level of 11.0%,
and whilst still being below Nedbank"s peers, is now comfortably above the cost
of capital. Despite the dilutive effects of the BEE transaction and the
accounting impacts of IFRS, Nedbank remains committed to achieving the 20% ROE
target by 2007 through the continued improvement in profit and the application
of sound capital management.
Strong capital position
Nedbank continues to be well capitalised with the Tier 1 capital adequacy ratio
increasing from 8.1% at 31 December 2004 to 9.4% at 31 December 2005. The total
capital adequacy ratio has increased to 12.9%, compared with 12.1% at 31
December 2004. This improved capital position has prompted the initiation of a
share repurchase programme by Nedbank, with just over 1 million ordinary shares
repurchased to date. This initiative further supports the efficient management
of Nedbank"s Tier 1 capital and improves the business"s overall capital mix.
Nedbank has also changed its dividend cover policy, reducing the cover ratio
from between 3 to 3.5 times headline earnings to between 2.5 to 3 times
headline earnings.
GENERAL INSURANCE - MUTUAL & FEDERAL
Strong results in a softening cycle
Mutual & Federal has performed strongly over the past year with an adjusted
operating profit of R1,178 million, a slight decrease from the 2004 result of
R1,190 million, reflecting the continuation of increasing pricing pressure on
premium income, and the negative impact of the reduction to the long term
investment return rates effective from 1 January 2005. This result has
benefited from the consolidation for the first time of the results of Credit
Guarantee Insurance Corporation (CGIC). Continued close management of expenses,
an overall relatively low level of significant Corporate and Commercial claims,
and the strong equity performance, with the JSE All Share index rising by more
than 45% during the year, also contributed to this result.
Highlights (Rm) %
2005 2004 Change
Adjusted operating profit 1,178 1,190 (1%)
Underwriting ratio* 8.4% 9.4%
Gross premiums* 8,004 7,360 9%
Earned premiums* 6,882 6,449 7%
Solvency ratio 73.7% 56.1%
Return on capital* 20.2% 23.9%
* As reported by Mutual & Federal
Solid premium growth at 9%
Total gross premiums for the year increased by 9% to R8,004 million, assisted
by the inclusion of CGIC. Excluding CGIC, gross premium growth would have been
3%, reflecting the intense levels of competition experienced in the market.
Each division has encountered challenges in defending its client base, with
particularly disappointing premium growth experienced in Personal schemes.
Following a change to interpretation of IFRS accounting rules and emerging
industry practice, from 1 January 2005 Mutual & Federal no longer consolidates
results of cells, entities into which clients may place business covering all
or part of their insurance risks, resulting in a R374 million reduction in net
premiums. As the cell results no longer form part of adjusted operating profit,
no transfer is required to minority interests, as was the case in prior years,
with this change in presentation having no effect on profit.
Claims maintained at a low level
Whilst a sharp increase in claims was experienced in the last quarter following
the impact of the expected seasonal weather, the overall level of commercial
and industrial claims remained relatively low for the year and positively
influenced the commercial portfolio. The claims ratio for the division improved
to 49% from 51% in 2004. The Personal division, however, was impacted by
adverse weather conditions and a noticeable decline in the profitability of the
motor account, which continued to be impacted by an increase in the incidence
of motor vehicle accidents. Management action has been taken to withdraw
certain motor group schemes in order to address the underperformance in this
division.
Healthy underwriting surplus maintained
The underwriting surplus of R577 million, although lower than the 2004 surplus
of R607 million, remained at a highly satisfactory level, representing an
underwriting ratio of 8.4% (the ratio of underwriting surplus to net earned
premiums). The Corporate section of the Commercial division, however, continued
to be impacted by aggressive competitor rate reductions.
The return on capital also remained strong at 20.2% due to the satisfactory
underwriting performance. The solvency margin at 73.7%, allowed an increase in
the Mutual & Federal final dividend to 115c. Mutual & Federal is reviewing its
current capital requirements, following the strong performance in 2005.
UNITED STATES
Profit up 11% reflects record fund flows
%
Highlights (GBPm) 2005 2004 Change
Adjusted operating profit 207 184 13%
Life assurance sales (APE) 290 274 6%
Funds under management (GBPbn) 131 97 35%
%
Highlights ($m) 2005 2004 Change
Adjusted operating profit 376 338 11%
Life Assurance Sales (APE) 528 501 5%
Funds under management ($bn) 226 185 22%
Adjusted operating profit for the US businesses increased by 11% from $338
million to $376 million in 2005, driven by record net cash flows and strong
investment performance in our US Asset Management business, offset by
historical reserve adjustments at US Life.
