Interim Results - Part 1

RNS Number : 8870W

Old Mutual PLC

05 August 2009

 



Old Mutual plc 

Interim Results

For the six months ended 30 June 2009

£m
Financial Summary	H1 2009	H1 2008
Adjusted operating profit before tax (IFRS basis)*	£538m	£773m
Adjusted operating earnings per share (IFRS basis)**	5.4p	7.7p
Adjusted operating Group MCEV earnings before tax	£755m	£902m
Adjusted operating Group MCEV earnings per share	8.9p	10.1p
Adjusted Group MCEV per share	143.8p	140.3p
Profit before tax (IFRS)	£160m	£853m
Basic earnings per share (IFRS)	(1.8p)	11.2p

Financial Highlights - A creditable performance in difficult markets 

●    Positive Group net client cash flows of £0.2 billion despite lower sales 

●    OMSA long-term business adjusted operating profit of R1.82 billion (2008: R1.84 billion) demonstrates strength of diverse product offering 

●    Nordic Life sales up 22% to £134 million (2008: £110 million) due to improved product range and stronger distribution

●    UK net client inflows of £0.4 billion driven by growth in platform sales 

●    US Asset Management net client inflows of $0.6 billion demonstrates strength of boutique model 

●    Group pro-forma FGD surplus at 30 June of £1 billion (31 December 2008: £0.7 billion). 

Operational and Strategic Highlights - Good progress in delivering on priorities

●    Closed Hong Kong office, sold Australian businesses, withdrew from ABN-Amro TEDA Chinese asset management acquisition 

●    Withdrawal from markets where scale not achievable: Portugal, Hungary, Czech Republic 

●    Major restructuring of US Life and OMCAP, creating greater focus and lower cost base 

●    New Group operating model to strengthen central governance 

●    Long-Term Savings structure introduced to leverage competitive advantages and capabilities. 

New Chairman Appointed

●    As announced separately today, on Chris Collins' retirement at the end of the year, Patrick O'Sullivan will join the Group as Chairman,     bringing strong financial services and corporate restructuring experience to the Board. 

Julian Roberts, Group Chief Executive, commented:

'We have delivered a creditable performance despite continued volatility in equity markets, and have taken a number of decisive actions in line with the strategic priorities we set out in March.  

'Our capital position was reinforced during the second quarter and our Group pro-forma FGD position is now above £1 billion. We have substantially de-risked our US businesses and our new operating model represents a fundamental shift to stronger governance from the centre. 

'For the past 12 months, our primary focus has been on fixing our problems and protecting ourselves against the downside. With the actions to do that largely complete, we can start to look past the immediate market challenges and begin to position ourselves for the upside which will come as markets recover.'  

Enquiries

Investor Relations
Patrick Bowes	UK	[phone]
Deward Serfontein	SA	[phone]
Media
Matthew Gregorowski	UK/SA	[phone]
		[phone]
Don Hunter (Finsbury)	UK	[phone]

Notes 

Unless otherwise stated, wherever the terms asterisked in the Financial Highlights are used, whether in the Financial Highlights, the Group Chief Executive's Statement, the Group Finance Director's Review or the Business Review, the following definitions apply:

*    For long-term business and general insurance businesses, 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 the US Asset Management business, it includes compensation costs in respect of certain long-term incentive schemes defined as non-controlling interests in accordance with IFRS. For all businesses, adjusted operating profit excludes goodwill impairment, the impact of acquisition accounting, put revaluations related to long-term incentive schemes, profit/(loss) on disposal of subsidiaries, associated undertakings and strategic investments, dividends declared to holders of perpetual preferred callable securities, and fair value (profits)/losses on certain Group debt movements.

**    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 non-controlling interests. It excludes income attributable to Black Economic Empowerment (BEE) trusts of listed subsidiaries. The calculation of the adjusted weighted average number of shares includes own shares held in policyholders' funds and BEE trusts.

Cautionary statement

This announcement has been prepared solely to provide additional information to shareholders to assess the Group's strategies and the potential for those strategies to succeed. It should not be relied on by any other party or for any other purpose. 

This announcement contains forward-looking statements with respect to certain of Old Mutual plc's plans and its current goals and expectations relating to its future financial condition, performance and results. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances that are beyond Old Mutual plc's control, including, among other things, UK domestic and global economic and business conditions, market-related risks such as fluctuations in interest rates and exchange rates, policies and actions of regulatory authorities, the impact of competition, inflation, deflation, the timing and impact of other uncertainties or of future acquisitions or combinations within relevant industries, as well as the impact of tax and other legislation and other regulations in territories where Old Mutual plc or its affiliates operate.

As a result, Old Mutual plc's actual future financial condition, performance and results may differ materially from the plans, goals and expectations set forth in Old Mutual plc's forward-looking statements. Old Mutual plc undertakes no obligation to update any forward-looking statements contained in this announcement or any other forward-looking statements that it may make.

Notes to Editors: 

A webcast of the presentation and Q&A will be broadcast live at 9:00am (BST), 10:00am (CET and South African time) today on the Company's website www.oldmutual.com. Analysts and investors who wish to participate in the call should dial the following numbers: 

UK (toll-free)	0500 1016 30
US (toll-free)	[phone]
Sweden (toll-free)	0200 8876 51
South Africa (toll-free)	0800 9914 68
International	[phone]

Playback (available for 14 days from 5 August), using pass-code 840789:

UK (toll-free)	0800 358 1860
US (toll-free)	[phone]
Sweden (toll-free)	[phone]
International	[phone]

Copies of these Interim Results, together with high-resolution images and biographical details of the Executive Directors of Old Mutual plc, are available in electronic format to download from the Company's website at www.oldmutual.com.

A Financial Disclosure Supplement relating to the Company's Interim Results can be found on the website. This contains key financial data for 2009 and 2008.

Group Chief Executive's Review

Overview

The Group delivered a creditable performance in light of the tough market conditions during the period. Although equity and credit markets have now come off their lows, their average for the period was around two-thirds of their average level in the first half of 2008, and they have continued to be highly volatile. This has affected customer confidence in savings and investments, the bedrock of our business. 

In this environment, our focus has been to manage effectively those areas within our control, namely improving our capital position and operational efficiency across our businesses, and we have made good progress in delivering on the strategic priorities we set out in March. Our capital position strengthened during the second quarter, with our Group pro-forma FGD surplus at 30 June standing at £1 billion, and this has further improved to £1.1 billion at 31 July. This is sufficient to cover the overall risks that the Group faces, and our individual business units also remain well capitalised.

Within our newly-formed Long-Term Savings ('LTS') division, we delivered good performances in the markets where we have dominant market positions, namely South Africa and Sweden, and across Europe we delivered strong net client cash flows. We also achieved positive client cash flows in US Asset Management, and have taken significant cost out of our US businesses, with US Life delivering a small profit for the period. 

We have made some fundamental changes to our operating model which will strengthen our central governance processes and the Group Executive Committee is now complete. Today we have also separately announced the appointment of Patrick O'Sullivan as Chairman, who will succeed Chris Collins at the end of the year. Patrick's extensive industry and restructuring experience will be a major benefit as we look to re-shape the Group over time. As previously announced, Mike Arnold will join the Board as a non-executive director on 1 September 2009. 

Dividends

As outlined in our preliminary results in March, the Board will not be declaring an ordinary dividend for the six months ended 30 June 2009. The Board will consider the position in respect of a final ordinary dividend for 2009 at the appropriate time in light of the then prevailing market and economic conditions and based on the Group's capital, cash flow and earnings with a view to maintaining cover of at least two times.

LTS - South Africa

South Africa delivered a strong performance given the rapid deterioration in economic conditions compared to the corresponding period last year. Sales were robust due to our brand strength and extensive Life and Unit Trust product offering. Long-term business adjusted operating profit was flat at R1.8 billion with lower equity markets significantly affecting asset management performance fees. Market conditions and recession-related job losses have resulted in lower levels of both single and regular premium business, while we have benefited from increased demand for risk-protection products. Net client cash flows were only marginally down excluding the PIC withdrawal announced in March and in our South African asset management business (OMIGSA) we are seeing evidence that clients are recognising the benefits of our boutique model. Old Mutual Life Assurance Company (SA) saw a further strengthening in its capital to a surplus of 3.9 times the required statutory level, the highest in the South African life insurance industry. 

Since the period end, we have announced the appointment of Kuseni Dlamini as Chief Executive of Old Mutual South Africa. We are confident that under his leadership our Southern African businesses will continue to thrive. However, the economy has been impacted by the global slowdown and is in a recession. Accordingly, our South African businesses have a cautious outlook for the remainder of this year. 

LTS - Europe 

Across Europe we delivered good positive client cash flows despite lower overall sales. Nordic produced an especially strong performance, with client inflows of £0.5 billion for the period, 12% of opening funds under management on an annualised basis. Nordic also produced a strong sales performance, with Life sales up 22% on an APE basis to £134 million, driven largely by its enhanced product range and strengthened broker relationships in Sweden, which have remained resilient to the deteriorating global economic environment. Assets under management across Europe held up well in tough market conditions, which at £53 billion is slightly above the position at 31 December 2008. All our Skandia businesses remain well capitalised. 

Client inflows in Skandia UK were £0.4 billion, as we continued to strengthen our position in the rapidly evolving platform market. As market leader, we have taken advantage of our scale by undergoing a major re-pricing exercise. While this is having an anticipated negative impact on margins in the short-term, over the longer-term we expect margins to improve in line with volume growth although this will take longer under current market conditions. We also expect to consolidate our market-leading position further as IFAs use fewer, larger platform providers and move in line with the requirements of the Retail Distribution Review. 

LTS - US Life

The transformation of US Life is now largely complete, including streamlining its product range and simplifying distribution to top-tier producing agents. We are now running the business from a significantly reduced cost base and are targeting sales for the full year of $700 million - $800 million, a third of the level in the prior year to conserve capital. While impairments on investments in the second quarter increased, overall impairment levels for the half year were significantly lower than for the second half of 2008, and there were no defaults on the corporate bond portfolio. 

Bermuda 

Having closed Bermuda to new business in March, we continued to improve the hedge effectiveness of the book which was 95.5% for the half year, a further improvement on the first quarter position. The business reported a small profit for the half-year and remains well capitalised. We do not currently anticipate that it will require any further capital. Furthermore, we have soft-closed funds that had low hedge effectiveness and strengthened governance, providing greater oversight from the centre. We and continue to look at options to de-risk this business further. 

US Asset Management 

Our US Asset Management business achieved positive net client inflows of $0.6 billion during the period, a major achievement given the outflows experienced across the industry generally, which reflects the strength of our multi-boutique model. Funds under management increased by 3% from the year-end position to $247 billion due to net positive market returns during the second quarter. We have closed Clay Finlay, which resulted in a reduction in FUM of $1.5 billion, following a significant fall in its assets under management attributed largely to the downturn in global equity markets. Since 30 June we have strengthened the client offering at Dwight Asset Management by acquiring the cash management team of Neuberger Berman. We have already taken considerable cost out of the business, and are restructuring Old Mutual Capital ('OMCAP'), our retail mutual fund business, halving its retail mutual fund range and cost base while introducing a new, more targeted distribution strategy. 

Nedbank and Mutual & Federal 

In what have been challenging market conditions for South African banks, Nedbank has remained solidly profitable although the reduced endowment from lower interest rates, slower asset growth and increasing impairments resulted in reduced earnings levels compared to the first half of last year. Nedbank has continued its focus on strengthening its capital and asset base and the South African banking system in general remains relatively stable. Nedbank's Tier 1 capital adequacy ratio increased from 9.6% in December 2008 to 10.0% and the total capital adequacy ratio increased from 12.4% to 13.2%. 

The first half performance of Mutual & Federal was adversely affected by a number of large claims and a weaker underwriting performance, although this improved during the second quarter. Its international solvency ratio improved to 46% at 30 June 2009 from 41% at the year-end. 

Strategy Update 

As outlined in our preliminary results in March, following a full review of our businesses, we identified five key priority areas aimed at creating a stronger, leaner, more focused Group. We have already made good progress in delivering on these priorities, while also focusing on improving operational efficiencies across our businesses. 

Maintain and strengthen our capital position

As already noted, we have continued to strengthen our regulatory capital position. We also have cash and committed facilities of £0.8 billion available at the holding company level, and our individual businesses remain well capitalised. Further strengthening of capital and liquidity remains a key area of focus. 

Streamline the portfolio over time 

As we have said consistently, reaching our optimal business structure will take time, especially while markets do not allow for corporate activity which is value enhancing for shareholders. Nevertheless, we have already taken a number of decisive actions during the period and continue to evaluate further opportunities. 

We closed our Asia Pacific regional office in Hong Kong, exited Portugal, sold our Australian businesses and withdrew from acquiring Fortis Bank's interest in AATEDA, a Chinese asset management joint venture. We have significantly reduced the product range and cost base in our US Life business and closed Bermuda to new business. We have also closed our US Asset Management boutique, Clay Finlay, and are in the process of streamlining OMCAP. 

We remain committed to exiting markets where we do not have scale and where there is limited potential for gaining scale within a reasonable time. We have therefore also decided to withdraw from Hungary and the Czech Republic. 

