Results year ended 31 Dec 07
Old Mutual PLC
27 February 2008
OLD MUTUAL plc
Issuer code: OLOML
JSE Share code: OML
NSX share code: OLM
ISIN: GB0007389926
Results for the year ended 31 December 2007
Year of investment establishes strong platform for future growth
• Net client cash flows (NCCF) of GBP23.4 billion, 9.9% of opening funds under
management (FUM)
• FUM up 18% to GBP278.9 billion despite unsettled market conditions
• Life APE sales up 12% to GBP1,760 million (up 16% at constant exchange rates)
• Mutual fund sales of GBP8,268 million: strong US and ELAM growth offset by
market declines in UK
• Value of new business up 5% to GBP266 million
• Profit before tax (IFRS) up 2% to GBP1,750 million
• Adjusted operating profit* on an IFRS basis up 11% to GBP1,624 million (2006:
GBP1,459 million)
• Adjusted operating earnings per share** up 12% to 16.9p on an IFRS basis
(31 December 2006: 15.1p)
• Adjusted Embedded Value per share 173.3p at 31 December 2007 (31 December
2006: 161.1p***)
• Recommended final dividend up 10% to 4.55p (68.92 cents****) per share, in
line with underlying growth rates
Jim Sutcliffe, Chief Executive, commented:
'In 2007, in conditions which became very challenging during the second half of
the year, we focused on building our capabilities across our international
portfolio. I am delighted that during this period of investment we were able to
produce strong earnings growth. Particularly pleasing was the continued
delivery of excellent investment performance across the Group, which stimulated
good growth in net client cash flows and funds under management which will
stand us in good stead going forward.
Looking ahead, while currency movements and the continued turbulent state of
global markets will have an impact on earnings, diversity in product mix and
geography, coupled with our robust capital position and operating momentum in
our businesses, give me confidence that we will deliver a resilient performance
in 2008.'
Enquiries
Investor Relations
Aleida White UK +44 (0)20 7002 7287
Deward Serfontein SA +27 (0)21 509 8709
Media
James Crampton UK +44 (0)20 7002 7133
Nad Pillay SA +27 (0)21 504 8026
College Hill (UK)
Tony Friend UK +44 (0)20 7457 2020
Notes
Wherever the terms asterisked in the Financial Highlights are used, whether in
the Financial Highlights, the 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 minority 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, the impact of closure of unclaimed shares trusts,
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 minority 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.
*** The 2006 comparative has been restated from that previously published to
reflect the value of own shares held by the Group's Employee Share Ownership
Plans (ESOP).
**** Indicative only, being the Rand equivalent of 4.55p converted at the
exchange rate prevailing on 25 February 2008. The actual amount to be paid by
way of final dividend to holders of shares on the South African branch
register will be calculated by reference to the exchange rate prevailing at
the close of business on 17 April 2008, as determined by the Company, and
will be announced on 18 April 2008.
Forward-looking statements
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 9.00 a.m. (UK
time), 10.00 a.m. (Swedish time) and 11:00am (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 toll-free numbers:
UK 0500 551 077
Sweden 0200 887 651
South Africa 0800 991 468
North America +1 877 491 0064
Playback (available until midnight on 12 March 2008):
UK 0207 031 4064
UK toll-free 0800 358 1860
Sweden +46 (0) 850 520 333
North America toll-free +1 888 365 0240
North America +1 954 334 0342
Access code: 785355
Copies of these results together with high-resolution images (at
http://www.oldmutual.com) and biographical details of the Executive Directors
of Old Mutual plc, are available in electronic format to download from the
Company's website.
A Financial Disclosure Supplement relating to the Company's Preliminary results
can be found on the website. This contains a summary of key financial data for
2007 and 2006.
An interview with Jim Sutcliffe, Chief Executive and Jonathan Nicholls, Group
Finance Director, in video, audio and text is available on the Company's
website, www.oldmutual.com, and on www.cantos.com.
Photographs of management are available at the Visual Media website
www.vismedia.co.uk.
Chief Executive's Statement
As previously outlined, Old Mutual implemented a programme of investment
throughout 2007 to develop the Group, address specific issue areas and place
the business on a sound footing for future growth. An enormous amount has been
achieved in building scale and market share, and great steps have been taken to
remain at the forefront of innovation and be competitive within our markets.
Despite these investments, exchange rate headwinds and tough market conditions
in the latter part of the year, our 2007 results reflect the renewed focus
Group-wide on delivering outstanding investment performance for customers and
returns for shareholders.
Net client cash flows remain excellent
Strong net client cash flows, a key indicator of business performance and a
measure being increasingly adopted as a reporting value throughout the
industry, were a strong feature of each of our businesses in 2007, in
particular of US asset management. While mutual fund sales were impacted in the
second half by unfavourable market conditions, life sales overall were good.
Steady growth in IFRS profit, RoE and FUM
Notwithstanding planned infrastructural investments, tight control on cost
elements continued, leading to an increase in IFRS-adjusted operating profit of
11%. Earnings per share grew by 12% and we produced a solid return on equity of
13.2%. The 2008 target of GBP300 billion in funds under management remains
firmly on track with the Group increasing funds by 18% to GBP279 billion in 2007
despite the problems that beset the market towards the end of the year.
Positive value creation through Skandia
Skandia, in all its geographies, has shown impressive growth and 2008 will mark
the conclusion of the integration programme embarked on when Old Mutual
acquired the company in 2006. The platform business in the UK continues to go
from strength to strength continuing to attract assets through its
well-established IFA network. Skandia Europe and Latin America (ELAM) is also
benefiting from the portfolio approach introduced to share practices across
like-regions, which has resulted in strong unit-linked sales. While the
competitive environment in Sweden continues to hamper margins, we are extremely
pleased to report a positive turnaround in sales growth in our Skandia Nordic
region. Overall, we believe, with the synergy targets on track, that the value
our Group is able to extract from Skandia has made this a very successful,
value accretive investment.
South African earnings move ahead strongly
Investment in the retail distribution system, the improvement in the retail
offering as well as new marketing initiatives helped drive sales at Old Mutual
South Africa (OMSA). With a strong stock market in the early part of the year
IFRS-adjusted operating profit grew by a healthy 23%. Corporate sales dropped
slightly after some large single outflows relating to changing client
investment mandates and some hesitancy over the introduction of the new
boutique asset management model. The new structure is in place, but as we have
said, will take time to bed down, and our focus is now on boosting investment
performance to attract inflows.
2007 was a milestone year for Nedbank. Management successfully achieved the
three-year recovery targets in the first half, and established a revitalised
working environment through investment in people, culture and values. This has
provided Nedbank with a competitive edge in the market and a solid foundation
from which to sustain its business performance and its credit and expense
management in expected tough trading conditions in the current year.
Mutual and Federal (M&F) suffered from a turn in the underwriting cycle and a
reduction in investment income. Although M&F is a solid business, we have
stated that it is not core to our asset gathering and management strategy in
South Africa, and toward the end of 2007 we announced that the Group was in
discussion with Royal Bafokeng Holdings to sell Old Mutual's 77% share in M&F.
The discussions continue and we hope to conclude them during the course of
2008.
US continues to deliver solid results
Strong investment performance again delivered a powerful net client cash flow
result, and asset management earnings grew strongly. Acadian led the way, but
there were also strong performances from Barrow Hanley, Dwight, and Rogge, and
performance fees were particularly good at Campbell. The life business had
exceptionally strong Variable Annuity sales results in the second half from the
Bermuda business and earnings were a pleasing increase on the underlying trend
in the first half. No further adjustments were required for the immediate
annuity portfolio. The US business was cash generative as planned.
Asia Pacific sales continue to grow
Our Asia Pacific businesses continue to reflect the impressive growth of the
region. Sales, the value of new business and the level of funds under
management have grown strongly, and our increased focus on the region,
including the recent establishment of a regional headquarters in Hong Kong,
stands us in good stead for the medium term.
Summary and outlook
In 2007, in conditions which became very challenging during the second half of
the year, we focused on building our capabilities across our international
portfolio. I am delighted that during this period of investment we were able to
produce strong earnings growth. Particularly pleasing was the continued
delivery of excellent investment performance across the Group, which stimulated
good growth in net client cash flows and funds under management which will
stand us in good stead going forward.
Looking ahead, while currency movements and the continued turbulent state of
global markets will have an impact on earnings, diversity in product mix and
geography, coupled with our robust capital position and operating momentum in
our businesses, give me confidence that we will deliver a resilient performance
in 2008.
Jim Sutcliffe
Chief Executive
27 February 2008
Group Finance Director's Review
GROUP RESULTS
Group Highlights (GBPm) 2007 2006 % Change
Adjusted operating profit (IFRS basis)
(pre-tax) 1,624 1,459 11%
Profit before tax (IFRS) 1,750 1,714 2%
Adjusted operating earnings per share
(IFRS basis) 16.9p 15.1p 12%
Basic earnings per share (IFRS basis) 19.2p 17.0p 13%
Adjusted operating profit (EEV basis)
(pre-tax) 1,532 1,605 (5%)
Adjusted operating earnings per share
(EEV basis) 17.2p 17.8p (3%)
Basic earnings per ordinary share from
continuing operations 18.3p 15.8p 16%
Basic earnings per ordinary share from
discontinued operations# 0.9p 1.2p (25%)
Adjusted Group embedded Value (GBPbn) 9.4 8.9 6%
Adjusted Group embedded Value per share 173.3p 161.1p## 8%
Value of new business 266 253### 5%
PVNBP 13,878 12,185###,+ 14%
Life assurance sales (APE) 1,760 1,576###,+ 12%
Unit trust/mutual funds sales 8,268 8,408### (2%)
Net client cash flows (GBPbn) 23.4 22.3 5%
Funds under management (GBPbn) 278.9 237.1 18%
Return on equity (%)++ 13.2% 12.0%
Return on Embedded Value (%) 13.2% 13.8%
Full dividend in respect of the
financial year 2007 6.85p 6.25p 10%
Net client cash flows delivered through sustained investment performance
During 2007, the Group's net client cash flows were a very healthy
GBP23.4 billion representing 9.9% of opening funds under management with good
contributions resulting from business unit investment performance. Our US asset
management business delivered excellent net inflows of GBP17.6 billion, while
the Skandia businesses achieved GBP5.3 billion of net inflows. For OMSA, net
client cash flows remained a challenge.
Solid sales
In Europe we continued to benefit from being the open architecture leader in
the UK with strong life assurance sales, whilst growth continued in ELAM with
excellent unit trust sales. In Nordic, investment in the sales channel led to a
turnaround from the decline in APE sales experienced during the first half of
the year. In the second half, sales in that region recovered resulting in a 3%
year-on-year increase overall. In the US, APE sales were up by 47% in US Dollar
terms, driven by exceptional growth in Bermuda. South African life sales were
7% higher in Rand terms although 5% lower in Sterling.
# The results of the Group's South Africa general insurance business, Mutual &
Federal, are shown as a discontinued operation in these financial statements.
The Group is currently in discussions with the investment group, Royal Bafokeng
Holdings (Proprietary) Limited ('RBH') which is expected to result in the sale
to RBH of a controlling interest in Mutual & Federal.
## The 2006 comparative has been restated from that previously published to
reflect the value of own shares held in Employee Share Ownership Plans (ESOP).
### 2006 comparatives restated to include acquired Skandia businesses on a pro
forma 12 month basis.
+ Restated due to change in the calculation of US Life APE calculation to align
with the value of new business calculation.
