Wrap Text
OML - Old Mutual PLC - Preliminary results for the year ended 31 December 2010
OLD MUTUAL PLC
ISIN: GB0007389926
JSE SHARE CODE: OML
NSX SHARE CODE: OLM
ISSUER CODE: OLOML
8 March 2011
Old Mutual plc
Preliminary results for the year ended 31 December 2010
Strong underlying results, one year into our three-year strategy
2010 2009 2009
Financial Summary1 (constant currency) (as reported)
Adjusted operating profit
before tax (IFRS basis)* GBP1 481m GBP1 300m GBP1 133m
Adjusted operating
earnings per share (IFRS
basis)** 16.0p 13.3p 11.6p
Net client cash flows (GBP5.7bn) (GBP2.0bn) (GBP1.8bn)
Funds under management GBP309.3bn GBP291.1bn GBP275.4bn
Group ROE 12.2% 9.1%
Adjusted MCEV per share 202.2p 171.0p
Total dividend for the
year 4.0p 1.5p
1 All numbers refer to core continuing businesses and 2009 comparatives have
been restated accordingly. Percentage movements below are shown on a constant
currency basis.
Profits up in each business unit 1
- Adjusted operating profit before tax (IFRS basis) up 14%:
- Strong growth in new business; continued focus on cost control
- EPS growth of 20%
- Long Term Savings NCCF doubled during the year to GBP5 billion:
- Emerging Markets positive overall; lower outflows from SA
- Wealth Management NCCF up 56%
- APE sales up 7% to GBP1 491 million:
- Continued momentum in sales on the UK platform, UK APE sales up 28%
- South Africa APE sales up 7%, savings products up 10% with strong regular
premiums growth in Retail Affluent
- Unit trust sales up 28% to GBP10.3 billion
- Headline earnings growth in Nedbank of 15%
- Funds under management up 6% from 31 December 2009
Robust financial position
- FGD of GBP2.1 billion at 31 December 2010 (GBP1.5 billion at 31 December
2009)
- Adjusted MCEV 202.2p per share at 31 December 2010, up 18% (IFRS NAV: 151p per
share)
- Board recommending a 2.9p final dividend for 2010 with a scrip alternative,
making a total dividend for the year of 4.0p
Committed to delivering the strategy
- Sale of US Life progressing with an anticipated close at or around the end
of the first quarter of 2011
- Good progress in delivering 2012 financial targets
- Run-rate cost savings of GBP59 million delivered to date against target of
GBP100 million by 2012
Julian Roberts, Group Chief Executive, commented:
`This has been a substantially improved performance by Old Mutual in 2010, with
operating profits significantly higher than last year. All our businesses have
delivered increased underlying earnings and profits from our key Long Term
Savings division were up 26%.
We have an attractive mix of businesses, with a strong franchise in high growth
emerging markets and innovative business models in both developed and highly
cash generative markets.
We have made some significant operational progress and we expect 2011 to be a
year of further delivery. We are committed to our three-year strategy and
meeting our stated operation targets.`
Enquiries
External Communications
Patrick Bowes UK +44 (0)20 7002 7440
Investor Relations
Deward Serfontein SA +27 (0)82 810 5672
Aleida White UK +44 (0)20 7002 7287
Media
William Baldwin-Charles +44 (0)20 7002 7133
Notes
Unless otherwise stated, wherever the terms asterisked in the Financial
Highlights are used, whether in the Financial Highlights, the Group Chief
Executive`s Statement, the Group Finance Director`s Review or the Business
Review, the following definitions apply:
* For long-term business and general insurance businesses, adjusted operating
profit is based on a long-term investment return, includes investment returns on
life funds` investments in Group equity and debt instruments, and is stated net
of income tax attributable to policyholder returns. For the US Asset Management
business, it includes compensation costs in respect of certain long-term
incentive schemes defined as non-controlling interests in accordance with IFRS.
For all businesses, adjusted operating profit excludes goodwill impairment, the
impact of acquisition accounting, put revaluations related to long-term
incentive schemes, profit/(loss) on disposal of subsidiaries, associated
undertakings and strategic investments, dividends declared to holders of
perpetual preferred callable securities, and fair value (profits)/losses on
certain Group debt movements.
** Adjusted operating earnings per ordinary share is calculated on the same
basis as adjusted operating profit. It is stated after tax attributable to
adjusted operating profit and non-controlling interests. It excludes income
attributable to Black Economic Empowerment (BEE) trusts of listed subsidiaries.
The calculation of the adjusted weighted average number of shares includes own
shares held in policyholders` funds and BEE trusts.
Cautionary statement
This announcement has been prepared solely to provide additional information to
shareholders to assess the Group`s strategies and the potential for those
strategies to succeed. It should not be relied on by any other party or for any
other purpose.
This announcement contains forward-looking statements with respect to certain of
Old Mutual plc`s plans and its current goals and expectations relating to its
future financial condition, performance and results. By their nature, all
forward-looking statements involve risk and uncertainty because they relate to
future events and circumstances that are beyond Old Mutual plc`s control,
including, among other things, UK domestic and global economic and business
conditions, market-related risks such as fluctuations in interest rates and
exchange rates, policies and actions of regulatory authorities, the impact of
competition, inflation, deflation, the timing and impact of other uncertainties
or of future acquisitions or combinations within relevant industries, as well as
the impact of tax and other legislation and other regulations in territories
where Old Mutual plc or its affiliates operate.
As a result, Old Mutual plc`s actual future financial condition, performance and
results may differ materially from the plans, goals and expectations set forth
in Old Mutual plc`s forward-looking statements. Old Mutual plc undertakes no
obligation to update any forward-looking statements contained in this
announcement or any other forward-looking statements that it may make.
Notes to Editors:
A webcast of the presentation and Q&A will be broadcast live at 9:00am (GMT),
(10:00am (CET)/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 numbers and quote the passcode 4868538:
UK/International +44 (0)20 7138 0844
US +1 212 444 0896
Sweden +46 (0)8 5352 6457
South Africa (toll-free) +27 11 019 7014
Playback (available for 14 days from 8 March), using pass-code 4868538#:
UK/International +44 (0)20 7111 1244
US +1 347 366 9565
Copies of these Results, together with high-resolution images and biographical
details of the Executive Directors of Old Mutual plc, are available in
electronic format to download from the Company`s website at www.oldmutual.com.
A Financial Disclosure Supplement relating to the Company`s Preliminary Results
can be found on the website. This contains key financial data for 2010 and 2009.
Foreign exchange rates
GBP/ZAR exchange rates GBP/SEK exchange rates
Average Closing Average Closing
exchange rate exchange rate exchange rate exchange rate
FY2010 11.31 10.28 11.14 10.42
FY2009 13.17 11.92 11.97 11.56
GBP/EUR exchange rates GBP/USD exchange rates
Average Closing Average Closing
exchange rate exchange rate exchange rate exchange rate
FY2010 1.16 1.16 1.55 1.55
FY2009 1.12 1.13 1.57 1.61
Group Chief Executive`s Review
Review of Operations
Introduction
Our operating results for 2010 are significantly ahead of the prior year results
as reported with profits up in each of our businesses. This excellent
performance was largely due to strong growth in new business sales, our
continued focus on cost control, improved persistency and favourable exchange
rates.
In addition to strong financial performance, we also focused on delivering our
strategy and have made good progress in 2010. We have agreed to sell US Life, a
business that was outside our Group risk and return profile, for $350 million,
resulting in an IFRS charge of GBP713 million. We are awaiting regulatory
approval, and expect the transaction to close at or around the end of the first
quarter of 2011. The next two years will see a continued single-minded focus to
meet our strategic objectives.