Leverage scale in our long-term savings businesses

The most significant structural change was to bring Skandia, OMSA, US Life and Asia Pacific together into a new LTS division under Paul Hanratty. This was premised on leveraging the competitive advantages and capabilities that we have in these businesses, principally through extracting cost efficiencies and more effective deployment of our technology.

A new LTS structure is being implemented, based around geographic or customer-related market segments. This will see our emerging market businesses, namely Africa, Latin America, India and China being grouped together and our European businesses, outside Scandinavia, being aligned according to their principal customer profiles, namely Retail and Wealth Management. 

Our open-architecture platform model, which is specifically aimed at the Wealth Management market where affluent clients are served by independent distributors, gives us a strong competitive advantage. Skandia UK, ELAM's Wealth Management business, Skandia International, Skandia Investment Group and our Institutional Sales business will all sit within the Wealth Management unit. The retail market has significant growth potential and we will look to reduce back-office administration costs in order to improve efficiency and increase profitability as markets recover. As a consequence of these changes, we are closing our ELAM regional office. 

We are in the process of identifying specific cost savings and developing a long-term growth strategy for LTS, and will report on these at the year-end results in March 2010. 

Drive value creation within, and between, our South African businesses 

Nedbank's priority during the first half has been on capital management rather than growth in light of the rapid deterioration in the operating environment. Nedbank has announced major management changes and we have also recently appointed a new Chief Executive at OMSA. With the new management teams in place, and given the good progress made in Nedbank in strengthening its capital base, there will be a renewed focus on implementing closer working practices between our South African businesses during the second half. 

Nedbank has also acquired Old Mutual's stake in the Nedlife, Fairbairn Private Bank and BoE Private Client joint ventures. This is another example of how we are working to simplify our organisation. Nedbank is also in negotiations with Imperial Holdings Limited to acquire the remaining 49.9% shareholding in Imperial Bank. 

Strengthen governance, risk management and operational efficiency 

Our new operating model is a fundamental shift away from the historic decentralised approach. Capital allocation and required returns, as well as risk policies, are now controlled from Group Head Office and we have implemented a new management and board structure to ensure comprehensive oversight from the centre. Our revised risk processes are being fully integrated into the business-planning process, including new risk strategies for each of our businesses. We are also refreshing the non-executive teams of our subsidiary Boards, which will strengthen both our governance and our technical skill base.

Outlook 

For the past 12 months, our primary focus has been on addressing our problems and protecting ourselves against the downside. With the actions to do that largely complete, we can start to look past the immediate market challenges and begin to position ourselves for the upside which will come as markets recover.

Julian Roberts
Group Chief Executive
5 August 2009

Group Finance Director's Review

GROUP RESULTS

Overview of H1 2009 results

H1 2009 performance has proved to be resilient given the continuation of generally weak market and operating conditions seen during the second half of last year. H1 2008 was clearly a cyclical peak in market and operating conditions for both our long-term savings and protection business and our banking activities. Adjusted Operating Profit earnings per share were 5.4p for H1 2009 compared to 7.7p for the comparable period of 2008 and 4.5p for H2 2008.

IFRS AOP for H1 2009 of £538 million was £235 million lower than that H1 2008. This was due to reduced new business sales, lower earnings on group capital, increased levels of credit impairment in the banking businesses, and lower asset management profits in SA and the US. Sales trends for the second quarter were worse than those of the first although we did begin to see the first tentative signs of stabilisation in the equity-related products of OMSA and some European operations at the end of the second quarter. Overall the Group delivered results in line with our plans that were drawn up in anticipation of current market conditions.

Adjusted operating Group MCEV earnings per share for the half-year of 8.9p were 1.2p (12%) lower than the 2008 half-year results, restated on to the new MCEV basis. The investment returns earned on the US bond portfolio made a significant contribution to earnings, which was partially offset by lower earnings in both the asset management and banking businesses.

Adjusted Group MCEV per share for H1 2009 increased to 143.8p from 117.6p at the year end. The increase in the MCEV per share over the year end was driven by the substantial reduction over the period in corporate credit spreads in US Life, economic variances (including the impact of the increase in global interest rates medium to long-term which reduced the time value of financial options and guarantees) and an amendment arising from an allocation of assets between covered and non-covered businesses at December 2008. This was partially offset by a lower result in Europe driven by lower expected returns as swap rates reduced significantly over 2008, adverse persistency experience and a low new business contribution.

The Chancellor's Budget announcements on 22 April confirmed that dividends received by UK companies from overseas trading subsidiaries would become exempt from UK corporation tax with effect from 1 July 2009 to ensure compliance with EU Freedom of Establishment principles. As at 30 June 2009, Skandia International's MCEV was net of a tax deduction of £166 million. Under IFRS accounting rules, a change in tax legislation can only be reflected in the financial statements once the new legislation is 'substantively enacted'. The Finance Bill 2009 became substantively enacted on 21 July 2009 so the gain will be recognised in H2 2009.

The ROEV of 14.8% has increased significantly driven by the lower opening embedded value as at 31 December 2008, and the recovery in US corporate bond spreads.

Management Discussion and Analysis of Results for H1 2009

The principal businesses of the group are the LTS division, Nedbank, Mutual & Federal and US Asset Management. Old Mutual owns 55% of Nedbank and 74% of Mutual & Federal. At 30 June 2009, the market capitalisation of Nedbank was £3.8 billion and of Mutual & Federal was £370 million. The results for Nedbank, Mutual & Federal and US Asset Management are discussed separately in the Business Review which follows this Report. Key performance statistics for the LTS business are as follows:

£m	H1 2009	H1 2008
Life assurance sales (APE)	634	755
Value of new business*	70	87
Adjusted operating profit (IFRS basis) (pre-tax)	317	420
Operating MCEV earnings (post-tax)	409	461

*    H1 restated on MCEV basis.

Sales across the LTS division declined, largely as a result of the fall in the UK single premium market, offset by a growth in Nordic sales. There was a small decline in recurring premiums across Europe. The managed reduction in the US Life product range also contributed to the decline in LTS sales. The APE margin of 11% for the half year has held up well relative to the comparative period (H1 2008: 12%) despite the fall in sales, and the PVNBP margin has also remained steady at 1.5%.

The fall in the new business margins in LTS is mainly attributable to the lower margins in Europe. Within Europe, there has been a marked fall in the margins for the UK business as a result of the move to the new platform. ELAM and Nordic margins were also weaker, whereas International remained flat as compared to H1 2008.

On an IFRS AOP basis, the LTS decline is predominantly in Europe and the US. The fall in US earnings is in line with scaling back of the business. The lower European earnings are due to lower sales and reduced funds under management.

Lower operating MCEV earnings are driven by the large decline in European earnings and to a lesser extent in South Africa, offset by a significant increase in the US on the back of increased expected returns.

Further discussion on the drivers for the movements within Europe, OMSA and US Life is given in the Business Review.

Reconciliation of IFRS and AOP profits

In accordance with our AOP policy, a charge for acquisition accounting (£118 million) and short-term fluctuations in investment return (£235 million) represented the key deductions from the adjusted operating profit (pre-tax) to arrive at a profit before tax on an IFRS basis of £160 million.

Underlying sources of profitability

The development of the Group's IFRS operating earnings for H1 2009 versus H1 2008 was caused by flat South African insurance results, lower asset management and Skandia earnings, predominantly based on fee income, and weaker spread income from banking and US Life earnings.

The underlying quality of the underwriting result improved in H1 2009 compared to H2 2008. Earnings from the existing book dominated earnings from new business as there were only small experience variances and small changes in assumptions.

The South African rand strengthened in recent months against sterling and the US dollar weakened against sterling. This had the effect of improving rand-denominated earnings whilst reducing the sterling equivalent of the US Life and Bermuda profits, and the sterling value of dollar-denominated debt.

Key actuarial and MCEV developments in H1 2009

The company now reports its supplementary embedded value information under Market Consistent Embedded Value Principles. Old Mutual's methodology adopts the Market Consistent Embedded Value Principles issued in June 2008 by the CFO Forum ('the Principles') as the basis for the methodology used in preparing the supplementary information. The Principles have been fully complied with at 30 June 2009 for all businesses with the exception of the use of adjusted risk free reference rates to take account of the liquidity component of corporate bond spreads that is evident in the market as at that date for US Life business and Old Mutual South Africa's (OMSA) Retail Affluent Immediate Annuity business. 

At 31 December 2008 we adjusted the risk-free reference rates in respect of the US Life business to allow for a liquidity premium of 300 bps, after reviewing relevant literature, including independent data published by Barrie & Hibbert. In June 2009, we have followed the same process to determine the adjustment of 175 bps to the risk-free reference rates for the US Life business. This reduction in the allowance for iquidity premiums partially offset the positive impact on MCEV in H1 2009 resulting from the uplift in the market value of corporate bonds as corporate bond spreads contracted. These economic changes, together with other economic assumption changes and investment variances, resulted in total 'economic variances' for US Life of £493 million.

We also introduced an adjustment to the OMSA Retail Affluent Immediate Annuity business in order to recognise a liquidity premium of 50 bps. This adjustment was determined with reference to the spread between bonds issued by state-owned enterprises such as ESKOM, and South African government bonds, and is used as a proxy to the spread that would apply in respect of non-credit default risk of South African corporate bonds. The introduction of this liquidity premium adjustment, together with other economic assumptions changes and investment variances, resulted in total 'economic variances' for OMSA of £(66) million. 

The Cost of Non-Hedgeable Risks ('CNHR') is derived by projecting the Economic Capital held in respect of these non-hedgeable risks into the future, and calculating the present value after applying a cost of 2% to this capital, at a business unit level, without allowing for group diversification benefits. The Economic Capital projected is based on the figure determined for the prior six month period; thus the December 2008 CNHR is based on the June 2008 Economic Capital, which was calculated with reference to EEV. The June 2009 CNHR is based on the December 2008 Economic Capital, which was based on MCEV for the first time. This has led to a step change in the calculation for all business units. The impact of this step change varies across business units, being smallest in OMSA, and largest in the Skandia business units. This accounted for the bulk of the 'other operating variances' for Europe of £(35) million. 

Positive mortality variances were experienced in the period, particularly in respect of OMSA and US Life SPIA contracts. The SPIA MCEV mortality basis was weakened marginally in order to align fully with the IFRS mortality basis. 

The calculation of the Time Value of Financial Options and Guarantees ('TVOG') in respect of US Life and Bermuda was refined in the period, leading to an increase in VIF at 30 June 2009.

Restatement of June 2008 Embedded Value results for the move to MCEV

As a consequence of the move to the MCEV basis of reporting as at 31 December 2008, we have published the June 2009 results on the MCEV basis, and have included a restatement of the June 2008 comparatives from the published EEV results to the new MCEV basis. The adjusted Group MCEV per share at 30 June 2008 was 140.3p, a reduction of 2.9p from the published EEV of 143.2p. As disclosed in the December 2008 restatement, the difference was primarily due to the non-capitalisation of credit risk spreads in the US Life business. The impact was broadly neutral for the South African and European businesses. The restatement incorporated an addition of 125 bps to the risk-free reference rates, using the same methodology to determine the US Life adjusted risk-free reference rates as at 31 December 2008 and 30 June 2009, and is fully described in the accompanying disclosures. 

Lapses and Surrenders

We continue to monitor and manage actively the lapse and surrender behaviour of clients and specific agents. Trends in the US were more volatile in the fixed annuity book, similar to industry-wide trends, and terminations have been above assumption levels for several months. A moderation during the second quarter brought about by an active lapse and surrender management programme had the effect of reducing fixed annuity termination rates close to assumption levels. We consider that the unusual market conditions have validated our decision to hold a higher than usual cash weighting in the US Life Investment portfolio. We currently hold around $1.2 billion of cash in the portfolio, which we estimate will fund a doubling of our lapse assumption for two years without recourse to sales of the assets held in the portfolio. This gives considerable flexibility when considering actions to mitigate against having to realise losses on corporate bonds. Termination experience in variable annuity and life products was below assumed levels.

OMSA saw some indications of deteriorating persistency in certain regular premium Mass Retail products given the economic conditions in H1 2009. Lapse and surrender management programmes in OMSA are well established.

The experience in the UK reflected anxiety around equity-based investments, although this stabilised in the second quarter. Elsewhere in LTS, trends were generally in line with assumptions. 

Overall the financial circumstances of our customer base remain the key driver of lapse and surrender behaviour. For example, with rising unemployment in a number of markets we would expect to see temporary deterioration in persistency, which should revert back to long-run assumptions as economic conditions improve.

Capital, liquidity and leverage

Capital

The Group's capital surplus at 30 June 2009 was £1.0 billion. The increase since 31 December was due to the statutory earnings in the period, rand strength and a Nedbank Tier 2 capital raising offset by modest rises in statutory bank capital requirements in South Africa. There was a positive £30 million movement in FGD arising from management actions including the disposal of Australia, closure of Bermuda to new business and a change in the investment mix of OMSA shareholder funds held to back the Capital Adequacy Requirement. The £41 million break fee paid to exit the AATEDA acquisition reduced our FGD surplus but, had the acquisition proceeded, it would have reduced the surplus by a greater amount. We estimate the capital surplus at 31 July was about £1.1 billion.

