Interim Results - Part 2

OLD MUTUAL PLC 7 September 1999 PART 2 Notes to the financial statements for the six months ended 30 June 1999 1 Basis of preparation Following the demutualisation of the South African Mutual Life Assurance Society on 11 May 1999 (with effect from 1 January 1999) and the subsequent group reorganisation, Old Mutual plc became the parent company of the Old Mutual Group and listed its shares on the London, Johannesburg and other southern African stock exchanges on 12 July 1999. The Group's financial statements for the six months ended 30 June 1999 presented on pages 5 to 19 have been prepared on the basis of accounting policies adopted in the Group's Prospectus dated 19 May 1999 (the 'Prospectus') and should be read in conjunction with those policies. Assets transferred to shareholder investment holding companies on demutualisation have been recorded at fair value, with associated investment return included in the operating results as other shareholder income, using a long term rate of return. Investment returns on shareholder assets remaining within life assurance companies have been included in the life assurance operating result using a long term rate of return. The balance sheet and the pro forma profit and loss account for the year ended 31 December 1998 have been substantially derived from the financial information contained in Parts 7 and 8 of the Prospectus. During 1998, in preparation for demutualisation and listing, the Group's year end was changed to 31 December. The pro forma profit and loss account therefore combines the actual results for the six months from 1 July to 31 December 1998 with the first half year results to 30 June 1998 derived on a time apportioned basis as half of the results for the year to 30 June 1998. Certain reclassifications have been made to the pro forma information in the Prospectus to accord with the format adopted in these financial statements. No comparative figures are presented for the consolidated profit and loss account for the period to 30 June 1998, as the results of a mutual society are not comparable with those of a shareholder owned group. Accordingly, no comparatives prior to 1 January 1999 have been presented for the cashflow statement and the reconciliation of movement in equity shareholders' funds. Rates of exchange used to translate Rand based amounts into Sterling were: Six months Year ended ended 30 June 31 December 1999 1998 Profit and loss account (average rate) 9.8305 9.1060 Balance sheet (closing rate) 9.5075 9.7763 Capital transactions in Sterling have been translated at the exchange rate ruling on the transaction date. The results for the six months ended 30 June 1999 are unaudited but have been reviewed by the auditors whose report is presented on page 20. The auditors have not reported on pro forma information under section 235 or 249A of the UK Companies Act 1985. These financial statements do not constitute statutory accounts as described in Section 240 of the UK Companies Act 1985. Notes to the financial statements for the six months ended 30 June 1999 continued 2 Segmental analysis of gross premiums written - long term business Rest Rest Total Rest Rest Total South of of South of of Africa Africa World Africa Africa World Rm Rm Rm Rm £m £m £m £m Single premiums Six months to 30 June 1999 3,333 70 850 4,253 Individual 339 7 86 432 business 3,069 54 16 3,139 Group business 312 5 2 319 6,402 124 866 7,392 Total 651 12 88 751 Single premiums Pro forma twelve months to 31 December 1998 5,368 114 1,587 7,069 Individual 590 13 175 778 business 8,709 114 - 8,823 Group business 956 13 - 969 14,077 228 1,587 15,892 Total 1,546 26 175 1,747 Recurring premiums Six months to 30 June 1999 4,596 211 444 5,251 Individual 468 21 45 534 business 1,630 234 - 1,864 Group business 166 24 - 190 6,226 445 444 7,115 Total 634 45 45 724 Recurring premiums Pro forma twelve months to 31 December 1998 9,180 417 723 10,320 Individual 1,008 45 80 1,133 business 3,882 553 - 4,435 Group business 426 61 - 487 13,062 970 723 14,755 Total 1,434 106 80 1,620 Notes to the financial statements for the six months ended 30 June 1999 continued 3 Segmental analysis of new business premiums - long term business Rest Rest Total Rest Rest Total South of of South of of Africa Africa World Africa Africa World Rm Rm Rm Rm £m £m £m £m Single premiums Six months to 30 June 1999 3,333 70 850 4,253 Individual 339 7 86 432 business 3,069 54 16 3,139 Group business 312 5 2 319 6,402 124 866 7,392 Total 651 12 88 751 Single premiums Pro forma twelve months to 31 December 1998 5,368 114 1,587 7,069 Individual 590 13 175 778 business 5,804 114 - 5,918 Group business 637 13 - 650 11,177 228 1,587 12,987 Total 1,227 26 175 1,428 Recurring premiums Six months to 30 June 1999 946 58 23 1,027 Individual 96 6 2 104 business 29 19 - 48 Group business 3 2 - 5 975 77 23 1,075 Total 99 8 2 109 Recurring premiums Pro forma twelve months to 31 December 1998 2,119 151 131 2,401 Individual 233 17 14 264 business 602 8 - 610 Group business 66 1 - 67 2,721 159 131 3,011 Total 299 18 14 331 Notes to the financial statements for the six months ended 30 June 1999 continued 4 Analysis of life assurance operating profit after long term investment return Pro Pro forma forma 6 year to 6 year to months months to 30 31 to 30 31 June December June December 1999 1998 1999 1998 Rm Rm £m £m 519 349 Life insurance operating profit 53 39 before long term investment return 899 1,204 Long term investment return 91 132 1,418 1,553 Life insurance operating profit after 144 171 long term investment return Life insurance operating profit before long term investment return is stated after reflecting a provision of £52.5 million (R516 million) in respect of pensions mis-selling liabilities in the Group's UK life assurance subsidiary. Investment returns on assets transferred to shareholder investment companies are included in other shareholders' income/expenses. 