The Group is in sound financial shape. At 31 December 2010 our FGD surplus was
GBP2.1 billion and we had total liquidity headroom of GBP1.4 billion.
Strategy Update
In 2010, we set out a new strategy for the Group. Our strategy is to build a
long-term savings, protection and investment group by leveraging the strength of
our people and capabilities in South Africa and around the world. Through the
delivery of this strategy, we will drive our businesses to enhance value for
both our customers and shareholders, increasing our international cash earnings
and overall return on equity. During the year, we entered into exclusive
negotiations to sell our shareholding in Nedbank, but these discussions did not
conclude with a formal offer being made. In 2011, we will continue to work with
Nedbank to build shareholder value.
We are now one year into a three-year process to deliver this strategy and are
making significant operational progress. We are rationalising our activities
over time, reducing the complexity of the Group and improving our structure as
we manage our business with a disciplined approach to risk management,
governance and allocation of capital. We have taken steps to simplify our Group
by selling the US Life business, subject to regulatory clearance, and will
continue to maintain our strict criteria for keeping businesses within the
Group: they must meet our capital and risk targets; be capable of achieving a
15% return on equity; add value to other parts of the Group; and be capable of
creating future value for shareholders.
We have previously said that we will explore the possibility of listing a
minority of the US Asset Management business and this remains our intention. The
timing of the IPO will be dependent on margin progression, investment
performance and growth.
We have set challenging Group-wide performance targets for the end of 2012:
reducing costs by GBP100 million; improving return on equity for our Long Term
Savings business to between 16% - 18%; and reducing debt by GBP1.5 billion
through proceeds of rationalisation and retained earnings. We have already
delivered GBP59 million of run-rate savings and are committed to deliver our
debt reduction target. Return on equity for the LTS business was 18.5% at the
year-end, as we benefited from positive, non-recurring items in both the Nordic
and Wealth Management businesses. Plans are in place to ensure this performance
is sustained within the target range.
We have implemented a new, more effective, governance and control system giving
our businesses local autonomy but ensuring that they work within Group
structures and disciplines, particularly on risk and product underwriting
standards. This new approach has been implemented effectively and has resulted
in the level of one-off operational losses reducing significantly across the
Group in 2010. We continue to manage risk effectively and have tightly managed
the US Life bond portfolio and our business in Bermuda.
We continue to assemble a strong management team, and recently appointed Peter
Bain as CEO of US Asset Management, and Peter Todd as Managing Director of
Mutual & Federal. These are key roles for the Group as we look to drive the
growth of these businesses.
We are clear on our strategy and are committed to delivering it.
Long Term Savings (`LTS`)
Our LTS division delivered very strong results for the year with operating
profits up 26% on a constant currency basis. This was driven by strong profit
performance by all of the businesses within LTS. Life sales for the year were up
7% and unit trust sales were up 28% on a constant currency basis. Funds under
management (`FUM`) increased and margins improved.
We continued to strengthen the LTS management team and we appointed new CEOs to
the Nordic business and the investment business in South Africa (`OMIGSA`) as
well as new heads of Product and IT, roles which are critical to leveraging our
capability and delivering the strategy.
We made significant strides in implementing the LTS strategy in 2010. The
business delivered run-rate savings of GBP44 million, against the targeted cost
reduction of GBP75 million. This was primarily driven by Wealth Management which
removed GBP35 million of costs in 2010 against its stated target of GBP45
million by 2012. We are seeking to leverage our IT and administration
capabilities in South Africa to drive economies of scale and in December we
opened a new office in Cape Town to provide customer service processing and IT
support for Retail Europe`s customers in Germany, Poland and Austria. Launching
new and innovative products through easily accessible distribution channels is
key to our aim of becoming our customers` most trusted partner. Whilst this work
is still at an early stage, we introduced a number of new initiatives in 2010.
OMSA and Mutual & Federal jointly developed a new short-term insurance product
iWYZE for the retail mass market in South Africa. This product is distributed
through traditional mass market models but also through digital channels and in
the nine months since it launched, has already attracted nearly 5 000 customers.
To date, iWYZE has also created approximately 150 new jobs in South Africa,
primarily for young people.
Through our joint venture in India, Kotak Mahindra Old Mutual Life Insurance, we
launched an online portal allowing customers to buy term insurance at a cheaper
rate than through normal distribution channels. In Mexico, a unit-linked product
was redesigned in conjunction with our team in South Africa and has since proved
a key driver of our increased sales in the country. We also introduced a new
Mass Retail distribution team into Mexico in December.
LTS: Emerging Markets
In South Africa, our business delivered a strong performance with life sales up
7% and unit trust sales up 17%. There was a noticeable improvement in sales in
the second half as interest rates were cut and as the economic environment in
South Africa stabilised. We saw good sales growth in both the Retail Affluent
and Mass Foundation segments, with a particular focus on savings products. The
latest economic data is encouraging for the performance of the business in 2011.
We launched the Futuregrowth Agri-Fund focusing on responsible equity
investments in agricultural land, agri-businesses and farming infrastructure.
OMIGSA attracted more than R8 billion into social infrastructure investment.
Responsible funds are an important part of our commitment to helping build South
African infrastructure and increase jobs for all parts of society.
Mexico saw growth of 36% due to the introduction of a regular premium savings
product in the first half of the year. In China, our joint venture with Guodian
had a strong year with APE sales up 77% to CNY163 million in 2010, following a
new channel diversification strategy.
We have set a target for our profits from our African insurance operations to be
the equivalent of 10% of our South African profits by 2012, and 15% by 2015. To
do this, we will leverage our experience and knowledge of the mass market sector
in South Africa to grow our distribution channels through tied-agents and
bancassurance and drive product development. We will also look to exploit new
channels as they are established. For example, in Kenya we have seen initial
success in distribution through mobile phones.
We see other opportunities for growth in Africa, but remain mindful of
our strict criteria for investment and any expansion must be within
appropriate risk-adjusted returns.
We have a solid foundation in South Africa from which we can drive growth in
other emerging markets, and we are adapting our senior management structures,
roles and responsibilities to achieve this. Our priorities for 2011 include
growing our sales force; designing and adapting products for a wide range of
customers; making it easier for our customers to access financial services and
promoting a savings culture in the markets in which operate. We have confidence
in the underlying business and are well-positioned to exploit business
opportunities as the economies of the Emerging Markets grow.
LTS: Nordic
The Nordic economies experienced positive GDP growth in 2010 and our Nordic
business also had a good year, delivering a 66% uplift in profit. Life sales
were down 21% on the prior year, in line with management expectations, following
the closure of an unprofitable business line in 2009. Our Danish business grew
strongly. FUM was up 14% on the prior year, mainly due to improved equity
markets, which also contributed to strong growth in mutual funds, up 37%.
During 2010, the Nordic business focused on building distribution and product
offerings, increasing efficiency and optimising its structures and risk
frameworks. The management team was strengthened and a new CEO appointed.
2011 is a critical year for Nordic as it focuses on delivering its cost savings
target of GBP10 million per annum. The cost of delivering these savings is
likely to have a negative impact on the profitability of the business in the
coming year. The management will continue to focus on driving sales, increasing
margins and delivering an improved distribution and product offering for the
future development of the businesses in a rapidly changing market-place. The
economic outlook for the year is positive across all the geographies and we
expect the Nordic savings markets to grow, albeit in a more competitive and
fragmented market environment.