In line with the Board's announcement in March, no interim ordinary dividend is proposed for 2009. The Board will consider the position in respect of a final ordinary dividend for 2009 at the appropriate time in light of the then prevailing market and economic conditions. Longer term, the Board will look to pay a dividend based on the Group's capital, cash flow and earnings, with a view to maintaining cover of at least two times. 

Our subsidiary businesses continue to have strong local statutory capital cover.

Business unit	Ratio
OMLAC(SA)	3.9x
Mutual & Federal	141%
US Life	281%
Nordic	10.8x
UK	3.0x
Nedbank*	Core Tier 1: 8.6% Tier 1: 10.0% Total: 13.2%

*    This includes unappropriated profits.

Liquidity

As a Group we concentrate on maintaining effective dialogue and strong commercial relationships with our banks. So far this year we have successfully extended two existing bank facilities of £250 million and have put in place an additional three year bank facility of $200 million. We have on-going discussions with several other banks within our relationship group and anticipate further improvements on our funding during the second half.

As of today the plc has available cash and commitments to facilities of over £800 million.

In addition to the cash and available resources referred to above at the holding company level, each of the individual businesses also maintains liquidity to support their normal trading operations. 

  Leverage 

£m	H1 2009	H1 2008
Opening Net debt	(2,263)	(2,420)
Inflows from businesses	350	597
Outflows to businesses + expenses	(449)	(157)
Debt and equity movements:
Ordinary Dividends paid	-	(227)
Share repurchase	-	(174)
Equity issuance	-	4
Other non-cash movements	(13)	(49)
Closing Net debt	(2,375)	(2,426)
Net decrease/(increase) in debt	(112)	(6)

Our reported net debt at 30 June 2009 was 5% up on the year end position at £2.4 billion, but £51 million lower than at H1 2008. During the half year, the business units contributed £350 million of inflows which were offset by £449 million of operational expenses and organic investment including the $225 million of capital injected into US Life in the first quarter. During the period cash of £41 million was used to exit the AATEDA transaction and £47 million was paid in respect of a market timing litigation which was part of the exposure originating from the sale of American Skandia. We expect that the final settlement of the various American Skandia matters will be covered within our existing provisions. 

We remain committed to supporting the US Life capital ratio to around 300%. Although the unrealised loss position has improved, statutory capital is driven primarily by impairments. To maintain this ratio, it is likely that we will make a cash injection into the business in early 2010 as we did at the beginning of this year. This could be in the order of $200 million to $300 million depending upon a wide range of factors including our statutory earnings in the second half, market movements, ratings migration and the implementation of possible changes to both US GAAP and NAIC accounting rules which are currently under consideration.

We made no ordinary dividend payments in the period and no new debt or equity was issued. The non-cash movements are largely the negative impact of currency and marking to market certain of our debt liabilities under IFRS. In the second half of the year, we anticipate seasonally higher net operational cash flows, particularly as a result of financing US Life in H1.

Net cash flows from clients

The Group enjoyed positive net client cash flow in H1 2009 with strong inflows in the US asset management businesses and Europe. 

Funds under management were down for the year but have been volatile given the substantial market movements in the period. The US and South African equity portfolios showed the greatest volatility. The movement had knock-on impacts on both management fees and performance fees.

US Life and US bond portfolio performance

The cash characteristics of the US Life business are very different than that of the equivalent period of last year. We are not making significant new bond purchases and new premiums have reduced significantly on the prior year due to decision to restrict new business. We are incurring significantly lower new business commissions and have successfully cut office costs. Regular claims continue to be paid out and total lapses and surrenders are lower than the prior year.

On the US Life $15.4 billion portfolio, the unrealised loss was $1.6 billion as of 30 June 2009, and has continued to improve to $1.4 billion as at 31 July 2009. This compares to $2.8 billion at 31 March 2009 and $2.3 billion at 31 December 2008. The unrealised loss on the Bermuda fixed income portfolio as at H1 2009 was $0.1 billion. All of the above are stated net of the impact of reclassification of certain securities permitted by the amendment of IAS 39, the unrealised loss on which amounted to $283 million at 30 June 2009 and $387 million at 31 December 2008 (30 June 2008: nil).

The portfolio continues to have approximately 5% in asset-backed and mortgage-backed securities, with approximately 5% in preferred stock and hybrid instruments. Of the portfolio, 49% is rated 'A' and above, 41% is rated 'BBB' or below and 10% is not rated. The ten largest holdings account for $802 million (4.7 %) of the portfolio (31 December 2008: $1.1 billion and 6.1%) with an average holding of $80 million (2008: $107 million).

There have been no defaults in the portfolio in the half-year and we have noted a number of recapitalisations mainly of financial companies which have benefited the valuation of the bonds we hold. The running yield of the portfolio is 5.83%.

  Long-term investment return

The reduction in the South African LTIR return is driven by a reduction in the rate from 16.6% in 2008 to 13.3% in 2009 in line with our accounting policy. Additionally this year we have changed the reporting segments of the LTIR to better reflect those assets supporting OMLAC(SA)'s Capital Adequacy Requirement (CAR) and the excess shareholder assets. The reallocation of the return is shown in the table below:

£m	June 2009 as currently reported	June 2008 as previously reported	June 2008 restated
OMSA LTIR	61	120	67
Plc	46	-	53
Total	107	120	120

Within the US Life business, the LTIR methodology has been refined to reflect an expected return for the year offset by a default impairment provision and an investment management expense allowance. Both the investment return rate and default impairment charge are to be applied to an asset base calculated on a 12 month rolling average amortised cost value for the investment portfolio. 

Bermuda

In Bermuda the costs of the hedging programme are now to be spread over the life of the programme. This more closely matches the approximately $2.5 million current monthly cost of protection to shareholders with the period of protection purchased.

Bermuda is now in run-off with hedge effectiveness of over 95% for the six months to 30 June 2009, up from 77.8% for the year to 31 December 2008. Residual risk relates to volatility and produced a profit of $96 million for the period. Economic hedge effectiveness was achieved through use of derivative instruments. On an economic basis, Bermuda made a profit of $112 million. This translates to an IFRS AOP profit of $5 million following the removal of short-term market movements and the inclusion of our long-term expectation of hedge expenses.

Surrender behaviour will determine the speed at which the Bermudan book of business runs-off over time, and the extent and timing of any capital and cash release.

Corporate disposals and acquisitions and related party transactions

As set out in the strategy in March 2009, the Group continues to simplify its structure and reduce its spread of business to focus on areas of key competence and competitive strength, and drive operational improvements.

OMSA sold to Nedbank its share in the Nedbank JVs in exchange for a consideration of 10.2 million Nedbank shares. This transaction will allow clarity of the management of these businesses and increase the non-interest income of Nedbank.

Nedbank is in negotiations with Imperial Holdings Limited to acquire the remaining 49.9% shareholding in the Imperial Bank joint venture. 

As we reviewed our strategy and reach in China, we withdrew from the AATEDA acquisition in China at a cost of £41 million.

During the period we completed the disposal of our Australian businesses at a loss of £4 million.

We also commenced SYmmETRY integration process and we expect it to have a positive impact on the high net worth strategy at OMSA in the near term. We completed the ACSIS transaction on 31 July 2009.

Tax and Non-controlling interests

Taxation at 28% of AOP for the first half was comparable to H1 2008. The effects of decreased South African secondary tax on companies (STC) costs and a higher proportion of low taxed income was offset by increased deferred tax assets not recognised and non-deductible costs. We anticipate a broadly similar effective tax rate for the full year.

Non-controlling interests were £42 million lower than last year reflecting lower Nedbank and Mutual & Federal earnings in this half compared to H1 2008.

Risks and Uncertainties

There are a number of potential risks and uncertainties that could have a material impact on the Group's performance and that could cause actual results to differ materially from expected and historical results.

Continued volatility in world economic conditions creates uncertainty in equity markets, currency fluctuations, credit spreads, corporate bond defaults and rating agency actions both on investments owned by the Group and the Group underlying entities. Unemployment conditions continue to deteriorate and could adversely affect termination experience in respect of the life insurance business that could result in realising losses on illiquid assets, particularly in the case of US Life. 

Economic uncertainty has contributed to reduced consumer confidence, which we have experienced as a consequence of changing product preferences to lower risk investment products and affecting termination experience in respect of existing and new business. These may have an impact on earnings and present both risks and opportunities for the Group.

The Group is continually monitoring these uncertainties and taking appropriate actions wherever feasible. The Group continues to meet Group and individual entity capital requirements and day to day liquidity needs. 

The implementation of the new operating model will present challenges and change risk across the Group. The Group continues to strengthen and embed its risk management framework, with increasing importance being placed upon its Risk Appetite framework, for example, in the business planning processes.

The Board of Directors has the expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the interim financial statements contained in this announcement.

Philip Broadley
Group Finance Director
5 August 2009 

 Business Review

LONG TERM SAVINGS: Old Mutual South Africa (OMSA) and Rest of Africa

Profits resilient as sales are under pressure in tough economic conditions

Highlights (Rm)		H1 2009	H1 2008	% Change
Long-term business adjusted operating profit		1,822	1,842	(1%)
Asset management adjusted operating profit		347	565	(39%)
Long-term investment return (LTIR)		833	1,007	(17%)
Adjusted operating profit (IFRS basis) (pre-tax)		3,002	3,414	(12%)
Return on allocated capital (OMSA only)		26.2%	28.3%
Operating MCEV earnings (covered business) (post-tax)*		1,511	2,654	(43%)
Return on embedded value (covered business) (post-tax)*		9.8%	14.6%
Life assurance sales (APE)**		2,191	2,459	(11%)
Unit trust/mutual fund sales***		11,893	10,503	13%
Value of new business*		326	342	(5%)
APE margin*		15%	14%
PVNBP*		16,660	17,893	(7%)
PVNBP margin*		2.0%	1.9%
Net client cash flows (NCCF) (bn)		(20.4)	(3.6)	(467%)
Highlights (Rbn)		H1 2009	FY 2008	% Change
SA client funds under management		435	472	(8%)

* H1 2008 restated on MCEV basis

** Life sales now exclude healthcare business 

*** OMSA Unit trust/mutual fund sales include Marriott Income Specialists

Summary Review of Business Unit Results

Introduction

The SA economy entered a recession after contracting by an annualised rate of 6.4% in the first quarter. The slow down in the economic growth has led to cumulative reductions of 4.5% in short-term interest rates since December 2008. The South African economy is expected to shrink by about 2% this year.

The rand has managed to recover some of the ground lost in Q3 and Q4 of 2008 closing at R7.75 against the dollar and R12.74 against the pound at the end of Q2 mainly as a result of a narrowing trade deficit.

Although investment markets remain highly volatile, in line with international markets, local equity markets have rebounded strongly from the lows hit in February, with performance for the half year period to 30 June up 3%.

Net client cash flow

As announced in March 2009, OMIGSA experienced a large outflow from PIC as a result of the PIC performing a full review and redistribution of their equity portfolio, significantly increasing their number of managers. As a result of the PIC withdrawal, net client cash outflows were significantly greater than the prior period. In addition to the PIC outflow, there was a termination of a large Corporate segment client in Q1 this year, and the poor economic environment has led to higher numbers of members withdrawing from pension funds. In the Retail space, NCCF was ahead of prior year as a result of increase in inflows mainly in Unit Trusts, as well as lower asset values leading to lower maturity benefits. In OMIGSA our client cash flows have benefited from good non-life sales.

Life assurance sales

Lower equity markets have reduced the attractiveness of the equity-based products to the retail investor and this has particularly affected the single premium market. Lower asset values combined with increased volatility have made customers exercise greater caution before moving assets. This has been particularly evident in the Corporate segment where the conversion to a completed sale has taken longer. The assets that moved were predominantly invested in money market or cash-type funds, which tend to have very low margins. This has led to the overall lower life sales but higher money market Unit Trust sales as shown by the 11% (2% excluding Nedlife) decline in Life APE and the 13% increase in Unit Trust sales. OMSA has benefited from the wide diversity of product offerings leading to a modest overall increase in sales over 2008 when looking at both Life and Unit Trust sales together. Within the life sales, risk products were down by 30% (11% excluding Nedlife), with the Retail Mass segment sales increasing by 37% on the back of larger sales force and risk sales in the Retail Affluent segment fell by 41% (up by 8% excluding Nedlife). 

Sales of recurring premium savings products declined 12% relative to prior year with a 20% decline in the Retail Affluent market as customers were reluctant to commit to long term savings products in light of the higher risk of job losses, lower disposable incomes as well as financial advisors adjusting to the new commission structures brought about by a change in the regulatory environment. In the Retail Mass segment recurring premium savings sales reduced by 9% mainly because of the increase in policy cancellations particularly where premiums are paid by debit order. Single premium savings products offering equity exposure also suffered. Our key non-equity offerings in the Retail Affluent segment, Investment Frontiers Fixed Bonds and annuities, were not as competitive as last year leading to a decline in overall sales compared to 2008. Annuity rates were improved at the end of April. We have launched a new bonus series for the Absolute Growth Portfolios to enhance the attractiveness of the product to Corporate customers. 

Unit trust/mutual fund sales

There were signs of a slow down in money market fund sales late in Q2 as short term interest rates fell. We expect to see increased interest in exposure to other asset classes should this trend continue, supported by the modest recovery of equity markets in Q2. We are positioned to compete strongly, especially following the recent improvement in OMIGSA's relative equity investment performance in Q2.

