Final Results - Year Ended 31 December 1999 - Pt 1
Old Mutual PLC
8 March 2000
PART 1
OLD MUTUAL PLC
Preliminary Results for the year ended 31 December 1999
HIGHLIGHTS
* Operating profits based on a longer term rate of return
increased by 23% to £656 million (1998: £534 million).
(Profit figures for the comparative 12 months to 31 December
1998 are given on a pro forma basis reflecting demutualisation
and change in year end)
* Profits attributable to shareholders exceed £1 billion.
* Life assurance operating profits of £426 million from
continuing operations, an increase of 47%.
* Adjusted earnings per share (smoothed) increased 21% to 12.2p
(1998: 10.1p).
* Proposed final dividend of 2p is effectively covered 3.0 times
on an annualised basis.
* Growth in life assurance new business embedded value profits to
£75 million.
* Embedded value increased 74% to £5.4 billion, equivalent to
157p per share.
* Asset management profits up 109% to £48 million.
8 March 2000
Mike Levett, Chairman & Chief Executive commented:
'I am delighted to be able to report on a year of substantial
progress at Old Mutual. We successfully made the transition from
a mutual life society to an internationally listed financial
services group, focused on delivering shareholder value.
Progress was achieved in our South African businesses and, since
our July listing, we have taken the first steps to create a
platform for our international expansion.'
OLD MUTUAL PLC
Preliminary Results for the year ended 31 December 1999
CHAIRMAN'S STATEMENT
Our maiden set of results as a public company for the year 1999
reflect the substantial progress achieved in the six months
since we became a listed company.
As a life assurance company we measure progress against
achievement of a smoothed profit performance, eliminating short-
term fluctuations in the market values of our holdings of equity
investments which would otherwise distort the true performance
in the businesses. Smoothed operating profit in sterling rose by
23% to £656 million (1998: £534 million) and smoothed earnings
per share increased by 21% to 12.2p. New business embedded value
profits in our life assurance business were also highly
satisfactory, at £75 million, compared to a loss of £4 million
for the 6 months to December 1998.
The overall uplift in embedded value to £5.4 billion, an
increase of 74% over the embedded value of £3.1 billion at the
end of 1998, was struck after new capital of £559 million raised
at the time of listing and £404 million new capital arising from
policyholder self-investment at the beginning of the year.
Dividend
The directors are proposing a final dividend for the year of
2.0p per share. As outlined in our prospectus, this represents
one half of the total dividend of 4.0p per share which the Board
would have expected to recommend had the Group been listed
throughout the year. This represents an increase of 33% on the
notional figure for the previous year (3.0p per share) indicated
in our prospectus. The annualised rate of dividend would be
three times covered by the smoothed earnings per share of 12.2p.
As we said in our prospectus, the Board intends to follow a
dividend policy aimed at achieving stable growth in dividends
over time, measured against the Group's underlying earnings and
cash flow. We plan to pay an interim dividend in November 2000,
which would represent approximately one third of the total
anticipated dividend for the year to December 2000.
Profits from operations
Whilst our core South African businesses continued to perform
strongly in 1999, their results when translated from Rand into
sterling were depressed by the fall of the average £/Rand
exchange rate during 1999 compared to 1998 by a factor of 8%.
Our life operating profits of £426 million from continuing
operations represent an increase of 47% in sterling terms over
the pro forma 1998 result. A key feature of the past year has
been the outstanding performance of our core South African life
operations. The performance in 1999 was the result of management
action during the year to introduce market-leading new products,
to revise pricing of new business, to develop a strong focus on
cost containment, and to an outstanding investment management
performance in a year of exceptional stockmarket returns.
Total funds under management increased to £45 billion, £19
billion of which is managed outside South Africa. Profits from
asset management, at £48 million, were up 109% over the year.
Old Mutual Asset Managers (OMAM) in South Africa capitalised on
a successful year of investment performance, winning a record
£1.6 billion of new third party funds. Our unit trusts in both
South Africa and Europe topped a successful year with market-
leading global technology funds. Shortly after the end of the
year we announced an offer for Gerrard Group to make us a
leading private client wealth manager in the UK. When
completed, this acquisition will bring our total UK funds under
management to more than £27 billion.
Project 500 - Driving down costs
The strong profit performance reflected our efforts to reduce
the cost base of the organisation through our Project 500
programme. By the end of the year we had more than achieved the
initial objective of Project 500, by putting actions into place
that are expected to deliver annual cost savings in excess of
R500 million (£50 million).
Subsidiaries
Nedcor, our listed banking subsidiary on the JSE, recently
reported a 20% pro forma rise in operating income to £296
million before tax, non-recurring deductions for general
provisions, and asset write-downs and income from associates.
After charges against operating income under UK GAAP, pre-tax
profit on banking business, including income from associates,
was £210 million, compared to £287 million for the previous
year.