LTS: Retail Europe
Retail Europe delivered a very positive performance in 2010, in the context of
GDP growth in all its markets. Equity markets were up, with the DAX showing a
16% gain for the year. Profits for Retail Europe were up 140% on the prior year,
with APE sales up 7% and mutual funds flat. FUM was up 23%.
Retail Europe continued to focus on building an integrated organisation and
reducing operating costs. As part of the focus on costs, IT and client
administration services for Retail Europe are being transferred to South Africa.
One-off costs associated with the transfer will impact profitability in 2011,
before the benefits start to come through in 2012.
The uplift in sales was driven by new product launches in Germany, Poland and
Switzerland. We also improved our marketing and sales drives to customers and
built strong, more fruitful relationships with our distributors in 2010 and
these proved to be significant drivers of the business` improved profits.
Macro-economic factors will continue to influence the business in 2011.
Positive equity and bond market performances will raise consumer confidence
although we expect there to be continued concern over unemployment levels. We
have a programme of product innovation for the markets in Germany and Poland
which should underpin growth in these attractive markets.
LTS: Wealth Management
This has been a significant year for Wealth Management. APE sales were up 19%,
and it delivered an 86% growth in profit, driven by delivery of GBP35 million
of run-rate savings, against its 2012 target of GBP45 million.
Investor confidence was boosted by the return to growth in equity markets
which led to increased funds under management in all of our businesses. In the
UK, we saw a continuation of the trend of IFAs converting to platform sales,
for both wrapped and unwrapped sales. This was particularly noticeable in the
first half as IFAs moved large blocks of business onto our platform ahead of
the tax year-end. Skandia`s market share in the UK continued to grow, and at
the end of the third quarter we had captured 7.4% of all industry channels,
versus 6.4% in the fourth quarter in 2009. Skandia Investment Group`s Spectrum
risk-targeted funds had a successful year with funds under management at
more than GBP750 million with the funds now available on all the major IFA
platforms in the UK. SIG also provided the technical expertise to allow the
Nordic business to launch its own risk-targeted funds, based on the Spectrum
concept, into Sweden.
During 2011, Wealth Management will continue to focus on cost reduction,
improving efficiency and meeting its 2012 targets, increasing risk controls
and improving the functionality of the platform and the richness of the product
offering. We are seeing an increasing demand from customers for products and
services that are focused on their needs, are easy to understand and do not
rely on heavy up-front commission to drive sales and with the forthcoming
Retail Distribution Review, governments having to roll-back State retirement
provision and the corresponding need for personal retirement savings, our
Wealth Management business is well-placed to meet customer demand. We plan
for the Platform to add to the profits of the Wealth Management business in
2012.
Nedbank
Household finances improved in South Africa as debt started to reduce and
interest rates eased to the lowest levels in 36 years. The recovery in the
credit cycle has proved to be more modest compared to previous cycles. The
ratio of household debt to disposable income reduced marginally and at the
same time debt service levels decreased to 7.5% and are now at a level that
is more conducive to improving economic growth in the consumer sector. In the
corporate sector, excess capacity and uncertainty over the sustainability of
the local and global recovery limited spending.
Nedbank showed solid earnings growth in a challenging economic environment.
Headline earnings increased by 15% to R4 900 million, which was marginally
ahead of the range guided at the third quarter trading statement, and
non-interest revenue increased 11% to R13.2 billion. Net interest income
increased 2% to R16.6 billion.
Nedbank`s credit loss ratio improved to 1.36% for 2010, its liquidity position
remains sound and its capital ratios remain above target levels. The Tier 1
capital adequacy ratio of 11.7% marginally improved from that at 31 December
2009, and the total capital adequacy ratio ended the period at 15.0%.
Nedbank is a strongly performing business and a significant contributor to
the Group. We have a clear strategy for growth with the key thrusts being
the repositioning of Nedbank retail, growing non-interest revenue, focusing
on areas that yield higher economic profit and increased focus on the rest
of Africa.
Mutual & Federal
2010 was a good year for Mutual & Federal with profits up 27% and a strong
underwriting performance following the cancellation of unprofitable business,
a relatively benign claims environment and a greater focus on claims cost
control.
During 2010, we introduced the step-change programme at M&F. Peter Todd has
been appointed as Managing Director of M&F and will drive the delivery of
the step-change programme over the next three years. The objectives of the
programme are to embed profitable and sound underwriting; to develop better
products; to be more customer-focused; grow our customer base by offering the
right distribution models; and improve efficiency. As part of the step-change
programme, we aim to improve profitability through growth in the direct and
broker channels and through the reduction of claims costs and expenses.
During the year, we entered the direct insurance channel via iWYZE, the
joint initiative with OMSA. This is the first step in extracting greater
value from M&F`s position within the Old Mutual Group following the
buy-out of minorities.
With its strong balance sheet and increased focus on alternative distribution
channels, we are confident that we can grow revenue while improving our expense
ratios.
US Asset Management
USAM profits improved 4% over 2009 due primarily to higher average FUM. We
saw net inflows into fixed income products, which were off-set by outflows
from equity, alternative and stable value products leading to an overall
negative NCCF of $18.0 billion. During the recent market dislocation, a
number of our affiliates underperformed in certain of their strategies,
but we are confident that they will deliver outperformance in time. Echo
Point began operating as a USAM affiliate in October launching with $1.7
billion funds under management in international growth equities.
Non-US clients represented more than a quarter of total funds under management
and a key objective for us is to grow and diversify this base. We have expanded
our global distribution through the hiring of new staff and we are expanding
our distribution presence in the Middle East, resulting in US Asset Management
now operating out of 13 countries. Growing the international element for US
Asset Management is a priority for the business and we continue to work
toward improving our margin with a target of 25% - 30% by the end of 2012
and improving investment performance.
Peter Bain has been appointed CEO of US Asset Management. Peter has a proven
track record in growing a boutique asset management company and his appointment
is a key milestone for the US Asset Management business as we look to grow the
business.
We believe in our boutique model, with its 18 affiliates and 160 investment
strategies. As investor confidence improves, and with our extensive diversified
product portfolio including non-US equity exposure, we believe we have the
opportunity to capture a share of these flows.
We continue to explore the possibility of a partial IPO by the end of 2012.
Board changes
On 5 August 2010, Roger Marshall became a non-executive director. Mr Marshall
replaced Richard Pym as Chairman of the Group Audit Committee. Mr Pym stepped
down in August at the end of his three-year term.
On 3 November 2010, Alan Gillespie joined the Board as a non-executive director.
Mr Gillespie will succeed Rudi Bogni as the Senior Independent Director when Mr
Bogni retires at the Company`s AGM in May 2011.
On 4 February 2011, Eva Castillo was appointed as a non-executive director of
Old Mutual plc.
Dividend
The Board has considered the position in respect of a final dividend for year
ended 31 December 2010, and is recommending a final dividend of 2.9p per share
(or its equivalent in other currencies). This makes a total dividend payment for
the year of 4.0p compared to 1.5p in the previous year. A scrip alternative will
be offered to eligible shareholders.
South African Empowerment
In South Africa in 2010, OMSA achieved and Nedbank maintained a Level 2 rating
status and Mutual & Federal a Level 3 rating status as BBBEE contributors.
Outlook
We have made some significant operational progress and we expect 2011 to be a
year of further delivery. We are committed to our three-year strategy and
meeting our stated operational targets.