Adjusted IFRS operating profit

In Q1 we reduced the rate of increase in cover on certain risk products in the Retail Mass segment to achieve better alignment between the cost of the benefit and the corresponding premium increase on the policies. The impact of this on the existing book has been a reduction in policy reserves leading to a significant contribution to life operating profit for the half year. Life profits also benefited from an increase in long bond yields during the half-year period leading to an increase in the interest assumption used to value life products from 7.5% at the beginning of the year to 9%. These positive factors were more than offset by: 

●    impact of lower equity levels on asset-based fees and investment variances, 

●    mortality and disability profits on Permanent Health Insurance and Group Life Assurance products, 

●    worse persistency experience as result of the impact of the tough economic environment on our customers, and 

●    a small charge for share-based payments this year compared to a large credit in the prior year. 

Asset management operating profit was down 39% as a result of lower asset values due to lower investment markets, lower performance fees especially among funds with CPI (domestic South African inflation) based benchmarks and higher expenses. Expenses were higher, in part, because of a charge for share-based payments costs this year as the Group share price increased compared to a credit in 2008 when the share price reduced over the half year. 

The LTIR was 17% lower after a 330bps decrease in the rate applied, reflecting lower investment returns on shareholder funds achieved in 2008 and the expectation of lower returns in 2009 combined with lower average investible asset balances. 

Value of new business

The VNB was 5% lower than 2008 level (16% higher excluding Nedlife) despite the decline in new business volumes because of an increase in the new business margin. The margin increased because of a change in product mix (higher proportion of protection product sales) and reduced rate of future cover increases on certain protection products in Retail Mass. 

Operating MCEV earnings

The operating Market Consistent Embedded Value (MCEV) earnings declined by 43% from the 2008 level, mainly due to lower expected existing business contribution resulting from a combination of a lower opening MCEV balance and a lower one-year swap rate at the start of 2009 compared to the start of 2008 (the expected existing business contribution under MCEV is derived with reference to the one-year forward swap rate applicable to the currency of the liabilities at the start of the reporting period) and the impact of worse termination experience particularly in the Retail segments as a result of the tough economic environment. 

In December 2008 we reached agreement to sell our healthcare business to Lethimvula and on 1 June 2009 we sold our share of the Nedgroup Life and BOE Private Client joint-ventures to Nedbank. As a result we now exclude OM Healthcare from our life sales and embedded value (2008 sales and MCEV numbers have therefore been restated to exclude this). Profits for OM Healthcare and Nedbank joint ventures are included for the first five months to 1 June 2009. 

Funds under management

Funds under management of R435 billion were down 8% on 31 December 2008 largely as a result of negative net client cash flow. After the period end, we completed the acquisition of 100% of ACSIS which will enable OMSA to gain access to a niche of private and retirement fund clients.

Our alternative asset class boutiques, OMIGPI and Alternative Investments, have shown resilience in performance in the volatile market. At an overall level our relative fund performance has improved over the short and medium term when measured against the benchmark funds and also improved over medium to long term when measured against peer funds as shown in a table below:

OMIGSA performance

	June 2009				December 2008
Proportion of funds outperforming	1 year	3 years	5 years		1 year	3 years	5 years
Benchmarks	42%	47%	48%		38%	36%	55%
Peer median	53%	55%	56%		57%	40%	54%

Capital position

Highlights (Rbn)	June 2009	Dec 2008	% Change
Admissible Capital	41.7	42.6	(2%)
Statutory Capital Adequacy Requirement (SCAR)	10.8	11.2	(4%)
Statutory Capital Cover	3.9x	3.8x

Old Mutual South Africa's life company capital position remains strong in spite of turbulent markets. The statutory capital cover has increased marginally to 3.9 times since December 2008. 

At 30 June 2009, the statutory capital requirement reduced to R10.8 billion from 31 December 2008's figure of R11.2 billion as a result of a decision to hold more cash and reduce our exposure to equities. 

  Detailed Review of Business Unit Segments

Retail Affluent (Rm)		H1 2009	H1 2008	% Change
Life sales (APE)
Savings		536	690	(22%)
Protection		287	483	(41%)
Annuity		100	114	(12%)
Total		923	1,287	(28%)
Single (APE)		367	470	(22%)
Recurring		556	817	(32%)
Unit Trust Flows		9,115	8,266	10%
Value of new business*		26	126	(79%)
APE margin*		2.8%	9.8%
Net client cash flow (NCCF) (Rbn)		1.9	(1.7)	212%

*    H1 2008 restated on MCEV basis 

Total Retail Affluent Life APE is 28% lower than 2008 as a result of the challenging economic environment impacting negatively on consumer disposable income and volatile markets leaving many customers unwilling to make long-term savings commitments. 

Life single premium sales are down 22% on 2008. Investment Frontiers is the main contributor to this drop, especially the Fixed Bond and market-linked funds. Annuity sales are down 12% from last year, because of less competitive annuity rates this year. 

Recurring premium savings sales are 20% lower than 2008, with clients reluctant to commit to long-term savings products in the current economic environment. Recurring premium risk sales excluding Nedlife from 2008 sales are up 9% from last year. Greenlight sales have been boosted by the launch of the new Severe Illness Benefit in June and we expect this to continue.

Unit Trust sales are 10% up on 2008 driven by strong money market flows in the volatile investment markets with Old Mutual Money Market offering very competitive rates. 

NCCF is positive, compared with negative flows in H1 2008. This is largely as a result of outflows, in particular surrenders and maturities, being lower than expected due to lower market levels for much of the year and a focus on business retention. 

VNB is 79% (61% excluding Nedlife) lower than 2008 due to lower sales volumes while margin is lower because of a lower proportion of profitable life single premium products as well as higher new business strain on the back of lower sales.

Retail Mass (Rm)		H1 2009	H1 2008	% Change
Life sales (APE)
Savings		288	316	(9%)
Protection		335	245	37%
Total		623	561	11%
Value of new business*		160	95	68%
APE margin*		26%	17%
Net client cash flows (NCCF) (Rbn)		1.2	0.9	33%

* H1 2008 restated on MCEV basis

Sales are up 11% over the equivalent period in 2008, as a result of the larger sales force. This is achieved in spite of continued challenges on retention at early policy durations, especially relating to savings business. 

The VNB and APE margin have increased from last year due to a favourable shift in product mix towards more profitable risk products and improved profitability of savings products.

Net client cash flow remains strong as a result of growth in life sales.

Corporate Segment (Rm)		H1 2009	H1 2008	% Change
Life sales (APE)
Savings		224	198	13%
Annuity		59	75	(21%)
Protection*		87	68	28%
Total		370	341	9%
Single (APE)		230	233	(1%)
Recurring *		140	108	30%
Value of new business**		52	56	(7%)
APE margin*		14%	16%
Net Client Cash flow (NCCF) (Rbn)		(4.4)	(2.7)	(63%)

*    Excluding Healthcare sales  

**    H1 2008 restated on MCEV basis

Total Corporate life sales (APE) are 9% higher than in 2008, driven by higher recurring premium sales. Risk business has had a better start to the year than in 2008 with a large scheme secured in January 2009. Single premium sales are at a similar level to 2008 despite the turbulence in investment markets. 

Despite total sales being 9% higher than in 2008, VNB is 7% lower. This is mainly due to a lower proportion of high margin annuity business in this year's sales compared to the corresponding period last year. A significant proportion of the savings flows have been into very low margin cash products compared to smoothed bonus products last year with the anticipation that this cash will move into the smoothed bonus products later this year. We have a strong sales pipeline, a new bonus series has been launched for the Absolute Growth Portfolios and we expect flows into that product to improve as the year progresses.

Net client cash flows are lower than in H1 of 2008. The termination of a large client (R1.47 billion) took place in February this year. Apart from this, other terminations have been at significantly lower levels than 2008. The worsening economic conditions are leading to higher rates of member withdrawal, impacting net client cash flow negatively. 

Old Mutual Investment Group South Africa (OMIGSA)
Rm		H1 2009	H1 2008	% Change
Life sales (APE)		137	142	(4%)
Unit trust/mutual fund sales		1,404	1,374	2%
Value of new business*		18	18	0%
APE margin*		13%	13%
Net client cash flows (NCCF) (Rbn)		(18.8)	(0.5)
Sources of FUM (Rbn)		H1 2009	FY 2008	% Change
Life		288	296	(3%)
Unit trusts		47	45	4%
Third party		77	110	(30%)
Total OMIGSA managed assets		412	451	(9%)
Managed by external fund managers		28	29	(3%)
Total OMSA FUM		440	480	(8%)
Less: managed by group companies for OMSA		(34)	(37)	8%
Total OMSA client funds managed in SA		406	443	(8%)

* H1 restated on MCEV basis

Net client cash flows (excluding the PIC) slightly improved from 2008, a result of good non-life sales and lower outflows given sensitivities to markets and a good response to the conservative positioning of Marriott Income Specialists boutique. 

As announced at our prelims presentation in March 2009, OMIGSA experienced a large outflow from PIC as a result of the PIC performing a full review and redistribution of their equity portfolio, significantly increasing their number of managers. While we lost significant assets, we were pleased to be awarded a portion of the re-configured portfolio, evidence of their confidence in our capabilities. 

As our boutique structure has bedded down, there has been increased stability in our teams. We have set strong foundations in place over the past two years and are slowly seeing improving levels of acceptance and confidence in individual boutique investment philosophies and processes. The merger of the OMIGSA Fixed Income and Futuregrowth teams has proceeded smoothly, with the new combined team operating a single cohesive investment process. 

The South Africa equity market (JSE All Share Index) has risen slightly off February lows, with a year to date performance of 3%. The past six months has been extremely volatile, with market sentiment oscillating between pessimism and flight to 'safe haven' sectors of gold and cash (particularly in January and February), and improved sentiment leading to rising markets from March onwards, particularly in sectors which had been heavily sold off between October and February. Compelling valuations in late 2008 in the non-gold Resources area, as well as some industrials, meant that a number of OMIGSA Boutiques were overweight in these areas early in the year. This significantly affected performance in January and February, but we saw a strong turnaround from March onwards. 

Futuregrowth (now merged with the OMIGSA Fixed Income boutique) continues to deliver good performance across its fund range. SYmmETRY performance has also improved with its Balanced and Defensive CIS funds well positioned relative to peer group. Our alternative asset class boutiques, OMIGPI and Alternative Investments, have shown resilience in performance in this time of market volatility, helping to diversify investor returns. Shorter term performance in the majority of our equity boutiques has improved substantially from the end February 2009 onwards. 

  Rest of Africa

Despite similar challenging markets in Namibia, particularly in the retail sector, sales were ahead of prior year mainly due to strong performance from institutional business. Recurring premium sales continued to show an improving trend to the end of June 2009, with Retail Mass and the Broker Distribution channels delivering a solid sales performance.

The total life sales (on APE basis) were up 6%. Life single premium sales were 38% lower as a result of the tough economic environment. This was offset by a 32% improvement in the recurring premiums sales, driven mainly by strong sales in the Retail Mass segment as a result of the growth in the sales force. 

Unit trust sales continued to improve significantly, with total sales for the six months to 30 June 2009 ending up 59% on the comparative period last year. This is mainly due to strong Money Market sales as investors consider money market as a safer option given the volatile equity markets.

  LONG-TERM SAVINGS: Europe (UK, International, Nordic, Europe and Latin America (ELAM))

Market share grows and steady NCCF

Highlights (£m)		H1 2009	H1 2008	% Change
Adjusted operating profit (IFRS basis) (pre-tax)		76	148	(49%)
Return on Equity		3.0%	4.6%
Return on Equity (excluding goodwill)		10.0%	14.9%
Operating MCEV earnings (covered business) (post-tax)*		40	291	(86%)
Return on embedded value (covered business)*		3.0%	15.7%
Life assurance sales (APE)		436	529	(18%)
Unit trust/mutual fund sales		1,855	1,942	(4%)
Value of new business*		39	70	(44%)
APE margin*		9%	13%
PVNBP*		3,111	3,962	(21%)
PVNBP margin*		1.3%	1.8%
Net client cash flows (£bn)		1.6	1.8	(11%)
Highlights (£bn)		H1 2009	FY 2008	% Change
Funds under management		53.1	52.8	1%

*    H1 2008 restated on MCEV basis.

Introduction

The weak economic conditions and lower financial markets have had a significant impact on the European businesses in 2009. There have been much lower sales volumes and customers have favoured more conservative asset mixes. This has put new business margins under pressure and also reduced the margins on existing assets under management. The lower interest rate environment and deteriorating credit experience have resulted in lower interest rates on shareholders funds and lower banking margins. Nevertheless, the Skandia businesses are well positioned for a recovery in markets and volumes, and market shares have generally increased. Operating MCEV earnings have reduced significantly reflecting a reduction in one-year interest rates, lower VNB, an increase in capital held to support non-hedgeable risks and adverse persistency experience. The last 12 months has seen high volatility in stock market levels and foreign exchange rates.

In the UK, the FTSE100 closed at 4,249 at 30 June 2009 (30 June 2008: 5,626). Although this was only a small decline from the opening position of 4,434, it masks a low of 3,512 in March. 

