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EUROPE
Proforma % change
Highlights (GBPm)* H1 2006 H1 2005
Adjusted IFRS operating profit 120 39 208%
Embedded value adjusted operating profit
(covered business) 183 137 34%
Life assurance sales (APE) 420 359 17%
Mutual fund sales 1,790 1,184 51%
Return on invested capital 9% n/a
Return on embedded value 13.3% n/a
Funds under management (GBPbn) 47 36 31%
* All current and prior year numbers reflect 5 months of results. All prior
year numbers are proforma, adjusted to Old Mutual accounting policies.
Prior year embedded value numbers are on a Skandia basis but allow for
group expenses.
Strong operating results
A strong operating result both on an IFRS and EEV basis was delivered, with the
integration remaining on track both in terms of realisation of synergies and
estimated synergy costs.
Adjusted operating profit on an IFRS basis increased from GBP39 million to
GBP120
million driven by higher funds under management, higher sales volumes and
increased fee income achieved across most areas of the business.
The embedded value adjusted operating profit before tax of GBP183 million
increased from GBP137 million, benefiting from excellent new sales in many
regions including UK post A-day sales, as well as significant growth in the
Europe and Latin America division (ELAM) particularly in Italy, Poland and
France and positive experience effects. In addition, experience variances
improved reflecting a higher level of fee income and better persistency
experience compared to that assumed in all three divisions.
Particularly pleasing was the increase in UK mutual fund sales, with 75% sales
growth in the UK from Skandia MultiFUNDS and Selestia combined, as the industry
shift to open architecture platforms continued.
Margins after tax on life business improved, after factoring in the Head office
expenses allocation. Healthy net cash inflows of GBP3 billion, led to funds
under
management increasing by 7% since 31 December 2005, benefiting also from the
strength of equity markets. This was also reflected in the increase in total
fund based fees of 58%.
The results from Skandia are above expectations with strong sales and we are
pleased that the business has shown minimal disruption from the acquisition in
February. Much, of course, remains to be done. We outlined our future strategy
on 20 June 2006 and we are committed to all the goals laid out at that time.
UNITED KINGDOM
Proforma
Highlights (GBPm)* H1 2006 H1 2005 % change
Long-term business 63 16 297%
Asset management 4 (7) 163%
IFRS adjusted operating profit 67 9 644%
Embedded value adjusted operating profit
(covered business) 86 52 65%
Life assurance sales (APE) 262 225 16%
Mutual fund sales 1,170 667 75%
Value of new business 26 17 53%
Life new business margin 10% 8%
Funds under management (bn) 31 23 35%
* All current and prior year numbers reflect 5 months of results. All prior
year numbers are proforma adjusted onto old Mutual accounting policies.
Prior year embedded value numbers are on a Skandia basis but allow for
group expenses.
Strong earnings
The improvement in the adjusted operating result in the first half of 2005 of
GBP9 million, to GBP67 million in the first half 2006 is primarily driven by
higher
fund base fees as asset appreciation and net fund inflows have increased funds
under management.
In addition the 2005 result was impacted by a number of one-off charges in
2005, as provisions were required to address changes in fee structure.
Embedded value adjusted operating profit before tax increased from GBP52 million
to GBP86 million, driven by growth in new business, operating leverage and
improved experience variances from the positive impact of high fee income.
Skandia UK also saw a rise in surrender rates associated with increased A-day
related pension transfer activity and we believe this trend was experienced
across the industry. We are currently undertaking measures to improve long-term
persistency performance.
Life sales up 16%, Mutual Fund sales up 75%
Skandia UK continued to deliver strong new business growth, with life APE sales
up 16% to GBP262 million (30 June 2005: GBP225 million).
UK onshore unit-linked sales grew by 39% to GBP162 million, benefiting from
increased transfer activity and higher regular premium investments following
the implementation of Pensions `A" Day regulations, with an 89% growth in
pensions sales.
Offshore sales declined by 5% to GBP100 million. Whilst strong growth was
experienced by Royal Skandia in international markets, this was offset by lower
UK sourced sales, where volumes were adversely impacted by uncertainty
surrounding the tax treatment of trusts.