Funds under management increased by 22% to $226 billion, with the asset
management business contributing the majority of this growth, whilst the US
Life business experienced an 18% increase in funds under management to $20
billion. The 35% increase in funds under management on a sterling basis
reflects the dollar appreciation during 2005.
Outlook
The Group"s focus in the US is on providing financial solutions to
`baby-boomers", with the life and asset management businesses well positioned
to meet this opportunity. We will continue to focus on delivering organic
growth in these businesses, particularly through building wholesale
distribution for the retail market and incrementally enhancing the breadth of
our products and investment styles.
At US Life we will continue to maintain strong pricing disciplines to achieve
sales growth in the higher margin, more profitable areas of the business.
Through strong capital management disciplines, the business continues to be
well positioned to achieve the target of delivering dividends from 2007.
At US Asset Management, the loss of higher margin assets during 2005, offset by
increased volumes of lower margin assets, may have a modest downward impact on
future earnings. However, we will continue to execute our strategy in the year
ahead, growing our core businesses, augmenting our capabilities where required,
and building up our retail platform and alternative investment business.
US LIFE
Continued strong growth
Highlights ($m) %
2005 2004 Change
Adjusted operating profit 162 178 (9%)
Return on equity 5.8% 8.4%
EV adjusted operating profit (after tax) 147 99 48%
Embedded Value 2,116 1,837 15%
Adjusted return on Embedded Value 8% 7%
Life assurance sales (APE) 528 501 5%
Value of new business 93 82 13%
New business margin 18% 16%
Funds under management ($bn) 20 17 18%
The business continued its strong growth trend as it develops towards maturity
and capital self-sufficiency. The Group is committed to ensuring that adequate
infrastructure is in place to support this growing business, which has now
trebled in size since its acquisition in 2001. As part of a wider internal
transformation programme, we have chosen to implement a new financial and
actuarial system, working closely with our external advisors to build new
actuarial models. Several historical reserve adjustments were identified during
the course of this transition, resulting in net adjustments to valuation
reserves totalling $40 million, driving a 9% decrease in adjusted operating
profit to $162 million. The system migration is due for completion in 2006 and
is expected to provide significant enhancements to our internal processes.
The business has been successful in growing underlying profit in line with
funds under management since 2001 and despite the drop in 2005, we expect this
long term trend in profit to continue.
ROE for the year of 5.8% was negatively impacted by the lower operating profit
and $200 million capital injection in late 2004 to strengthen the business"s
capital base and maintain the targeted risk-based capital (RBC) ratio at 300%,
coupled with the repatriation to the United States of a significant block of
annuity business from Old Mutual Re (Ireland) at the end of 2004.
APE up 5%
Total sales on an APE basis were $528 million for the year, an increase of 5%
from $501 million in 2004, underpinned by strong growth for the year of 40% in
life sales and 85% in offshore annuity sales through Old Mutual Bermuda.
Life product sales of $148 million for the year, compared with $106 million in
2004 reflect the success of our market penetration strategies, strong market
growth in the middle income sector and a strengthening of relationships with
our key distributors. We are now ranked 18th overall for sales in the life
market and remain the market leader for mortgage protection term insurance.
Equity Index Annuity sales was the single largest APE contributor, as agent and
consumer acceptance expanded the market.
Old Mutual Bermuda"s sales reflected growth in our bank distribution, combined
with extensions to our product range to include fixed annuity and equity
indexed products modelled closely on our onshore products. Corporate sales
continued to be held at low levels due to the strength in retail sales.
Improved margins
The after-tax value of new business increased to $93 million, 13% higher than
in 2004, positively impacted by the growth in sales and an increase in the new
business margin from 16% for 2004 to 18% for the year. The increased margin is
at the upper end of our long-term expectations under EEV methodology and
reflects the strengthening of our pricing disciplines, positive investment
yields, and a favourable product mix.