The Swedish stock market rose by 19.8% in the 6 months to 30 June 2009, however it is still 12.2% lower than its position at 30 June 2008. The Swedish kronor weakened against sterling moving from 11.45 at 31 December 2008 to 12.70 at 30 June 2009. 

The Euro weakened against sterling in the period from 1.04 at 31 December 2008 to 1.17 at 30 June 2009. European equity markets had varied experience in the first half with some increasing from year end positions and others remaining broadly flat compared to the year-end, however they were all still lower than at 30 June 2008. The Italian index (MIBTel) moved up 26% from the year-end position, but remains 16% down on its position at 30 June 2008; the German Dax was broadly flat compared to the year-end, but was 36% lower than at 30 June 2008, and the French CAC 40 was 2% lower than at 31 December 2008, but is 29% lower than at 30 June 2008.

Positive net client cash flows despite low investor confidence

The European business delivered positive net client cash flows for the period with net inflows of £1.6 billion, representing 6% of opening funds under management on an annualised basis. Nordic's net client cash flow for the period was excellent at £0.5 billion (30 June 2008: £0.3 billion), representing 12% of opening funds under management on an annualised basis. The positive performance was largely driven by a combination of strong sales and lower outflows from maturities and surrenders. In ELAM, net client cash flows for the period were also strong at £0.6 million, representing 12% of opening funds under management on an annualised basis. The positive performance included very good sales production in Italy and Latin America as well as ongoing retention programs which have contributed to the positive outcome. The UK business delivered net inflows of £0.4 billion in the first half of 2009. This cash flow was driven by the growth in platform sales (although this was below the planned level) as Skandia UK continues to benefit from net inflows from a number of key competitors in the market. Margins on the platform are lower than on traditional business. Operational leverage is expected to be generated as volumes increase.

Despite excellent net client cash flows, poor investment returns in most European markets resulted in only a £0.3 billion increase in funds under management since the beginning of the year. Nordic reported an increase in funds under management to £8.4 billion at 30 June 2009, up 6% (16% on a local currency basis) from the level at 31 December 2008. The growth was driven by strong net client cash flow and the increase in the Swedish stock market in the first half of 2009. UK also reported an increase in funds under management since the end of 2008 at £23 billion, whereas the International business reported lower funds under management at £12 billion reflecting surrenders in the second quarter. In the second half of 2008 there was a switch into cash-based investments but this is showing signs of reversing in the second quarter of 2009 as some confidence returns to the market.

Strong sales performance in Nordic but investment volatility affected other European businesses

Life sales APE declined in line with the market by 18% to £436 million in 2009. Nordic's excellent growth in sales continued during the period despite the financial turmoil. Life sales APE were up 22% on the comparative period, mainly due to strong sales in Sweden. The very strong trend in new sales experienced in 2008 continued in 2009 and so far there are no signs of any negative effects from the volatile markets or worsening economic conditions on sales volumes in Sweden. The broker sales channel accounted for the majority of the increase during H1 2009 as a result of strengthened relationships supported by the investment portfolio product Depå and faster introduction of new funds to the market. 

In the UK, life sales APE declined in line with the market. Skandia UK took a strategic decision in late 2008 to grow scale in the platform market by removing the initial charges on its platform product. Within the single premium personal pension market, Skandia UK improved its position as market leader in platform business in the first quarter of 2009. The market changes as a result of the Retail Distribution Review will create costly and significant implementation challenges for all firms in the UK retail sector, requiring all firms to examine the validity of their existing business model. However, Skandia UK's platform model is already clearly aligned to the FSA's desire for greater choice and transparency and hence we are confident that it will benefit from the change in the UK distribution landscape.

International life sales APE are down 34% on the same period last year as a result of the challenging market conditions in the majority of its markets. Customer nervousness and increased appetite for regular premium products have affected production, never-the-less the International business continues to benefit from its geographic diversity, full open-architecture proposition and strong distribution relationships to meet the needs of its high-net-worth customer base and remains the leading player in single premium products to its target markets. We continued to develop products and the e-business customer proposition during the first half of 2009. 

In aggregate, ELAM life sales APE were down for the period, with different trends evident in the various countries. Life markets in Europe continue to be oriented towards traditional life, with unit-linked lines showing significant year-on-year decreases. In the predominantly regular premium markets, the negative impacts were felt more strongly as regular savers face increased uncertainty over disposable incomes and constrained savings potential, while guarantee products remain attractive to clients given fears about market risk. In the Mass Retail markets, notably Germany and Poland, the traditional ramp-up around year-end did not materialise last year, affecting pipeline sales in 2009. Single premium business, however, has recovered well from levels seen in the second half of 2008. In the predominantly single premium Affluent business there has been strong production in Italy, as a result of compelling product offerings and good distribution relationships. 

Good unit trust performance in difficult markets 

Unit trust sales were down 4% on the comparative period at £1,855 million. Nordic's mutual fund sales were down by 6% on the comparative period, whereas ELAM increased by 14% (mainly due to currency movements). Nordic benefited during the first six months of 2009 from a material inflow of customer fund holdings from other banks as a result of a marketing campaign launched in February. The Latin American business in particular did well in the first half of the year, with higher volumes as a result of equity market growth. UK mutual fund sales fell by 19% in the first half of 2009. 

Adjusted operating profit (IFRS basis) impacted by market conditions

Adjusted operating profit (IFRS basis) was down 49% to £76 million for the period. All businesses experienced a fall in profits with the UK result down by 32% to £46 million, Nordic decreased by 44% to £22 million, International fell by 53% to £11 million and ELAM was down by 116% to £(3) million over the comparative period.

The UK result was impacted by reduced fees from lower funds under management, reduced investment income from lower interest rates and, as expected, the removal of the initial margin on the platform business. These adverse effects have been partially offset by policyholder tax releases. The beneficial impact of policyholder tax will be diluted as the financial markets improve. 

The Nordic result was also affected by lower asset-based revenues due to lower funds under management at the beginning of the year, lower profits from healthcare, a lower interest margin and increased credit losses in SkandiaBanken. Whilst credit losses have increased on 2008 levels, the credit loss ratio remains very low at 0.16% in H1 2009, compared to 0.07% in H1 2008. 

International's result was mainly affected by lower new business levels, currency losses and other costs.

The ELAM businesses reported a loss of £3 million (2008: profit of £17 million) largely as a result of lower markets and increased policyholder participation costs in Germany of £8 million.

All of the European businesses have been managing their expense bases tightly throughout the period. We have decided to restructure the various European businesses. ELAM is being split so that the businesses in France, Italy and Spain (Affluent) are managed with the UK and International businesses so that they can benefit from the scale of these similar Wealth Management businesses. The Retail business is being kept separate, while the Latin American businesses will now report into and leverage off the South African businesses. This will allow us to close the ELAM regional office and reduce ongoing running costs, although there are restructuring costs in 2009.

Value of new business affected by lower volumes

VNB fell by 44% to £39 million. Although there were strong results in Nordic from excellent sales production, these were offset by the effect of lower volumes across the rest of the European business which have relatively fixed cost bases in the short term. The life new business APE margin ended the period at 9%, down from 13% in the comparative period. 

The value of Nordic's new business increased due to higher life new sales in both Sweden and Denmark whilst strong cost control has been maintained. However, the life new business APE margin of 15% declined from 17% at 30 June 2008 as the strengthened retention assumptions in 2008 fed through to the 2009 results, and due to adverse business mix, as a higher proportion of sales are in lower margin products. 

In the UK, the value of new business fell by 69% to £5 million due to lower volumes and the removal of the initial margin on the platform business to capture market share. Some fall in the margin was expected as part of the strategy to promote the new platform business, and the new operating model is designed to grow operating profitability through increased scale. However the extent of market level declines has meant that margins have reduced more than anticipated in our repricing decision taken in 2008. 

International has maintained its new business margin at 17% in the first six months, demonstrating the resilience of the franchise. The high margin is driven by a positive business mix impact more than offsetting lower volumes and benefits from the quality of the high-net-worth client base, strong distribution relationships, tight cost control and the breadth of the customer proposition.

Decrease in operating MCEV earnings (covered business) (post tax)

The operating MCEV earnings, on covered business after tax, decreased by 86% to £40 million. Each of the European businesses saw a decline in profits in the period, largely from a combination of worsening economic conditions affecting sales volumes, and lower interest rates in 2008 leading to lower expected return. In addition, there has been adverse persistency experience and an increase in the cost of non-hedgeable risks. 

In the UK, there was a fall in operating MCEV earnings to £13 million from £135 million in the comparative period. The 2008 result benefited from positive assumption changes, mainly due to increased recognition of retained rebates from fund managers. The value of new business has also fallen by £9 million as a result of lower volumes and the migration of business to the platform model. Persistency experience worsened and the capital held for non-hedgeable risks increased in the period. 

International's MCEV operating earnings reduced to £2 million in 2009, a fall of £51 million, as a result of adverse persistency experience, particularly in the Middle East, lower new business profits (down £9 million) from lower volumes, and an increase in the cost of non-hedgeable risks. 

The MCEV operating earnings for Nordic fell by 50% to £42 million compared with the first half of 2008 as a result of lower interest rates, an increase in the cost of non-hedgeable risks, and the effect of a positive assumption change in 2008 for the introduction of currency spreads. Improved persistency experience and higher profits from new business have partially offset these amounts.

ELAM reported an MCEV operating loss of £17 million for the period, compared with a profit of £20 million in the comparative period. The shortfall to last year arises from a combination of factors including lower new business profits (£14 million), lower interest rates, adverse experience variances (including policyholder participation in Germany), and an increase in the cost of non-hedgeable risks.

Continued growth in banking business 

SkandiaBanken's liquidity position is strong, largely because the bank's assets are funded by deposits. The capital ratio as at 30 June 2009 was 13.7% (on a Basel II, pillar one basis). SkandiaBanken's retail lending portfolio has been built on sound lending practices with 95% of mortgages having strong creditworthiness (the average loan-to-value in the portfolio at the end of the period was approximately 40%) while the remaining 5% of the lending portfolio relates to car and personal loans. The quality of the lending portfolio is evidenced by the credit loss ratio which has remained at a low level of 0.16% with a deterioration in Norway being largely offset by an improvement in Sweden. Whilst mortgage and savings volumes have increased on the comparative period, the profitability of the bank has been affected by the worsening economic conditions which have caused the net interest margin to fall to 1.4% at 30 June 2009 compared with 1.5% at 30 June 2008.

Capital levels remain strong

The European businesses are well capitalised and the current levels of statutory capital are within or above the target ranges set by management. 

Continued investment innovation at Skandia

During 2009, the European businesses continued to invest in improving product propositions and customer service standards to create value for customers and distributors. The work was rewarded by a number of industry awards during the first half of the year. 

  LONG-TERM SAVINGS: US Life

Business transformation and de-risking of the business is continuing 

Highlights ($m)		H1  2009	H1 2008	% Change
Adjusted operating profit (IFRS basis) (pre-tax)		44	104	(58%)
Return on equity		27.4%	7.2%
Operating MCEV earnings (covered business) (post-tax)*		388	(10)	3978%
Life assurance sales (APE)		57	124	(54%)
Value of new business*		11	(10)	210%
APE margin*		19%	(8%)
PVNBP*		521	1,076	(52%)
PVNBP margin*		2.1%	(0.9%)
Net client cash flows ($bn)**		(0.9)	(0.4)	(125%)
Highlights ($bn)		H1 2009	FY 2008	% Change
Funds under management**		15.8	15.2***	4%

*    H1 2008 restated on MCEV basis

**     Stated on a start manager basis as USAM manages funds on behalf of US Life

***     Restated to include the assets reclassified under IAS 39.

Introduction

The US economy contracted by between 1% and 2% during Q2, compared to 6.1% in Q1, with the improvement driven by government programmes to boost liquidity. Unemployment and foreclosure rates continue to increase, and unemployment figures of 9-10% are expected in 2009, which would be the highest rate in 26 years. In response to the increasing unemployment rate the Federal Reserve has pledged to maintain the key interest rate at 0-0.25% for 'an extended period'. Economists predict that interest rates will stay at record lows through the rest of 2009.

The dollar rate strengthened marginally against sterling during Q1 (closing at $1.43) but weakened during Q2 to close at $1.65 against sterling.

Equity market volatility remained high. A rally in the latter part of Q2 resulted in the S&P 500 level increasing by 1.8% year to date, although its 30 June 2009 position is 28% lower than at 30 June 2008.

Initial business transformation actions substantially complete 

As outlined at the year-end, the key focus for the management of the US Life business has been to transform and scale back the business. The product profile has been streamlined, eliminating unprofitable product lines. A consequence is that overall volumes are inevitably reduced compared to 2008, although with lower new business strain, the business as a whole is now less capital-intensive than in previous periods. The major transformational actions, covering the reduced product range, the restructuring of distribution with a focus on top-tier producing agents, lower staff numbers and a full review of the company's outsourcing model, are complete. 

The streamlining of the product range was accompanied by a reduction in current year sales targets from 2008 levels. Year-to-date sales are ahead of plan in dollar terms, but within the capital budget allocated to new business. Given a continuation of this capital-efficient sales mix, we now anticipate full year 2009 sales in the $700 million to $800 million range. In current market conditions annuity products are of greater appeal to clients than indexed life products and provide less capital strain. Our distribution partners have the capacity to sell these products and have supported the change in the product range. A new agreement with a major outsourcer, expected to deliver savings of $5 million per year, provides added downward pressure on ongoing costs as well as favourably boosting overall service levels. The run-rate of expenses has reduced by nearly 50% from the prior year expense levels.