Mutual fund sales increased by 75% to GBP1,170 million (30 June 2005: GBP667
million), benefiting from strong tax year end sales and the continuing industry
shift to open architecture investment platforms.
Profit margins
Value of new business for life business after tax of GBP26 million resulted in a
profit margin (after tax and after allocating Head Office expenses) of 10%.
Skandia UK"s margin has benefited from favourable operating leverage from
strong new sales and an improvement in product mix, as Skandia sold
proportionately less of some lower margin International products. The long-term
goal, as communicated on 20 June 2006, is to achieve margins in the 11-12%
range.
Funds under management
Funds under management have increased by 7% to GBP31 billion from 31 December
2005, benefiting from strong net inflows from unit-linked and mutual funds
coupled with favourable market movements.
The largest increase was experienced within mutual funds driven by strong
performance in Skandia MultiFUNDS (SMFL), Selestia and Skandia Investment
Management (SIML).
SMFL/Selestia inflows are growing strongly as fund platforms become the
industry standard for mutual funds investments. SIML has continued to broaden
its fund range, with new funds such as Global Best Ideas Funds (GBI) launched
in June 2006.
SIML funds were added to the Selestia platform in June and the SMFL/Selestia
integration plan continues to gain momentum in line with the plans announced by
the Group on 20 June 2006.
NORDIC
Proforma
Highlights (SEKm)* H1 2006 H1 2005 % change
Long-term business 481 276 75%
Asset management 12 10 18%
Banking 79 58 36%
Adjusted operating profit 572 344 66%
Embedded value adjusted operating profit
(covered business) 755 460 64%
Life assurance sales (APE) 904 916 (1%)
Mutual fund sales 793 820 (3%)
Value of new business 260 261 -
Life new business margin 29% 29%
Funds under management (bn) 99 82 21%
* All current and prior year numbers reflect 5 months of results. All prior
year numbers are proforma adjusted onto Old Mutual accounting policies.
Prior year embedded value numbers are on a Skandia basis but allow for
group expenses.
Nordic division delivers good profits
Adjusted operating profit increased from SEK344 million to SEK572 million
benefiting from higher fund- based fees in the unit-linked business, improved
risk result and higher rebates from fund managers. Within Nordic, a majority of
fee income is fund based and it grew 38% with funds growing by 21%. Whilst
Nordic"s banking result has improved in 2006 due to lower head office expense
allocation, underlying business performance was dampened by both lower net
interest income due to a change in product mix and increased competition as
well as higher transaction and project costs following the Basel II
implementation.
Embedded value adjusted operating profit increased from SEK460 million to
SEK755 million driven by a higher return on in-force business and significant
improvements in experience variances mainly related to higher fee income and
surrenders in line with that assumed as part of the restatement. The value of
new business was relatively stable.
During the prior year there was increased transfer activity from other products
as a result of the new Kapitalpension product. As expected during the first
half of 2006, the levels of surrenders in unit-linked business have levelled
off with the reduced impact of conversions to Kapitalpension.
Sales
Unit-linked APE sales in the Nordic region decreased by 1% to SEK904 million
with 7% growth in recurring premiums offset by a 31% decrease in single
premiums, reflecting a downturn in Kapitalpension product sales over the second
quarter, as the rush to convert older contracts has tailed off. For the same
reason, surrenders were also lower.
The downturn in Kapitalpension is reflected in the declining market share for
unit-linked business in Sweden, which was 17.9% on a moving twelve months basis
compared to 18.7% a quarter earlier. New sales within the corporate segment in
Sweden were stable and Skandia"s market share in that segment grew slightly to
18.3%. The corporate segment accounts for more than two-thirds of new sales in
Sweden.
Profit margins maintained
Strong profit margins for unit linked business were maintained in the first
half of 2006, and the VNB after tax of SEK260 million resulted in a profit
margin after tax of 29%. We expect that structural changes in the Swedish
market will squeeze margins down to the 22-25% range as communicated on 20
June.
Funds under management
Despite the decrease in equity markets during the second quarter of 2006, total
funds under management retained most of the increase seen in 2005. The increase
was driven by higher net inflows from customers into unit-linked funds.