++ Return on equity is calculated using adjusted operating profit after tax and
minority interests on an IFRS basis with allowance for accrued coupon payments
on the Group's hybrid capital. The average shareholders' equity used in the
calculation excludes hybrid capital.
Value of new business up 5%
The value of new business (VNB) grew to GBP266 million, driven by excellent
sales in US Life and strong sales in the UK. The APE profit margin increased to
21% for the US Life business, compared with 18% in 2006. The UK APE margin of
10% was sustained during the period and it is expected that this business will
meet its 11-12% target in 2008. In Nordic, the APE margin declined mainly due to
increased costs from the new Liv-Link agreement, strengthened lapse assumption,
lowered changes and a different business mix, whereas in ELAM we exceeded the
margin target. In OMSA, the margin declined slightly from the 2006 result
largely due to operating assumptions and the VNB decreased slightly in local
currency terms.
IFRS-adjusted operating earnings per share 16.9p
In spite of the significant impact of Rand and US Dollar currency depreciation,
and the full impact of additional shares issued in relation to the acquisition
of Skandia, the Group produced a 12% increase over 2006 in its overall earnings
per share.
2006 restated
Group Highlights (GBPm) 2007 2006 at 2007 rates
Adjusted operating profit
Africa 1,254 1,118 988
United States 260 264 244
Europe 268 239 239
Other 2 1 1
1,784 1,622 1,472
Other shareholders' expenses (41) (33) (33)
Finance costs (119) (130) (130)
Adjusted operating profit before tax and
minority interests 1,624 1,459 1,309
Tax (418) (395) (354)
Minority interest (292) (274) (247)
Adjusted operating profit after tax and
minority interests 914 790 708
Adjusted operating EPS (pence) 16.9 15.1 13.1
Assuming constant exchange rates, 2006 adjusted operating EPS would have been
13.1p with the currency impact being 1.5p and the impact of the increase in
issued shares being 0.5p. 2007 EPS increased on this basis by 29%.
Adjusted embedded value per share 173.3p
The adjusted Group embedded value (EV) per share was 173.3p and adjusted Group
EV was GBP9.4 billion at 31 December 2007 (31 December 2006: GBP8.9 billion).
This represents an increase from 161.1p (restated from 157.2p+++) as at
31 December 2006. The movement in EV per share has largely been driven by the
net impact of profit flows particularly from non-covered business, strong
investment market movements and a slight impact of currency appreciation. The
EV per share is after dividend payments and has also been affected by a
reduction in the share price of the listed subsidiaries. The share buyback
programme to 31 December 2007 has increased the EV per share by 0.2p.
+++ Note that after allowing for the opening adjustment calculated now as part
of the fair value balance sheet exercise and including the adjustment for the
value of ESOP shares, the adjusted Group EV at 1 January 2007 is GBP8.8 billion
and the EV per share at 1 January 2007 is 159.9p.
Return on equity continued to improve
Return on equity for the Group improved to 13% from 12%, reflecting the
improvement in the earnings run rate compared to 2006 particularly for OMSA,
Nedbank, US asset management and UK. In addition, the long-term investment
return improved partially due to the strong investment performance of the
shareholders equity in South Africa.
Long-term
Group Highlights 2007 (GBPm) business Asset management Banking
Adjusted operating profit (IFRS
basis) (pre-tax) 771 288 636
Adjusted operating profit (EEV
basis) (pre-tax) 758 288 636
Profit before tax (IFRS) 862 299 650
Value of new business 266 - -
Life assurance sales (APE) 1,760 - -
Unit trust/mutual funds sales - 8,268 -
Net client cash flows (GBPbn) 4.4 19 -
Funds under management (GBPbn) 82.0 193.3 -
General
Group Highlights 2007 (GBPm) insurance Other
Adjusted operating profit (IFRS basis) (pre-tax) 89 (160)
Adjusted operating profit (EEV basis) (pre-tax) 89 (150)
Profit before tax (IFRS) 82 (103)
Value of new business - -
Life assurance sales (APE) - -
Unit trust/mutual funds sales - -
Net client cash flows (GBPbn) - -
Funds under management (GBPbn) - 3.6
Long-term
business
Group Highlights 2006 (GBPm) Asset management Banking
Adjusted operating profit (IFRS
basis) (pre-tax) 759 236 545
Adjusted operating profit (EEV
basis) (pre-tax) 981 236 545
Profit before tax (IFRS) 742 294 555
Value of new business 244 - -
Life assurance sales (APE) 1,520 - -
Unit trust/mutual funds sales - 8,408 -
Net client cash flows (GBPbn) 5.3 17.0 -
Funds under management (GBPbn) 72.8 163.1 -
General
Insurance
Group Highlights 2006 (GBPm) Other
Adjusted operating profit (IFRS basis) (pre-tax) 82 (163)
Adjusted operating profit (EEV basis) (pre-tax) 82 (157)
Profit before tax (IFRS) 132 (9)
Value of new business - -
Life assurance sales (APE) - -
Unit trust/mutual funds sales - -
Net client cash flows (GBPbn) - -
Funds under management (GBPbn) - 3.5
Robust capital position
The Group's gearing level remains comfortably within our target range, with
senior debt gearing at 31 December 2007 of 1.9% (5.9% at 31 December 2006) and
total gearing, including hybrid capital, of 20.5% (21.4% at 31 December 2006).
In January 2007, the Group issued Eur750 million of Lower Tier 2 Preferred
Callable Securities, the proceeds of which were used, in part, to finance the
repayment of a Eur400 million senior Eurobond that matured in April 2007.
The Group has continued to develop its Economic Capital programme and a
comfortable surplus exists within each of our South African, US and European
regions, meaning that the Group is not reliant for its economic solvency on the
need to transfer capital between geographies.
The Group is in compliance with the Financial Groups Directive capital
requirements, which apply to all EU-based financial conglomerates. Our FGD
surplus was GBP1.7 billion at 31 December 2007 and we seek to maintain a FGD
surplus of around GBP750 million to GBP1 billion.
Capital requirements are set by the Board whilst recognising the need to
maintain appropriate credit ratings and to meet regulatory requirements at both
the Group and local business level.
Other
Our GBP350 million share buyback programme was announced at the beginning of
October 2007 and we have so far repurchased approximately 184 million shares
through the London and Johannesburg markets at a total sterling equivalent cost
of GBP282 million.
Holding company cash generation
The table below shows the cash flows of the Old Mutual plc holding company and
its satellite holding companies. We believe this provides a clear picture of
the cash receipts and payments of the holding companies.
2007 2006
GBPm GBPm
Total net debt at start of period 2,407 1,278
Operational flows
Operational receipts 868 535
Operational expenses (152) (156)
Other expenses (71) 645 379
Capital flows
Capital receipts 69 356
Acquisitions (66) (1,287)
Organic investment (220) (217) (214) (1,145)
Debt and equity movements
Old Mutual plc dividend paid (333) (281)
Share repurchase (177)
New equity issuance 12 14
Other movements 54 (441) (96) (363)
Total net debt at end of period 2,420 2,407
Total net debt within the holding company at the end of 2006 was
GBP2,407 million. A total of GBP937 million of operational and capital receipts
were received from business units during 2007.
GBP220 million was invested in the businesses and GBP333 million was used to pay
the 2006 final and 2007 interim dividends. In 2007, GBP177 million was spent on
repurchasing shares.
Total net debt at the end of the year was GBP2,420 million.
Taxation
The Group's effective IFRS AOP tax rate has decreased to 26% from 27% in 2006.
This reflects M&F paying a lower special dividend in 2007 and reductions in the
tax rates in the UK and Germany, partially offset by a changed profit mix in
South Africa.
Dividend
The directors of Old Mutual plc are recommending a final dividend of 4.55p per
share#### for the year ended 31 December 2007, to be paid on 30 May 2008.
Together with the interim dividend of 2.3p per share paid in November 2007,
this makes a total of 6.85p per share for the year, which represents an
increase of 10% over 2006. The indicative Rand equivalent of this final
dividend++++ is 68.92c, making a total of 103.75c, an increase of 17%. The
Board's policy on dividends is to seek to achieve steadily increasing returns to
shareholders over time, reflecting the underlying rate of progress and cash
flow requirements of Old Mutual's businesses.
Jonathan Nicholls
Group Finance Director
27 February 2008
COMPARATIVE INFORMATION
The reporting format for Old Mutual plc for the 2007 reporting period is as
follows:
• All Group comparative reporting information on earnings include Skandia from
the date of acquisition of 1 February 2006 (unless indicated otherwise).
• Within the financial statements the Europe division comparative information
is from the date of acquisition of 1 February 2006.
• Where Europe information is shown within the business review, this has been
adjusted on a pro forma basis to reflect ownership from 1 January 2006.
#### The record date for this dividend payment is the close of business on
Friday, 9 May 2008 for all the Exchanges where the Company's shares are listed.
The last day to trade cum-dividend on the JSE and on the Namibian, Zimbabwe and
Malawi Stock Exchanges will be Friday, 2 May 2008 and on the London Stock
Exchange, Tuesday, 6 May 2008. The shares will trade ex-dividend from the
opening of business on Monday, 5 May 2008 on the JSE and the Namibian, Zimbabwe
and Malawi Stock Exchanges, and from the opening of business on Wednesday, 7
May 2008 on the London Stock Exchange. Shareholders on the South African,
Zimbabwe and Malawi branch registers and the Namibian section of the principal
register will be paid the local currency equivalents of the dividend under the
dividend access trust arrangements established in each country. Shareholders
who hold their shares through VPC AB, the Swedish nominee, will be paid the
equivalent of the dividend in Swedish Kronor (SEK). Local currency equivalents
of the dividend for all five territories will be determined by the Company
using exchange rates prevailing at close of business on Thursday, 17 April 2008
and will be announced by the Company on Friday, 18 April 2008. Share
certificates may not be dematerialised or rematerialised on the South African
branch register between Monday, 5 May and Friday, 9 May 2008, both dates
inclusive, and transfers between the registers may not take place during that
period.
++++ Based on rates at 25 February 2008 (R15.1467 = GBP1)
Business Review
UNITED KINGDOM AND OFFSHORE
Pro forma*
2006 % Change
Highlights (GBPm) 2007
IFRS-adjusted operating profit
(pre-tax) ** 173 134 29%
EV-adjusted operating profit (covered
business) (pre-tax) 266 226 18%
Life assurance sales (APE) 740 646 15%
UK life assurance sales (APE) 468 396 18%
Unit trust sales 2,275 3,227 (30%)
Value of new business (post-tax) 77 65 18%
New business margin (post-tax) 10% 10%
PVNBP 6,297 5,350 18%
Net client cash flows (GBPbn) 3.9 4.9 (20%)
Funds under management (GBPbn) 41.9 36.0 16%
* The 2006 numbers are stated on a pro forma basis assuming ownership for 12
months rather than 11 months and have been restated to include the results of
Old Mutual International.
** From 2007 the treatment of Selestia deferred fee income has been harmonised
with Skandia MultiFUNDS reducing the 2007 result. The impact of policyholder
tax has been smoothed from 2007.
Positive net client cash flows and strong growth in funds under management
Net client cash flows were GBP3.9 billion for the year, representing 11% of
opening funds under management. Whilst net client cash flows are down on 2006,
they remain strongly positive, with 2006 being inflated by the post 'A-Day'
effect and the exceptional institutional mutual fund business mentioned below.