5 Analysis of banking operating profit Pro forma Pro forma 6 Reported year to 6 year to months Actual months to 30 6 months 31 to 30 31 June to December June December 1999 30 June 1998 1999 1998 1998 Rm Rm Rm £m £m 2,172 1,834 3,945 Net interest income 221 433 1,636 1,537 3,248 Non-interest revenue 166 357 3,808 3,371 7,193 Total operating income 387 790 (777) (378) (647) Specific and general (79) (71) provisions 3,031 2,993 6,546 Net income 308 719 (2,063) (1,967) (3,990) Operating expenses (210) (438) 968 1,026 2,556 Operating profit 98 281 The pro forma comparative results for the year to 31 December 1998 combine Nedcor's actual results for the second half of the year to 31 December 1998, which historically has contributed the larger part of the operating profits, with the results for the first half to 30 June 1998 derived on a time apportioned basis as half of the actual results for the year to 30 June 1998. Therefore, actual results in Rand for the six months to 30 June 1998 as reported by Nedcor are also included above for comparison. In the six months to 30 June 1999 the profit on the sale of the travel business, NedTravel, of £20 million (R193 million), has been treated as a non- operating item in the consolidated profit and loss account (see note 9). OLD MUTUAL PLC Interim Results for the six months ended 30 June 1999 Notes to the financial statements for the six months ended 30 June 1999 continued 6 Analysis of general insurance business operating profit Pro forma Pro forma 6 year to 6 year to months months to 30 31 to 30 31 June December June December 1999 1998 1999 1998 Rm Rm £m £m (51) 67 Underwriting result (5) 7 316 715 Long term investment return 32 79 General insurance business 265 782 operating profit after long 27 86 term investment return Net written premiums 573 1,081 Motor 58 119 262 302 Fire 27 33 432 877 Accident 44 96 20 49 Other 2 5 1,287 2,309 Total 131 253 Net claims incurred 486 872 Motor 49 96 152 241 Fire 15 26 376 627 Accident 38 69 16 40 Other 2 4 1,030 1,780 Total 104 195 7 Other shareholders' income/expenses Pro Pro forma forma 6 year to 6 year to months months to 30 31 to 30 31 June December June December 1999 1998 1999 1998 Rm Rm £m £m 343 N/A Long term investment return 35 N/A 109 94 Other income 11 10 (577) (342) Other charges (59) (37) (125) (248) (13) (27) As stated in note 1 above, investment returns on assets transferred to shareholder investment holding companies on demutualisation are included in other shareholders' income/expenses, based on a long term investment return. The difference between actual return and the long term investment return is included in short term fluctuations (note 13). Interim Results for the six months ended 30 June 1999 Notes to the financial statements for the six months ended 30 June 1999 continued 8 Funds under management As at As at As at As at 30 31 30 31 June Decembe June December r 1999 1998 1999 1998 Rm Rm £m £m Insurance linked and non- 212,720 179,918 linked investments 22,373 18,404 Unit trusts 8,189 7,860 Capel Cure Sharp 861 804 28,780 25,698 Old Mutual Asset Managers 3,027 2,629 7,080 8,378 Nedcor Investment Bank 745 857 Asset Managers 44,049 41,936 4,633 4,290 Third party funds 86,815 82,238 Capel Cure Sharp 9,131 8,412 27,440 20,530 Old Mutual Asset Managers 2,886 2,100 23,821 21,743 Nedcor Investment Bank 2,505 2,224 Asset Managers 138,076 124,511 14,522 12,736 394,845 346,365 Total funds under management 41,528 35,430 9 Non-operating items Non-operating items in the six months to 30 June 1999 represent a profit of £20million (R193 million) arising from the sale of Nedcor's NedTravel business, offset by a provision of £4 million (R39 million), made in the UK, associated with the withdrawal of the Group from the UK life assurance market. 