Lending in the bank increased by 14% compared to 31 December 2005, resulting
mainly from mortgages in Norway.
EUROPE AND LATIN AMERICA (ELAM)
Proforma
Highlights (Euro m)* H1 2006 H1 2005 % change
Long-term business 19 12 58%
Asset management (3) (6) 42%
Adjusted operating profit 16 6 167%
Embedded value adjusted operating profit
(covered business) 60 74 (19%)
Life assurance sales (APE) 132 95 39%
Mutual fund sales 816 665 23%
Value of new business 25 17 47%
Life new business margin 19% 18%
Funds under management (bn) 13 10 30%
* All current and prior year numbers reflect 5 months of results. All prior
year numbers are proforma adjusted onto Old Mutual accounting policies.
Prior year embedded value numbers are on a Skandia basis but allow for
group expenses.
Positive growth in IFRS profit
Adjusted operating profit increased to Euro 16 million compared to Euro 6
million in the prior year driven by increased fee income as funds under
management have continued to grow, higher inflows together with maintained cost
control. Total fund based fees increased 50% during the first six months as the
total funds within Unit Linked and Mutual Funds grew by 30% from 30 June 2005.
Within Mutual Funds, Colombia and Skandia Global Funds are the largest positive
contributors to the IFRS result whereas the businesses in some other countries
are still in a start up phase.
Embedded value adjusted operating profit of Euro 60 million declined from Euro
74 million despite higher value of new business compared to last year due to
strong growth in the value of new business in Italy, Poland and France. This
was because there was some positive one-off effects in the value of new
business and experience variance due to the German overhang in 2005 as well as
changes in operating assumptions in 2005.
Strong growth in sales
Life APE sales growth has been particularly strong in Italy, Poland and France,
with exceptionally strong single premium sales in Italy in the first quarter of
2006.
The new business inflow in Germany continues to recover even though the market
is still slower than in the first years before the pension reform. Germany,
like Austria, has a steady book of regular premium contracts generating a good
level of regular inflow.
ELAM achieved growth of 23% in mutual fund sales to Euro 816 million (30 June
2005: Euro 665 million), primarily driven by excellent sales in Spain and
Colombia in the first quarter.
Margin of 19% achieved
The overall new business margin of 19% was slightly higher than the expected
long-term margin of 16-18% as communicated on 20 June due to a shift in the
geographical new business mix.
Funds under management
Despite the decrease in equity markets during the second quarter of 2006, total
funds under management remain stable at Euro 13 billion when compared to 31
December 2005. Net client cash flows were positively impacted by strong inflows
within mutual funds offset by withdrawals in the short-term asset management
business, primarily due to the downturn in equity markets during the second
quarter of 2006.
OTHER
Highlights (GBPm) H1 2006 H1 2005* % change
Adjusted operating profit 9 8 13%
Funds under management (GBPbn) 7 6 17%
Unit trust sales 779 450 73%
* Includes results of Skandia Australia and Skandia-BSAM (China).
A year of strong organic growth
The success of our organic growth strategy continues with our other businesses
(including Old Mutual Asset Managers (OMAM (UK)), Skandia Australia, Old Mutual
Asset Managers Bermuda and our Asian operations) delivering adjusted operating
profit of GBP9 million for the half year 2006.
OMAM (UK) produced solid results, with adjusted operating profit of GBP6 million
driven by strong hedge fund and retail unit trust performance.
Unit trust sales increased by 73% to GBP779 million for the first half (30 June
2005: GBP450 million) driven by strong sales at OMAM (UK) as the business
continued to benefit from the expansion of its product portfolio and the
further strengthening of its distribution capabilities.
Expansion into Asia
Our life associate in India, Kotak Mahindra Old Mutual, continues to make
strong progress. Total premium income on an APE basis reached GBP55 million for
the first six months of the year, an increase of 92% over the first half of
2005. The business now has more than 2,000 employees and a tied-agency force of
14,000, and operates from 51 branches in 39 cities across India.
Skandia-BSAM, our joint venture with the Beijing state-owned Asset Management
Company, now in its second year of operation, has made a very good start to the
year, achieving 87% of its annual sales target at the half-year. In addition to
the current branches in Beijing and Shanghai, we will be opening a third branch
in Nanjing before the end of the year.