Julian Roberts
Group Chief Executive
8 March 2011
Group Finance Director`s Review
GROUP RESULTS
Overview of FY 2010 results
FY 2009
Group Highlights (GBPm)1 (constant
FY 2010 currency) % change
Adjusted operating profit (IFRS basis,
pre-tax) 1 481 1 300 14%
Adjusted operating earnings per share (IFRS
basis) 16.0p 13.3p 20%
Life assurance sales - APE basis 1 491 1 392 7%
Unit trust/mutual fund sales 10 305 8 068 28%
Return on equity* 12.2%
Net client cash flows (GBPbn) (5.7) (2.0) (185%)
Funds under management (GBPbn) 309.3 291.1 6%
Total dividend for the year 4.0p 1.5p 167%
FY 2009
Group Highlights (GBPm)1 (as reported) % change
Adjusted operating profit (IFRS basis, pre-tax) 1 133 31%
Adjusted operating earnings per share (IFRS basis) 11.6p 38%
Life assurance sales - APE basis 1 312 14%
Unit trust/mutual fund sales 7 567 36%
Return on equity* 9.1% 310bps
Net client cash flows (GBPbn) (1.8) (217%)
Funds under management (GBPbn) 275.4 12%
Total dividend for the year 1.5p 167%
1 The balances in the above table are in respect of core continuing businesses
only and the 2009 comparatives have been restated accordingly.
* ROE is calculated as IFRS AOP (post-tax) divided by average shareholders`
equity of core businesses (excluding the perpetual preferred callable
securities).
During the year to 31 December 2010 (`the year`) Old Mutual showed a very strong
improvement in results compared to the prior year. Adjusted Operating Profit
(`AOP`) earnings per share were 16.0p for 2010 compared to 11.6p for 2009. This
was driven by improved operational performance across the Group and positive
currency movements. Funds under management grew by 12% compared to the prior
year, largely due to improved market conditions. Return on equity grew to 12.2%,
primarily as a result of improved margins and favourable foreign exchange
movements.
IFRS AOP on a pre-tax basis of GBP1 481 million for the year was GBP348 million
higher than in the prior year. This was made up of GBP181 million (52%) due
to improvement in trading results, and GBP167 million (48%) from the positive
benefit of currency movements. On a constant currency basis, the AOP for 2009
was GBP1 300 million. Strong growth in new business sales, lower credit losses
in banking, a close focus on overall cost control, improved persistency and
higher profits in our general insurance business drove the underlying
performance.
Net client cash flows (`NCCF`) doubled in LTS to GBP5 billion, and were positive
in all our European businesses and in our Retail South African businesses.
This was off-set by outflows in the Corporate and OMIGSA businesses in South
Africa, and in certain affiliates of USAM. The NCCF contribution from Wealth
Management was particularly strong, increasing by 56% to GBP3.9 billion largely
from the UK Platform and Italy.
Funds under management increased to GBP309 billion although there were periods
of substantial market movements in the year. Across all our principal equity
markets, second quarter falls more than eclipsed first quarter rises. Markets
steadily rose from August onwards, all recording their 2010 highs in the last
week of the year. The JSE All Share index rose by 16% in the year, the FTSE
rose by 9%, the S&P-500 by 13% and the Swedish SAX:OMX by 23%.
Management Discussion and Analysis of Results for FY 2010
The principal businesses of the Group are the LTS division, Nedbank, Mutual &
Federal and US Asset Management. During the period, Old Mutual owned on
average 54% of Nedbank. At 31 December 2010 the market capitalisation of
Nedbank was GBP6.2 billion. The results for each of the LTS businesses,
Nedbank, Mutual & Federal and US Asset Management are discussed separately
in the Business Review which follows this Report.
Summary adjusted operating profit statement
GBPm 12 months 12 months
ended 31 December ended 31 December
2010 2009* % change
Revenue
Net earned premiums 3 278 2 746 19%
Investment return
(non-banking) 10 585 10 903 (3%)
Banking interest
and similar income 4 082 3 989 2%
Fee and commissions 3 160 2 538 25%
Other revenue 298 311 (4%)
Total revenues 21 403 20 487 4%
Expenses
Net claims and
benefits incurred (4 564) (3 126) 46%
Change in investment
contract liabilities (6 899) (8 341) (17%)
Bank interest (2 500) (2 627) (5%)
Other expenses (5 966) (5 262) 13%
Total expenses (19 929) (19 356) 3%
Share of associated
undertakings profit/(loss)
after tax 7 2 250%
Adjusted operating
profit/(loss) before tax
and non-controlling
interests 1 481 1 133 31%
* The year ended 31 December 2009 has been restated to reflect US Life as
discontinued.
The improvement in our AOP earnings was principally driven by increased income
from rising markets, better underwriting performance in all our insurance
businesses, growth in Nedbank`s non-interest revenue stream, and the benefit
of positive currency movements.
The 19% increase in net earned premiums reflected the growth in new
business sales most notably in Emerging Markets, Mutual & Federal and Wealth
Management. The majority of the fee and commission income growth arose in
Wealth Management, largely attributable to the increase in FUM over the period,
and in Nedbank, reflecting a growing customer base. Investment return is
driven by dividend and interest income, and gains and losses on the fair
value of investments and securities, a large proportion of which are held
attributable to investment contract holders. The decline in investment return
in the year broadly matches the corresponding movement in investment contract
liabilities in Wealth Management and Nordic given the investment nature of
the contracts written in those businesses. However, in Emerging Markets the
increase in investment return is not closely matched by a similar change in
investment contract liabilities due to its larger proportion of insurance
type products, and because substantial shareholder capital is held in South
Africa. Other expenses grew by 13% over the period, reflecting increased
levels of new business written, FX movements (primarily the strengthening
of the Rand) and increased remuneration costs in South Africa.
Group net margin (measured as net profits earned on average assets) increased
by 4.3 basis points over the period from 38.7bps to 43.0bps. Of this, the
European LTS businesses generated 3.9 basis points as the uplift in profits
significantly exceeded their average asset growth, and 0.3 basis points came
from Emerging Markets where AOP grew at a marginally higher rate than growth
in average assets, resulting in a small increase. The increase in profit from
the non-LTS businesses resulted in a further 1.6 basis point increase, and
the reduced LTIR contribution resulted in a decrease of 1.5 basis points.
Operating
profit
analysis
GBPm FY 2010 FY 2009 % change FY 2009* % change
(constant (as reported)
currency)
Long Term
Savings 897 713 26% 636 41%
Nedbank 601 548 10% 470 28%
Mutual &
Federal 103 81 27% 70 47%
US Asset
Management 87 84 4% 83 5%
(128) (104) 23% (104) 23%
Finance costs
LTIR on
excess
assets 31 91 (66%) 91 (66%)
Interest
payable to
non-core
operations (55) (40) 38% (40) 38%
Interest
receivable
from
non-core
operations 16 12 33% 12 33%
Other net
income and
expenses (71) (85) (16%) (85) (16%)
Adjusted
operating
profit 1 481 1 300 14% 1 133 31%
* The year ended 31 December 2009 has been restated to reflect US Life as
discontinued.
Finance costs increased mainly as a result of inclusion of a full year interest
charge on the GBP500 million seven-year 7.125% fixed rate senior bond placed in
October 2009. The interest payable to non-core operations reflects the interest
payable on the loan note arrangement between Bermuda and Group following a
change to the terms of the arrangement. The decline in other net income and
expenses is mainly attributable to a stamp duty reserve tax refund received in
the first half of the year (GBP16 million) and higher dividend income (GBP5
million). Group costs for 2010 were GBP60 million (2009: GBP70 million).