During the year Nedcor greatly extended its focus on emerging
information technologies in partnership with Dimension Data
International Ltd. which after the year end acquired the
European networks and e-commerce provider, Comparex Networks.
Omnilink, a partnership between Old Mutual, Nedcor and Dimension
Data, further developed during the year as a leading provider of
backbone virtual private networks to industry and commerce.
Nedcor's management further strengthened capital and reserves of
the bank during the year, with its capital ratio rising to 12%.
Tight cost controls held expenses growth to under 2% and
continued to drive down the cost/income ratio from 56.2% to
51.7%,
General insurance profits at our JSE-listed subsidiary, Mutual &
Federal (M&F), were adversely affected by underwriting losses,
although it is pleasing to note that the company returned to
underwriting profit in the second half as a result of
adjustments to premium levels. M&F returned £144 million of
capital to shareholders by way of a special dividend in
September 1999.
Pre- and post-tax profits
Old Mutual's pre-tax result, on a statutory reporting basis,
benefited from strong investment returns on shareholder assets,
largely reflecting the recovery in the South African equity
market during 1999. This produced an excess return of £778
million over the smoothed return used to calculate operating
profits.
During the year a revised basis for the taxation of South
African life assurance companies was introduced, with effect
from January 2000. The effect of this change is reflected in our
results for 1999. A transitional tax in 1999 on the move to the
revised basis has led to an overall increase in the Group's
effective tax charge to 25% (of smoothed operating earnings).
In our first year as a public company it is a noteworthy
milestone that profits after tax were over £1 billion, from
which our maiden dividend of £69 million is proposed to be paid.
Technology
During the year we further developed our portfolio of emerging
businesses. We partnered with Computer Sciences Corporation to
outsource non-core infrastructure systems management in order to
focus our investment on new systems development and integration
initiatives. Across the Group, administrative intermediary and
customer support systems are being systematically upgraded and
transportable platforms developed to exploit synergies between
operations worldwide. In e-commerce Old Mutual Unit Trusts in
South Africa is already operating an end-to-end internet
delivery channel. Other Group companies are re-focusing on
developing further our ability to leverage the low cost base we
have established through systems leadership in South Africa to
provide life and wealth management products, and developing e-
commerce distribution and service delivery channels,
internationally.
Developments since the year end
In January 2000 we announced a recommended bid for Gerrard Group
plc, a leading wealth management and financial services company
in the UK. The bid has been declared unconditional as to
acceptances and now awaits final regulatory approval. Gerrard
provides an excellent opportunity to benefit from increased
scale.
By merging Gerrard's private client business, Greig Middleton,
with that of Capel Cure Sharp, our existing subsidiary, the
prospective enlarged company will occupy a leading position in
UK private client wealth management, with total UK funds under
management of £27 billion and excellent prospects for future
growth.
We agreed at year end the disposal of our UK Life business, via
two separate transactions with XL Mid Ocean and Century Life.
Once completed we expect this will release approximately £65m of
capital. An exceptional book gain in net assets of £15 million
was taken in 1999.
Board appointment
In January 2000 Jim Sutcliffe was appointed to the Board of Old
Mutual plc and joined the Executive Management Team, taking
specific responsibilities for the Group's life assurance
businesses. Jim has a significant track record in the industry
in the UK, South Africa, and the USA. I welcome him to Old
Mutual. His international experience will be invaluable to our
management in seizing the many opportunities that we can see
ahead.
Outlook
Our strong 1999 results demonstrate our ability to deliver
shareholder value. We will continue to strive to drive value
forward by enhancing the performance of our core businesses in
southern Africa, growing profitability and reducing costs across
all of our businesses; and seeking to add new business
opportunities internationally in our chosen areas of operation.
I am confident that Old Mutual has both the will and the
potential to deliver further substantial progress in the coming
years.
MIKE LEVETT
Chairman & Chief Executive
ENQUIRIES:
Old Mutual plc Tel: + 44 20 7569 0100
Mike Levett, Chairman
Eric Anstee, Finance Director
Jim Sutcliffe, Chief Executive, Life
James Poole, Director, Investor Relations
College Hill Tel: + 44 20 7457 2020
Alex Sandberg
Mark Garraway
Gareth David
Nicholas Williams
College Hill South Africa Tel: + 27 11 447 3030
Graham Fiford
Tony Friend
Further details on Website www.oldmutual.com
OLD MUTUAL PLC
Preliminary Results for the year ended 31 December 1999
REVIEW OF OPERATIONS
Old Mutual's business comprises life assurance in Southern
Africa, asset management in Southern Africa and the UK, banking
through its 53% subsidiary Nedcor Ltd, general insurance through
its 51% interest in Mutual & Federal Investments Ltd., and other
life and asset management businesses internationally.
LIFE ASSURANCE
Highlights
The year was characterised by strong growth in operating profits
and a significant turnaround in new business profitability.