Australian Skandia Limited has been in operation for five years and provides
investors with a choice of flexible, long-term savings solutions. Australia
remains an attractive market, with the business showing strong fund inflows.
Going forward we will continue to pursue organic growth, with new product
launches and further development of our distribution team capabilities planned
for OMAM (UK). The business is also focusing on diversifying its revenue
streams, primarily through growth in the institutional business.
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 six months ended 30 June 2006
The following table summarises the Group"s results in the consolidated income
statement on page 30. Adjusted operating profit represents the Directors" view
of the underlying performance of the Group. This summary does not form part of
the interim financial statements.
GBPm
6 months ended 6 months ended Year ended
30 June 30 June 31 December
Notes 2006 2005 2005
South Africa
Long-term
business 224 214 475
Asset management 55 37 85
Banking 274 176 421
General
insurance 42 49 102
595 476 1,083
United States
Long-term
business 72 62 106
Asset management 59 50 118
131 112 224
Europe
Long-term
business 111 - -
Asset management 3 (2) (4)
Banking 6 - -
120 (2) (4)
Other
Long-term
business (1) - -
Asset management 10 10 20
9 10 20
Finance costs (63) (19) (37)
Other
shareholders"
income/(expense
s) (21) (11) (25)
Adjusted
operating
profit* 3(ii) 771 566 1,261
Adjusting items 4 (40) 87 218
Profit before
tax (net of
income tax
attributable to
policyholder
returns) 731 653 1,479
Total income
tax expense 5 (296) (181) (484)
Less: income
tax
attributable to
policyholder
returns 84 21 127
Income tax
attributable to
shareholders (212) (160) (357)
Profit for the
financial
period 519 493 1,122
Profit for the
financial
period
attributable
to:
Equity holders
of the parent 380 387 867
Minority
interests
Ordinary shares 113 78 203
Preferred
securities 26 28 52
519 493 1,122
* For long-term and general insurance business, adjusted operating profit is
based on a long-term investment return, includes investment returns on life
funds" investments in Group equity and debt instruments and is stated net of
income tax attributable to policyholder returns. For all businesses,
adjusted operating profit excludes goodwill impairment, the impact of
acquisition accounting, initial costs of Black Economic Empowerment schemes,
profit / (loss) on disposal of subsidiaries, associated undertakings and
strategic investments and dividends declared to holders of perpetual
preferred callable securities.
Adjusting items comprise:
GBPm
6 months ended 6 months ended Year ended
30 June 30 June 31 December
Notes 2006 2005 2005
Income /
(expense)
Goodwill
impairment
and impact of
acquisition
accounting 4(i) (135) (14) (22)
Profit /
(loss) on
disposal of
subsidiaries,
associated
undertakings
and strategic
investments 4(ii) 97 (4) 58
Short-term
fluctuations
in investment
return 4(iii) 73 133 363
Investment
return
adjustment
for Group
equity and
debt
instruments
held in life
funds 4(iv) (97) (28) (109)
Initial costs
of Black
Economic
Empowerment
schemes 4(v) - - (72)
4(vi) /
Dividends
declared to
holders of
perpetual
preferred
callable
securities 8 22 - -
Adjusting
items (40) 87 218
Adjusted operating profit after tax attributable to ordinary equity holders
is determined as follows:
GBPm
6 months ended 6 months ended Year ended
30 June 30 June 31 December
Notes 2006 2005 2005
Adjusted
operating
profit 771 566 1,261
Tax on adjusted
operating
profit 5 (196) (137) (314)
575 429 947
Minority
interests -
ordinary shares (119) (76) (185)
Minority
interests -
preferred
securities (26) (28) (52)
Adjusted
operating
profit after
tax
attributable to
ordinary equity
holders 430 325 710
Pence
6 months ended 6 months ended Year ended
30 June 30 June 31 December
Earnings per
share
attributable to
ordinary equity
holders Notes 2006 2005 2005
Adjusted
operating
earnings per
ordinary share* 7(ii) 8.5 8.7 18.5
Basic earnings
per ordinary
share 7(i) 8.0 11.2 25.1
Diluted
earnings per
ordinary share 7(i) 7.5 11.2 24.3
Adjusted
weighted
average number
of shares -
millions 7(ii) 5,063 3,753 3,840
Weighted
average number
of shares -
millions 7(i) 4,547 3,467 3,456
* Adjusted operating earnings per ordinary share is calculated on the same
basis as adjusted operating profit. It is stated after tax attributable to
adjusted operating profit and minority interests. It excludes income
attributable to Black Economic Empowerment trusts of listed subsidiaries.