Good inflows, combined with favourable market movements during the first half
of the year, have driven an increase in funds under management during 2007 as a
whole. In the second half, growth was constrained by volatile markets which
affected investment performance and investor sentiment. This was partially
offset by continued positive net client cash flows.
Pension sales higher
The increase in life assurance sales APE for 2007 is largely driven by UK
pensions. Single premiums were the key driver, with sales of both Selestia's
Collective Retirement Account and Skandia's Monocharge pension up by over 25%.
International business increased in the year, benefiting from strong portfolio
bond sales into the UK in the first half and single premium business in Latin
America and the Far East. A tail-off in offshore institutional short-term
business following a tax change in the UK Budget has been offset by higher
regular premium business in the latter part of the year. Although this business
has experienced increased competition we believe the offshore market has good
potential for growth.
Unit trust performance impacted by revised business mix
Although the year started very positively, the latter part of 2007 reflected
the influence of increased uncertainty and volatility in equity markets. Unit
trust sales were 30% down on 2006. This is largely accounted for by the low
margin institutional mutual fund business being significantly down in the year,
with no recurrence of the exceptional business volumes experienced in the third
quarter of 2006. The year concluded with our new Selestia Investment Solutions,
our market-leading open architecture platform experiencing increasing volumes,
providing a solid base for future growth.
Strong growth in IFRS adjusted operating profit
IFRS AOP increased by 29% to GBP173 million for the year. The improvement has
been driven by significantly higher level of funds under management throughout
the year as a result of positive net client cash flows being sustained well
into 2007 as well as improved rebate terms. The effect of both of these factors
is a rise in asset-based fees. In addition, there has been a positive impact
from the growth in investment income. Both revenue and cost benefits continue
to be derived from increased scale and synergies.
Higher EV-adjusted operating profit (covered business)
EV-adjusted operating profit before tax increased by 18% to GBP266 million. The
value of new business improved 18% to GBP77 million. Expense synergies and
improved mix across the business helped sustain the new business margin of 10%,
with sales of single premium pensions being especially strong.
The EV-adjusted operating profits include GBP43 million post-tax of positive
impact from operating assumption changes largely due to a reduction in
corporation tax assumption from 30% to 28%. Operating experience for
persistency and expenditure continued in line with expectations. Modest
offsetting revisions were required with positive impacts arising from
improvement in the allowance for fee income following continuous commercial
negotiations and increasing purchasing power.
Further innovative investment solutions
Skandia Investment Management Ltd's (SIML) unconstrained Best Ideas range was
expanded with the launch of UK Strategic Best Ideas in September 2007. UK
Strategic Best Ideas is the first multi-manager UK UCITS III fund to use long
and short equity positions, and has gathered over GBP90 million in assets since
its launch, despite the difficult market environment.
Skandia's risk-focused multi-manager funds have delivered strong absolute
returns, typically with volatility far lower than that of our peers and,
consequently, the majority of these funds have delivered better risk-adjusted
returns. During the recent volatile market conditions these funds have
performed ahead of our peers, showing the benefits of their specific mandates.
Continued progress with integration activity
Integration activities remain on target to deliver the committed savings as
well as providing significant revenue potential. The Selestia Investment
Solutions platform was launched in August 2007, the full benefits of which will
flow through following migration of Skandia MultiFUNDS investors on to the new
platform in the second half of 2008. We launched the Skandia Investment Group
during the course of the year. This brings sharper focus and energy to
investment product manufacturing and strengthens our multi-manager business in
a rapidly growing industry. It also improves revenue for divisions and
shareholders through broadened and strengthened investment products and greater
leverage of buying power with fund groups.
Changes in the UK market
Skandia responded positively to the FSA's review of the retail distribution
market, supporting the proposal that there should be two types of distribution:
an 'advice channel' and a 'no advice channel'. Skandia has also supported the
concept of 'customer agreed remuneration' and has suggested that individuals
interfacing with consumers should have appropriate qualifications and be a
member of appropriate professional bodies that require commitment to a code of
ethics.
The pre-Budget report of October 2007 proposed a change in capital gains tax
(CGT) to 18% for unit trust investments, without a similar change in CGT for
insurance bonds. Investment bonds will continue to be tax advantageous for
certain consumer segments and there will continue to be demand for such
solutions. However, total bond demand is likely to soften and we have already
seen a material reduction in bond sales since November 2007. It is likely that
such demand will switch towards collective investments, outside of an insurance
tax wrapper, where it should be noted that Skandia UK has a market-leading
position, albeit with lower margins than for investment bonds.
NORDIC
Pro forma*
2006
Highlights (SEKm) 2007 % Change
IFRS-adjusted operating profit (pre-tax) 874 1,075 (19%)
EV-adjusted operating profit (covered
business) (pre-tax) 700 1,589 (56%)
Life assurance sales (APE) 1,992 1,942 3%
Mutual funds sales 3,474 2,940 18%
Value of new business (post-tax) 254 529 (52%)
New business margin (post-tax) 13% 27%
PVNBP 8,700 9,675 (10%)
Net client cash flows (SEK bn) 2.7 3.5 (23%)
Funds under management (SEK bn) 116.7 107.1 9%
* The 2006 numbers are a pro forma result assuming ownership for 12 months
rather than 11 months.
Strong market performance contributed to funds under management
Funds under management increased to SEK116.7 billion due to solid investment
performance and continued positive net client cash flows. Volatile equity
markets during the latter part of 2007 slowed asset growth, but closing funds
under management were still up 9% over 2006.
Sales performance improving
Life sales on an APE basis exceeded the prior year by 3%. The negative sales
trend experienced in the first half of 2007 was finally reversed in the third
quarter and continued to improve significantly during the fourth quarter with
the subsequent turnaround in market share. The unit-linked business in Denmark
also contributed to this turnaround with a strong sales performance. The
turnaround in Sweden was the result of broadening the product and fund ranges
and a refocus of our sales initiatives through our tied sales force (up 47%
comparing the fourth quarter of 2007 to the fourth quarter of 2006) and the
broker channel (up 15% comparing the fourth quarter of 2007 to the fourth
quarter of 2006). The tied sales force performance was driven by a greater
focus on unit-linked products. From 1 February 2007 the tax advantages of the
Swedish Kapitalpension product were removed following a change in regulations.
This negatively impacted sales as Kapitalpension products accounted for 10% of
sales in 2006.
Margins under pressure in the short term
Life new business margin was down from an exceptional 27% in 2006 to 13% in
2007. The decline can be attributed to a change in arrangements between Skandia
AB and Skandia Liv (the Liv-Link agreement), the strengthened lapse
assumptions, lowered charges (due to market competition), and a change in
business mix in Sweden, particularly since Kapitalpension product tax
advantages were removed.
In the medium term, the new business margin is expected to improve to reach
high teens. This will be achieved through continued growth in sales leading to
economies of scale, product development and the introduction of a new more
cost-efficient IT platform and other expense led initiatives. During 2007,
investment in IT commenced with the development of the new Investment Portfolio
system which enables an enhanced product offering.
Underlying IFRS AOP profit solid
IFRS AOP decreased by 19% for the year primarily due to the introduction of the
Liv-Link agreement, which deals with the administration and distribution costs
associated with the jointly marketed products.
EV-adjusted operating profit impacted by market pressure
EV AOP is down 56% on 2006 mainly driven by a net negative effect from
assumption changes and recalibration of risk margin of SEK735 million in 2007.
There is strong price pressure in the Swedish market
and in order to adapt to market conditions fees have been reduced for the
'tick-the-box' collective agreements and the tendered corporate business during
2007. Persistency assumptions have also been strengthened which is offset by
capitalisation of future waiver of premium business profits which was
previously not valued. The drop in value of new business is another driver for
the lower EV AOP in 2007 compared to 2006.
Continued growth in banking business and increased focus
Both deposit and loan books at SkandiaBanken continued to increase in 2007. The
growth in loans has slowed down, but the net interest margin was maintained at
prior year levels, despite stiff competition. Lending increased to SEK52.7
billion, up 20% on 2006, mainly due to good growth in Norway in both mortgage
lending and car financing. The number of customers increased 3% over 2006.
SkandiaBanken's operating profit for 2007 was SEK191 million, 31% higher than
2006.
During 2007, SkandiaBanken started a major shift in strategic direction to a
bank focused on a broader long-term savings and client offerings. In October we
announced the sale of SkandiaBanken Bilfinans, the vehicle finance business, to
DnB NOR. The total book profit expected to be realised is SEK1 billion. The
Danish banking operations were also divested in the third quarter of 2007 to
strengthen profitability and to bring focus to the remaining businesses.
Putting the business on a sound footing for the future
The focus during the year has been on improving operational efficiency and
aggressive marketing activities and these are continuing in 2008. The
investment programme and restructuring activities within Nordic reduced IFRS-
adjusted operating profit for the year by SEK81 million, however, we have
strengthened the savings offering during 2007 by widening the fund range in
both Skandia AB and SkandiaBanken. The unit-linked products have been improved
with several new product offerings during 2007 and further improvement is
underway. One example of the latter is the new Investment Portfolio product
launched during February 2008.
Positive outlook
In future years, the Nordic savings market is likely to be affected by a number
of legislative changes impacting tax neutrality between savings with and
without insurance wrap, transfer rights, market competition and changes to
collective pensions agreements. However, with a full range of product offerings
traditional life, unit-linked, banking, financial advisory, mutual funds and
healthcare Skandia Nordic is well positioned in a growing savings market.
The key focus going forward is building an offering which provides both
end-customers and distributors with advisory tools and top quality advice,
innovative products, top-quartile returns and the market's best client service.
There are strong synergies in terms of scale, brand and cross-selling and
administration. The second half of 2007 marked a watershed for Skandia Nordic,
particularly in Sweden, with renewed optimism founded on a new CEO, sales
increases, product launches and much improved relations with Skandia Liv, the
media and customers.
EUROPE AND LATIN AMERICA (ELAM)
Pro forma*
Highlights (Eurm) 2007 2006 % Change
IFRS-adjusted operating profit (pre-tax) 43 42 2%
EV-adjusted operating profit (covered
business) (pre-tax) 48 121 (60%)
Life assurance sales (APE) 276 252 10%
Mutual fund sales 3,071 2,188 40%
Value of new business (post-tax) 54 52 4%
New business margin (post-tax) 20% 21%
PVNBP 2,139 2,062 4%
Net client cash flows (Eurbn) 1.8 1.7 6%
Funds under management (Eurbn) 13.0 10.8 20%
* The 2006 numbers are restated on a pro forma basis assuming ownership for 12
months and excludes the Skandia Vida business sold in 2007, except EV AOP,
which includes Vida
Funds under management growing significantly
Net client cash flows during the year represented 17% of opening funds under
management, or 23% of opening funds under management when adjusted for the
planned divestiture from the Spanish institutional business reflecting the
continued growth of the business. Market movements for ELAM were positive for
the first six months of the year, but experienced a downturn in the second half
of the year following market trends across the world, to end the year broadly
flat. Despite the market volatility created by the sub-prime mortgage crisis
and credit crunch, as well as the closure of the Spanish institutional asset
management business (resulting in a Eur0.6 billion reduction in net client cash
flows against 2006), funds under management increased 20% from the start of the
year as a result of strong inflows.
Continuing growth in life sales (APE)
2007 was generally a tougher year for sales than 2006 in the majority of the
ELAM countries. In many of the markets, unit-linked sales slowed down,
recording negative net cash flows, and the tax-driven incentives which
positively impacted some of the markets in 2006 were not repeated in 2007. Life
sales on an APE basis rose 10% over the prior year, with strong growth in
regular premium sales in Central Europe, partially offset by lower single
premium sales in Southern Europe. Overall, we are satisfied with the progress
that the business made in the ELAM territories, with increased market share
evident in the majority of instances.