Life operating profits (before tax and based on a longer-term
rate of return on shareholder fund portfolio investments)
increased 120% to £376 million. Profits were boosted by one off
items, totaling approximately £50 million, resulting primarily
from investment market conditions in the year. This offset the
loss of £50 million in respect of our discontinued UK life
business. The life operating profit is equivalent to 1.5% of
insurance funds at 31 December 1999, which compares very well
with similar companies around the world. Insurance funds, a
primary driver of profits, grew by 30% to £24 billion as at the
year end.
Embedded value added by new business was £75 million compared
with a loss of £4 million in the six months to 31 December 1998.
This is an accumulated value as at the end of the year, and is
on the 1999 South African tax basis. Restating the value on the
new South African tax basis, including corresponding pricing
changes, the new business embedded value would be £66 million.
Besides the recovery in the South African stock market, the
strong improvement in operating profits and embedded value added
by new business was the result of a very successful cultural
shift from a mutual environment to a shareholder environment.
This was evidenced by the effort put into eliminating
unprofitable business, carefully managing costs (particularly in
respect of new business related expenses), improved new business
pricing and carefully managing all sources of profit. Expenses
were held at 1998 levels, and office staff numbers decreased by
over 10%.
South African Individual Business
The key features of the year for our Individual Business were
strong growth in operating profits to £168 million (before tax
and excluding investment return on shareholder funds) and a
significant turnaround in new business embedded value
profitability to £36 million (including expected return to the
end of the year), on the back of good volumes of single premium
business, particularly for our Investment Frontiers product
range, which was introduced towards the end of 1998. The market
for individual investment products has been characterised by a
trend towards flexible investment products. Our Investment
Frontiers product range is ideally positioned to benefit from
this trend, with a wide range of innovative investment
offerings, which we further extended during the year.
Recurring premium growth for new business sold through affinity
groups was also good, thanks to the success of our new renewable
term risk product, the increased productivity of our sales force
in this market, and to cross-selling initiatives with People's
Bank (a subsidiary of Nedcor) and the JD Group (a South African
retailer). This product is carefully structured to cope properly
with the effect that AIDS will have in this market.
Sales volumes of other recurring premium new business have
declined. The consequences of the spike in interest rates and
the stock market decline in 1998 continued to affect consumer
confidence in 1999. We took steps to improve profitability by
restructuring our Agency Distribution channel and branch
network, by cutting back on other new business related expenses
and by increasing minimum premiums for several products. In the
short run this has had a negative effect on new business
volumes, but has built a sound platform for future growth. We
have also continued to invest in the development of alternative
distribution channels, such as direct distribution and e-
commerce, where our primary website now receives over 30,000
visits per month.
We continue to use technology to improve business efficiency. In
1999, important enhancements were made to our client record and
data-warehousing systems. New network technology improved
messaging capability between our diverse platforms and systems.
Our Affinity Group division significantly upgraded its policy
administration system. Our call centre was the subject of
intense activity around the time of our demutualisation and
listing, with calls reaching 26,000 per day. We have built upon
this capability to enhance our client servicing and reduce
costs.
South African Group Business
Our Group Business unit has undergone a significant
restructuring of its business operations in 1999 in recognition
of the transforming marketplace. This has significantly reduced
its cost base, while its retirement fund administration services
have been re-priced. Pre-tax operating profits (excluding
investment return on shareholder funds) increased to £67 million
and embedded value added by new business was maintained at £32
million (including expected returns to the end of the year), on
the back of single premiums of £521 million, and recurring
premiums of £21 million, excluding Group market linked business.
The ramifications of the 1998 stock market decline continued to
be felt in 1999. New investments in our Guaranteed Fund product
reduced noticeably, as many retirement funds retained their net
cash flow on short term deposit. The Guaranteed Fund product
did, however, receive new single premiums of £170 million from
retirement funds which sold their free Old Mutual shares and
invested the proceeds in their Guaranteed Fund policies.
The 1998 events triggered a change in outlook by the market to
retirement fund investment products. With the predominance of
defined contribution funds, and with many of these funds
starting to offer member investment choice, the market decline
highlighted the inappropriateness of the traditional guaranteed
fund product for this market. We have accordingly developed and
introduced two new smoothed bonus products, CoreGrowth and
Genesis. These products have attracted significant new business,
and by the end of 1999 had investments totalling £225 million.
Another new product introduced in 1999 was Platinum Pensions, a
with-profit life annuity. This product succeeded our OptiPlus
product range, which was closed to new business after the market
fall. The new product has been structured to ensure more
efficient use of capital and to build on the success of
Optiplus, and attracted new business of £125 million by the end
of the year.
Our risk business continued to produce acceptable underwriting
results in a highly competitive market. We have a substantial IT
project underway to improve service quality and productivity in
our retirement fund administration area. This together with the
restructuring of the business in 1999 will place the business on
a sound basis for future growth.