The calculation of the adjusted weighted average number of shares includes
own shares held in policyholders" funds and Black Economic Empowerment
trusts.
Consolidated Income Statement
for the six months ended 30 June 2006
GBPm
6 months ended 6 months ended Year ended
30 June 30 June 31 December
Notes 2006 2005 2005
Revenue
Gross earned
premiums 3(iii) 2,411 2,148 4,473
Outward
reinsurance (129) (80) (197)
Net earned
premiums 2,282 2,068 4,276
Investment
income (net of
investment
losses) 3,661 2,501 6,569
Banking
interest and
similar income 1,304 944 2,018
Fee and
commission
income, and
income from
service
activities 1,074 576 1,274
Other income 127 104 215
Share of
associated
undertakings"
profit after
tax 3 6 17
Total revenues 8,451 6,199 14,369
Expenses
Claims and
benefits
(including
change in
insurance
contract
provisions) (3,759) (3,334) (7,795)
Reinsurance
recoveries 109 88 226
Net claims
incurred (3,650) (3,246) (7,569)
Change in
provision for
investment
contract
liabilities
(including
amortisation) (832) (448) (1,202)
Losses on
loans and
advances (73) (53) (103)
Finance costs
(including
interest and
similar
expenses) (42) (22) (40)
Banking
interest
expense (712) (576) (1,254)
Fees,
commissions
and other
acquisition
costs (381) (164) (389)
Other
operating and
administrative
expenses (1,414) (951) (2,155)
Change in
provision for
third party
interest in
consolidated
funds (453) (50) (80)
Goodwill
impairment 4(i) (2) (2) (5)
Amortisation
of PVIF and
other acquired
intangibles (174) (9) (24)
Profit /
(loss) on
disposal of
subsidiaries,
associated
undertakings
and
strategic
investments 4(ii) 97 (4) 58
Total expenses (7,636) (5,525) (12,763)
Profit before
tax 674
815 1,606
Income tax
expense 5 (296) (181) (484)
Profit for the
financial
period 519 493 1,122
Profit for the
financial
period
attributable
to:
Equity holders
of the parent 380 387 867
Minority
interests
Ordinary shares 113 78 203
Preferred
securities 26 28 52
Profit for the
financial
period 519 493 1,122
Pence
6 months ended 6 months ended Year ended
30 June 30 June 31 December
Earnings and
dividend per
share 2006 2005 2005
Basic earnings
per ordinary
share 7(i) 8.0 11.2 25.1
Diluted earnings
per ordinary
share 7(i) 7.5 11.2 24.3
Dividend per
ordinary share 8 3.65 3.5 5.35
Weighted average
number of shares
- millions 4,547 3,467 3,456
Consolidated Balance Sheet
at 30 June 2006
GBPm
At At At
30 June 30 June 31 December
Notes 2006 2005 2005
Assets
Goodwill and other intangible
assets 5,444 1,302 1,570
Investments in associated
undertakings 56 132 93
Investment property 728 704 847
Property, plant and equipment 476 457 538
Deferred tax assets 536 505 458
Reinsurers" share of
insurance contract provisions 819 362 455
Deferred acquisition costs 1,419 815 1,089
Current tax receivable 74 28 29
Loans, receivables and
advances 20,530 15,600 18,456
Derivative financial
instruments - assets 1,280 1,971 1,604
Financial assets fair valued
through income statement 66,739 28,470 35,378
Other financial assets 12,235 11,886 12,265
Short-term securities 911 1,293 1,764
Other assets 3,526 2,721 2,409
Assets held-for-sale 1,168 - -
Cash and balances with the
central banks 2,078 1,946 3,051
Placements with other banks 720 324 568
Total assets 118,739 68,516 80,574
Liabilities
Insurance contract provisions 21,751 19,794 23,258
Financial liabilities fair
valued through income
statement 52,311 15,863 21,187
Third party interests in