Prudent action taken to build the strength of this business
Whilst the fundamentals of our US Life business model remain unchanged, the
strong sales growth experienced in the first nine months of the year allowed
management the opportunity to rationalise certain products and distribution
channels towards the end of 2005, providing the business with a more efficient
distribution network.
The increasingly efficient use of outsourced underwriting and administration
services also continued to differentiate the US operations. Our migration to a
new third party administrator has been successfully executed, contributing to a
reduction of 49% in our annual per policy unit costs compared with 2003, which
was the last full year prior to the move to outsourcing.
US ASSET MANAGEMENT
Record net cash flows contribute to strong operating result
The Group"s US asset management business delivered excellent growth in adjusted
operating profit of $214 million, an increase of 34% over 2004. The combination
of record net cash flows, strong investment performance and positive equity
markets led to a 23% increase in asset levels to $226 billion for 2005.
%
Highlights ($m) 2005 2004 Change
Adjusted operating profit 214 160 34%
Funds under management ($bn) 226.3 184.6 23%
Average funds under management ($bn) 207 165 25%
Net fund flows ($bn) 26.3 12.3 114%
Operating margin 26% 24%
Operating profit has also benefited from a significant increase in one-off
transaction and performance fees of $106 million in 2005, with the increase of
56% over 2004 sourced primarily from the Campbell Group and Heitman.
Funds up 23% to $226 billion
Funds at our US Asset Management business increased by 23% to $226 billion at
31 December 2005 from $185 billion at 31 December 2004, driven by record net
inflows of client assets totalling $26 billion. The net fund inflows were
achieved mainly in international and emerging markets equity, value equity and
fixed income, as well as $11 billion in cash collateral assets. Strong
investment performance and positive market action contributed 8.3% or $15
million towards this increase.
Funds under management were negatively impacted by the restructuring of the
Pacific Financial Research (PFR) team, which was announced during the third
quarter of 2005. Definitive management action taken to address the impact of
this reorganisation and significant fund inflows from other areas of the US
asset management business, resulted in minimal net cash outflows of less than
$400 million for the fourth quarter.
Barrow, Hanley, Mewhinney & Strauss, one of the affiliates in the US Asset
Management business, has been awarded the mandate to manage from the start of
2006, the Clipper Focus fund, formerly managed by PFR, and now renamed the Old
Mutual Barrow Hanley Value Fund.
Excellent fund performance
The record net fund inflows reflected the excellent investment performance
achieved by our member firms.
At 31 December 2005 86% and 95% of assets outperformed their benchmarks over
three and five years respectively. Over the same periods 52% and 68% of assets,
respectively, ranked in the first quartile of their peer group.
Building our distribution
Our retail initiative continued to gather momentum with gross sales of $1.9
billion, of which $445 million related to open-end mutual fund sales. We
invested $19 million in this initiative during the year, with the aim of
providing our affiliates with access to a higher margin market and further
diversifying revenue-generating sources for the Group. The business continued
to expand its product offering, with four new open-end mutual funds and two
closed-end fund products launched during 2005.
US Asset Management has actively worked to manage its portfolio during the
year, establishing a high- quality alternative investments business with the
launch of 2100 Capital, the initiation of our strategic partnership with Copper
Rock Capital Partners as well as the acquisition of Larch Lane, a New
York-based hedge fund specialist in October. In an effort to sharpen our
strategic focus, we divested ourselves of L&B Realty, Integra Global Advisors,
and UAM (Japan) during the year.
The US Asset Management business now primarily consists of profit-sharing
businesses, being left with only one significant revenue-sharing firm, First
Pacific Advisors, which has an option to acquire certain of the firm"s assets
and liabilities with effect from October 2006.
UK & REST OF WORLD
A year of exceptional growth
Our UK & Rest of World asset management and life assurance businesses delivered
exceptional growth in adjusted operating profit to GBP24 million in 2005 from a
loss of GBP5 million in 2004.
%
Highlights (GBPm) 2005 2004 Change
Adjusted operating profit 24 (5.0)
Funds under management (GBPbn) 6.9 5.2 33%
Selestia sales 704 423 66%
Old Mutual Asset Managers (UK) (OMAM (UK)), in particular, produced strong
results with adjusted operating profit increasing to GBP13 million from GBP5
million in 2004. This result was driven by excellent hedge fund and retail unit
trust performance, combined with strong net fund inflows, resulting in a 38%
increase in funds under management to GBP4.7 billion. 2005 was OMAM (UK)"s most
successful year in terms of gross and net business, with gross sales of GBP1.1
billion. Overall, 67% by value of the retail unit trust funds produced top
quartile performance for the year, with the UK Select Mid Cap and the UK Select
Small Cap equity funds both ranked in first place within their sectors for the
year ending 31 December 2005.