International Business
Outside South Africa, our African life businesses operate in
underdeveloped markets. They suffered difficult economic
circumstances during 1999, typified by high inflation and high
interest rates. Old Mutual maintains a leading market position
in these markets, holds a strong brand and is well positioned to
take advantage of any return to stable economic conditions.
Our life operations in the UK, Guernsey, the Isle of Man, Hong
Kong, Dublin and Bermuda underwent a strategic review in 1999.
As already reported, this resulted in the withdrawal of the
Group from its UK life business, together with the sale of the
Group's distribution business, Pioneer. Growth opportunities
remain in the expatriate market and in other emerging markets.
ASSET MANAGEMENT
Old Mutual Asset Managers
Total assets under management by OMAM Group were £27.1 billion
at year-end. This represents strong growth of 44% over the year,
driven by a combination of excellent new business inflows and
buoyant investment markets.
Relative investment performance of OMAM's funds and products was
highly competitive. Largely as a result of this, OMAM achieved
an industry record for net new business inflows in South Africa
amounting to £1.6 billion of new third party institutional
mandates. OMAM also won third party mandates from US and UK
institutions.
OMAM in South Africa added to its list of achievements in 1999
by being rated as the top fund management company in South
Africa by the management of a very broad spread of the listed
corporations in the 1999 Reuters Survey of Global Emerging
Markets.
Competition for funds in South Africa remains strong. The
institutional market continues to be influenced by the effects
of retirement funds shifting from defined benefit to defined
contribution schemes. In the retail market, investors take a
more active interest in their contractual and discretionary
savings. Product innovations and technology developments create
new competitive dynamics in the quest to satisfy investor needs
profitably.
OMAM will aim to develop its operations through a combination of
organic growth, selective acquisition and strategic alliances.
Unit Trusts
During the year there were a number of structural changes in the
OMAM Group. Old Mutual Fund Managers (OMFM), which administers
and markets a range of UK-registered unit trusts, was merged
with OMAM (UK) and moved into the latter's offices in the City
of London. This created a unit trust operation with over £3
billion of assets under management. OMAM (Zimbabwe) was created
by separating the asset management business from the Life
Company in that country.
OMUT, our unit trust management business in South Africa, had a
very successful year, attracting £600m of new funds from
investors and increasing its market share to over 19%, excluding
money market funds.
In March 1999, OMUT launched a new Global Technology Fund, which
attracted R875million (£88million) in new money and delivered a
62% return in the period ended 31 December 1999, to become the
top performing new fund in the industry. In July 1999 another
launch of two funds-of-funds products with different risk/reward
profiles, attracted a further R337million (£34million).
Capel Cure Sharp
Total funds under management at the Capel Cure Sharp Group (CCS)
at the year end were £9.6 billion, an increase of 5% over 1998
of which 53% is now managed on a discretionary basis. CCS's unit
trust funds passed through the £1 billion mark during the year.
In November 1999 CCS Unit Trust group also launched a Global
Technology Fund, which to date has attracted investment of £40
million and has delivered a return of 68% since launch,
comfortably beating the benchmark index MSCI Global Technology.
Over the year the performance of the unit trusts was excellent,
with 15 of CCS's 16 funds producing above average performance
and with ten in the first quartile.
The UK high net worth market is growing rapidly and attracting a
larger customer base, especially of younger and more financially
sophisticated individuals.
During 1999 we completed the merger of Albert E Sharp with Capel-
Cure Myers, achieving annualised cost savings of £16 million as
part of Project 500. The year also saw the development of a web-
based communication channel, giving clients on-line access to
their portfolios. This site is now being further developed in
line with CCS's individual lifelong wealthcare strategy.
In October 1999 we launched Albert E Sharp Securities ('AESS')
to develop the Group's institutional stockbroking and corporate
finance business in the small to medium cap market. AESS will
focus on industries and companies that are either growing or in
the process of change. AESS began market making in February
2000.
OLD MUTUAL PLC
Preliminary Results for the year ended 31 December 1999
REVIEW OF OPERATIONS
Acquisition of Gerrard Group plc
Through Capel Cure Sharp, Old Mutual already has a leading
presence in the high net worth market. On 18 January 2000 Old
Mutual announced a recommended offer for Gerrard Group plc, a
leading specialist banking and private client business (Greig
Middleton). The Group believes it is particularly well placed
to capitalise on the growth of the UK high net worth market.
Galaxy Portfolio Services
Galaxy was formed in 1999 with the merger of Old Mutual
Investment Services and Nedcor Investment Bank Investment
Product Services (Pty) Limited. Assets under administration more
than doubled from £400 million at the beginning of the year to
£900 million as at 31 December 1999. Our effective interest,
including the stake held via Nedcor Investment Bank Holdings
Ltd, is 91%.
In August, Galaxy launched an Investment Advisory Service, which
created the facility for clients to have their assets managed by
professional investment managers, in accordance with
predetermined mandates representing various risk profiles.