Long-term investment return (`LTIR`)
As anticipated, the LTIR on the shareholder assets decreased from GBP91 million
to GBP31 million. This was a result of the 390 basis point reduction to 9.4%
in the rate applied to shareholder assets within Emerging Markets. This
reflected the expected return from the asset allocation of 25% equities and
75% cash in 2010. The LTIR rate in Mutual & Federal was similarly reduced by
390 basis points in 2010. The LTIR rate for Emerging Markets and Mutual &
Federal has been further reduced in 2011 to 8.4% to reflect the prevailing
low interest rate environment in South Africa.
Reconciliation of Group AOP and IFRS profits
GBPm
Year ended Year ended
31 December 31 December
2010 2009*
Adjusted operating profit 1 481 1 133
Adjusting items (482) (973)
Non-core operations - Bermuda (3) 1
996 161
Profit before tax (net of policyholder tax)
Income tax attributable to policyholder
returns 149 192
Profit before tax 1 145 353
Total income tax (456) (400)
Profit/(loss) from continuing operations
after tax 689 (47)
Profit/(loss) from discontinued operations
after tax (713) (71)
Profit/(loss) after tax for the financial
year (24) (118)
Other comprehensive income for the financial
period 1 151 1 228
Total comprehensive income for the financial
period 1 127 1 110
Attributable to
Equity holders of the parent 594 709
Non-controlling interests
Ordinary shares 428 334
Preferred securities 105 67
Total comprehensive income for the financial
period 1 127 1 110
* The year ended 31 December 2009 has been restated to reflect US Life as
discontinued.
The key adjusting items between our AOP and IFRS profits for the year are
deductions of GBP214 million in respect of acquisition accounting (mainly the
amortisation of acquired present value of in-force business), GBP83 million
for short-term fluctuations in investment return (of which GBP71 million
relates to the smoothing of previous years` deferred tax assets), and GBP203
million in respect of the impact of marking-to-market of Group debt, as the
improvement in the external valuation of Group debt in the year negatively
impacted profit after tax for the year. This reverses previous years`
mark-to-market gains on Group debt. Other adjustments net to GBP18 million.
As previously reported, the prior year AOP results benefited from the
structural tax efficiency applicable to UK companies writing unit-linked
business in the UK, together with the smoothing of previous years` deferred
tax assets. These assets arose during the significant market volatility of
the preceding two years where falls in the value of policyholder assets
resulted in the recognition of significant deferred tax assets in the IFRS
income statement, which were spread forward under AOP. The pre-tax smoothing
for 2010 gave rise to a profit of GBP71 million, a similar amount to 2009.
For 2011, the pre-tax impact will be a profit of GBP27 million, falling to
nil thereafter.
The profit on continuing operations of GBP689 million was off-set by a loss
on discontinued operations of GBP713 million, resulting from the impairment
of the US Life business in anticipation of its sale at the terms agreed with
the purchaser. The Group produced a loss after tax of GBP24 million on an IFRS
basis. In addition to this the Group generated other comprehensive income of
GBP1 151 million largely from favourable currency movements. There was therefore
an increase in net assets of GBP1 127 million in the period.
Long Term Savings
Key performance statistics for the LTS division are as follows:
GBPm
Emerging Markets Nordic Retail Europe
FY 2010
Life assurance sales (APE) 487 201 69
PVNBP 3 269 1 104 513
Value of new business 86 41 7
Unit trust/mutual fund sales 3 668 581 23
NCCF (GBPbn) - 0.7 0.4
FUM (GBPbn) 57 14 5
Adjusted operating profit (IFRS
basis) (pre-tax) 539 110 51
Operating MCEV earnings (covered
business) (post-tax) 344 45 66
VNB + Exp Var/MCEV (covered
business) 4.7% 4.7% 2.2%
Wealth
FY 2010 Management Total
Life assurance sales (APE) 734 1,491
PVNBP 6 380 11 266
Value of new business 66 200
Unit trust/mutual fund sales 4 507 8 779
NCCF (GBPbn) 3.9 5.0
FUM (GBPbn) 56 132
Adjusted operating profit (IFRS basis) (pre-tax) 197 897
Operating MCEV earnings (covered business) (post-tax) 112 567
VNB + Exp Var/MCEV (covered business) 3.1% 4.1%
GBPm
Emerging Markets Nordic Retail Europe
FY 2009 (as reported*)
Life assurance sales (APE) 393 235 67
PVNBP 2,834 1,150 537
Value of new business 65 44 (5)
Unit trust/mutual fund sales 2,765 393 24
NCCF (GBPbn) (1.6) 1.0 0.5
FUM (GBPbn) 44 11 4
Adjusted operating profit (IFRS basis)
(pre-tax) 446 62 22
Operating MCEV earnings (covered
business) (post-tax) 212 81 (44)
VNB + Exp Var/MCEV (covered business) 0.5% 7.5% (5.1%)
Wealth Management Total
FY 2009 (as reported*)
Life assurance sales (APE) 617 1,312
PVNBP 5 042 9 563
Value of new business 49 153
Unit trust/mutual fund sales 3 210 6 392
NCCF (GBPbn) 2.5 2.4
FUM (GBPbn) 47 106
Adjusted operating profit (IFRS basis) (pre-tax) 106 636
Operating MCEV earnings (covered business) (post-tax) (4) 245
VNB + Exp Var/MCEV (covered business) 0.6% 1.3%
* The year ended 31 December 2009 has been restated to reflect US Life as
discontinued.
LTS AOP earnings benefited from higher fees generated from positive net client
cash flows particularly in Wealth Management, rising funds under management and
the strengthening of the Rand and Swedish Krona against Sterling. On a constant
currency basis, earnings were up 26%.
The Emerging Markets business accounts for 60% of the LTS IFRS AOP earnings,
43% of LTS FUM, and 33% of LTS APE sales. This compares to 70% of restated
AOP, 41% of FUM, and 30% of APE sales in 2009.
APE Sales increased by 14% for the LTS division as a whole, with the growth
coming largely from the regular premium products in the Retail businesses of
Emerging Markets, and Wealth Management single premium products, notably in
the UK and Italy. A managed shift in business mix in Nordic was executed with
sales decreasing from prior year levels. There was encouraging growth in both
single and recurring premiums in Retail Europe. Sales for the second half of
2010 were ahead of the first half for Emerging Markets and Retail Europe, and
evenly spread across the year in Nordic. Wealth Management sales were slightly
higher in the first half of the year than the second given the usual seasonal
weighting to the first quarter of the year, and the benefit of the short-term
Italian tax shield.
Mutual fund sales were up by GBP2 387 million, with strong performance in
Wealth Management and Emerging Markets particularly in the second half of
the year.
Across LTS as a whole, new business APE margins have improved to 13% for
2010 (2009: 12%). This reflects the focus on selling more profitable products
with better margins, notably in Nordic, and increased sales of a higher
margin product in the first half of the year in Emerging Markets. The APE
margin in Emerging Markets increased from 16% to 18%. In Nordic, the APE
margin has increased from 19% to 21%, benefiting from the managed reduction
of low margin product sales such as Link regular. In Retail Europe, the
APE margin has improved considerably to 11% from a negative position in the
comparative period. Across Wealth Management, the APE margin increased from
8% to 9%, with the UK increasing from 2% to 3%, and International from 18%
to 19%. The most significant increase in APE margin was in respect of the
Continental European markets, which increased from 3% to 8% as result of
the increase in volumes in Italy. Sales of mutual funds, which make up the
bulk of Wealth Management`s sales, are not included in the APE margin. The
IFRS operating margin rose to 38bps from 25bps for Wealth Management as a
whole. For LTS as a whole the PVNBP margin improved to 1.8% (2009: 1.6%).