Sales managed down 

As discussed previously, the result of the streamlining of the product range and the focus on top-tier producing agents has been to manage sales downwards. Fixed indexed annuity sales, a key product line, reduced approximately 61% to $276 million in line with plan and our capital utilisation plan. This line contributed 66% of total APE for the first six months of 2009. Fixed deferred annuity sales reduced by approximately 47%. This product line continues to address the needs of customers who seek fixed interest guarantees during times of market volatility and economic instability. Immediate annuity sales (which do not include any life-contingent products), which remain an important offering since they contribute to capital in the year of sale, declined by 31%. 

Total sales on an APE basis in respect of life products were down 54% over the comparative period, with Universal Life APE down approximately 45% to $15 million and term sales reduced to minimal levels off the back of very low activity levels in the mortgage market.

Adjusted operating profit (IFRS basis) results 

Adjusted operating profit (IFRS basis) was $44 million for the first half of 2009 compared to $104 million for the first half of 2008. This reflects retrospective DAC unlocking of $36 million resulting from higher surrender activity and a reduction in the interest margin earned; of the $50m fall in investment income, $28 million is driven by the change in the long-term earned rate, and $22 million is driven by lower net investment income due to a decrease in average assets under management as a result of higher surrenders. These negative impacts were offset by the positive impact of commuting 17 large case Single Premium Immediate Annuity (SPIA) contracts, positive experience variances and small hedging gains. 

Value of new business 

VNB increased by $21 million over the comparative period, with the margin ending the period at 19%. The increase in margin was mainly due to higher swap rates and the focus on selling more profitable business. To that end, the traditional business has been shrunk given the unsatisfactory pricing available on an MCEV basis, and management actions to improve margins on fixed index annuities have increased VIF.

MCEV results 

Operating MCEV earnings were $398 million higher than the comparative period. This was mainly due to increased expected returns, which accounted for $199 million of earnings in this reporting period compared to $26 million in the comparative period. Under MCEV methodology investment spreads in excess of the adjusted risk free reference rate are not recognised upfront but are left to emerge as they are earned. Where earned rates exceed the contractual minimum guarantees plus our target profit spread, the additional return earned is shared between policyholders and shareholders. Where the earned rate is below this threshold we no longer achieve our spread and therefore if returns increase we aim to regain that spread before crediting a greater proportion to policyholders. At the end of 2008 projected returns under MCEV were below guarantees for many products, largely as a result of the widening of corporate bond spreads in the second half of the year which increased market-to-market losses on the portfolio. At the end of 2007 the comparative returns were much higher. Thus most of the additional expected spread flows directly to profit in the first half of 2009, whereas in the first half of 2008 much of it would have been passed on to policyholders through increased crediting rates. 

In addition, there was a positive impact of $116m arising from an amendment to the calculation of the Time Value of Options and Guarantees ('TVOG') in relation to a particular block of in-force policies. We further benefited from positive experience variances. During the period we commuted a block of our SPIA contracts to the owners through their third party advisors at a similar value to the reserve established for this block after the recent reserve strengthening, giving in fact a positive variance. Although the experience from the total SPIA annuity block can be expected to be volatile, since it is a small book with some large individual contracts, we are confident that the reserve adjustments made in previous periods are adequate to cover the future expected outcomes in respect of this business and the transaction described above supports this view. 

The large movements below the line demonstrate the sensitivity of the US Life MCEV to changes in the economic environment, as market consistent methodology means that results move in line with the movements in the market in general. Since assets are marked to market the high unrealised losses in the bond portfolio depressed the MCEV at 31 December 2008; the $0.7 billion decrease in unrealised losses over the period was the main driver of a positive $737 million below the line variance. 

Credit update 

Although the fixed income portfolio continued to be affected by poor economic and financial market conditions, the fair value of the portfolio increased $0.7 billion from year-end. The impact of the IAS 39 reclassification was $283 million as at 30 June 2009, compared to $387 million at 31 December 2008 (30 June 2008: nil), and is excluded from the disclosures that follow. The yield on the book value of the fixed income portfolio has not changed significantly in H1 as no major asset purchases or sales have occurred since year-end. The company retains 8% of its holdings in cash and short term investments (totalling $1.2 billion). However the net unrealised loss position on the fixed income security portfolio improved to $1.6 billion at 30 June 2009 ($2.3 billion at 31 December 2008), reflecting a broad recovery in financial markets in general, and narrowing corporate credit spreads in particular. As at 31 July 2009, the unrealised loss position further improved to $1.4 million. Continued government support of the residential mortgage market, and new considerations of increasing such support to the commercial mortgage market, have also led to narrowing spreads across structured securities, which have also been accretive to the portfolio's unrealised loss position. Approximately $1.7 billion of the fixed income portfolio is classified as Loans and Receivables, which are carried at amortised cost. As a result, $0.3 billion of unrealised losses on a mark-to-market basis are not reflected in the balance sheet in accordance with IAS 39.

During the period there were no defaults in the corporate bond portfolio and $199 million of IFRS impairment losses were recognised on 54 securities, which were partially offset by $40 million of net investment trading gains. Regulatory impairment losses were $163 million. As of 30 June 2009 compared to 31 December 2008, approximately $689 million of securities previously rated investment grade are now rated non-investment grade and approximately $96 million of securities rated non-investment grade have been downgraded further. Impairment losses included $129 million related to structured securities, with the losses being due to adverse changes in expected future cash flows. The impairment losses were primarily in residential mortgage-backed securities ($52 million), commercial mortgage-backed securities ($66 million), preferred stocks and hybrid securities ($26 million), and three corporate holdings in the financial services sector ($51 million).

The fixed income portfolio has exposure to approximately $0.7 billion of preferred stock/hybrid instruments amounting to 5% of the portfolio at 30 June 2009 versus $1.1 billion (6% of the portfolio) at 30 June 2008, with the bulk of this exposure concentrated in the financial sector. During the first quarter, these holdings came under pressure as concerns about financial institutions continued to mount. In the second quarter, however, these securities have recovered sharply, as results from the Federal Reserve's 'stress test' of banks were released and banks and other financial institutions sought to raise capital to bolster their balance sheets. In general, finance-related names were the largest contributors to the improvement in the net unrealised loss position for the fixed income portfolio during the second quarter. 

The fair value of the US fixed income investment portfolio at 30 June 2009, after recognition of the impairments, totalled $14.4 billion (31 December 2008: $14.0 billion). 

Rigorous impairment process

We continue to conduct a rigorous impairment review process and we shall continue to record impairments where we see any actual credit deterioration from the time the bonds first went on our watch list. Impairments of $199 million were recorded in H1 2009 compared to $136 million in H1 2008 and $575 million in H2 2008. Statutory impairments were $163 million compared to $101 million in H1 2008 and $294 million in H2 2008. Total impairments since 2007 amount to $910 million in IFRS terms of which $558 million has impacted statutory earnings and capital ratios.

Potential capital strain from migration of the portfolio has been extensively modelled and we had planned for an increase in statutory charges for migration of 43% for H1 which was consistent with actual. 16% is forecasted for the remainder of 2009, compared to 18% in FY 2008. Migration risk is closely monitored and requires a case-by-case analysis rather than a broad sector-based approach. Migration mainly took place within the corporate bond and structured security portfolio. 

Increase in funds under management driven by recovery of investment valuations 

Funds under management ended the period at $15.8 billion, up 4% from the opening position primarily due to the $0.7 billion (5%) increase in the market value of the investment portfolio and investment income for the period. This was partially offset by negative net client cash flows at 12% of opening funds under management on an annualised basis. Net client cash flows were inevitably reduced compared to the prior year due to the decision to reduce new business volumes (total gross sales for the six months to 30 June 2009 were $419 million compared to $946 million for the same period in 2008, a reduction of 56%), in addition to an increase in surrender activity. During Q2 2009, a conservation programme was introduced to focus on the reduction of termination activity. The programme, initially focused on conserving fixed annuity assets, encompasses focused surrender activity monitoring, policyholder outreach, and agent communication and monitoring. This has already delivered benefits and surrenders have begun to trend downward in May, June and July. The running 4-week average annuity account value surrendered per week was approximately $34 million just prior to commencement of the programme and reduced to approximately $18 million as of the end of Q2.

Liquidity and asset/liability management a key focus

The US portfolio and business operations produced net cash flows of $260 million in the half year. Cash income from the portfolio in the form of interest and maturities amounted to $509 million. Maturities were lower than last year, in line with expectation given the profile of the bonds and the planned duration matching against the policy maturities. Net transfers of $225 million were made to the business from plc. As this business is managed to a reduction in sales level of approximately two-thirds of the 2008 levels, we can expect that the natural cash cycle of maturities will rise as policies mature, are surrendered or lapse, and investment income and expenses contract. The net cash position then rises and the prospect of surplus capital emerges. 

The maturity profile follows the historic growth in sales of the business meaning that asset/liability management is taken into account, as well as the impact of impairments on the portfolio. We are relatively well matched with an average asset duration of 5.6 years for assets and average liability duration of 5.1 years for liabilities.

We have continued to maintain strict investment control over the portfolio. We are managing to minimise capital but we have been prepared, on occasion, to selectively trade out of positions at gains and losses in the period. Our new Chief Investment Officer has sought to manage the process of reinvesting net premiums into cash to ensure ample liquidity, but we are likely to be selectively investing in credit a portion of our surplus cash during 2009 to improve yield. 

Capital

OM Financial Life Insurance Company regulatory capital increased during the half year driven by strong statutory operating earnings partially offset by investment impairments. 

OM Financial Life's regulatory capital requirements increased (at the targeted 300% level) primarily due to ratings downgrades in its fixed income investment portfolio. 

The increase in capital and offsetting increase in required capital reduced the risk-based capital ratios from 305% at 31 December 2008 to 281% at 30 June 2009, which is within the targeted range for the interim period.

  LONG-TERM SAVINGS: Asia Pacific

Continued focus on existing businesses in India and China

We continue to generate business through our joint ventures in China (Skandia:BSAM) and in India (Kotak Mahindra Life Insurance). Gross written premiums of £118 million in India were 21% lower than the comparative period, whilst gross written premiums of £23 million in China were 22% higher than the comparative period. We continue to maintain and grow our presence in Hong Kong through our Royal Skandia (Skandia International) operation.

  BANKING: NEDBANK GROUP (NEDBANK)

Resilient performance balance sheet strengthened and strong capital ratios in a challenging environment

The full text of Nedbank's results for the six months ended 30 June 2009, released on 5 August 2009, can be accessed on Nedbank's website http://www.nedbankgroup.co.za

				Rm
Highlights		H1 2009	H1 2008	% Change
Adjusted operating profit (IFRS basis) (pre-tax)**		2,890	5,086	(43%)
Headline earnings*		1,988	2,943	(32%)
Net interest income*		8,185	7,960	3%
Non-interest revenue*		5,377	4,954	9%
Net interest margin*		3.44%	3.83%
Credit loss ratio*		1.5%	0.96%
Cost to income ratio*		52.5%	51.5%
ROE*		11.1%	18.7%
ROE* (excluding goodwill)		12.6%	21.3%

*    As reported by Nedbank in their report to shareholders as at 30 June 2009

**    Prior year AOP included an amount of R726 million in respect of the sale of Visa shares.

The first half of 2009 has been a challenging period for the South African economy. It has been a harsh environment for clients and this has negatively impacted bank earnings. In this environment, Nedbank has focused on the strength of its balance sheet. Capital ratios continued strengthening, liquidity was sound throughout the period and Nedbank increased its net asset value. 

Nedbank remained solidly profitable, but the reduced endowment income and margin on current and savings accounts from lower interest rates, together with slower asset growth and increasing impairments, have resulted in reduced earnings levels compared with the period to June 2008. There are, however, signs that the first half of 2009 may have seen the worst of the retail credit cycle.

Throughout this difficult period Nedbank has continued to advance loans to its clients while ensuring affordability criteria are met. Nedbank has shown modest market share growth in most core retail and commercial advances categories. Nedbank continues to seek ways of assisting distressed clients, promoting responsible lending and encouraging savings. Of the large South African banks, Nedbank offers amongst the lowest bank fees for low and middle income earners.

Banking environment

In the first quarter of 2009 the South African economy contracted at its fastest rate since the third quarter of 1984. The deterioration in the South African banking environment, as indicated in Nedbank's first quarter trading update in May 2009, has been more severe than was anticipated at the time of the release of the 2008 financial results in February 2009. The risk remains high that the recovery in economic growth may be slow and protracted, and that retrenchments will increase and house prices will continue to decline into the second half of the year. 

While lower interest rates are positive for consumers - as reflected in the slower rate at which retail impairments are increasing - this has a negative impact on bank earnings in the short term due to reduced endowment income and margin on current and savings accounts. Wholesale banking, which has been resilient, even at the peak of the interest rate cycle, is starting to show increased signs of increased credit stress being experienced by some clients. 