Mutual fund sales up strongly and margins improved
Mutual fund sales were up 40% over 2006 with strong contributions from our
discretionary asset manager, Skandia Global Funds, and from Palladyne. Our
Latin American pensions business performed well, supplemented by strong
institutional inflows. Average margins on mutual fund business improved as
funds placed in the low margin institutional asset management business in Spain
have been replaced by funds in the higher margin discretionary asset management
and long-term businesses. This led to a significantly improved adjusted
operating result for the mutual fund portion of the business.
Value of new business increasing with profit margins exceeding the target range
at 20%
VNB for the year was up slightly against the prior year. The post-tax new
business margin of 20% achieved for the year exceeded the medium-term target
range of 16-18%. During 2007, we reduced our margin on key products to maintain
our competitive position and we expect that pricing pressure will continue in
the future.
Continued strong underlying adjusted operating profit result
IFRS AOP was in line with the 2006 result, with 2007 results constrained by
incurring costs of Eur7 million to realise synergies. Growth was driven by the
larger in-force book of business and by healthy net client cash flows. As a
consequence, fund-based fees are up on the prior year, while premium-based fees
are at approximately the same level.
Poland has grown strongly over the last 18 months and is a significant
contributor to both new sales and ELAM's overall result. This is a reflection
of the efforts put into this business over recent years, with particular
emphasis on growing distribution. In our Italian business, we have renegotiated
commercial terms with key distributor groups in order to secure the business
model for the future. Colombia has performed well in very difficult market
conditions, growing market share considerably, while new business sales in
Mexico have increased markedly on the back of the increase in the financial
planner distribution force.
EV AOP impacted by assumption changes
EV AOP has been impacted by three main items during the year. Firstly, net
unfavourable assumption changes of Eur70 million have been recorded in
2007. As reported during the year, we reassessed the operating assumptions in
Italy, in particular the surrender assumptions, following unexpected surrender
experience of products exiting the surrender penalty period during the
first half of the year. This review resulted in an adjustment to EV AOP of
Eur49 million, and changes to persistency assumptions in other countries were
also undertaken that contributed further to a net unfavourable impact.
Secondly, there have been changes to Divisional overhead capitalisation during
2007 following the changes made to the operating structures within Skandia
since the acquisition. Finally, the current year EV AOP result was positively
impacted by changes to the tax rate in Germany.
Well positioned
ELAM continues to be well placed to achieve further growth, as evidenced by
rising market shares in most of the countries in which we operate. Product
development and innovation remain at the heart of our offering, with close to
40 new products and product enhancements launched during the year. Early
indications are that innovative major new product launches in Austria and
Switzerland have been very well received in their local markets.
LONG-TERM BUSINESS & ASSET MANAGEMENT - OLD MUTUAL SOUTH AFRICA (OMSA)
Strong recurring premium sales performance in Retail Businesses
Highlights (Rm) 2007 2006 % Change
Long-term business adjusted operating profit 3,082 3,077 -
Asset management adjusted operating profit 946 874 8%
Long-term investment return (LTIR) 2,988 1,773 69%
IFRS-adjusted operating profit 7,016 5,724 23%
Return on Allocated Capital 24% 23%
EV-adjusted operating profit (covered
business) 4,769 5,752 (17%)
EV (covered business) 34,678 33,274 4%
Return on EV (covered business) 11.2% 13.5%
Life assurance sales (APE) 4,699 4,416 6%
Unit trust sales 15,547 14,833 5%
Value of new business (post-tax) 756 781 (3%)
APE margin (post-tax) 16% 18%
PVNBP 31,380 30,004 5%
Net client cash flows (Rbn) (18.7) (29.1) 36%
SA client funds under management (Rbn) 445 424 5%
OMSA net client cash flow remained a challenge for us in 2007, primarily due to
net outflows from institutional clients, notably from two multi-managers,
following changes of portfolio managers and concerns about short-term
performance in 2006. Inflows were lower as consultants and investors adopted a
'wait and see' approach because of uncertainty over the implications of the new
boutique structure on performance. Investment performance for 2007 remained
disappointing, with figures for the year showing 24% of funds outperforming
benchmarks and achievement of the positions four and six in the Alexander
Forbes Large Manager Watch over one and three years respectively. We
deliberately took defensive positions in most portfolios in 2007 anticipating a
market correction and this cost us performance for the year.
Life sales on an APE basis increased by 6% over 2006. Recurring premium sales
grew strongly, up 14% on the back of increased sales force in the Retail Mass
market business as well as competitive risk product and credit life sales in the
Retail Affluent market. Life Single premium sales were down 7% on 2006
primarily due to competitor margin pressure, and also, because we had a
significant deal in our Symmetry multi-manager business at the end of 2006
which was non- recurring. The launch of the Absolute Return Fund and
enhancements to the fixed bond rates on the lnvestment Frontiers product at
mid-year helped improve sales in the second half of the year. We continued to
gain market share in the Life retail sector.
Unit trust sales were up after including sales through Marriott for the full
year in 2007. Excluding Marriott, sales were down 10% on 2006 because of
residual concerns over portfolio manager changes and short-term investment
performance on certain core funds (Dynamic Floor and Enhanced Income funds).
The new Stable Growth Fund, was launched in July 2007 and has had good early
sales.
IFRS AOP was 23% higher than in 2006. Within this result, our long-term
business AOP increased marginally and the LTIR increased 69% after changes in
calculation method to more appropriately recognise the value of the
shareholders' fund, and the higher asset base. The marginal increase in
long-term business profit was a result of the continued switch to less capital
intensive, lower margin products. Positive contributions arose from an increase
in the average level of policyholders' funds under management driven by higher
market levels and a significantly lower IFRS 2 share-based payments charge.
These were offset by an increase in the investment guarantee reserve, which
resulted from the adoption of a market-consistent basis for the valuation of
these reserves as well as the application of a discretionary margin.
Asset management AOP was up 8% due to higher market levels. The good returns
achieved also led to a good flow of performance-related fees, and higher
property profits after the first full-year contribution from Marriott Income
Specialists (Marriott). However the profit growth was tempered by additional
advertising costs associated with the launch of the new boutique structure in
OMIGSA, a review of incentive levels for fund managers and loss of fee income
as a result of the withdrawal of client funds.
We declared strong bonuses in February 2008 on many of our with-profits
products, in spite of market volatility in early 2008. This reflects the good
returns these products have generated. Our portfolios' Bonus Smoothing Accounts
remain in very strong positions following these strong bonus declarations.
Embedded Value was impacted by net capital transfers to Old Mutual plc of
R5.9 billion during the year. Excluding these capital transfers, EV increased by
22% over the year and was positively impacted by market levels. However, the
EV AOP is lower than in 2006 because the prior year profit was boosted by the
recalibration of the risk margin in the discount rate of R1,093 million
(R711 million post-tax), while the 2007 profit is reduced by the substantial
increase in the investment guarantee reserve to reflect the use of a market
consistent methodology, the switch to lower margin business of certain
liabilities (which has resulted in lower capital requirements and improved ROC),
and the reduction of certain margins in the Corporate segment aimed at providing
better value for our customers.
Retail Mass
Rm 2007 2006 % Change
Life sales (APE)
Savings 613 476 29%
Protection 477 411 16%
Total 1,090 887 23%
Life VNB 322 263 22%
Life APE margin (post-tax) 30% 30%
Net client cash flow (Rbn) 1.9 1.7 12%
Retail Mass sales were up 23% on 2006. This result reflects the continued focus
on growing the sales force, which at 31 December 2007 was 11% higher than at
the beginning of the year. Excellent growth was also achieved in sales through
the broker channel, which were 106% up on the prior year. There was, however, a
small swing to lower margin savings business.
VNB was 22% higher than 2006, with the new business APE margin constant at 30%,
the latter benefitting from improved burial society results and a lower
secondary tax on companies being offset by an increase in the proportion of low
margin savings business. We responded to the shift in mix and the lower margins
on savings business following the Statement of Intent, which sets minimum
standards for surrender and paid-up values, by implementing changes to adviser
remuneration and increasing minimum premiums for savings business. This had a
negligible impact on mix, but did improve the profitability of savings business
slightly.
In 2007, we continued innovating and delivering financial solutions relevant to
our customers. In October we launched the Domestic Workers Fund, in
collaboration with the Presidential Working Group on Women, a fund targeted at
extending retirement provisioning and risk benefits for domestic workers. In
November we launched Pay-When-You-Can, an innovative flexible premium funeral
product for the entry level market, in Shoprite stores nationwide. In December
we launched Zimele compliant funeral plans (contributing to Financial Sector
Charter scores), which also address the need for affordable products for the
previously untapped entry-level market.
Retail Affluent
Rm 2007 2006 % Change
Life sales (APE)
Savings 1,321 1,278 3%
Protection 1,056 897 18%
Annuity 197 193 2%
Total 2,574 2,368 9%
Life sales (APE)
Single 868 838 4%
Recurring 1,706 1,530 12%
Non-life sales* 1,821 1,949 (7%)
Life VNB 330 289 14%
Life APE margin (post-tax) 13% 12%
Net client cash flow (Rbn) (2.7) 0.9
* Includes non-life flows in respect of OMUT, Galaxy and Linked Investment
Service Provider (LISP) sales on an APE basis
Life recurring premium sales were 11% higher than for the prior year, driven by
continued good sales of risk business, leveraged from enhancements to our
Greenlight risk product range (17% higher) and good credit life sales (26%
higher), reflecting the extension of personal credit through Nedbank. Recurring
premium Max Investment savings business (both life and non-life wrappers)
performed well ending the year 17% up, with significant growth (62%) of the
non-life recurring option, but from a relatively low base.
Single premium life sales were 4% up on 2006. Single premium investment sales
were flat as we were challenged by perceptions about OMIGSA restructuring, key
staff losses and OMIGSA investment performance in some of the flagship funds,
principally our Dynamic Floor and Enhanced Income funds. These effects were
offset by improved investment performance, the new Absolute Return Fund launch
and enhancements to the fixed bond rates of the life product. In the last
quarter there were large non-recurring inflows into the private equity fund of
Investment Frontiers. Single premium sales of the offshore investment product
through Old Mutual International continued to accelerate and were 56% up over
2006.
Life VNB was 14% higher than 2006, with the new business APE margin improving
from 12% to 13%. The biggest driver of the improvement was the impact of
increased volumes, particularly on the recurring premium book on the absorption
of initial distribution costs, both at a product level and in the distribution
channels.
Bancassurance sales through Nedbank continued to grow and were up 16% over
2006. The launch of a new, low cost, simple savings product through Nedbank
branches was very well received. Credit life sales slowed following the
introduction of the National Credit Act, but were offset by the new savings and
risk product flows.
Corporate Segment
Rm 2007 2006 % Change
Life sales (APE)
Savings 597 629 (5%)
Protection 145 99 46%
Annuity 111 193 (42%)
Healthcare 183 239 (23%)
Total 1,036 1,160 (11%)
Life sales (APE)
Single 644 788 (18%)
Recurring 392 372 5%
Non-life sales* 755 1,678 (55%)
Life VNB 104 229 (55%)
APE margin (post-tax) 10% 20%
Net client cash flow (Rbn)** (17.9) (31.7) 44%
* Includes non-life flows in respect of OMIGSA and Old Mutual Properties on an
APE basis
** Includes NCCF for OMIGSA
Net client cash flows in the Corporate market, although still strongly
negative, were less severe than in 2006, and Employee Benefits net client cash
flow was significantly better than 2006. Termination experience, in particular,
was very good and the impacts of the launch of the Absolute Growth Portfolios,
as well as strong bonuses, were factors in this regard. Net client cash flows
in OMIGSA were adversely affected by withdrawals following the loss of two key
portfolio managers, clients switching from core and balanced mandates and
residual concerns about short-term performance in 2006.