The market-consistent value of new business (`VNB`) improved for all of our LTS
businesses, with the exception of Nordic, where although the underlying margins
of the business improved, the absolute value of new business fell as a result
of the decline in new business volumes (due to the cessation of sales of an
unprofitable recurring premium product) and changes in assumptions.
The LTS net client cash flows more than doubled as improvements in Wealth
Management and Emerging Markets more than outweighed the lower net flows in
Nordic given lower sales volumes. Funds under management for LTS at 31
December 2010 increased by 25% to GBP131.8 billion (31 December 2009: GBP105.
5 billion) although there were periods of substantial market movements during
the year, with notable falls in the second quarter and increases towards the
end of the year.
The Rand started the year at 11.92 against Sterling, strengthening to 11.45
at 30 June 2010, and to 10.28 by 31 December 2010. The US Dollar and Swedish
Krona also strengthened, although to a lesser degree, appreciating 4% and 10%
respectively in the year. The average exchange rates to Sterling over the
year were 11.31 (2009: 13.17), 1.55 (2009: 1.57) and 11.14 (2009: 11.97) for
the Rand, US Dollar and Swedish Krona respectively. The cumulative effect of
foreign exchange movements for LTS was an increase of GBP77 million on IFRS
profitability.
Further discussion on the drivers for the movements within the individual LTS
business units is given in the individual Business Reviews which follow this
Review.
Group cost savings and ROE and margin targets
At the 2009 Preliminary Results and Strategy Update, the Group introduced
three-year cost saving and return on equity targets. The improvement in ROE
has been driven by the achieved cost savings, and increased FUM resulting
from strong growth in new business sales and positive market levels.
FY 2010 FY 2009 External
ROE and margin targets Target
Long Term Savings 1
Emerging Markets 25% 23%2 20%-25%
Nordic 11% 12% 12%-15%
Retail Europe 20% 9% 15%-18%
Wealth Management 14% 8% 12%-15%
LTS3 Total 18.5% 14.8% 16%-18%
USAM Operating Margin 18% 18% 25%-30%
1 ROE is calculated as IFRS AOP (post-tax) divided by average shareholders`
equity, excluding goodwill, PVIF and other acquired intangibles.
2 Within Emerging Markets, OMSA is calculated as return on allocated capital.
Full year 2009 has been adjusted to the 2010 LTIR rate.
3 Long Term Savings 2009 restated from 14.9%.
We are in the process of delivering the reduction in the cost base of our
businesses as announced in March 2010. Wealth Management have made good
progress with GBP35 million of run-rate savings achieved to date against the
2012 target of GBP45 million. Retail Europe has achieved GBP6 million of
run-rate savings as a result of reduced staff costs and centralisation of
functions in Berlin. US Asset Management delivered around GBP15 million of
actual savings in the year as a result of restructuring in 2009, and
therefore on a run-rate basis, the business is already exceeding its target.
Costs to achieve in 2010 totalled GBP45 million. Our focus in 2011 and 2012
will be on continued execution, particularly in Wealth Management, Nordic and
Retail Europe, while maintaining the reductions we have achieved to date. The
costs of executing the cost reduction process will restrict 2011 profits
from these businesses. Nordic restructuring costs are anticipated to be
approximately GBP30 million in 2011.
Summary MCEV results
p
Adjusted Group MCEV per share at 31 December 2009 171.0
Adjusted operating Group MCEV earnings per share 15.5
Covered business 11.0
Non-covered business 4.5
Below the line effects 15.7
Economic variances and other 11.2
Foreign exchange movements 15.9
Dividends to shareholders (2.7)
Nedbank market value adjustment 1.7
M&F dilution (7.1)
BEE and ESOP adjustment 1.1
Marking debt to market value (4.4)
Adjusted Group MCEV per share at 31 December 2010 202.2
The adjusted Group MCEV increased 22% from GBP9.0 billion at 31 December 2009
to GBP11.0 billion at 31 December 2010. The adjusted Group MCEV per share
increased by 18% (or 31.2p) from 171.0p to 202.2p over the same period.
The adjusted operating Group MCEV earnings per share increased by 4.8p from
10.7p for 2009 to 15.5p for 2010.
Non-covered business operating earnings per share, at 4.5p, were 3.2p higher
for 2010 compared to the 2009 result of 1.3p, as a result of:
- Higher profits in the asset management businesses, arising from higher
Funds under management, and
- Higher sterling profits in the banking business due to greater fee income
and lower bad debt charges.
Covered business operating MCEV earnings of 11.0p were 1.6p higher in 2010
compared to 9.4p in 2009 as a result of:
- A strong turnaround in the contribution from experience variances, due to
improved persistency experience relative to the assumption changes made at
December 2009, and improved expense experience;
- Lower contribution from operating assumption changes, particularly for
persistency and expenses; off-set by
- A lower expected existing business contribution, mainly resulting from
a reduction from the contribution made by US Life due to lower yields on
the corporate bond portfolio at the start of 2010 compared to the start of
2009; and
- An adverse contribution from methodology changes and error corrections,
(reflected as part of other operating variances).
The net risk-free return from investment in new business in LTS (calculated as
VNB based on the risk free return, divided by the free surplus invested in new
business) has increased from 35p per GBP1 in 2009 to 48p per GBP1 in 2010, with
all LTS businesses contributing to the improvement.
A substantial component of the increase in adjusted Group MCEV per share during
2010 was due to significant foreign exchange gains as a result of the
strengthening of the Rand, Dollar and Krona to Sterling. The balance of the
increase was due to the impact of economic variances (the increase in the equity
markets and reductions in interest rates), and the expected existing business
contribution from covered business. This is partially off-set by the dilutionary
effect of the M&F acquisition of minorities and the adjustment to mark the debt
to market value.
The Mutual & Federal minority interests were acquired on 8 February 2010, in
consideration for 147 million Old Mutual plc shares. This transaction diluted
the adjusted Group MCEV per share by 7.1p as a result of a change of the basis
of valuation of Mutual & Federal as an unlisted entity (reduction of 2.5p), and
the additional shares issued as consideration to the Mutual & Federal minorities
(reduction of 4.6p). Mutual & Federal is now incorporated in the adjusted Group
MCEV at the IFRS net asset value (31 December 2010: GBP409 million). Previously
it was included at the Group`s share of the market value (31 December 2009:
GBP448 million), which was higher than IFRS net asset value (31 December 2009:
GBP265 million).
The MCEV methodology does not capitalise returns on assets in excess of the
adjusted risk free reference rates. For the US Life business, we have estimated
that the present value of credit spreads not valued at December 2010 amounted
to GBP593 million, compared to GBP571 million at December 2009. Taking this
into account, we estimate that the value of US Life including an appropriate
allowance for additional credit spreads (a proxy to the European Embedded
Value basis) was GBP404 million at December 2010 compared to GBP253 million
at December 2009.
Risk management using Economic Capital and Market Consistent Embedded Value
The Group`s current internal Economic Capital models form the basis of the
Risk Appetite and limit-setting framework, which is applied on the basis of
Market Consistent valuation methodologies and assumption setting processes.