Selestia has also continued to build critical mass with sales of GBP704 million
for 2005, an increase of 66% when compared to sales of GBP423 million in 2004.
The UK & Rest of World segment also includes the results from Old Mutual
International, the Far East and Bermuda with our interests in India continuing
to grow exponentially, now in its fourth full year of financial operation. The
business is currently operating from 45 branches in 31 cities across India and
has a sales force of around 10,500 tied agents.
Outlook
Going forward we will continue to pursue organic growth, with new product
launches and further development of our team capabilities planned for OMAM
(UK). The focus at Selestia is on continuing to build critical mass, with the
planned launch of a new pension product in response to the release of the
Pensions `A" Day regulations.
We are also committed to expanding our operations in India and China through
the development and offering of financial solutions to the emerging middle
class in those countries.
Summary Consolidated Income Statement
for the year ended 31 December 2005
The financial information in this document does not constitute the Company"s
statutory accounts for the years ended 31 December 2005 or 2004 but is derived
from the 2005 accounts. Statutory accounts for 2004, which were prepared under
the UK GAAP, have been delivered to the Registrar of Companies, and those for
2005, prepared under accounting standards adopted by the EU, will be delivered
following the Company"s Annual General Meeting. The auditors (KPMG Audit Plc)
have reported on those accounts: their reports were unqualified, did not
include reference to any matters to which the auditors drew attention by way of
emphasis without qualifying their reports and did not contain statements under
Section 237 (2) or (3) of the Companies Act 1985.
GBPm
Year to Year to
31 December 31 December
Notes 2005 2004
Africa
Long term business 2(iv) 467 467
Asset management 2(vii) 86 54
Banking 2(vi) 394 203
General insurance 2(v) 102 101
1,049 825
North America
Long term business 2(iv) 89 97
Asset management 2(vii) 118 87
207 184
United Kingdom & Rest of World
Long term business 2(iv) 8 6
Asset management 2(vii) 15 (5)
Banking 2(vi) 27 23
50 24
Finance costs (37) (49)
Other shareholders" income /
(expenses) 2(viii) (25) (30)
Adjusted operating profit* 1,244 954
Goodwill impairment 3(i) (5) (33)
Profit / (loss) on disposal of
subsidiaries, associated
undertakings and
strategic investments 3(ii) 58 (27)
Short term fluctuations in
investment return 3(iii) 363 197
Investment return adjustment for
Group equity and debt instruments
held in life funds 3(v) (109) (99)
Initial costs of Black Economic
Empowerment schemes 3(vi) (72) -
Income from hedging activities that
do not qualify for hedge
accounting 3(iv) - 31
Fines and penalties 3(vii) - (49)
Profit before tax (net of income
tax attributable to policyholder
returns) 1,479 974
Total income tax expense 4 (484) (344)
Less income tax attributable to
policyholder returns 127 62
Income tax attributable to equity
holders (357) (282)
Profit for the financial year 1,122 692
Profit for the financial year is
attributable to:
Equity holders of the parent 867 559
Minority interests - ordinary shares 5(i) 203 74
Minority interests - preferred
securities 5(ii) 52 59
1,122 692
* For life assurance and general insurance businesses, adjusted operating
profit is based on a long term investment return, includes investment returns
on investments in Group equity and debt instruments held in life funds and is
stated net of income tax attributable to policyholder returns. For all
businesses, adjusted operating profit excludes goodwill impairment, fines and
penalties, initial costs of Black Economic Empowerment schemes and
profit/(loss) on disposal of subsidiaries, associated undertakings and
strategic investments. Adjusted operating profit excludes income from hedging
activities that do not qualify for hedge accounting.