Total Corporate sales were lower than 2006, driven by lower sales of Symmetry
(who had a very large deal in 2006), Annuities and Healthcare. There was a
strong performance in the second half of 2007 in the Guaranteed Products where
the launch of the Absolute Growth Portfolios was successful and has started to
attract good new sales. Risk sales were also strong in 2007 compared to the
prior year. Although Annuity sales were lower than 2006, the pipeline for 2008
is strong and business was secured at the end of 2007 which should flow through
to 2008.
Healthcare sales are below last year due to a shrinking market, with government
employees moving to GEMS, and a somewhat reduced focus on Oxygen within the
distribution channels. Appointments have been made to drive the distribution of
Healthcare more effectively, especially in the Retail distribution channels.
The decrease in new business margins and VNB relative to 2006 is mainly a
result of a reduction in the Platinum Pensions 2003 capital charge which was
done so as to offer better value to customers and drive future sales, as well
as lower volumes of high margin annuity business towards smoothed bonus
products. Lower sales volume in Symmetry and Healthcare also contributed. This
has had a knock-on impact reducing the overall life new business margin.
Old Mutual Investment Group South Africa (OMIGSA)
Sources of FUM (Rbn) 2007 2006 % Change
Life 319 283 13%
Unit trusts 48 40 20%
Third party 88 95 (7%)
Total OMIGSA managed assets 455 418 9%
Managed by external fund managers 34 30 13%
Total OMSA FUM 489 448 9%
Less: managed by group companies for OMSA (44) (24) (83%)
Total OMSA client funds managed in SA 445 424 5%
The implementation of the boutique structure in OMIGSA has been a key feature
for 2007. We continue to focus on stabilising the structure and increasing
investors' confidence in individual boutique investment philosophies.
Non-life sales (OMIGSA) are significantly lower than prior year as a result of
the non-repetition of two very large deals in the first half of 2006
(R11.1 billion), and the smaller pipeline at the start of 2007. The investor and
consultant concerns relating to OMIGSA's restructuring into a multi-boutique
business and some areas of investment performance have also contributed to low
sales. These, however, have started to improve.
2007 ended on a highly volatile note as the unravelling global sub-prime crisis
dented investor confidence and global financial markets. Against this uncertain
backdrop, the investment performance across our different boutiques was
satisfactory. Although the three year performance slipped as poorer short-term
equity performance fed through to the longer term performance numbers, we had
anticipated a market correction and generally the portfolios were defensively
positioned. Overall, just over half of the funds outperformed their benchmarks
over one and three years respectively to the end of December. For the peer
cognisant institutional funds, 45% and 9% of mandates were above the industry
median over one and three years respectively. More than half of institutional
mandates outperformed their benchmarks over these same periods. The Macro
Strategy Investments boutique's Profile Balanced Fund was ranked fourth over
one year, sixth over three years and third over five years ending 31 December
2007 in the Alexander Forbes Global Large Manager Watch survey.
In 2007, half of the key unit trust funds, representing 69% of unit trust
assets, were first and second quartile performers over one year, 69% were first
and second quartile over three years and 64% over five years to the end of
December 2007.
The boutiques with the most notable performance for the three years ending 2007
were the Absolute Return, Macro Strategy Investments, Fixed Income and Select
Equity boutiques, with 100%, 99%, 95% and 76% respectively of their funds under
management beating their benchmarks.
During the year, Marriott Income Specialists' launched the Marriott
International Income Growth Fund, OMIGSA Property launched Triangle, an
industry defining direct property fund, Umbono Fund Managers launched the
RAFI 40 Index Fund and OMUT launched their Stable Growth Funds.
Outlook
The long-term outlook for savings and wealth management in South Africa remains
positive, with the following points as key contributors:
> Prudent fiscal and monetary policy is expected to return the economy to a
robust growth path in the latter half of 2008.
> Continued growth of black middle class and affluent markets off the back of a
growing economy and Black Economic Empowerment efforts.
> Government is formulating policy that would create a framework for mandatory
retirement savings.
> Strong growth in household incomes, enabling more people to start or increase
savings for retirement.
> Improvements in financial education and transparency of financial products
enhancing accessibility.
In the short term, a slowdown in growth rates of both the economy and
disposable incomes is expected as monetary policy is tightened to contain
inflationary pressures and as global economic growth slows. Increased
competition is expected for the flows into the market, and also for existing
assets, especially for retirement annuities that have been transferable between
funds from October 2007. In this environment, distribution, superior investment
performance and coverage of all asset classes will be crucial for success.
Old Mutual is well placed to compete in this environment, with our investment
boutiques continuing to grow and the coverage of asset classes increasing, and
we have the ability to leverage our large distribution network to deliver
financial solutions to our advantage.
We also see great short term opportunities of growth of insurance products in
the lower to middle income market where product penetration is low. Old Mutual
has strong market leadership through our Retail Mass Market business to benefit
from these opportunities.
BANKING - NEDBANK GROUP (NEDBANK)
2007 financial targets achieved
Highlights (Rm) 2007 2006 % Change
IFRS-adjusted operating profit 9,220 6,973 32%
Headline earnings* 5,921 4,435 34%
Net interest income* 14,146 10,963 29%
Non-interest revenue* 10,445 9,468 10%
Net interest margin* 3.94% 3.94%
Cost to income ratio* 54.9% 58.2%
ROE* 21.4% 18.6%
ROE* (excluding goodwill) 24.8% 22.1%
* As reported by Nedbank
We are pleased with the balance we have achieved between delivering on our
short-term performance targets and investing to build a platform for long-term
growth. Although the financial performance is now benchmarking closer to that
of Nedbank's peers, we aspire to improve further.
Headline earnings increased by 34% to R5,921 million. Basic earnings grew by
33% to R6,025 million.
Headline earnings per share (EPS) increased by 34% to 1,485 cents (2006: 1,110
cents). Diluted headline EPS increased by 33% from 1,076 cents to 1,429 cents.
Basic EPS grew by 33% from 1,135 cents in 2006 to 1,511 cents in 2007.
Nedbank's return on average ordinary shareholders' equity (ROE) improved from
18.6% to 21.4% for the year, exceeding the target of 20% that was set in 2004
at the start of our recovery programme. ROE, excluding goodwill, improved from
22.1% to 24.8%.
Net interest income (NII)
NII grew 29% to R14,146 million (2006: R10,963 million) due to strong growth in
average interest-earning banking assets of 29%.
Nedbank's net interest margin for the year was 3.94%, unchanged from 2006. The
margin benefited from the endowment impact of interest rate increases on
capital and current and savings accounts of 0.4%, and decreased from liability
margin compression of 0.1% as deposit interest rates continued to price in
upside risk and as the sector had to source a higher proportion of funding from
the wholesale deposit market. In addition, the NII margin decreased from asset
margin compression of 0.3% mainly from the impact of strategic changes in the
product mix of personal loans and competitive pricing behaviour particularly in
home loans and commercial mortgages.
Impairments charge on loans and advances
The credit loss ratio increased from 0.52% in 2006 to 0.62% in 2007. The growth
in advances and the increase in the credit loss ratio are reflected in a 46%
increase in the impairments charge to R2,164 million. Impairment levels have
risen in Nedbank Retail and Imperial Bank, while the credit loss ratios in
Nedbank Capital and Nedbank Corporate have remained at lower than expected
levels, assisted by active credit management and unusually high levels of
recoveries. The effect of the deteriorating retail environment has been
mitigated to some extent through tighter credit policies and an early focus on
collection processes and systems. Nedbank has continued to apply stringent
credit management policies and has tightened credit granting requirements in
the retail areas most affected by the worsening credit cycle over the last two
years.
Nedbank has no direct exposure to US sub-prime mortgages. The group is
indirectly exposed in that it does have some banking relationships with
institutions with sub-prime exposure. These are relatively small and are not
currently expected to lead to any losses in the Nedbank group.
Nedbank Retail raised an additional Incurred But Not Reported (IBNR) provision
of R167 million in December 2007 to anticipate the effect of the current higher
interest rates not yet evident in the historic data used for provisioning
calculations.
Non-interest revenue (NIR)
NIR for the year increased by 10% to R10,445 million.
This growth in NIR was driven primarily by commission and fee income growth of
15% and an increase in private equity revaluations, realisations and dividend
income.
This growth was partially offset by weak trading results as reported in the
first half, mainly due to poor trading within the business alliance with
Macquarie, the competitive pricing structure for transactional products adopted
in Nedbank Retail, where fees have been reduced by an average of 19% since
mid-2006, and a continuing move from cheques to electronic channels by business
banking clients.
Expenses
Expenses continue to be tightly managed increasing by 14% to R13,489 million.
The 'jaws' ratio continued to improve throughout the year, with total revenue
growth of 20% being 6% above expense growth of 14%, resulting in the efficiency
ratio improving from 58.2% for 2006 to 54.9%.
Growth in operating expenses slowed, as anticipated, while staff expenses
increased reflecting the investment Nedbank has made in client-facing staff and
an increase in variable pay as a result of the continued improvement in
operating performance. Marketing costs increased as planned as Nedbank
continued to invest in repositioning the Nedbank brand.
Expenses included the costs for the integration of Old Mutual Bank into
Nedbank, Bond Choice's expenses and the IFRS2 charge in respect of the group's
BEE transaction.
Advances and deposits
During 2007, advances grew 21% to R374 billion, with average interest-earning
banking assets increasing by 29% to R359 billion.
As a result of the strong advances growth, total assets increased 15% to
R489 billion. Growth in higher-risk areas, such as personal loans, slowed as the
group tightened credit criteria and focused on higher-quality, lower-margin
personal loans. Deposits increased by 18% from December 2006 to R385 billion at
December 2007.
Nedbank's liquidity remains sound in an overall liquidity environment that was
made more challenging by the negative international liquidity developments.
Contagion of South African markets has been limited, with little direct
exposure by local banks to the US sub-prime markets. The primary impact has
been limited to a reduction in international liquidity, which has traditionally
not been a large portion of the funding base, and an increase in the cost of
capital market debt. This has had a small negative impact on the cost of
rolling over conduit paper and new subordinated-debt issues.
During 2007 Nedbank successfully launched its inaugural auto loans and
residential mortgage-backed securitisation programmes, raising R1.7 billion and
R1.87 billion respectively. These programmes have diversified the funding base
and added tenor to the bank's existing funding profile. In addition, Nedbank
issued a further foreign syndicated loan of USD500 million in February 2007,
raising additional foreign funding and creating further funding
diversification.
Risk and capital management
Nedbank has successfully implemented its Basel II blueprint. This is in line
with the revisions to the Banks Act and the new internationally based Basel II
banking regulations introduced by the South African Reserve Bank (SARB), which
were effective from 1 January 2008. The main purpose of Basel II is to promote
significant enhancement and sophistication of risk and capital measurement and
management, thereby further elevating the safety and soundness of the banking
industry.