10 Taxation Pro Pro forma forma 6 year to 6 year to months months to 30 31 to 30 31 June December June December 1999 1998 1999 1998 Rm Rm £m £m 3 11 United Kingdom - 1 496 762 Overseas 51 84 499 773 Total 51 85 Tax on banking, general insurance and asset management business has been calculated using the relevant standard rates of corporation tax in each jurisdiction. The standard 1999 corporate tax rate in South Africa is 30% (1998: 35%). Tax on life assurance profits in South Africa has been based on the anticipated long term business fund tax surplus at an effective tax rate for the year ending 31 December 1999. The tax liability at 31 December 1999 will, however, largely depend on investment values at 31 December 1999, which may be different from values assumed in arriving at the charge for the six months ended 30 June 1999. Accordingly, the half year tax position may not be representative of the final position at 31 December 1999. Notes to the financial statements for the six months ended 30 June 1999 continued 11 Earnings per share The basic earnings per share shown in the consolidated profit and loss account is calculated by reference to the retained profit of £601million (R5,916 million) for the six months ended 30 June 1999 and the weighted average of 2,971 million shares in issue during the six months ended 30 June 1999. In accordance with merger accounting principles, it has been assumed that the number of shares issued as a result of the self-investment transaction and on demutualisation were in issue throughout the entire six months ended 30 June 1999. Pro forma earnings per share calculations have also been based on this number of shares in issue. Adjustments made to earnings and number of shares in issue to calculate the earnings per share based on a long term investment return are shown below. Pro Pro forma forma 6 year to 6 year to months months to 30 31 to 30 31 June December June December 1999 1998 1999 1998 Rm Rm £m £m 5,916 (920) Retained profit/(loss) for 601 (101) the financial period (4,119) 3,641 Short term fluctuations net (419) 401 of minority interest Retained profit before short 1,797 2,721 term fluctuations in 182 300 investment return Number of shares Date of issue (millions) Shares in issue at 1 1 January 1999 Self-investment 26 February 1999 316 transaction Issue of shares on 11 May 1999 2,654 demutualisation Total shares in issue 2,971 at 30 June 1999 Additional capital July 1999 473 raised on listing Total shares in issue 3,444 at 31 July 1999 Diluted earnings per share is calculated to reflect the impact of shares held in an Employee Share Ownership Plan, which on conversion will have a dilution effect of 39 million shares. Old Mutual plc shares held by policyholders' funds (316 million) are included in the earnings per share calculation reflecting the policyholders' economic interest in these shares. OLD MUTUAL PLC Interim Results for the six months ended 30 June 1999 Notes to the financial statements for the six months ended 30 June 1999 continued 12 Equity shareholders' funds The effect of the demutualisation on equity shareholders' funds together with other movements in the period is shown below. Opening equity shareholders'Share Share Profit& £ millions funds Capital PremiumLoss Total Opening equity 1,588 - - - 1,588 shareholders' funds Self-investment - 32 24 348 404 transaction Issue of the shares on demutualisation (1,588) 265 333 990 - Retained profit for the - - - 601 601 period Exchange fluctuation - - - 123 123 Closing equity - 297 357 2,062 2,716 shareholders' funds Opening equity Shareholders'Share Share Profit& Rand millions funds CapitalPremium Loss Total Funds for future appropriations 15,527 - - - 15,527 Self-investment - 318 235 3,401 3,954 transaction Issue of shares on demutualisation (15,527) 2,646 3,328 9,553 - Retained profit for the period - - - 5,916 5,916 Exchange fluctuation - - - 408 408 Closing equity shareholders' funds - 2,964 3,563 19,278 25,805 In addition to equity shareholders' funds, the fund for future appropriations at 31 December 1998, as disclosed in the Prospectus, included £6 million (R57 million) relating to the Group's UK life assurance subsidiary. This amount has been excluded from equity shareholders' funds and is separately classified in the balance sheet. The self-investment transaction relates to the issue of shares by Old Mutual plc in exchange for equity investments previously held for the benefit of policyholders. These equities included a 15% interest in the Nedcor group. On demutualisation of the South African Mutual Life Assurance Society on 11 May 1999, Old Mutual plc issued shares to eligible policyholders and others in consideration for a proprietary interest in the Old Mutual Group. Notes to the financial statements for the six months ended 30 June 1999 continued 13 Long term investment return Group operating profit is stated after allocating an investment profit in the insurance businesses based on a long term investment return. The long term investment return is based on achieved real rates of return adjusted for current inflation expectations, and consensus economic and investment forecasts. The return is applied to assets held in the shareholders' funds of the life assurance companies excluding any subsidiary undertakings. The long term return throughout the period has been assumed to be 14% per annum. Short term fluctuations in investment return represent the difference between the investment return on shareholder funds in the period and the return based on a long term investment return. They are made up as follows: Pro Pro forma forma 6 months year to 6 year to months to 30 31 To 30 31 June December June December 1999 1998 1999 1998 Rm Rm £m £m 3,062 (2,834) Life assurance 311 (312) 1,158 (1,495) General insurance 118 (165) 468 N/A Shareholders' funds 48 N/A 4,688 (4,329) Short term fluctuations 477 (477) in investment return 14 Post balance sheet events In connection with listing its shares on the London and other stock exchanges in July 1998, Old Mutual plc issued a total of a further 473 million shares at an aggregate premium of £521 million. Had these shares been in issue throughout the period ended 30 June 1999 and invested as a deposit rate of 4.875%, the basic earnings per share for the six months ended 30 June 1999 would have been 18p (R1.74) per share. 