In this way the Group is able to ensure that Risk Appetite and exposures
are derived with respect to a risk-neutral benchmark, which adds value by
ensuring that the Group makes explicit decisions regarding risk assumption
inherent in New Business and management of the in-force book. We believe
that this disciplined approach facilitated better decision-making around
risk assumption over the past year. The new Solvency II internal model builds
on the work done under the current Economic Capital model, and will be used
in future to generate benefit in respect of making decisions which formally
quantify potential investment and market risk exposures, hence support better
informed decision-making.
Free surplus generation
The Group generated GBP759 million of free surplus in the period (2009: GBP434
million), of which GBP503 million (2009: GBP581 million) was generated by the
LTS division. GBP519 million (2009: GBP249 million) of the GBP759 million was
generated from covered business (which includes US Life and Bermuda). We
anticipate that the value of our in-force business will generate GBP3 billion
of free surplus from the covered business over the next five years. Free
surplus generated from the in-force business is used to cover investment
in new business, to pay dividends, and to provide free cash flow to the
Group.
Sources and uses of free surplus
Gross inflows from core and continuing operations were GBP1 016 million
(2009: GBP1 064 million), and new business spend was GBP419 million (2009:
GBP438 million). Total net free surplus generated of GBP645 million was
lower than the GBP782 million in 2009 due to cash costs of restructuring in
2010 and the acceleration of cash flow in respect of the VIF financing for
Skandia International in 2009.
Capital, liquidity and leverage
Capital
The Group`s regulatory capital surplus, calculated under the EU Financial
Groups Directive, at 31 December 2010 was GBP2.1 billion. The Group followed
the FSA`s requirements, and gave it six months advance notice of its right to
call a GBP300 million Lower Tier 2 instrument at the first call date of 21
January 2011. The bond was subsequently called on this date. As a result of
that notice, the Lower Tier 2 instrument had been excluded from the regulatory
capital surplus calculations as at 31 December 2010. On a like-for-like
basis, the regulatory capital surplus at 31 December 2010 was GBP2.4 billion
(31 December 2009: GBP1.5 billion). The FGD of GBP2.1 billion represented a
coverage ratio of 146%, compared to 135% at 31 December 2009. The increase
in the coverage ratio since 31 December 2009 comprises statutory profits in
LTS (Emerging Markets and UK) and Nedbank, reduced resilience risk capital
requirement in Bermuda due to hedging and a reduction in Nedbank`s capital
requirement reflecting a change to the `capital floor` regime operated by
the South African Reserve Bank. These positive changes have been partially
off-set by increased capital requirements in Emerging Markets, deduction of
intangible
assets in Nedbank for the first time and by the payment of Group ordinary
and preferred dividends. On completion of the US Life transaction, and as
previously announced, we would anticipate a reduction in FGD surplus of
approximately GBP100 million.
Our Group regulatory capital, calculated in line with the FSA`s prudential
guidelines, is structured in the following way:
GBPm
FY 2010 % FY 2009* %
Ordinary Equity 5 168 77 4 171 71
Other Tier 1 Equity 653 10 611 10
Tier 1 Capital 5 821 87 4 782 81
Tier 2 2 363 35 2 562 44
Deductions from total capital (1 439) (22) (1 497) (25)
Total Capital 6 745 100 5 848 100
* FY 2009 restated to reflect actual FSA submission.
Tier 1 Capital includes GBP203 million of hybrid debt capital reported for
accounting purposes as minority interests and Tier 2 includes GBP338 million of
capital hybrid debt, which is reported as Group preference shares.
The Group`s FGD surplus is calculated using a method called `deduction and
aggregation`, and is the Group`s capital resources less the Group`s capital
resources requirement. Group capital resources is the sum of the business unit
net capital resources, which is calculated as its standalone capital resources
less the book value of the Group`s investment; the Group capital resources
requirement is the sum of each business unit`s capital requirement.
The contribution made by each business unit to the Group`s regulatory surplus
will, therefore, be different from its locally reported surplus since the latter
is determined without the deduction for the book value of the Group`s
investment. Thus, although all our major business units have robust local
solvency surpluses, a number of them do not make a positive contribution to the
Group`s FGD position. The corollary of this is that a disposal of a business
unit at a value equal to or greater than its net asset value will normally have
the effect of increasing the Group`s FGD surplus.
Our subsidiary businesses continue to have strong local statutory capital cover.
At 31 December 2010 At 31 December 2009
Ratio Ratio
Business unit
OMLAC(SA) 4.1x 4.1x
Mutual & Federal 2.02x 1.53x
US Life 350% 312%
Nordic 9.8x 10.8x
UK 2.8x 2.9x
Nedbank* Core Tier 1: 10.1% Core Tier 1: 9.9%
Tier 1: 11.7% Tier 1: 11.5%
Total: 15.0% Total: 14.9%
* This includes unappropriated profits.
We have set a target to reduce the Group`s debt by at least GBP1.5 billion on a
cash basis by the end of 2012, whilst ensuring also that the Group`s balance
sheet and the holding company`s liquidity continues to be prudently managed
against our internal targets. In 2010 the holding company repaid GBP97 million
of Old Mutual senior debt and on 21 January 2011 the Group repaid its GBP300
million Lower Tier 2 security.
Liquidity
As a Group we continue to maintain effective dialogue and strong commercial
relationships with our banks and credit investors. As of 31 December 2010,
the Group has available cash and committed facilities of GBP1.4 billion (31
December 2009: GBP1.2 billion). Of this cash on hand at the holding company
was GBP0.4 billion (31 December 2009: GBP0.4 billion).
In addition to the cash and available resources referred to above at the
holding company level, each of the individual businesses also maintains
liquidity to support their normal trading operations.
Holding company net debt
GBPm
FY 2010 FY 2009
Opening net debt (2 273) (2 263)
Inflows from businesses 433 529
Outflows to businesses and expenses (201) (339)
Debt and equity movements:
Ordinary dividends paid (net of scrip dividend elections) (65) -
Equity issuance 4 -
Other movements (334) (200)
Closing net debt (2 436) (2 273)
Net decrease/(increase) in debt (163) (10)
Net inflows from businesses less expenses increased compared to 2009 and
included a net remittance from US Life of GBP51 million. The holding company
made ordinary dividend payments in the period of GBP65 million and offered a
scrip dividend election. Of the total other movements of GBP334 million, GBP183
million is in respect of the revaluation of the fair value of Group bonds
relating to improved credit spreads and the balance is foreign exchange
movements and other net flows.
Dividend
Dividend policy
The Board intends to pursue a progressive dividend policy consistent with our
strategy, having regard to overall capital requirements, liquidity and
profitability, and targeting dividend cover of at least 2.5 times IFRS AOP
earnings over time.
Final dividend for 2010
The Board has carefully considered the position in respect of a final dividend
for 2010, and is recommending the payment of a final 2010 dividend of 2.9p per
share (or its equivalent in other applicable currencies). A scrip option is also
being offered.