Summary Consolidated Income Statement
for the year ended 31 December 2005 continued
The adjusted operating profit on an after tax attributable to equity holders
is determined as follows:
GBPm
Year to Year to
31 December 31 December
Notes 2005 2004
Adjusted operating profit 1,244 954
Tax on adjusted operating profit 4 (308) (244)
936 710
Minority interests - ordinary shares 5(i) (185) (94)
Minority interests - preferred
securities 5(ii) (52) (59)
Adjusted operating profit after tax
attributable to equity holders 699 557
The reconciliation of adjusted operating profit after tax attributable to
equity holders to profit for the financial period attributable to equity
holders is as follows. Details of items included in profit before tax but
excluded from adjusted operating profit are set out in note 3.
GBPm
Year to Year to
31 December 31 December
2005 2004
Adjusted operating profit after tax
attributable to equity holders 699 557
Goodwill impairment (4) (17)
Profit / (loss) on disposal of subsidiaries,
associated undertakings and strategic
investments 32 (21)
Short term fluctuations in investment return 294 149
Investment return adjustment for Group equity
and debt instruments held in life
funds (109) (99)
Initial costs of Black Economic Empowerment
schemes (54) -
Income attributable to Black Economic
Empowerment trusts of listed
subsidiaries 9 -
Income from hedging activities that do not
qualify for hedge accounting - 31
Fines and penalties - (41)
Profit for the financial period attributable to
equity holders 867 559
p
Year to Year to
Earnings per share attributable to 31 December 31 December
equity holders Notes 2005 2004
Adjusted operating earnings per share*6(ii) 18.2 14.9
Basic earnings per share 6(i) 25.1 16.3
Diluted earnings per share 6(i) 24.3 16.3
Adjusted weighted average number of
shares - millions 3,840 3,738
Weighted average number of shares -
millions 3,456 3,422
* Adjusted operating earnings per share is calculated on the same basis as
adjusted operating profit, but is stated after tax and minority interests
and excluding income attributable to Black Economic Empowerment trusts of
listed subsidiaries. The calculation of the weighted average number of
shares includes own shares held in policyholders" funds and Black Economic
Empowerment trusts of the parent company.
Consolidated Income Statement
for the year ended 31 December 2005
GBPm
Year to Year to
31 December 31 December
Notes 2005 2004
Revenue
Gross earned premiums 4,473 4,114
Outward reinsurance (197) (140)
Net earned premiums 4,276 3,974
Investment income (net of investment
losses) 6,569 4,286
Banking interest and similar income 2,198 2,023
Fee and commission income,
and income from service activities 1,274 1,143
Other income 215 216
Total revenue 14,532 11,642
Expenses
Claims and benefits (including change
in insurance contract provisions) (7,795) (5,901)
Reinsurance recoveries 226 143
Net claims incurred (7,569) (5,758)
Change in provision for investment
contract liabilities (including
amortisation) (1,202) (760)
Losses on loans and advances (103) (104)
Finance costs (including interest
and similar expenses) (40) (61)
Banking interest expense (1,434) (1,459)
Fees, commissions and other
acquisition costs (389) (413)
Other operating and administrative
expenses (2,179) (1,954)
Change in provision for third
party interest in consolidated funds (80) (55)
(12,996) (10,564)
Share of associated undertakings"
profit after tax 17 18
Goodwill impairment (5) (33)
Profit / (loss) on disposal
of subsidiaries, associated
undertakings
and strategic investments 58 (27)
Profit before tax 1,606 1,036
Income tax expense 4 (484) (344)
Profit for the financial year 1,122 692
Profit for the financial year is
attributable to:
Equity holders of the parent 867 559
Minority interests - ordinary shares 5(i) 203 74
Minority interests - preferred
securities 5(ii) 52 59
1,122 692
p
Year to Year to
31 December 31 December
Earnings and dividend per share 2005 2004
Basic earnings per share 6(i) 25.1 16.3
Diluted earnings per share 6(i) 24.3 16.3
Dividend per share 5.35 4.85
Weighted average number of
shares - millions 3,456 3,422
Consolidated Balance Sheet
at 31 December 2005
GBPm
At 31 At 31
December 31 December
2005 2004
Assets
Goodwill and other intangible assets 1,570 1,296
Investment in associated undertakings 93 149
Investment property 847 690
Property, plant and equipment 538 512
Deferred tax assets 458 440
Reinsurers" share of insurance contract provision 455 317
Deferred acquisition costs 1,089 655
Current tax receivable 29 20