Nedbank has received formal approval from the SARB for the Advanced Internal
Ratings Based (AIRB) approach for credit risk for its principle operations in
SA, while Imperial Bank and the African subsidiaries have adopted the
standardised approach. Nedbank's risk and capital management capabilities allow
it to optimise the risk/return trade-offs equation and grow the businesses
profitably within a clearly established risk appetite.
During the year Nedbank continued to actively manage its capital:
> the expensive NED2 R4 billion bond on its call date in July 2007 was
redeemed;
> execution of several Tier 2 subordinated-debt issues totalling R6.77 billion,
thereby continuing to build a smooth and diversified subordinated-debt maturity
profile. (A highlight was the R2 billion inaugural Tier 2 investment in a South
African bank by the International Finance Corporation and the African
Development Bank);
> completion of a R1.7 billion Imperial Bank asset securitisation;
> completion of a R1.87 billion Nedbank Retail home loan securitisation; and
> issue of Tier 1 perpetual preference shares of R364 million.
Certain hybrid capital instruments now qualify as Tier 1 regulatory capital
under Basel II and Nedbank is well-advanced in planning its inaugural hybrid
Tier 1 issue.
Nedbank Group, Nedbank Limited and Imperial Bank Limited all received rating
upgrades from Moody's and Fitch during 2007. This was very pleasing and
recognises the successful turnaround of Nedbank over the past few years.
Nedbank expects to issue further Tier 2 capital and hybrid forms of Tier 1
capital in 2008. Nedbank is committed to improving its profile as an issuer in
the debt capital markets and this should result in a more robust
subordinated-debt yield curve.
Prospects
The slowdown in consumer spending, the increase in consumer credit stress,
continuing electricity shortages and sustained dislocation in credit and equity
markets are likely to make the year ahead significantly more challenging for
the South African economy and the banking sector. The key factors influencing
performance in 2008 are:
> slower growth in retail advances;
> continued good growth in wholesale advances, although the influence of
electricity shortages on the economy may cause this to slow;
> lower margins as a result of margin compression in certain categories of
advances and continued reliance on wholesale funding, which are only partially
offset by the endowment benefit arising from past interest rate increases;
> higher impairment charges due to the impact of higher interest rates on the
retail portfolios and lower wholesale recoveries; and
> fewer positive non-recurring items and revaluations in the private equity
portfolios.
While the general banking environment will be much tougher than in previous
years, Nedbank is confident of continuing to improve its performance off the
solid platform built over the past four years. Nedbank's focus is now on working
towards its vision of becoming southern Africa's most highly rated and
respected bank.
The main focus areas for Nedbank in 2008 include building on its transformation
journey, and growing our retail distribution network, transactional banking
market share, relevance in the public sector, business banking franchise and
mass-market strategy.
In addition, Nedbank is focused on being involved in social and community
projects, managing the credit cycle, disciplined expense management, ongoing
capital management activities, with an active process of continuous improvement
in all operations and applying economic-value-based management. From 2008
economic profit (EP) replaces ROE as the primary internal financial performance
measure in the group. EP is a best-practice measure since it incentivises an
appropriate balance between return and growth, and better aligns with
shareholder value creation.
Medium- to long-term financial targets
After successfully delivering on the short-term financial targets of a 20% ROE
and 55% efficiency ratio in 2007, Nedbank set the following key medium- to
long-term external targets:
> ROE (excluding goodwill) 10% above Nedbank's monthly weighted average cost of
ordinary shareholders' equity.
> Growth in diluted headline EPS of at least average CPIX plus GDP growth plus
5%.
In the medium term Nedbank targets to meet or exceed the comparable performance
of its peers.
GENERAL INSURANCE MUTUAL & FEDERAL
Solid performance in a challenging year
Highlights (Rm) 2007 2006 % Change
IFRS-adjusted operating profit 1,256 1,039 21%
Gross premiums* 9,323 8,549 9%
Earned premiums* 7,948 7,458 7%
Claims ratio* 66% 63%
Combined ratio* 95.4% 93.9%
Solvency ratio* 42% 49%
Return on capital* (3 year average) 31.7% 27.5%
* As reported by Mutual & Federal
Mutual & Federal maintained solid results in the context of a highly
competitive trading environment and a gradual decline in the underwriting cycle
following the record results achieved in 2004 and 2005.
The underwriting result for the year was adversely impacted by an increase in
the severity and frequency of large claims, particularly industrial fires.
Severe weather conditions experienced in South Africa also negatively impacted
the results. In addition, despite strong rating adjustments and underwriting
interventions, results in the motor account continued to be negatively impacted
by an increase in claims emanating from high levels of accidents on South
African roads.
Gross premiums
Gross premiums in Risk Finance grew by only 2%, but the Personal and Commercial
portfolios grew 9% and 13% respectively, giving an overall increase of 9%
against the prior year. This was achieved despite the cancellation of certain
uneconomical blocks of business within the Personal division. Mutual & Federal
does not accept risks at sub-economic rates and has diligently followed prudent
underwriting practices.
Combined ratio weakens
Mutual & Federal generated an underwriting surplus of R366 million (2006: R455
million), or a ratio of 4.6% to earned premiums (2006: 6.1%), which is above
our long-term objective of 4%. The estimation methods used in providing for
claims and other technical liabilities were further refined and this released
R96 million (2006: R215 million) into the underwriting result. If these
adjustments are excluded, the underwriting result improved over the previous
year by R52 million.
The trading environment remains conducive to producing an improved underwriting
profit in 2008 with signs of a hardening of rates in certain sectors. Recent
electricity load shedding has created substantial inconvenience to Mutual &
Federal, but it is unlikely to impact the underwriting account significantly.
Solvency ratio
The solvency ratio has decreased from 49% to 42% following the payment of a
special dividend of R2 per share in December 2007.
Strong growth in adjusted operating profit and return on capital exceeding
target
The adjusted operating profit includes R262 million arising from a change in
the long-term investment return rate from 11.1% to 15.6%. This, together with
the special dividend of R8 per share paid in 2006, and R2 per share in 2007 has
contributed to the increase in the return on capital from 27.5% in 2006 to
31.7% in 2007. This is well ahead of our targeted return of 20%.
Sale discussions continue
Old Mutual announced in November 2007 that it had entered discussions with
community-based investment group, Royal Bafokeng Holdings, regarding a
potential sale of its controlling interest in Mutual & Federal. The discussions
are continuing, and a further announcement will be made in due course.
US LIFE
Continuing strong international variable annuity sales add to diversity of
earnings
Highlights (USDm) 2007 2006 % Change
IFRS-adjusted operating profit (pre-tax) 195 230 (15%)
Return on equity 5.9% 7.3%*
EV-adjusted operating profit (pre-tax) 126 181 (30%)
Return on Embedded Value 3.8% 6.1%
Life assurance sales (APE) 671 455** 47%
Value of new business (post-tax) 144 83 73%
New business margin (post-tax) 21% 18%**
PVNBP 6,305 4,093** 54%
Funds under management (USDbn) 24.1 22.1 9%
* Restated due to change in ROE methodology
** Restated due to change in US Life APE calculation to align with the volume
of new business calculation.
Growth in funds under management
Funds under management of USD24.1 billion at year end were up 9% due to positive
net client cash flows of USD2.4 billion, primarily driven by strong Old Mutual
Bermuda variable annuity sales partially offset by increased surrenders on the
Multi-Year Guaranteed Annuity block of business and a 1% decrease in fair value
of invested assets.
The business returned cash in 2007, while exceeding targeted risk-based capital
ratios in the operating entities including OM Financial Life Insurance Company
and Old Mutual Bermuda.
Excellent sales growth in international variable annuity business
Total life sales were USD6.1 billion on a gross basis, up 58% over 2006. Total
life sales APE were USD671 million, a 47% increase over 2006. Sales by
Old Mutual Bermuda were the largest contributor to the increase over the prior
year.
Old Mutual Bermuda increased sales on an APE basis by 201% to USD360 million
compared to 2006, representing 54% of APE sales in the US Life business. The
increase in sales was due to a new product launch in April 2007 and new
distribution agreements in Asia. Bermuda now represents 25% of the total funds
under management. Universal Life sales were up over the comparative period by
28% as part of a shift from a term life focused distribution to a more balanced
life portfolio. Continued demand for fixed indexed annuities was also a
contributing factor. We have an attractive and diverse mix of product offerings
including variable annuities, fixed indexed annuities, term life and universal
life.
Value of new business and healthy margins driven by strong offshore variable
annuity sales
VNB for the year of USD144 million was up 73% due to the higher volume of
Bermuda variable annuity business. The new business margin of 21% was at the
high end of our longer-term expectations primarily driven by Bermuda variable
annuity business. The overall business continues to benefit from good investment
performance and enhanced distribution. Our coordinated retail distribution
strategy has made good progress.
Underlying results solid
IFRS- and EV-adjusted operating profit and returns decreased in 2007 compared to
2006. This was due to assumption and modelling changes recorded during 2007 and
non-recurring net investment income in the first half of 2006 of USD18 million.
As indicated at our interim results, we strengthened our annuitant mortality
assumptions and adopted a more conservative approach to future assumed spreads.
These changes resulted in a USD277 million (USD186 million post-tax) adjustment
to embedded value (of which USD195 million (USD131 million post-tax) is in
respect of annuitant mortality assumptions which are included within EV adjusted
operating profit) and a USD60 million adjustment to pre-tax IFRS-adjusted
operating profits. Excluding these impacts, IFRS adjusted operating profit was
up 20%, driven by higher average asset levels.
Credit update
3% of US Life's fixed income portfolio of USD21 billion has direct exposure to
sub-prime debt and this helped US Life weather the market turbulence during the
second half of 2007. The sub-prime exposure is highly rated (86% is AAA, 99% is
AA and higher, and 100% is A and higher), concentrated in first mortgages
without rate-reset risk, and owner- occupied, rather than investor properties.
Approximately 2.3% of US Life's investment portfolio has exposure to monoline
insurers, of which USD493 million (85% of the total exposure) is indirect
(wrapped) exposure, with a 95% fair value to book value ratio, and USD90 million
is direct (unsecured) exposure, with a 87% fair value-to-book value ratio. Of
the 15% that represents the unsecured exposure, most are being recapitalised,
or have sufficient funds to go into run-off mode, if necessary.
US Life was not fully immune to the unfavourable credit conditions and recorded
USD64 million of impairment provisions during the fourth quarter. For IFRS-
adjusted operating profit, the impairment provision did not impact the
long-term investment return in 2007.
The investment portfolio's aggregate credit experience remained within
expectations and is in line with long-term assumptions.
Business Review
US ASSET MANAGEMENT
Another year of strong investment performance and asset growth
Highlights (USDm) 2007 2006* % Change
IFRS-adjusted operating profit 324 259 25%
Mutual fund/unit trust sales 3,782 3,088 22%
Net client cash flows (USDbn) 35.2 31.0 14%
Operating margin 27% 27%
Funds under management (USDbn) 332.6 272.6 22%
* 2006 comparative information has been restated to include OMAM (UK)
(transferred from the Skandia UK segment to the US asset management segment),
and to exclude fund flows related to eSecLending, which was sold in 2006
Investment performance drives growth in funds under management
Strong investment performance at our affiliates continued to attract new funds
during a volatile year in global equity markets. At 31 December 2007, 83% of
assets had outperformed their benchmarks and 83% were ranked above the median
of their peer group over the trailing three year period. A pleasing
USD35.2 billion of net client cash flows, 13% of opening funds under management,
were up 14% on 2006 with Rogge, Acadian, Barrow Hanley and Dwight the largest
contributors. Market appreciation of USD22 billion and the acquisition of
USD3 billion in assets at Ashfield Capital Partners contributed to an
overall increase in funds under management of 22% to USD332.6 billion at
31 December 2007.
Retail sales growth continues
Old Mutual Capital's gross mutual fund sales increased 3% from 2006 to
USD1,408 million despite the impact of volatile markets during the second half
of the year. At year-end, fourteen of Old Mutual Capital's mutual funds carried
four or five star rankings by Morningstar. OMAM (UK) unit trust sales increased
38% over 2006 to USD2,374 million, benefiting from investments made during 2006
to enhance the product offering and distribution capabilities of the business.