15 Reconciliation of operating profit to net operating cashflows 6 months 6 months to 30 to 30 June June 1999 1999 Rm £m 6,634 Profit from insurance and other activities 675 968 Profit from banking activities 98 7,602 Profit on ordinary activities before tax 773 (4,324) Unrealised investment gains (440) (659) Insurance and other activities non cash (66) flow items 962 Banking non cash flow items 98 (3,623) Net cash outflow from other banking (369) activities (42) New cash outflow from operating activities (4) Report of the auditors 1999 Interim Report Independent review report by KPMG Audit plc to Old Mutual plc Introduction We have been instructed by the company to review the financial information set out on pages 5 to 19 and we have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information. Directors' responsibilities The interim report, including the financial information contained therein, is the responsibility of, and has been approved by, the directors. The Listing Rules of the London Stock Exchange require the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual accounts except where they are to be changed in the next annual accounts in which case any changes, and the reasons for them, are to be disclosed. Since there were no preceding annual accounts, the interim reports has been prepared on the basis set out in note 1. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4: Review of interim financial information issued by the Auditing Practices Board. A review consists principally of making enquiries of group management and applying analytical procedures to the financial information and underlying financial data and, based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review is substantially less in scope than an audit performed in accordance with Auditing Standards and therefore provides a lower level of assurance than an audit. Accordingly we do not express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 30 June 1999. KPMG Audit plc Chartered Accountants London Supplementary information on the embedded value of Old Mutual plc Embedded value as at 30 June 1999 The embedded value of Old Mutual plc as at 30 June 1999 is set out below, together with the corresponding position at 31 December 1998. As at As at As at As at 30 31 30 31 June December June December 1999 1998 1999 1998 Rm Rm £m £m 25,805 15,527 Equity shareholders' funds 2,716 1,588 Excess of market value of Nedcor and Mutual & Federal over their 10,651 5,173 net asset value 1,120 529 Reversal of provision for write- - 2,144 off of internally generated - 219 goodwill Adjustment to include UK and offshore life subsidiaries on a (255) (211) statutory solvency basis (27) (21) 36,201 22,633 Adjusted net worth 3,809 2,315 Value of in-force business before 9,205 8,300 cost of solvency capital 968 849 (806) (759) Cost of solvency capital (85) (78) 8,399 7,541 Value of in-force business 883 771 44,600 30,174 Embedded value 4,692 3,086 The embedded value is an actuarially determined estimate of the economic value of a life assurance company, excluding any value which may be attributed to future new business. The embedded value is the sum of the adjusted net worth and the present value of the projected stream of future after-tax distributable profits from the life assurance business in-force at the valuation date, adjusted for the cost of holding an appropriate level of solvency capital. The value of new business written in a period is the present value, at the point of sale, of the projected stream of after-tax profits from that business. The embedded value of Old Mutual plc is the sum of its adjusted net worth and the value of in-force life business in its life assurance subsidiaries. The adjusted net worth of Old Mutual plc is equal to the equity shareholders' funds adjusted to reflect listed subsidiaries at market value, and UK and offshore life assurance subsidiaries on a statutory solvency basis. The embedded value does not include a market valuation of asset management subsidiaries (including asset management business written through our life assurance companies), nor of any other in-force non-life insurance business of the Group. The embedded value at 30 June 1999 has been calculated on a basis consistent with that used in determining the value at 31 December 1998 that was published in Part 9 of the Prospectus dated 19 May 1999. A summary of the assumptions used to calculate the embedded value is given below. The embedded value includes the capital of £404 million (R3,954 million), arising from the self-investment in the first quarter, which involved the issue of 316 million shares to the policyholders' funds in the