During the first five months to 31 December 1999, these mandates
attracted nearly £50 million of client assets. Galaxy also
launched a range of offshore foreign currency funds which enable
both new and existing clients to diversify into a range of
Dollar and Sterling funds managed by third parties.
BANKING
Nedcor again achieved excellent results, with headline operating
earnings, excluding supplemental additions to general risk
provisions and prudent write-downs in respect of central
Johannesburg properties of £94 million and including income from
associates, increasing from £287 million to £309 million.
Earnings per share at Nedcor Group level increased by 25% and
average total assets increased by 13%.
Retail banking had a particularly satisfactory year with market
share growth experienced in home loans, credit cards and
investment products. The Nedcor group's cost to income ratio
reduced from 56.2% to an industry leading benchmark in South
Africa of 51.7%. The hangover effects of the high interest rate
environment were reflected in a 130% increase in the provisions
compared to last year.
The bank remains well capitalised. Exceptional gains of £66
million were realised on sale of the Group's travel business and
sale of 15% in Nedcor Investment Bank upon its listing,
assisting Nedcor to achieve a capital adequacy ratio target of
12% during the year. Last year Nedcor Investment Bank
contributed £50 million to Nedcor's bottom line 1999 results.
This was 25% higher than last year, in spite of a general
slowdown in corporate activity.
During the year Nedcor made an approach to Standard Bank to
propose a merger at a ratio of one Nedcor share for 5.5 Stanbic
shares. Nedcor is awaiting the outcome of its application for
regulatory approval and of an action in the South African courts
relating to regulatory jurisdiction before making an offer to
Standard Bank's shareholders. Old Mutual continues to support
the proposal.
Investment in strategic alliances continued during the year,
with Nedcor commencing its joint venture with Capital One in the
US, aimed at exploiting electronic technology to sell additional
products. In September, Nedcor invested a further £140 million
in Dimension Data International (DDIL).
Nedcor also floated 15% of its interest in Nedcor Investment
Bank (NIB) on the Johannesburg and Namibian stock exchanges
which raised £100 million in new capital. The float provides NIB
with a significant brand building opportunity whilst enabling
NIB to provide a share option incentive mechanism for key staff.
In December, NIB acquired the commercial division of Edward
Nathan & Friedland, a leading corporate law firm in South
Africa, which represents NIB's strategic response to the
convergence of corporate advisory services in the South African
marketplace. This transaction gives NIB a significant tier-one
corporate finance capability and the possibility of additional
deal flow and synergies generating a significant source of
future growth.
Nedcor's goal is to develop a globally competitive and client-
focused bank to take advantage of improvements in banking
technology and enhanced e-commerce capability. Domestically
Nedcor is a national champion in banking in South Africa.
Nedcor's international strategy concentrates on areas where both
barriers to entry and capital requirements are lower and
therefore much effort has been directed toward the virtual
banking and technology arenas, again exploiting its vision of
the convergence of banking and technology to create a unique
platform for future growth.
GENERAL INSURANCE
The general insurance market in South Africa continues to suffer
from the effects of intense competition, deteriorating claims
experience and higher claims costs which has led to a decline in
underwriting profitability across all classes. Fraudulent claims
activity coupled with high costs of crime, added to rising
accidents and fire claim costs, have had adverse consequences
for the South African general insurance industry.
For Mutual & Federal, which is one of the leaders in the market
with a 12% market share, underwriting results were disappointing
this year, relative to past performance. As a result earnings
fell to £59 million from £86 million in 1998.
A programme to raise rates during the year was partially
successful in restoring underwriting profitability by year end,
but margin pressure remains. Underwriting performance remains,
however, favourable by international standards and market-share
was retained despite growing competition. A strict control over
supplier costs ensured that increases in the average claims
costs were held below the headline South African inflation rate
of 8%.
Mutual & Federal was pleased to receive the award of South
African Financial Services Intermediaries Association Commercial
Insurer of the Year for 1999. In mid-1999 Duff & Phelps rating
agency confirmed Mutual & Federal's AAA credit rating.
OLD MUTUAL PLC
Preliminary Results for the year ended 31 December 1999
FINANCIAL REVIEW
Introduction
Operating profit before tax for our life assurance business is
determined using a modified statutory method of accounting for
life profits and excludes the future profitability of in-force
and new business. Operating profits before tax also include the
results for the Group's listed banking and general insurance
subsidiaries before minorities and the results of the asset
management operations in full.
Operating profits for the life and general insurance companies
are reported on the basis of a longer term investment rate of
return, which smoothes out the impact of short term fluctuations
in investment returns on shareholder funds.
This statutory basis for calculating earnings is supplemented by
a separate reporting of embedded value profit. Embedded value
profit is a realistic method of profit reporting and reflects
more accurately the underlying performance of the Group's life
assurance business.
An embedded value provides an actuarially determined estimate of
the economic value of a life assurance company. It represents
the sum of the shareholders' net assets at market value and the
present value of the future after tax profit from the life
business written and in force at the valuation date, adjusted
for the cost of holding an appropriate amount of solvency
capital. The change in the embedded value over the period,
adjusted for any capital raised and dividend provided for,
provides a measure of the performance of a life assurance
operation, referred to as the embedded value profit.