Loans, receivables and advances 18,456 16,520
Derivative financial instrument assets 1,604 2,689
Financial assets fair valued through income
statement 35,378 28,357
Other financial assets 12,265 9,763
Short term securities 1,764 2,829
Other assets 2,409 2,074
Cash and balances with central banks 3,051 1,513
Placements with other banks 568 392
Total assets 80,574 68,216
Liabilities
Insurance contract provisions 23,258 18,883
Liabilities fair valued through
the income statement
(including investment
contract liabilities) 21,187 15,035
Third party interests in
consolidation of funds 966 556
Borrowed funds 1,433 1,441
Provisions 504 510
Deferred revenue 138 139
Deferred tax liabilities 611 386
Current tax payable 178 171
Deposits from other banks 2,577 2,813
Amounts owed to other depositors 15,509 15,251
Other money market deposits 3,059 3,037
Derivative financial instrument liabilities 1,634 2,646
Other liabilities 3,101 2,652
Total liabilities 74,155 63,520
Net assets 6,419 4,696
Shareholders" equity
Equity attributable to
equity holders of the parent 4,751 3,265
Minority interests - ordinary shares 1,012 783
Minority interests - preferred securities 656 648
Total minority interests 1,668 1,431
Total equity 6,419 4,696
Consolidated Cashflow Statement
for the year ended 31 December 2005
GBPm
Year to Year to
31 December 31 December
2005 2004
Cash flows from operating activities
Profit before tax 1,606 1,036
Capital gains included in investment income (4,340) (2,523)
Loss on disposal of property, plant and
equipment 8 9
Depreciation of property, plant and equipment 61 121
Amortisation and impairment of intangible assets 75 110
Provision for bad debts 122 122
Share-based compensation expense 94 15
Share of associated undertakings" profit after
tax (17) (18)
(Profit) / loss arising on disposal of
subsidiaries, associated undertakings and
strategic investments (58) 27
Other non-cash amounts in profit 9 19
Non-cash movements in profit before tax (4,046) (2,118)
Reinsurance assets (83) 2
Deferred acquisition costs (276) (269)
Loans, receivables and advances (3,233) (512)
Insurance contracts 3,307 2,677
Investment contracts 2,319 928
Amounts owed to depositors (including bank and
money market deposits) 983 1,544
Other operating assets and liabilities 465 (650)
Changes in working capital 3,482 3,720
Taxation paid (314) (323)
Net cash from operating activities 728 2,315
Cash flows from investing activities
Net disposal / (acquisition) of financial
investments 644 (2,386)
Net disposal of investment properties 40 9
Net acquisition of tangible fixed assets (83) (55)
Net acquisition of intangible fixed assets (17) (35)
Acquisition of interests in subsidiaries (56) (158)
Disposal of interests in subsidiaries,
associated undertakings
and strategic investments 33 84
Net cash inflow / (outflow) from investing
activities 561 (2,541)
Cash flow from financing activities
Dividends paid to:
Ordinary shareholders of the Company (184) (166)
Equity minority interests and preferred
security interests (99) (79)
Interest payable (excluding banking interest
payable) (40) (48)
Net proceeds from issue of ordinary shares
(including by subsidiaries to
minority interests excluding Treasury shares) 2 232
Repayment of convertible debt (336) (5)
Issue / (repayment) of subordinated debt 259 (62)
Issue of perpetual preferred callable securities 688 -
Other debt repaid (10) (29)
Net cash flows from financing activities 280 (157)
Net increase / (decrease) in cash and cash
equivalents 1,569 (383)
Effects of exchange rate changes on cash and
cash equivalents 86 93
Cash and cash equivalents at beginning of the
year 1,648 1,938
Cash and cash equivalents at end of the year 3,303 1,648
Consisting of:
Placements with other banks 567 392
Cash and balances with central banks 3,051 1,513
Other cash equivalents 382 218
4,000 2,123
Less: Cash and cash equivalents subject to
consolidation of funds (697) (475)
3,303 1,648
Statement of Changes in Consolidated Equity
for the year ended 31 December 2005
GBPm
Number of Attributable to
shares issued equity holders of
Year ended 31 December 2005 and fully paid the parent
Equity holders" funds at 1 January 2005 3,854 3,265
Change in equity arising in the year
Fair value gains / (losses):
Property revaluation - 27
Net investment hedge reserve - (78)
Available-for-sale investments - (249)
Shadow accounting - 117
Currency translation differences
/ exchange differences on
translating foreign operations - 263
Cash flow hedge amortisation - (12)
Redemption of convertible bonds - (18)