life assurance companies, but excludes the further capital raised at the time of listing, which occurred after 30 June 1999. Supplementary information on the embedded value of Old Mutual plc continued The risk discount rates for South African business were 19.5% and 20.5% at 30 June 1999 and 31 December 1998 respectively. The reduction in the discount rate is consistent with reduction in the investment return assumptions as set out below. For non-South African operations appropriate discount rates have been chosen on a basis consistent with that for South Africa. The results have been reviewed by Tillinghast-Towers Perrin who have confirmed to the Directors that the methodology and assumptions used to determine the embedded value are reasonable and that the embedded value profits are reasonable in the context of the operating performance and experience of the life assurance business during the six months to 30 June 1999. Embedded value profits The change in the embedded value over the period, adjusted for the capital raised, provides a measure of the Group's performance during the period, and is known as the embedded value profits. The after tax embedded value profits for the six months to 30 June 1999 are set out below. 6 6 months months to 30 to 30 June June 1999 1999 Rm £m 44,600 Embedded value at 30 June 1999 4,692 (30,174) Embedded value at 1 January 1999 (3,086) 14,426 Increase in embedded value 1,606 (3,954) Less capital raised (404) 10,472 Embedded value profits 1,202 The components of these profits are set out below. 6 months 6 months to 30 to 30 June June 1999 1999 Rm £m 132 Profits from new business 13 Profits from existing business: 688 Expected return 70 32 Experience variances 3 Additional pensions mis-selling (516) provision (52) 336 Operating profits 34 880 Investment variances 90 9,262 Investment return on adjusted net 942 worth (6) Exchange rate movements 136 10,472 Embedded value profits 1,202 The profits from new business shown in the above table comprise the value of new business written during the period accumulated to the end of the period. Supplementary information on the embedded value of Old Mutual plc continued Value of new business The amounts of new recurring and single premium life assurance business written by the group in the six months to 30 June 1999 and the value of the new business at the point of sale are set out below. The value of new business has been determined using the same assumptions and discount rates as those used to determine the embedded value at 30 June 1999. Six months to 30 June 1999 Six months to 30 June 1999 New premiums Value New premiums Value Recurring Single Recurring Single Rm Rm Rm £m £m £m 908 5,820 144 Value before cost of 92 592 15 capital (20) Cost of solvency (2) capital 124 Value of new business 13 Summary of Assumptions The principal assumptions used in the calculation of the value of in-force business and the value of new business are set out below. The pre-tax economic assumptions used for South African business are shown below. South Africa 30 June 31 December 1999 1998 Fixed interest return 15.5% 16.5% Equity and property 18.5% 19.5% return Expense inflation 11.5% 12.5% Rand amounts were converted to Sterling at the following exchange rates: Rand per £1 Sterling As at 30 June 1999 9.5075 As at 31 December 1998 9.7763 6 months to 30 June 1999 9.8305 (average) Appropriate economic assumptions for the non-South African operations were chosen on bases consistent with those adopted in South Africa. Current tax legislation has been assumed to continue unaltered. The assumed future mortality, morbidity, and voluntary discontinuance rates are based, as far as possible, on analyses of recent operating experience. Assumed future expenses are based on current levels of expenses. Projected expense savings arising from Project 500 have not been taken into account. The impact of any expense savings in future years will be reflected in higher embedded value profits as and when they are realised. The future expenses attributable to life assurance business do not include group expenses incurred at the holding company level. Supplementary information on the embedded value of Old Mutual plc continued Future investment expenses were based on the current scales of fees payable by the life assurance companies to the asset management subsidiaries. To the extent that these fees include profit margins for the asset management subsidiaries, these margins have not been included in the value of in-force business or the value of new business. The effect of increases in premiums over the period for policies existing as at 31 December 1998 has been included in the value of in-force business only where such increases are associated with indexation arrangements. Other increases in premiums in existing policies are included in the value of new business. This Interim Report is also available on the Company's website at www.oldmutual.plc.uk. Further copies may be obtained from Investor Relations, Old Mutual plc 3rd Floor, Lansdowne House, 57 Berkeley Square,London W1X 5DH. Telephone +44 (020) 7596 0100 Fax +44 (020) 7569 0221

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