Financial Performance
Operating profits (based on the longer term rate of return)
before tax increased 23% which included an outstanding
performance from the Group's core life insurance operations
where operating profits from continuing businesses of £426
million represented an increase of 47% over 1998 pro forma of
£289 million. High investment returns in South Africa have
resulted in short term fluctuations being strongly positive.
Total short term fluctuations for the Group amounted to £778
million. The focus on cost containment has also significantly
contributed to the improved result.
The asset management businesses made a strong contribution to
operating profits, with the overall result of £48 million
representing an increase of 109% over 1998's £23 million. The
1999 profits benefited both from a strong performance of OMAM
(SA) which added £1.6 billion funds under management during the
year and the cost savings achieved of £16 million in the
integration of the UK private client businesses Capel Cure-Myers
and Albert E Sharp.
Funds under management for the Group totalled £45 billion. This
represents a 29% increase over 1998. Of this amount at the year
end OMAM group managed funds of £27.1 billion, including £19.3
billion of life funds, third party institutional funds of £5.1
billion and unit trusts of £2.7 billion.
Nedcor's banking underlying results were strong at £309 million
before the impact of non-recurring deductions for general
provisions and asset writedowns. These adjusted earnings
exclude both the gains on the sale of Nedtravel (£20 million)
and the listing of 15% of investment banking subsidiary NIB (£46
million) which are carried below the line as exceptionals and
the non recurring deductions for general provisions and property
portfolio writedowns. These provisions, charged by Nedcor
against the gains, were grossed up in the Group results and
deducted from operating earnings to arrive at a banking pre-tax
profit of £210 million (1998: £287million).
From June 2000 the Bank for International Settlements, under the
Basle agreement on Banking Supervision, proposes to impose an
extra 1% provision on risk weighted assets for all emerging
market banks. The increases in provisions were made with this
target in mind. Overall Nedcor's reserves for bad and doubtful
debts now stand at 3% of average advances. In addition
retention of profit meant that Nedcor's capital ratio was 12% at
year end, making Nedcor one of the best capitalised banks in
South Africa. Start-up losses of £5 million were incurred in the
development of Old Mutual Bank.
Mutual & Federal's result before minorities, at £59 million, was
31% below pro forma 1998 result of £86 million, reflecting tough
underwriting conditions as a result primarily of the higher
incidence of motor accident claims and inadequate rating levels
in the fire account. Results did improve in the second half
however, largely due to rate increases implemented in the second
half year. In September, Mutual & Federal declared a special
dividend of £144 million from excess capital. As a result, the
Group's longer term rate of investment return will be calculated
going forward on a lower level of shareholder funds.
Other shareholders' income/expense comprises the smoothed
investment return on the shareholders' funds outside of the life
assurance and general insurance companies plus returns on funds
raised at listing, totalling £40 million, operating results from
a number of financial services businesses including health, and
corporate costs.
In December 1999 the Group reached agreement to dispose of its
UK life insurance operations to Century Group, following the
reinsurance of its annuity portfolio to XL Mid Ocean. The
transaction has received regulatory approval and awaits consent
of the Court. Results for both 1998 and 1999 have been impacted
by provisions required against pension mis-selling and the
effects of improving annuitant mortality.
The UK life operation has been treated separately in
discontinued operations. The Group has retained provisions of
£38 million against warranties provided to the purchaser in
respect of pension mis-selling, over and above the provisions
held in the company disposed of. The sale and reinsurance
agreement results in a gain of £15 million on book value in 1999
including £10 million in respect of the reinsurance agreement.
However, although the sale gave rise to a gain on book value, it
resulted in an embedded value loss of £12 million.
Profit before tax is declared after additional general risk
provisions and property write-downs by Nedcor, amortisation of
goodwill from the Group's acquisition of Albert E Sharp, and
investment returns in excess of the longer term investment
return.
The effective rate of tax in 1999 was 25%. The Four Funds basis
of life taxation in South Africa was modified with effect from 1
January 2000. Inter alia, the changes reduced the deductibility
of expenses for tax in the policyholders' life funds and the
deductibility of transfers of profit from policyholder funds to
shareholders' funds. The impact of both changes is expected to
increase the effective rate of tax in the South African life
business in future years to about 28%. The 1999 result includes
a transitional charge in respect of the move to this new basis
of £61 million.
The directors have proposed a final dividend for 1999 of 2.0p
per share. On an annualised basis, the 4.0p per share represents
an increase of 33% over the notional annual dividend of 3.0p per
share indicated in the prospectus when we listed.
Embedded Value Profits
Excluding capital raised and dividends provided for, the Group's
embedded value increased during 1999 by £1,434 million. Most of
this growth arose from investment return on the adjusted net
worth, which benefited from high investment returns on
shareholder investments, particularly in South Africa.