Review of results

As highlighted in the 2008 annual results announcement, management has focused on maintaining a strong and appropriately liquid statement of financial position (balance sheet) during these difficult market conditions. It is therefore pleasing to report that Nedbank increased net asset value (NAV) by 7.4% to 8,762 cents per share. Nedbank's Tier 1 capital adequacy ratio increased from 9.6% in December 2008 to 10.0% and the total capital adequacy ratio increased from 12.4% to 13.2%. Nedbank's ratio of risk-weighted assets to total assets ratio is 62.8%, above the top end of the peer group, indicating the conservative approach adopted in applying Basel II. The inter-bank funding market has functioned normally and liquidity remains sound. 

Headline earnings decreased by 32.4% from R2,943 million for the period to June 2008 to R1,988 million for the six months to June 2009. Diluted headline earnings per share decreased by 34.1% from 719 cents to 474 cents. Basic earnings decreased by 28.7% from R3,597 million to R2,564 million for the current period. Diluted earnings per share decreased by 30.5% from 879 cents to 611 cents. 

Overall Nedbank's results were negatively impacted by lower interest rates and the effects of the economic recession. This has resulted in margin compression from the negative endowment effect and margin compression on current and savings accounts and a reduction in transaction volumes. In addition, impairments have increased from December 2008, although some improvement has been noted since March 2009.

Solid client flows, a healthy retail deposit franchise, improved asset margins on new business, strong levels of capital and good cost discipline have created a solid base from which to grow. 

Nedbank achieved a return on average ordinary shareholders' equity (ROE) excluding goodwill of 12.6% and an ROE of 11.1% for the period. 

Financial performance

Net interest income (NII)

NII grew 2.8% to R8,185 million (June 2008: R7,960 million) as a result of a 14.8% increase in average interest-earning banking assets offset by compression in Nedbank's margin.

The net interest margin for the period was 3.44%, down from 3.83% for the period to June 2008 and the 3.66% for the year ended December 2008. 

Margin compression was largely due to the reduced endowment income impact on capital and margin on non-rate sensitive deposits resulting from the faster than expected reduction in interest rates. In addition, margin was impacted by other liability margin compression reflecting the higher cost of term funding; the increased duration in the wholesale deposit book and the cost of holding additional liquidity buffers; the cost of funding increased non performing loans and properties in possession; debits relating to accounting for historic structured-finance transactions with related credits offset in taxation; and interest earning assets repricing more quickly than interest bearing liabilities. 

Impairments charge on loans and advances

The credit loss ratio reflects the very tough economic conditions and increased to 1.57% for June 2009 compared with 0.96% for the same period in 2008 and 1.36% for the second half of 2008. It is encouraging that this ratio showed a slight improvement from the 1.67% reflected in Nedbank's first quarter trading update. 

Given the recessionary environment, South African businesses are experiencing increased levels of stress which has resulted in higher levels of impairments in the wholesale advances books but still within the through the cycle range for this sector. 

Defaulted advances increased by 94.8% (annualised) to R25,437 million from R17,301 million reported in December 2008 and total impairment provisions increased by 32.9% (annualised) to R9,142 million for the same period. Approximately R1 billion of the defaulted advances are technical in nature and the direct result of applying a reduced instalment to historic arrears balances as interest rates fall. Note that, in this context, default means that customers are not fully up to date with repayments but a high percentage of the advances are still recoverable. 

Management has maintained a strong focus on managing risk and improving asset quality, particularly in retail home loans. Good progress has been made and average loan-to-value (LTV) ratios for new home loans at grant stage have been reduced to 79.9%. This trend is evident in lower LTV ratios at grant stage and in an improved distribution of the book when measured by balance outstanding to original valuation. Client rates have also increased during the past six months, with a significant reduction in the average concession granted on new business. Similar steps have been taken in other secured loan products with Nedbank Retail. However, because of the lower volumes of new business being written, this will take some time to impact the margin on the overall book, which has also been negatively affected by an increase in the cost of funds.

Non-interest revenue (NIR)

Nedbank's focus on growing non-interest revenue streams is starting to show results. NIR increased 8.5% to R5,377 million (June 2008: R4,954 million). Commission and fee income grew by 8.7%, mainly from increases in transactional banking fees and insurance product pricing in Retail and strong cash handling volumes, increased electronic banking volumes and credit related excess/commitment fees in Business Banking. The migration of Corporate Banking clients onto the NetBank electronic banking system will commence later in the year and is expected to contribute to the acquisition of transactional banking corporate clients. 

Trading income was up by 14.2% from R813 million at June 2008 to R928 million, driven primarily by favourable trading opportunities in treasury and the global markets businesses. 

NIR from the private equity portfolios declined in line with markets by R80 million compared to June 2008, in line with markets. 

NIR includes an amount of R85 million (June 2008: R21 million) from the credit related fair value adjustment of the bank's own sub-debt. This is low quality earnings and has not been attributed to capital.

Expenses

Nedbank's expenses increased by 7.1% to R7,121 million (June 2008: R6,651 million) and are in line with expectations. Expenses remain tightly controlled with staff expenses having increased by 7.1%, resulting from the 1.5% growth in staff numbers compared with June 2008, marketing and public relations costs decreased by 3.4%; information technology costs grew by 7.4%, largely attributable to ongoing investment in systems development for client businesses and risk-related projects; fees and insurance increased by 18.4% as a result of increased fraud levels; and Nedbank's black economic empowerment (BEE) transaction expenses decreased from R108 million to R66 million mainly through movements in the share price.

In line with expectations, as NII growth slowed predominantly from lower endowment income and margin on current and savings accounts, Nedbank's efficiency ratio deteriorated marginally from 51.5% to 52.5%.

Associate income

Associate income decreased from R84 million in June 2008 to R55 million largely as a result of lower earnings in the Nedbank Retail Bancassurance and Wealth joint ventures and the fact that these were consolidated for the last month of the current period. 

Taxation

The taxation charge (excluding taxation on non-trading and capital items) decreased by 36.7% from R1,014 million in June 2008 to R642 million primarily as a result of lower profits in the period. 

Capital

Nedbank and its subsidiaries are well capitalised with all capital adequacy ratios well above minimum regulatory levels, and Nedbank's ratios are now at the top end or slightly above Nedbank's internal target ranges which were increased in December 2008 in response to the deteriorating environment. 

Nedbank has been proactive in managing the efficiency of its capital structure, and in the first quarter of 2009 successfully placed a 13 year (non-call 8 year) $100 million listed lower Tier 2 subordinated unsecured floating rate note with an international investor. Nedbank's core Tier 1 capital adequacy ratio (calculated on Tier 1 capital excluding perpetual preference share capital and hybrid debt capital instruments) increased to 8.6% from 8.2% in December 2008 and the Tier 1 capital adequacy ratio increased to 10.0% from 9.6%. The total capital adequacy increased to 13.2% from 12.4% in December 2008 and is now above Nedbank's increased total capital adequacy target range of 11.5% to 13.0%.

In accordance with its prudent capital management strategy, Nedbank increased its levels of surplus capital, and currently holds a surplus of R10.6 billion relative to its calculated economic capital requirements, calibrated to an A- debt rating (including a 10% buffer), and a surplus of R10.7 billion relative to its regulatory capital adequacy requirements. 

Following the conservative approach when implementing Basel II in 2008, Nedbank has adopted a prudent risk-weighted asset optimisation programme. Since December 2008, this programme has resulted in a decrease in risk-weighted assets, held for credit risk, and the risk-weighted assets to total assets ratio is 62.8%. This is still above the top end of the peer group, highlighting further optimisation opportunities. Nedbank's leverage ratio (total assets to ordinary shareholders' equity) at 14.8 times remains conservative by both international and local standards, and has declined from 16.2 times (December 2008), evidencing focus on balance sheet strength in the current economic climate.

To strengthen capital further Nedbank intends, subject to regulatory approval and market conditions, issuing non-redeemable, non-cumulative preference shares amounting to approximately R500 million during August 2009.

Funding and liquidity

Nedbank maintains a conservative funding structure, in line with the domestic market and its liquidity remains sound. There is no Tier 2 refinancing required in the capital markets for 2009. Nedbank remains appropriately liquid with a loan-to-deposit ratio of 93.8%.

Given Nedbank's domestic focus, international funding represents a small portion of Nedbank's funding base at around 1.5% and the increased cost of international funding as a result of the reduction in international liquidity has had a minimal effect on Nedbank.

Total assets

Total assets decreased marginally by 3.5% (annualised) to R557 billion (December 2008: R567 billion) as a result of decreasing overnight loans and foreign correspondents, as well as the maturing of R6 billion of additional liquid assets that were accumulated prior to the 2008 year end and repayment of the associated repo funding. Growth in average interest-earning banking assets slowed to 14.8% (June 2008 growth: 22.9%). 

Advances and Deposits

Advances are 1.1% (annualised) lower than at December 2008, reducing from R434 billion to R432 billion at June 2009 with the reduction being mainly attributable to lower levels of trading assets flowing from a more cautious approach to risk appetite. Overall, growth has slowed down as result of subdued demand as well as Nedbank's focus on more selective advances growth and improving margins. 

Nedbank reduced its exposure to foreign correspondents, overnight loans and trading advances. Excluding these categories core banking advances grew by 4.2% (annualised) from December 2008. Home loans grew by 6.2% (annualised) and vehicle and asset finance loans by a more muted 1.9% (annualised) with market share increasing in both of these categories.

Nedbank grew its market share of deposits, but deposits declined by 2.8% (annualised) from R467 billion at the year end to R460 billion at June 2009 driven mostly by a reduction in repurchase trading activity referred to above. Retail deposit growth was broadly flat in a highly competitive market that has started to experience declining demand for savings and investment products given lower interest rates.

Nedbank is focused on maintaining and building its strong deposit franchise. Optimising its funding mix and funding profile by growing the Retail and Business Banking portion of the deposit base remains key, as is the competitive pricing of term deposits.

Update on acquisitions

In May 2009, Nedbank announced the acquisition of NedLife, BoE Private Clients and Fairbairn Private Bank from OMSA. These acquisitions were approved by shareholders and have been consolidated by Nedbank with effect from 1 June 2009. 

On 29 May 2009, Nedbank advised that it was in negotiations with Imperial Holdings Limited to acquire the remaining 49.9% shareholding in Imperial Bank. The negotiations are progressing well and Nedbank hopes to announce the details shortly. 

Outlook 

Initially the domestic economy was resilient during the early stages of the international financial crisis but has increasingly succumbed to the effects of the global recession. Consequently we believe the recovery will be more protracted than previously anticipated, with gross domestic product (GDP) growth currently forecast by Nedbank to decrease by 2.0% during 2009 with a modest expansion of 1.7% forecast in 2010. 

Volumes of new business in retail remain constrained by low levels of consumer confidence and consumer concerns around falling asset prices and increasing unemployment. Lower local demand, international trade activity and commodity prices together with the strong Rand have increased the pressure on businesses and led to declining corporate demand and confidence. 

In addition to the 400 basis point cut in interest rates this year to date, a further 100 basis point cut is currently anticipated for the remainder of 2009. The effect of reduced endowment and lower margin on current and savings accounts will have on banking interest margins will increase during the second half, while a reversal in the impairment trend is currently only anticipated to begin to positively impact bank earnings growth in the next 12 to 18 months.

Prospects

Nedbank remains cautious in its outlook for the remainder of 2009 and performance is currently expected to reflect the following: advances growth in the mid-single digits; margin compression, on the 2008 margin, of around 30 to 35 basis points; the credit loss ratio is currently forecast to improve marginally from the 1.57% for the period to June 2009; NIR growth for the year in upper single digits; expense growth for the year in early double digits, partially driven by the full consolidation of the joint ventures purchased from Old Mutual which will, when combined with the endowment pressure in NII, lead to a deterioration in the cost to income ratio from the 52.5% for the period; and a focus on improving capital adequacy ratios and optimising funding and liquidity.

Nedbank has revised its outlook for the full 2009 year and continues to be cautious about prospects for the rest of the year. Forecast risk remains high in this environment. 

Nedbank remains disciplined and firmly focused on the basics of good banking, ensuring that the fundamentals of the Nedbank group remain solid. Nedbank is well capitalised, with conservative funding, good liquidity, a focus on risk management and strong cost management.

  GENERAL INSURANCE: MUTUAL & FEDERAL

Challenging trading conditions

Mutual & Federal's results for the six months ended 30 June 2009, released on 29 July 2009, can be accessed on Mutual & Federal's website http://www.mf.co.za

Highlights (Rm)	H1 2009	H1 2008	% Change
Underwriting result	(96)	(23)	(317%)
Long term investment return (LTIR)	388	450	(14%)
Adjusted operating profit (IFRS basis) (pre-tax)	292	427	(32%)
Gross premiums*	4,358	4,689	(7%)
Earned premiums*	3,550	3,914	(9%)
Claims ratio*	73.1%	71.4%	-
Combined ratio*	102.7%	100.6%	-
Solvency ratio*	46%	43%	-
Return on capital* (3 year average)	17.1%	25.5%	-

*     As reported by Mutual & Federal in their report to shareholders as at 30 June 2009

Profits impacted by adverse insurance environment 

Adjusted operating profit for the six months declined following a significant deterioration in the underwriting result despite the cancellation of certain unprofitable blocks of business in 2008. These blocks of business were cancelled as there were no reasonable expectations of them returning to profitability. The deterioration in profit in 2009 is a result of a number of large commercial and industrial claims in the first quarter. There were also substantial personal lines claims following the widespread rains, whilst the difficult economic environment resulted in significant underwriting losses for Credit Guarantee. The overall situation did however improve subsequently and acceptable levels of underwriting profits were achieved in the second quarter. 