Other movements - (21)
Aggregate tax effect of items taken
directly to or transferred
from equity - 34
Net income recognised directly in
equity - 63
Profit for the year - 867
Total recognised income / (expense)
for the year - 930
Dividends for the year - (184)
Net purchase of treasury shares - (182)
Issue of perpetual preferred callable
securities - 679
Issue of share capital 231 159
Net acquisition of minority interests - -
Exercise of share options 5 4
Fair value of equity settled share
options - 80
Equity holders" funds at 31 December
2005 4,090 4,751
GBPm
Total minority Total
Year ended 31 December 2005 interest equity
Equity holders" funds at 1 January 2005 1,431 4,696
Change in equity arising in the year
Fair value gains / (losses):
Property revaluation - 27
Net investment hedge reserve - (78)
Available-for-sale investments - (249)
Shadow accounting - 117
Currency translation differences
/ exchange differences on
translating foreign operations 12 275
Cash flow hedge amortisation - (12)
Redemption of convertible bonds - (18)
Other movements 23 2
Aggregate tax effect of items taken
directly to or transferred
from equity - 34
Net income recognised directly in equity 35 98
Profit for the year 255 1,122
Total recognised income / (expense) for the year 290 1,220
Dividends for the year (99) (283)
Net purchase of treasury shares - (182)
Issue of perpetual preferred callable securities - 679
Issue of share capital - 159
Net acquisition of minority interests 26 26
Exercise of share options - 4
Fair value of equity settled share options 20 100
Equity holders" funds at 31 December 2005 1,668 6,419
Statement of Changes in Consolidated Equity
for the year ended 31 December 2005 continued
GBPm
Year ended 31 Share Share Other Translation
December 2005 capital premium reserves reserve
Attributable to equity
holders of the parent
at
1 January 2005 386 600 445 122
Changes in equity arising
in the year:
Fair value gains /
(losses):
Property revaluation - - 27 -
Net investment hedge
reserve - - (50) (28)
Available-for-sale
investments - - (249) -
Shadow accounting - - 117 -
Currency translation
differences /
exchange differences on
translating
foreign operations - - - 263
Cash flow hedge
amortisation - - (12) -
Redemption of convertible
bonds - - (18) -
Other movements - - - -
Aggregate tax effect of
items taken
directly to or transferred
from equity - - 34 -
Net income / (expense)
recognised
directly in equity - - (151) 235
Profit for the year - - - -
Total recognised income /
(expense) for
the year - - (151) 235
Dividends for the year - - - -
Net purchase of treasury
shares - - - -
Issue of perpetual
preferred callable
securities - (9) - -
Issue of share capital 23 136 - -
Exercise of share options 1 3 - -
Fair value of equity
settled share options - - 80 -
Attributable to equity
holders of the parent
at 31 December 2005 410 730 374 357
GBPm
Perpetual
Preferred
Retained Callable GBPm
Year ended 31 December 2005 earnings Securities Total
Attributable to equity holders of the
parent
at
1 January 2005 1,712 - 3,265
Changes in equity arising in the year:
Fair value gains / (losses):
Property revaluation - - 27
Net investment hedge reserve - - (78)
Available-for-sale investments - - (249)
Shadow accounting - - 117
Currency translation differences /
exchange differences on translating
foreign operations - - 263
Cash flow hedge amortisation - - (12)
Redemption of convertible bonds - - (18)
Other movements (21) - (21)
Aggregate tax effect of items taken
directly to or transferred from equity - - 34
Net income / (expense) recognised
directly in equity (21) - 63
Profit for the year 867 - 867
Total recognised income / (expense) for
the year 846 - 930
Dividends for the year (184) - (184)
Net purchase of treasury shares (182) - (182)
Issue of perpetual preferred callable
securities - 688 679
Issue of share capital - - 159
Exercise of share options - - 4
Fair value of equity settled share options - - 80
Attributable to equity holders of the
parent
at 31 December 2005 2,192 688 4,751
GBPm
At At
31 December 31 December
Other reserves 2005 2004
Merger reserve 184 184
Available for sale reserve 68 153
Investment property revaluation reserve 39 26
Convertible debt reserve - 17
Net investment hedge reserve - 50
Cashflow hedge reserve (3) 9
Share based payments reserve 86 6
374 445
Retained earnings have been reduced by GBP712 million at 31 December 2005 in
respect of treasury shares held in policyholder funds, ESOP trusts, Black
Economic Empowerment trusts and other related undertakings.