Profits from new business written during the year were £75
million, up significantly from a loss of £4 million in the
second half of 1998.
Positive new business embedded value profits were generated by
all the South African life businesses. This improvement was
aided by a recovery from the adverse circumstances that affected
our new business in the second half of 1998 and the first half
of 1999. Investment Frontiers, Platinum Pensions, and investment
in the Guaranteed Fund by some retirement funds of the proceeds
from the sale of their free demutualisation shares contributed
in particular to improved single premium volumes. A focus on new
business cost containment and the introduction of more
profitable new products also made a positive contribution.
The change in the South African tax basis, however, had a
negative impact of £121 million on embedded value profits. This
charge includes provision for the additional tax of £61 million
that will be payable at the end of 2000 on transition from the
old to the new basis. The remaining £60 million also includes
the capitalised value of future additional tax expected to be
paid by shareholders, after making allowance for amounts to be
borne by policyholders.
Experience variances (other than additional provisions for
pensions mis-selling reported at mid-year) and investment
variances were both positive. Exchange rate impacts result from
movement in the average £/Rand exchange rate.
Embedded Value
During 1999 the Group's embedded value rose 74% from £3.1
billion to £5.4 billion. This includes additional capital of
£963 million, £404 million from the policyholder self investment
at the beginning of the year, and £559 million raised in the
course of listing in the middle of the year.
The value of in-force business has increased from £771 million
to £806 million. This increase would have been greater but for
the adverse impact of the exclusion of the discontinued UK life
operations and the inclusion of the effect of the new SA tax
basis.
The embedded value does not include a valuation of the
businesses of the asset management subsidiaries (including such
business written through the life assurance companies), nor of
any other in-force non-life business of the Group.
We have continued to maintain a 1% margin between our discount
rate and the assumed equity return rate which we believe is a
conservative treatment.
Shareholders' Funds
The Group derives competitive advantage from the financial
strength of its life businesses in South Africa. Retention of
capital in excess of the minimum statutory requirements for the
life business enables shareholders' funds to be invested in a
diversified portfolio of equity investments, which in addition
to current beneficial tax treatment, enhances returns to
shareholders in the longer term. The proposed introduction of
Capital Gains Tax in South Africa from 1 April 2001 may to some
extent reduce the tax advantage of equities. We will continue to
evaluate the optimal mix of our shareholder portfolio
investments, to ensure that these deliver maximum value for
shareholders.
Since the allocation of shares in the demutualisation and
subsequent listing of the company on five stock exchanges, the
remaining significant portion of shareholder funds in the
balance sheet is invested in our listed subsidiaries Nedcor and
Mutual & Federal, and also in our various asset management
businesses and in other subsidiary businesses. These businesses
form an integral part of the Group.
Capital Management
Internal targets were set in 1999 for the return on capital for
life assurance businesses based on a prudent internal measure of
required solvency capital. These targets are kept under constant
review to ensure they are consistent with the Group's overall
sterling return on capital targets.
During 1999 the life business units have reviewed their capital
requirements to ensure efficient use of capital. Particular
attention is being paid to designing and developing new products
that have lower capital requirements and provide a higher return
on capital. It is consequently envisaged that over time capital
will be generated in excess of that required for the life
businesses, and that this excess capital could be gradually
released for redeployment elsewhere in the Group.
The Group has also sought to reallocate capital from less
productive activities and to free up excess capital in parts of
the business to enable the Group to develop businesses expected
to have higher growth and greater return on equity for
shareholders. The sale of the Group's UK life business, which
has underperformed for a number of years, should release £65
million of capital when successfully completed. In keeping with
this overall Group philosophy of optimal capital utilisation,
Mutual & Federal's Board of Directors declared a special
dividend of £144 million to shareholders from excess funds in
September 1999.
The raising of £559 million new equity capital at listing and
the syndication of a £300 million revolving credit facility at
very competitive rates during the year demonstrates the value to
the Group of access to lower-cost international capital markets.
The acquisition of Gerrard will be financed largely from
internal cash resources, except for the loan notes to be taken
up by Gerrard shareholders. Following this acquisition, the
Group retains the capability to mobilise internal and external
resources to make further acquisitions which fit the established
strategic criteria and meet our required rate of return, whilst
maintaining at all times sufficient working capital for
operations and normal business contingencies.
Share buybacks
The company keeps shareholder capital constantly under review.
Resolutions will be put at the next annual general meeting of
the company to renew existing authorities to allot shares, to
disapply statutory pre-emption rights, and to make market
purchases of Old Mutual shares on the London Stock Exchange. In
addition the company intends to seek shareholder approvals for a
reduction in share premium account in order to create reserves
in the accounts and authorities to buy back shares on the four
southern African stock exchanges on which its shares are
currently listed.
The mechanism for achieving any future stock market purchases in
the African territories will be through four separate
'contingent purchase contracts' with the respective counterparty
defined in the contracts, in each of territories concerned.