The AOP was furthermore impacted by a reduction in the long term rate of return from 16.6% to 13.3%. This change in rate decreased operating income by R98 million in 2009 and the profit attributable to equity shareholders accordingly declined by 6.8%.

Gross premium income declined by 7.1%, largely due to a 39% reduction in personal scheme premiums following the cancellation of unprofitable business. Risk finance premiums declined by 41% due to a reduction in reinsurance received from the furniture retail sector as a consequence of lower consumer spending. 

Investment income declined during the period mainly as a result of a reduction in equity gains. Whilst dividend income reduced in line with lower equity holdings, interest income increased as a result of higher levels of cash holdings during the period, not withstanding the reduction in interest rates.

Improvement in solvency

As a result of the surplus for the period, the net asset value per share improved by 5% to R11.44 at 30 June 2009 compared to R10.92 at 31 December 2008. The international solvency margin (being the ratio of net assets to net premiums on the international basis) correspondingly increased to 46% at 30 June 2009 and remains in the target range of 45% to 50% adopted by Mutual & Federal. In light of the need to build solvency levels and conserve capital, an interim dividend has not been declared.

Other

Despite difficult trading conditions in the first half, the company has started to benefit from the reorganisation to a regionalised business model which is expected to deliver improved service levels to clients and intermediaries.

  US ASSET MANAGEMENT

Solid results given continued difficult market conditions

Highlights ($m)		H1 2009	H1 2008	% Change
Adjusted operating profit (IFRS basis) (pre-tax)		46	139	(67%)
Return on Capital		2.1%	8.5%
Operating margin		15%	26%
Unit trust/mutual fund sales		660	1,179	(44%)
Net client cash flows ($bn)		0.6	1.9	(68%)
Highlights ($bn)		H1 2009	FY 2008	% Change
Funds under management		247.1	240.3	3%

Market volatility

Investment market dislocation both in bonds and equities resulted in large numbers of withdrawals and reallocation. The business reacted with robust and early cost action and a tough assessment of the portfolio's performance.

Investment performance solid through a continued difficult investing environment

In the context of this market, aggregate long-term investment performance from our member firms remained strong. At 30 June 2009, 55% of assets had outperformed their benchmarks over the trailing three-year period and 56% of assets were ranked above the median of their peer group over the trailing three year period. As of the trailing five-year period, 77% of assets outperformed their respective benchmarks and 63% of assets were ranked above the median of their peer group. These numbers represent both an improvement from the first quarter, and demonstrate that our affiliates continue to deliver strong investment returns for our clients. 

Positive net cash flows and resilient multi-asset model

Net client cash inflows for the period were $0.6 billion, compared to $1.9 billion for the last half year. Given the level of net outflows experienced across the industry over this challenging period, achieving positive net flows was encouraging, and reflects the longevity of the asset base given the specific investment styles available to clients through the boutique model. The net positive result was driven in particular by strong flows at Heitman, Barrow Hanley and Rogge. 

Funds under management ended the period at $247.1 billion, a 3% increase from 31 December 2008. $7.6 billion (3%) of the increase was due to positive market returns, with the market recovery in the second quarter more than erasing the declines experienced in the first quarter. The decline in unit trust sales also reflected weak market conditions. We made the decision to close one of our affiliates, Clay Finlay, which resulted in a $1.5 billion reduction in funds under management during the period. 

Adjusted operating profit (IFRS basis) down 67%

Adjusted operating profit for the period was down 67% over the comparative period. This was a result of a 29% decrease in average funds under management (41% decrease in equity assets and 14% decrease in fixed income and other assets) compared to H1 2008, which drove down management fee revenue, as well as a reduction in performance fees and transaction fees to 4% of total revenue, down from 6% in H1 2008. Also contributing to the decline were lower seed capital investment returns and the absence of revenue from securities lending, which was suspended in the second half of 2008. The interim 2009 result was also negatively impacted by approximately $6 million of costs associated with the closure of Clay Finlay. The operating margin, which is calculated inclusive of non-controlling interest expense, declined as revenues fell, offset in part however by expense savings. The RoC performance reflected similar factors. Expenses are down 32% relative to the comparative period, reflecting significant action taken by management to control costs in the current economic climate as well as lower variable compensation. At current market levels we expect increased revenues, operating margins, and profit in the second half of 2009 relative to the first half.

  Positioning the business for growth 

Cash management team added at Dwight

A lift-out of Neuberger Berman's cash management team to Dwight Asset Management has been completed, and will be effective from 1 July. Cash management complements Dwight's current capabilities as a stable value manager, and provides the business with an opportunity to offer a complete investment solution to current and prospective clients. We anticipate subsequent positive development of new clients and client cash flow as the team becomes established.

Equity plans

Five additional equity plans have been implemented during 2009, bringing the total number of affiliates with equity to fourteen. We anticipate completing the rollout of equity plans across the business within the next twelve months. Aligning the interests of affiliate management and shareholders as regards revenue and cost management is considered a vital component of our long-term strategy, and key to talent retention and for positioning the business for sustainable long-term growth. 

Evolution in retail strategy 

Building on the long-term success of our institutional asset management business, we plan to streamline our mutual fund offerings, pending board and shareholder approval. The resulting fund line-up is expected to include primarily single-manager, single-strategy funds, which offer style purity, economies of scale, and leverage the firm's strengths as an institutional asset manager. In addition we will adopt a more focused, investment-oriented distribution model. To meet the needs of intermediary partners who increasingly demand in-depth mutual fund research and information, Old Mutual has aligned its distribution structure to offer a higher degree of technical investment expertise. 

As a result of offering fewer products and introducing a new distribution strategy, OMCAP will eliminate certain administrative and sales positions over the next eight months and leverage specific core competencies of the broader USAM organization. In 2009, cost savings from these actions are expected to be offset by one-time restructuring costs. The expected run-rate cost savings are $10-15 million per annum starting in 2010.

  BERMUDA

Continuing Actions to De-risk the Business

Highlights ($m)		H1 2009	H1 2008	% Change
Adjusted operating profit (IFRS basis) (pre-tax)		5	(92)	105%
Life assurance sales (APE)		2	222	(99%)
Value of new business*		-	(5)	100%
APE margin		0%	(2%)
PVNBP*		23	2,225	(99%)
PVNBP margin		0%	(0.2%)
Highlights ($bn)		H1 2009	FY 2008	% Change
Funds under management**		5.5	5.8	(5%)

*    H1 2008 restated on MCEV basis

**     Stated on a start manager basis as USAM manages funds on behalf of Bermuda.

Improved Hedge Effectiveness

Following the completion of a strategic review of the business in March 2009 with subsequent closure of Old Mutual (Bermuda) Ltd (OMB) to new business on 18 March 2009, we have continued our action programme to further de-risk the business whilst focusing on significantly reducing the business expense base. We have also strengthened our governance and risk management practices.

The results of the de-risking programme continue to be successful. Hedge effectiveness for the six months ended 30 June 2009 further improved to 95.5% (from 91.6% for the three months ended 31 December 2008) in respect of hedged components of risk. We have not hedged volatility in the period and benefited from gains as a result of this position. The soft-close strategy, which prevents policyholders from transferring money into funds that are illiquid and/or volatile, was effected on 30 April 2009, and fund mappings have been updated to reflect fund returns and new indices.

IFRS AOP of $5 million is $97 million higher than the prior period primarily due to a lower hedge losses and expenses.

OMB remains firmly committed to all existing policy obligations and remains well capitalised, with statutory capital of $476 million as at 30 June 2009. No further capital injection is anticipated.

Credit Update

The improvement in corporate spreads and the relatively short duration of the OMB portfolio has resulted in a net improvement in the unrealised loss position of the portfolio. The net unrealised loss position was $0.1 billion at 30 June 2009 compared to $0.3 billion at 31 December 2008. Impairment charges of $21 million have been recorded for the six months ended 30 June 2009. There were no defaults in the period.

Actions for the remainder of the year will be focused on further de-risking the OMB fixed income portfolio through selective sales, whilst reinvesting proceeds into assets that will be accretive to investment returns and the aggregate portfolio risk profile.

Index to the financial Information 

Statement of directors' responsibilities in respect of the half-yearly financial statements    35

Independent review report by KPMG Audit Plc to Old Mutual plc    36

Consolidated income statement    37

Consolidated statement of comprehensive income    38

Reconciliation of adjusted operating profit to profit after tax    39

Consolidated statement of financial position    40

Condensed consolidated statement of cash flows    41

Consolidated statement of changes in equity    42

Notes to the consolidated financial statements    48

    1 Accounting policies    48

    2 Foreign currencies    49

    3 Segment information    49

    4 Operating profit adjusting items    66

    5 Income tax expense/(credit)    75

    6 (Losses)/earnings and (loss)/earnings per share    76

    7 Goodwill    78

    8 Borrowed funds    78

    9 Dividends    82

    10 Contingent liabilities    82

Notes to the Old Mutual Market Consistent Embedded Value basis supplementary information    86

    1 Basis of preparation    86

    2 Methodology    87

    3 Assumptions    88

    4 (i) Adjusted Group Market Consistent Embedded Value presented per business line    93

    5 Adjustments applied in determining total Group MCEV earnings before tax    106

    6 Other movements in net equity impacting Group MCEV    107

    7 Reconciliation of MCEV adjusted net worth to IFRS net asset value for the covered business    108

    8 Value of new business (after tax)    109

    9 Product analysis of new covered business premiums    111

    10 Drivers of new business value*    112

    11 Sensitivity tests    113

    12 Key changes in MCEV methodology and assumptions    115

    13 Restatement of adjusted Group Embedded Value per share    115

    14 Restatement of adjusted Group MCEV operating earnings per share    115

    15 Restatement of Embedded Value of covered business    116

    16 Comparison of components of Embedded Value on EEV and MCEV bases    118

    17 Restatement of value of new business (after tax) of covered business    119

    18 Restatement of Return on Embedded Value of covered business    120

 Statement of directors' responsibilities in respect of half-yearly financial statements

For the six months ended 30 June 2009

We confirm that to the best of our knowledge:

●    the consolidated financial information has been prepared in accordance with the recognition and measurement principles of International Financial Reporting Standards adopted by the EU and in accordance with the requirements of IAS34 'Interim Financial Reporting' 

●    the interim management report includes a fair review of the information required by: 

(a)    DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b)    DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

Julian Roberts               Philip Broadley
Group Chief Executive     Group Finance Director

5 August 2009                 5 August 2009

  Independent review report by KPMG Audit Plc to Old Mutual plc

Introduction

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2009 which comprises the Consolidated income statement, the Consolidated statement of comprehensive income, the Consolidated statement of financial position, the Condensed consolidated statement of cash flows, the Consolidated statement of changes in equity and the related explanatory notes.  We have also reviewed the reconciliation of adjusted operating profit to profit after tax which has been prepared on the basis as set out on page 39.  

We have also been engaged by the company to review the Old Mutual Market Consistent Embedded Value ('Old Mutual MCEV') basis supplementary information for the six months ended 30 June 2009 as set out on pages 83 to 120 ('the supplementary information') including the conversion of its comparative supplementary information for six months ended 30 June 2008, previously prepared on the European Embedded Value ('EEV') basis, to an Old Mutual MCEV basis.  

We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements or the supplementary information.  

This report is made solely to the company in accordance with the terms of our engagement to assist the company in meeting the requirements of the Disclosure and Transparency Rules ('the DTR') of the UK's Financial Services Authority ('the UK FSA') and also to provide a review conclusion to the company on the supplementary information. Our review of the condensed set of financial statements has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose. Our review of the supplementary information has been undertaken so that we might state to the company those matters we have been engaged to state in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached.  

Directors' responsibilities  

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FSA. The directors have accepted responsibility for preparing the supplementary information contained in the half-yearly financial report in accordance with the basis of preparation as set out on page 86.  

As disclosed in note 1, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the EU. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU.  

The supplementary information has been prepared in accordance with the basis of preparation as set out on page 86, using the methodology and assumptions set out in notes 2 and 3 to the supplementary information. The supplementary information should be read in conjunction with the group's condensed financial statements which are set out on pages 37 to 82.  

Our responsibility  

Our responsibility is to express to the company a conclusion on the condensed set of financial statements and the supplementary information in the half-yearly financial report based on our review.  

Scope of review  

We conducted our reviews in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information and supplementary information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.  

Conclusion  

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half yearly financial report for the six months ended 30 June 2009 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FSA.  

Based on our review, nothing has come to our attention that causes us to believe that the Old Mutual MCEV basis supplementary information for the six months ended 30 June 2009 is not prepared, in all material respects, in accordance with the basis of preparation as set out on page 86, using the methodology and assumptions set out in notes 2 and 3 to the supplementary information.  

Alastair W S Barbour  
for and on behalf of KPMG Audit Plc  

Chartered Accountants  
8 Salisbury Square  
London EC4Y 8BB  
5 August 2009

 

END

 

 

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