Statement of Changes in Consolidated Equity
for the year ended 31 December 2005 continued
GBPm
Number of Attributable to
shares issued equity holders of
Year ended 31 December 2004 and fully paid the parent
Equity holders" funds at 1 January 2004 3,837 2,651
Changes in equity arising in the year
Fair value gains / (losses):
Gain on property revaluation - 9
Available-for-sale investments - 118
Shadow accounting - (35)
Currency translation differences /
exchange
differences on translating foreign
operations - 122
Cash flow hedge amortisation - (4)
Other movements - (14)
Aggregate tax effect of items taken
directly to or
transferred from equity - (18)
Net income recognised directly in
equity - 178
Profit for the year - 559
Total recognised income / (expense)
for the year - 737
Dividends for the year - (166)
Sale of treasury shares - 25
Issue of share capital - -
Net acquisition / disposal of minority
interests - -
Exercise of share options 17 15
Fair value of equity settled share
options - 3
Equity holders" funds at 31 December
2004 3,854 3,265
GBPm
Total minority Total
Year ended 31 December 2004 interest equity
Equity holders" funds at 1 January 2004 1,212 3,863
Changes in equity arising in the year
Fair value gains / (losses):
Gain on property revaluation - 9
Available-for-sale investments - 118
Shadow accounting - (35)
Currency translation differences / exchange
differences on translating foreign operations 81 203
Cash flow hedge amortisation - (4)
Other movements 11 (3)
Aggregate tax effect of items taken directly to or
transferred from equity - (18)
Net income recognised directly in equity 92 270
Profit for the year 133 692
Total recognised income / (expense) for the year 225 962
Dividends for the year (84) (250)
Sale of treasury shares - 25
Issue of share capital 5 5
Net acquisition / disposal of minority interests 66 66
Exercise of share options 7 22
Fair value of equity settled share options - 3
Equity holders" funds at 31 December 2004 1,431 4,696
Statement of Changes in Consolidated Equity
for the year ended 31 December 2005 continued
GBPm
Share Share Other
Year ended 31 December 2004 capital premium reserves
Attributable to equity holders of the
parent at
1 January 2004 384 587 370
Changes in equity arising in the year
Fair value gains / (losses):
Gain on property revaluation - - 9
Available-for-sale investments - - 118
Shadow accounting - - (35)
Currency translation differences / exchange
differences on translating foreign
operations - - -
Cash flow hedge amortisation - - (4)
Other - - 2
Aggregate tax effect of items taken
directly to
or transferred from equity - - (18)
Net income recognised directly in equity - - 72
Profit for the year - - -
Total recognised income / (expense) for the
year - - 72
Dividends paid in year - - -
Sales of treasury shares - - -
Exercise of share options 2 13 -
Fair value of equity settled share options - - 3
Attributable to equity holders of the
parent at
31 December 2004 386 600 445
Translation Retained GBPm
Year ended 31 December 2004 reserve earnings Total
Attributable to equity holders of the
parent at
1 January 2004 - 1,310 2,651
Changes in equity arising in the year
Fair value gains / (losses):
Gain on property revaluation - - 9
Available-for-sale investments - - 118
Shadow accounting - - (35)
Currency translation differences /
exchange
differences on translating foreign
operations 122 - 122
Cash flow hedge amortisation - - (4)
Other - (16) (14)
Aggregate tax effect of items taken
directly to
or transferred from equity - - (18)
Net income recognised directly in equity 122 (16) 178
Profit for the year - 559 559
Total recognised income / (expense) for
the
year 122 543 737
Dividends paid in year - (166) (166)
Sales of treasury shares - 25 25
Exercise of share options - - 15
Fair value of equity settled share
options - - 3
Attributable to equity holders of the
parent at
31 December 2004 122 1,712 3,265
Retained earnings have been reduced by GBP526 million at 31 December 2004 in
respect of shares held in policyholder funds, ESOP trusts and related
undertakings.
Date: 27/02/2006 09:01:45 AM Produced by the JSE SENS Department