consolidation of funds 2,261 708 966
Borrowed funds 9 2,203 1,048 1,433
Provisions 371 237 285
Deferred revenue 207 123 138
Deferred tax liabilities 1,259 486 611
Current tax payable 229 154 178
Deposits from other banks 1,377 1,090 2,577
Amounts owed to other
depositors 18,380 14,776 15,509
Other money market deposits 2,886 3,122 3,059
Derivative financial
instruments - liabilities 1,241 1,893 1,634
Liabilities held-for-sale 1,105 - -
Other liabilities 4,680 4,016 3,320
Total liabilities 110,261 63,310 74,155
Net assets 8,478 5,206 6,419
Shareholders" equity
Equity attributable to equity
holders of the parent 6,932 3,816 4,751
Minority interests
Ordinary shares 868 737 1,012
Preferred securities 678 653 656
Total minority interests 1,546 1,390 1,668
Total equity 8,478 5,206 6,419
Consolidated Cash Flow Statement
for the six months ended 30 June 2006
GBPm
6 months ended 6 months ended Year ended
30 June 30 June 31 December
Notes 2006 2005 2005
Cash flows from
operating
activities
Profit before
tax 815 674 1,606
Non-cash
movements in
profit before
tax (1,454) (1,328) (4,046)
Changes in
working capital 7,309 597 3,482
Taxation paid (172) (199) (314)
Net cash inflow
/ (outflow)
from operating
activities 6,498 (256) 728
Cash flows from
investing
activities
(Acquisition) /
disposal of
financial
investments (6,568) 1,057 644
(Acquisition) /
disposal of
investment
properties (37) (11) 40
Net acquisition
of other fixed
assets (50) (28) (100)
Acquisition of
interests in
subsidiaries (1,351) (106) (56)
Disposal of
interests in
subsidiaries,
associated
undertakings
and strategic
investments 113 (16) 33
Net cash
(outflow) /
inflow from
investing
activities (7,893) 896 561
Cash flows from
financing
activities
Dividends paid
to:
Equity holders
of the parent 8 (174) (118) (184)
Ordinary
minority
interests and
preferred
security
interests (82) (47) (99)
Interest
payable
(excluding
banking
interest
payable) (43) - (40)
Net proceeds
from issue of
ordinary shares
(including by
subsidiaries to
minority
interests) 17 3 2
Repayment of
convertible
debt - (341) (336)
Issue of
subordinated
debt 264 - 259
Other debt
issued /
(repaid) 404 - (10)
Issue of
perpetual
preferred
callable
securities - 347 688
Net cash inflow
/ (outflow)
from financing
activities 386 (156) 280
Net (decrease)
/ increase in
cash and cash
equivalents (1,009) 484 1,569
Effects of
exchange rate
changes on cash
and cash
equivalents (405) (120) 86
Cash and cash
equivalents on
acquisition of
new
subsidiaries 167 - -
Cash and cash
equivalents at
beginning of
the period 3,303 1,648 1,648
Cash and cash
equivalents at
end of the
period 2,056 2,012 3,303
Consisting of:
Cash and
balances with
the central
banks 2,078 1,946 3,051
Placements with
other banks 720 324 568
Other cash
equivalents 346 226 381
3,144 2,496 4,000
Cash and cash
equivalents
subject to
consolidation
of funds (1,088) (484) (697)
2,056 2,012 3,303
Cash flows presented in this statement include all cash flows relating to
policyholders" funds for the long-term business.
Statement of Changes in Equity
for the six months ended 30 June 2006
Millions GBPm
Number of Attributable to
shares issued equity holders of Total minority Total
Six and fully paid the parent interest equity
months
ended 30
June
2006
Equity holders"
funds at
beginning of the
period 4,090 4,751 1,668 6,419
Change in
equity arising
in the period
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