IFRS-adjusted operating profit increases 25%
AOP for the year was up 25% compared to the prior year, primarily as a result
of increased funds under management and higher performance fees. The operating
margin remained in line with the prior year, dampened during 2007 by expenses
associated with long-term equity plan implementations. The loss of margin is
offset, however, by above average net client cash flows. Aligning the interests
of our affiliates and shareholders through equity plans is critical to setting
us apart in this regard.
ASIA PACIFIC
Highlights (GBPm) 2007 2006 % Change
Australia unit trust/mutual funds sales 604 560* 8%
Australia institutional sales 115 - n/a
Skandia:BSAM (China) Gross Premiums ** 122 38 221%
Advisors selling Skandia: BSAM products 2,477 799 210%
KMOM (India) Gross Premiums ** 163 108 51%
KMOM branches 106 65 63%
* Skandia businesses included in the 2006 numbers have been adjusted on a
pro forma basis assuming ownership for 12 months rather than 11 months
** This represents 100% of the businesses; OM owns 50% of Skandia:BSAM and 26%
of KMOM
In January we announced the appointment of Steffen Gilbert as Regional Head of
Asia Pacific and we announced the establishment of our Asia Pacific
headquarters, based in Hong Kong. This will form the base from which we intend
to expand our existing operations throughout the region.
Australia
Operations in Skandia Group Australia include retail mutual funds and
institutional investment funds. After breaking even for the first time in 2006,
the business generated an operating profit of AUD7.8 million (GBP3.3 million) in
2007. At 31 December 2007, funds under management were AUD14.5 billion
(GBP6.4 billion), up 2% from AUD14.2 billion (GBP5.7 billion) at 31 December
2006. This was made up of institutional funds of AUD8.7 billion and retail funds
of AUD5.8 billion. Integration of the institutional business, acquired in late
2006, is now complete and on track to generate the expected cost savings. The
2007 John West Platform awards in Australia named Australian Skandia Limited as
the rising star for having above average platform funds under management growth.
China
Skandia:BSAM, our 50:50 joint venture with the Beijing State-owned Asset
Management Company (BSAM), is now in its third full year of operation and
continues to show strong sales growth (gross premiums for the year were over
three times the comparative prior year). The business sells unit-linked
products and has licences to operate in Beijing, Shanghai, Jiangsu Province and
Guangdong Province. Despite its recent entry into the market, of the 24 foreign
owned joint venture insurance companies in China, Skandia:BSAM had, for 2007,
the eighth largest gross premium flows (up two places compared to 2006). Our
unit-linked product range was granted 'the most welcome financial product'
award at the Shanghai Financial Expo 2007. New business margins are just over
25% which is higher than our long-term expectations.
India
Kotak Mahindra Old Mutual Life Insurance Ltd (KMOM), our joint venture with the
Kotak Mahindra Group, in which we have a 26% stake, continues to show steady
progress. The business now operates in 74 cities and 106 branches across India.
Gross premiums for the calendar year were GBP163 million, up 51% from
GBP108 million for the comparative period. In September we agreed to boost the
venture with a capital injection of INR1.5 billion (approximately GBP19 million)
in order for the business to extend its office network and increase its
workforce. New business margins are healthy and are consistent with those of
listed competitors in the country.
Outlook
Our key Asia Pacific objective is to develop a credible operation in terms of
both size and profitability. As well as building and widening our presence in
existing markets, we will develop opportunities for geographic expansion.
We will continue to provide working capital to our Indian and Chinese joint
ventures to support their further expansion and expect our Australian business
to continue to grow profitably in 2008.
GBP exchange rates AUD RMB INR
Closing 2.26 14.47 78.15
YTD Average 2.39 15.23 82.77
27 February 2008
Consolidated income statement
For the year ended 31 December 2007
GBPm
Year ended
31 December
Year ended 2006
31 December 2007 Restated
Revenue
Gross earned premiums 4,941 4,026
Outward reinsurance (201) (178)
Net earned premiums 4,740 3,848
Investment return (non-banking) 6,071 10,188
Banking interest and similar
income 3,190 2,427
Banking trading, investment and
similar income 170 181
Fee and commission income, and
income from service activities 2,457 2,171
Other income 212 307
Share of associated
undertakings' (loss)/profit
after tax (1) 6
Profit on disposal of
subsidiaries, associated
undertakings and strategic
investments 25 85
Total revenues 16,864 19,213
Expenses
Claims and benefits (including
change in insurance contract
provisions) (6,612) (7,554)
Reinsurance recoveries 184 216
Net claims and benefits incurred (6,428) (7,338)
Change in investment contract
liabilities (2,618) (4,655)
Losses on loans and advances (157) (123)
Finance costs (50) (91)
Banking interest payable and
similar expenses (2,053) (1,461)
Fee and commission expense, and
other acquisition costs (650) (592)
Other operating and
administrative expenses (2,724) (2,709)
Change in third party interest
in consolidated funds (156) (278)
Goodwill impairment (5)
Amortisation of PVIF and other
acquired intangibles (360) (379)
Total expenses (15,196) (17,631)
Profit before tax 1,668 1,582
Income tax expense (479) (563)
Profit from continuing
operations after tax 1,189 1,019
Profit from discontinued
operations after tax 57 74
Profit after tax for the
financial year 1,246 1,093
Profit for the financial year
attributable to:
Equity holders of the parent 1,972 836
Minority interests
Ordinary shares 224 207
Preferred securities 50 50
Profit after tax for the
financial year 1,246 1,093
Earnings per share
Based on profit from continuing
operations (pence) 18.3p 15.8p
Based on profit from
discontinued operations (pence) 0.9p 1.2p
Basic earnings per ordinary
share (pence) 19.2p 17.0p
Based on profit from continuing
operations (pence) 17.3p 15.0p
Based on profit from
discontinued operations (pence) 0.8p 1.1p
Diluted earnings per ordinary
share (pence) 18.1p 16.1p
Weighted average number of
shares millions 4,894 4,705
Adjusted operating profit
For the year ended 31 December 2007
Reconciliation of adjusted operating profit to profit after tax
GBPm
Year ended Year ended
31 December 31 December
2007 2006
Restated
South Africa 1,165 1,036
United States 260 264
Europe 268 239
Other 2 1
1,695 1,540
Finance costs (119) (130)
Other shareholders' expenses (41) (33)
Adjusted operating profit before
tax* 1,535 1,377
Adjusting items 73 (34)
Profit for the financial year
before tax (excluding policyholder
tax) 1,608 1,343
Total income tax expense (479) (563)
Income tax attributable to
policyholder returns 60 239
1,189 1,019
Profit for the financial year after
tax from continuing operations
Profit for the financial year after
tax from discontinued operations 57 74
Profit after tax for the financial
year 1,246 1,093
Adjusted operating profit after tax
attributable to ordinary equity
holders
GBPm
Year ended Year ended
31 December 31 December
2007 2006
Restated
Adjusted operating profit* before
tax 1,535 1,377
Tax on adjusted operating profit (390) (352)
Adjusted operating profit* after 1,145 1,025
tax from continuing operations
Adjusted operating profit* after
tax from continuing operations 1,145 1,025
Adjusted operating profit* after
tax from discontinued operations 61 39
Adjusted operating profit* after tax 1,206 1,064
Minority interest ordinary shares (242) (224)
Minority interest preferred
securities (50) (50)
914 790
Adjusted weighted average number of
shares (millions) 5,411 5,222
Based on adjusted operating profit
from continuing operations**
(pence) 16.1p 14.6p
Based on adjusted operating profit
from discontinued operations**
(pence) 0.8p 0.5p
Adjusted operating earnings per
share** (pence) 16.9p 15.1p
* 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 minority 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, the impact of closure of unclaimed shares trusts,
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 minority interests. It excludes income
attributable to Black Economic Empowerment trusts of listed subsidiaries. The
calculation of the adjusted weighted average number of shares includes own
shares held in policyholders' funds and Black Economic Empowerment trusts.
Consolidated balance sheet
At 31 December 2007
GBPm
At At
31 December 31 December
2007 2006
Restated
Assets
Goodwill and other intangible assets 5,459 5,367
Mandatory reserve deposits with
central banks 615 515
Property, plant and equipment 608 499
Investment property 1,479 1,149
Deferred tax assets 683 511
Investments in associated undertakings
and joint ventures 81 83
Deferred acquisition costs 2,253 1,578
Reinsurers' share of long-term
business policyholder liabilities 1,394 1,314
Reinsurers' share of general insurance
liabilities 57
Deposits held with reinsurers 213 247
Loans and advances 30,687 26,438
Investments and securities 90,220 81,915
Current tax receivable 83 60
Client indebtedness for acceptances 165 188
Other assets 2,181 3,106
Derivative financial instruments
assets 1,527 1,263
Cash and cash equivalents 3,469 3,101
Non-current assets held-for-sale 1,617 1,165
Total assets 142,734 128,556
Liabilities
Long-term business policyholder
liabilities 84,251 75,265
General insurance liabilities 265
Third party interests in consolidation
of funds 3,547 3,041
Borrowed funds 2,353 1,978
Provisions 499 542
Deferred revenue 462 283
Deferred tax liabilities 1,413 1,393
Current tax payable 320 283
Other liabilities 6,180 7,247
Liabilities under acceptances 165 188
Amounts owed to bank depositors 31,817 27,130
Derivative financial instruments
liabilities 1,716 1,071
Non-current liabilities held-for-sale 414 1,107
Total liabilities 133,137 119,793
Net assets 9,597 8,763
Shareholders' equity
Equity attributable to equity holders
of the parent 7,961 7,237
Minority interests
Ordinary shares 933 848
Preferred securities 703 678
Total minority interests 1,636 1,526
Total equity 9,597 8,763
Consolidated cash flow statement
For the year ended 31 December 2007
GBPm
Year ended Year ended
31 December 31 December
2007 2006
Cash flows from operating activities
Profit/(loss) before tax from continuing
operations 1,668 1,582
Profit before tax from discontinued
operations 82 132
1,750 1,714
Capital gains included in investment
income (1,836) (4,076)
Profit/(loss) on disposal of property,
plant and equipment 4 (1)
Depreciation of property, plant and
equipment 73 68
Amortisation and impairment of
intangible assets 403 428
Impairment of loans and receivables 183 143
Share-based compensation expense 15 40
Share of associated undertakings'
loss after tax (1) (6)
Loss arising on disposal of
subsidiaries, associated undertakings
and strategic investments (25) (85)
Other non-cash amounts in profit 29 68
Non-cash movements in profit before
tax (1,155) (3,421)
Reinsurers' share of long-term
business policyholder liabilities (53) (785)
Deferred acquisition costs (482) (632)
Loans and advances (5,339) (5,543)
Insurance liabilities 1,962 2,886
Investment contracts 4,124 6,594
Amounts owed to bank depositors 4,647 5,251
Other operating assets and liabilities (491) 555
Changes in working capital 4,368 8,326
Taxation paid (563) (317)
Net cash inflow from operating 4,400 6,302
activities
Cash flows from investing activities
Acquisition of financial
investments (3,896) (4,294)
Acquisition of investment
properties (26) (4)
Net acquisition of tangible fixed
assets (186) (120)
Net acquisition of intangible fixed
assets (67) (39)
Acquisition of interests in
subsidiaries (278) (1,318)
Disposal of interests in
subsidiaries, associated undertakings
and strategic investments 106 78
Net cash outflow from
investing activities (4,347) (5,697)
Cash flows from financing activities
Dividends paid to:
Equity holders of the Company (333) (282)
Equity minority interests and
preferred security interests (205) (199)
Interest payable (excluding banking
interest payable) (83) (52)
Net proceeds from issue of ordinary
shares (including by subsidiaries to
minority interests) 42 52
Net receipts from unclaimed shares
trust 95
Issue of subordinated debt 699 297
Other debt repaid (356) (96)
Net cash outflow) from
financing activities (141) (280)
Net (decrease)/increase in cash and
cash equivalents (88) 325
Effects of exchange rate changes on cash and
cash equivalents 50 (575)
Cash and cash equivalents on acquisition of new
subsidiaries 581
Cash and cash equivalents at beginning of the year 3,634 3,303
Cash and cash equivalents at end of the year 3,596 3,634
Consisting of:
Coins and bank notes 211 236
Money at call and short notice 3,169 2,856
Balances with central banks (other than
mandatory reserve deposits) 121 9
Cash and cash equivalents from non-current
assets held-for-sale (32) -
Cash and cash equivalents 3,469 3,101
Mandatory reserve deposits with central banks 615 515
Other cash equivalents 808 1,101
Cash and cash equivalents subject to
consolidation of funds (1,296) (1,083)
Total 3,596 3,634
Other supplementary cash flow disclosures
Interest income received (including banking
interest) 4,858 4,059
Dividend income received 388 513
Interest payable (including banking interest) 2,130 1,552
Cash flows presented in this statement include all cash flows relating to
policyholders' funds for the long-term business.