Further details of the proposed resolutions and the contingent
purchase contracts will be included with the notice of meeting
in the annual report. The authorities to buy back shares will
collectively permit the company to buy up to a maximum of 10% of
the current issued share capital.
Shareholder information
On July 12 1999 the company listed its shares on five stock
exchanges in London, Johannesburg, Malawi, Zimbabwe, and
Namibia. The total number of shares in issue at the year end
was 3,444,624,230.
For calculating earnings per share the average number of shares
in issue for the year was 3,127,051,667.
The annual general meeting will be held at the Grosvenor House
Hotel, London, at 11:00 a.m. on 18 May 2000. Notice will be
given with the company's annual report and accounts, which are
expected to be posted in the first week of April.
Subject to the dividend being approved at the Annual General
Meeting, it will be paid on 31 May 2000 to shareholders on the
UK register on 14 April 2000 and on the southern African
registers on 7 April 2000, which will also be the currency
conversion date for converting the dividend into other
currencies.
The interim results for the six months to 30 June 2000 will be
released on Tuesday 5 September 2000.
Old Mutual plc
Preliminary results for the year ended 31
December 1999
Summary consolidated profit and loss
account
Year to 31 December 1999
Pro forma
Year to year to
31 December 31 December
1999 1998
Notes £ £
Operating profit
Life assurance (based on a long term
investment return)
Continuing operations 4 426 289
Discontinued operations (50) (118)
Banking 5 210 287
Asset management 48 23
General insurance business (based on a 6 59 86
long term investment return)
Other shareholders' income / (expenses) 7 (37) (33)
Operating profit before short term 656 534
fluctuations in investment return
Short term fluctuations in investment 10 778 (477)
return
Non-operating items 12 54 -
Profit on ordinary activities before tax 1,488 57
Tax on profit on ordinary activities 11 (165) (85)
Profit / (loss) on ordinary activities 1,323 (28)
after tax
Minority interests (257) (73)
Profit / (loss) attributable to 1,066 (101)
shareholders
Dividend proposed 13 (69) -
Retained profit / (loss) for the 997 (101)
financial period
p p
Basic earnings per share 13 34.1 (3.4)
Diluted earnings per share 13 33.9 (3.4)
Adjusted earnings per share based on a 13 12.2 10.1
long term investment return
Old Mutual plc
Preliminary results for the year ended 31 December 1999
Consolidated profit and loss account
Technical account -longterm business
Pro forma
Year to year to
31 31
December December
1999 1998
Notes £ £
Earnedpremiums,net of reinsurance
Gross premiums written
Continuingoperations 2 3,301 3,328
Discontinued operations 2 33 37
3,334 3,365
Outward reinsurance premiums (5) (20)
3,329 3,345
Investment income 2,995 2,507
Unrealised gains on investments 3,783 -
Other technical income, net of reinsurance 35 4
10,142 5,856
Claims incurred,net of reinsurance
Claims paid
Gross amount (3,360) (2,970)
Reinsurers'share 35 56
(3,325) (2,914)
Change in the provision for claims, net of reinsurance (67) (31)
(3,392) (2,945)
Changes in other technical provisions, net of reinsurance
Longterm business provision, net of reinsurance
Gross amount (3,670) 448
Reinsurers' share (30) (12)
(3,700) 436
Change in technical
provisions for linked liabilities,
net of reinsinsurance (1,519) 260
(5,219) 696
Net operating expenses (552) (543)
Investment expenses and charges (28) (26)
Unrealised losses on investments - (3,147)
Tax attributable to the long term business (116) (50)
Allocated investment return transferred
from / (to) the non technical account (543) 312
Balance on the technical account -long term business 292 153
Analysed between:
Continuing operations 342 271
Discontinued operations (50) (118)
292 153
Balance on the technical account - long term business
Analysis of balance on technical account -longterm business
Long term business result before investment return 105 21
Long term investment return 187 132
Balance on the technical account - long term business 292 153
Technical account -general business
Pro forma
Year to year to
31 31
December December
1999 1998
Notes £ £
Earned premiums,net of reinsurance
Gross premiums written (continuing operations) 291 292
Outward reinsurance premiums (33) (39)
6 258 253
Change in the provision for unearned premiums, net of reinsurance
Gross amount 2 7
Reinsurers'share (1) -
259 260
Allocated investment return 56 79
transferred from the non-technical account
Claims incurred, net of reinsurance
Claims paid
Gross amount (223) (226)
Reinsurers'share 21 35
(202) (191)
Change in the provisions for claims, net of reinsurance
Gross amount 8 (4)
Reinsurers'share (5) -
(199) (195)
Net operating expenses (57) (58)
Balance on the technical account -general business 59 86
Analysis of balance on technical account - general business
General 3 7
business result before long term investment return
Long term investment return 56 79
Balance on the technical account -general business 59 86
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