Cash and cash equivalents subject to consolidation of funds are not included in
the cash flow as they relate to the minority holding in the funds.
Management do not consider that there are material amounts of cash and cash
equivalents which are not available for use by the Group.
Consolidated statement of changes in equity
For the year ended 31 December 2007
Millions GBPm
Number of
shares
issued Attributable to
and fully equity holders
Year ended 31 December 2007 paid of the parent
Equity holders' funds at beginning of the year 5,501 7,237
Change in equity arising in the year
Fair value gains/(losses):
Property revaluation 95
Net investment hedge (13)
Available-for-sale investments:
Fair value losses (161)
Shadow accounting 25
Currency translation differences/exchange
differences on translating foreign operations 129
Other movements (4)
Aggregate tax effect of items taken directly
to or transferred from equity 34
Net income recognised directly in equity 105
Profit for the year 1,972
Total recognised income and expense for the
year 1,077
Dividends for the year (373)
Net sale of treasury shares 149
Shares repurchased in the buyback programme (177)
Issue of ordinary share capital by the Company 3
Net acquisition of interests in subsidiaries
Exercise of share options 9 9
Fair value of equity settled share options 36
Equity holders' funds at end of the year 5,510 7,961
Millions GBPm
Total minority Total
Year ended 31 December 2007 interest equity
Equity holders' funds at beginning of the year 1,526 8,763
Change in equity arising in the year
Fair value gains/(losses):
Property revaluation 1 96
Net investment hedge (13)
Available-for-sale investments:
Fair value losses (161)
Shadow accounting 25
Currency translation differences/exchange
differences on translating foreign operations 4 133
Other movements (4)
Aggregate tax effect of items taken directly to
or transferred from equity 34
Net income recognised directly in equity 5 110
Profit for the year 274 1,246
Total recognised income and expense for the year 279 1,356
Dividends for the year (165) (538)
Net sale of treasury shares 149
Shares repurchased in the buyback programme (177)
Issue of ordinary share capital by the Company 3
Net acquisition of interests in subsidiaries (4) (4)
Exercise of share options 9
Fair value of equity settled share options 36
Equity holders' funds at end of the year 1,636 9,597
Share Share Other Translation
Year ended 31 December 2007 capital premium reserves reserve
Attributable to equity
holders of the parent
at beginning of the year 550 746 2,901 (421)
Changes in equity arising
in the year:
Fair value gains/(losses):
Property revaluation 95
Net investment hedge (13)
Available-for-sale
investments:
Fair value losses (161)
Shadow accounting 25
Currency translation
differences/exchange
differences
on translating foreign
operations 129
Other movements (10) (2)
Aggregate tax effect of
items taken directly to
or transferred from equity 22 3
Net income recognised
directly in equity (29) 117
Profit for the year
Total recognised income
and expense for the year (29) 117
Dividends for the year
Net sale of treasury shares
Shares repurchased in the
buyback programme
Issue of ordinary share
capital by the Company 3
Exercise of share options 1 8
Fair value of equity
settled share options 36
Attributable to equity
holders of the
parent at end of the year 551 757 2,908 (304)
GBPm
Perpetual
preferred
Retained callable
Year ended 31 December 2007 earnings securities Total
Attributable to equity holders of the
parent
at beginning of the year 2,773 688 7,237
Changes in equity arising in the year:
Fair value gains/(losses):
Property revaluation 95
Net investment hedge (13)
Available-for-sale investments:
Fair value losses (161)
Shadow accounting 25
Currency translation differences/exchange
differences
on translating foreign operations 129
Other movements 8 (4)
Aggregate tax effect of items taken
directly to
or transferred from equity 9 34
Net income recognised directly in equity 17 105
Profit for the year 972 972
Total recognised income and expense for
the year 989 1,077
Dividends for the year (373) (373)
Net sale of treasury shares 149 149
Shares repurchased in the buyback
programme (177) (177)
Issue of ordinary share capital by the
Company 3
Exercise of share options 9
Fair value of equity settled share options 36
Attributable to equity holders of the
parent at end of the year 3,361 688 7,961
GBPm
At
31 December
Other reserves 2007
Merger reserve 2,716
Available-for-sale reserve (30)
Property revaluation reserve 75
Share-based payments reserve 147
Attributable to equity holders of the parent at end of the year 2,908
Retained earnings have been reduced by GBP588 million at 31 December 2007 in
respect of own shares held in policyholders' funds, ESOP trusts, Black Economic
Empowerment trusts and other related undertakings. Included in the dividend for
the year is GBP40 million of dividends declared to holders of perpetual
preferred callable securities. Within issue of ordinary share capital by the
Company are prior year transaction costs totalling GBP2 million deducted from
the share premium. Included within other reserves is the merger reserve for the
additional share consideration made in respect of the Skandia acquisition,
being the difference between the market value of the shares on the date of
issue and the nominal value included as share capital.
Millions GBPm
Attributable to
Number of shares equity holders
Year ended 31 December 2006 issued and fully paid of the parent
Equity holders' funds at
beginning of the year 4,090 4,751
Changes in equity arising in the year
Fair value gains/(losses):
Property revaluation 28
Net investment hedge 75
Available-for-sale investments:
Fair value losses (111)
Recycled to income statement on
realisation 17
Shadow accounting 28
Currency translation
differences/exchange differences
on translating foreign operations (852)
Other movements 38
Aggregate tax effect of items
taken directly to or transferred
from equity 14
Net expense recognised directly
in equity (763)
Profit for the year 836
Total recognised income and
expense for the year 73
Dividends for the year (321)
Net sale of treasury shares 18
Issue of ordinary share capital
by the Company 1,400 2,674
Net acquisition of interests in
subsidiaries
Exercise of share options 11 14
Fair value of equity settled
share options 28
Equity holders' funds at end of
the year 5,501 7,237
Millions GBPm
Total minority Total
Year ended 31 December 2006 interest equity
Equity holders' funds at beginning of the year 1,668 6,419
Changes in equity arising in the year
Fair value gains/(losses):
Property revaluation 28
Net investment hedge 75
Available-for-sale investments:
Fair value losses (111)
Recycled to income statement on realisation 17
Shadow accounting 28
Currency translation differences/exchange
differences on translating foreign operations (208) (1,060)
Other movements (42) (4)
Aggregate tax effect of items taken directly to
or transferred from equity 14
Net expense recognised directly in equity (250) (1,013)
Profit for the year 257 1,093
Total recognised income and expense for the year 7 80
Dividends for the year (160) (481)
Net sale of treasury shares 18
Issue of ordinary share capital by the Company 2,674
Net acquisition of interests in subsidiaries 11 11
Exercise of share options 14
Fair value of equity settled share options 28
Equity holders' funds at end of the year 1,526 8,763
GBPm
Share Share Other Translation
Year ended 31 December 2006 capital premium reserves reserve
Attributable to equity
holders of the parent
at beginning of the year 410 730 374 357
Changes in equity arising
in the year:
Fair value gains/(losses):
Property revaluation 28
Net investment hedge 75
Available-for-sale
investments:
Fair value losses (111)
Recycled to income
statement on realisation 17
Shadow accounting 28
Currency translation
differences/exchange
differences
on translating foreign
operations (852)
Other movements (6)
Aggregate tax effect of
items taken directly to
or transferred from equity 11 (1)
Net expense recognised
directly in equity (33) (778)
Profit for the year
Total recognised income
and expense for the year (33) (778)
Dividends for the year
Net sale of treasury shares
Issue of ordinary share
capital by the Company 139 3 2,532
Exercise of share options 1 13
Fair value of equity
settled share options 28
Attributable to equity
holders of the
parent at end of the year 550 746 2,901 (421)
GBPm
Perpetual
preferred
Retained callable
Year ended 31 December 2006 earnings securities Total
Attributable to equity holders of the
parent at beginning of the year 2,192 688 4,751
Changes in equity arising in the year:
Fair value gains/(losses):
Property revaluation 28
Net investment hedge 75
Available-for-sale investments:
Fair value losses (111)
Recycled to income statement on
realisation 17
Shadow accounting 28
Currency translation differences/exchange
differences
on translating foreign operations (852)
Other movements 44 38
Aggregate tax effect of items taken
directly to
or transferred from equity 4 14
Net expense recognised directly in equity 48 (763)
Profit for the year 836 836
Total recognised income and expense for
the year 884 73
Dividends for the year (321) (321)
Net sale of treasury shares 18 18
Issue of ordinary share capital by the
Company 2,674
Exercise of share options 14
Fair value of equity settled share options 28
Attributable to equity holders of the
parent at end of the year 2,773 688 7,237
GBPm
At
31 December
Other reserves 2006
Merger reserve 2,716
Available for sale reserve 28
Property revaluation reserve 48
Cash flow hedge reserve (1)
Share-based payments reserve 110
Attributable to equity holders of the parent at end of the year 2,901
Retained earnings have been reduced by GBP704 million at 31 December 2006 in
respect of own shares held in policyholders' funds, ESOP trusts, Black Economic
Empowerment trusts and other related undertakings. Included in the dividend for
the year is GBP39 million of dividends declared to holders of perpetual
preferred callable securities. Within issue of ordinary share capital by the
Company are transaction costs totalling GBP2 million deducted from the share
premium. Included within other reserves is the merger reserve for the
additional share consideration made in respect of the Skandia acquisition,
being the difference between the market value of the shares on the date of
issue and the nominal value included as share capital.
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