Dividend timetable
The timetable for the final dividend for the year ended 31 December 2010 is set
out below:
Declaration date 8 March 2011
Scrip calculation price determined Last five dealing days on each exchange
ending on 31 March 2011
Currency conversion date 31 March 2011
Exchange rates, scrip calculation
price and ratio announced 1 April 2011
Last day to trade cum div for
shareholders on the branch registers
in Malawi, South Africa and Zimbabwe
and on the Namibian section of the
principal register 8 April 2011
Ex-dividend date for shareholders on
the registers in Malawi, South Africa
and Zimbabwe and on the Namibian
section of the principal register 11 April 2011
Last day to trade cum div for
shareholders on the UK register 12 April 2011
Ex-dividend date for shareholders on
the UK register 13 April 2011
Scrip dividend alternative offer
closes for shareholders on the branch
registers in Malawi, South Africa and
Zimbabwe and on the Namibian section
of the principal register 12 noon on 15 April 2011
Record date for the dividend 15 April 2011
Scrip dividend alternative offer
closes for shareholders on the UK
principal register 12 noon on 3 May 2011
Annual General meeting, when
shareholders will be asked to approve
the dividend 12 May 2011
Dividend payment date and first day of
dealings in new Ordinary Shares issued
under the scrip dividend alternative 31 May 2011
The entitlement to receive the scrip dividend alternative is personal and
non-transferable. Shareholders should note that they will not be able to
trade their entitlement to new Ordinary Shares to be issued pursuant to
elections under the scrip dividend alternative until 30 May 2011. The full
terms of the scrip dividend alternative are available on the Company`s
website.
Share certificates for shareholders on the South African register may not be
dematerialised or rematerialised between 11 April and 15 April 2011, both
dates inclusive, and transfers between the registers may not take place
during that period.
Corporate disposals and acquisitions and related party transactions
As set out in the Strategy Update in March 2010, the Group continues to simplify
its structure and reduce its spread of businesses to focus on areas of key
competence and competitive strength, and drive operational improvements.
On 6 August 2010, the Group announced the disposal of the US Life operations
to Harbinger Capital Partners. In February 2011, we agreed to enter into an
amended SPA with an affiliate of Harbinger Capital Partners LLC. The Board
of Harbinger Group Inc. - a public company listed on the NYSE - has recently
agreed to acquire this affiliate. We await regulatory approval for the
transaction, and closing is expected at or around the end of the first
quarter of 2011. The US Life business has been classified as a non-core
discontinued operation, and as such its profits are excluded from the
Group`s IFRS adjusted operating profit. US Life made a trading profit of
GBP51 million before the deduction of inter-company interest paid to Group.
In accordance with IFRS 5, the assets and liabilities of US Life have been
classified as held for sale in the statement of financial position for the
current year. The amount recognised as the impairment on remeasuring the
business to fair value (less the costs to sell) was GBP827 million. The
loss after tax on the sale was GBP713 million. A summarised review of the
operating performance of US Life is set out below:
US Life
Life sales summary
APE sales at $143 million increased by 34% relative to the comparative
period. Fixed indexed annuities, which represent more than half of the
total APE, increased 30% in 2010 compared to 2009. The increase was driven
by product revisions and competitive annuity rates. The sales levels are
within the range set for the business and reflect the approach to managing
capital within the business. Our top ten annuity distribution partners who
have represented an average of 60% of our total sales volume over the past
five years grew sales collectively by 62% in 2010.
IFRS results
The IFRS pre-tax profit for the year for the US Life business was $50
million (2009: loss of $195 million), with financial performance benefiting
from lower impairment losses and the reversal of prior impairments, partially
off-set by higher deferred policy acquisition costs (DPAC) amortisation as a
result of higher gross profits.
Value of new business
The value of new business decreased by $66 million relative to the
comparative period. The decrease in VNB was mainly due to the extended
low yield environment and a lower assumed liquidity premium. The negative
VNB position is largely the result of the MCEV basis used, where credit
spreads in addition to the liquidity premium are not valued in the
determination of MCEV, but shown as earnings when earned. Although we
believe that the VNB is positive on an EEV basis, the negative figure on
the MCEV basis quantifies the extent to which the business would rely on
earning credit spreads in order to provide the guarantees underwritten.
Management actions taken during the period included lowering commission
rates and increasing bonus on certain products, which improved consumer
value.
MCEV Results
The 2010 operating MCEV earnings after tax of $72 million decreased
significantly relative to the comparative period. This was mainly due to
the 2009 expected returns being based off higher asset yields, higher credit
spreads and a very depressed starting position. The persistency assumption
changes of Universal Life insurance plans (UL) and Return of Premium term
insurance plans (ROP) also contributed to the lower MCEV operating earnings.
Operating experience variances were higher than 2009. Fixed Indexed Annuity
(FIA) contributed most to the favourable result in 2010. The positive variance
of FIA was primarily due to higher than expected surrenders of FIA contracts
that are unprofitable on an MCEV basis, while in 2009, the positive impact
from higher than expected surrenders were more than offset by the negative
impact from lower than expected interest margins.
MCEV increased by $220 million over the year. In addition to the effects
above, other significant movements affecting the closing MCEV were the
variances related to the change in economic conditions, largely due to
reduced risk-free rates and lower credit spreads, partially offset by
the liquidity premium reducing from 100bps to 75bps.
Funds under management
Funds under management ended the year at $17.2 billion, up $0.5 billion from
the opening position, primarily due to a $0.8 billion increase in the market
value of the investment portfolio for the year and increased net investment
income. Net client cash flows improved by 47% in 2010 compared to 2009
primarily due to lower surrender activity and higher sales in 2010. Net
cash and short term holdings at 31 December 2010 were $630 million.
Investment portfolio
The net unrealised position on the fixed income security portfolio improved
to a net gain of $309 million at 31 December 2010 ($497 million net unrealised
loss at 31 December 2009 and $138 million net unrealised gain at 30 June 2010).
Although the increase in Treasury yields during the fourth quarter of 2010
negatively affected the net unrealised position, as credit spreads were
tighter overall on a year-on-year basis, the unrealised position improved
compared to the prior year. In addition, management undertook selective
derisking of the investment portfolio. As at 31 December 2010, $546 million
of the total $551 million of the specified securities in the stock purchase
agreement with Harbinger Capital Partners had been sold at terms better than
those expected on signing of the sale agreement. The remaining $5 million
of specified securities have been sold since the year-end.
The quality of the investment portfolio improved throughout the year and 92%
of the total portfolio had a market to book value ratio greater than 90% at
the end of 2010. The market to book value ratio of the fixed income portfolio
improved from 97% at the beginning of the year to 102% at 31 December 2010.
There were no defaults in 2010. Net realised gains in 2010 of $19 million
include $22 million of trading gains on previously impaired securities
that had recovered in fair value and $70 million of losses realised on
the sale of securities in anticipation of the sale of the company. US Life
also generated $64 million of net gains on derisking trades during favourable
market conditions. Expected cash flows on certain previously impaired
structured securities improved significantly in 2010, resulting in $54
million of revaluation gains. These revaluation gains were partially
off-set by impairments.
During 2010, IFRS impairments were $50 million, generally in line with our
long-term assumption of $48 million, and compared to $389 million in 2009.
The 2010 impairments on 42 securities related primarily to structured
securities, with the losses due to adverse changes in expected cash flows,
or the likelihood of diminished loss coverage from distressed monoline
insurers that guaranteed the performance of the security. The impairment
losses were primarily in RMBS ($30 million), ABS ($8 million), and CMBS ($6
million).
Capital
OM Financial Life`s risk-based capital ratio increased from 312% as at 31
December 2009 to 350% as at 31 December 2010. Regulatory capital grew $83
million during 2010 driven by strong statutory operating earnings. OM
Financial Life`s required capital decreased (at the targeted 300% level)
primarily due to a lower risk investment portfolio offset by capital required
for new business growth. The US Life Group distributed a total of $109 million
to OM plc in 2010 comprised of $59 million from OM Financial Life Insurance
Company and $50 million from OM Re.
Bermuda
As disclosed in our Announcement in March 2010, Bermuda remains a non-core
business, and as such its profits are therefore excluded from the Group`s
IFRS adjusted operating profit. A review of the operating performance of
Bermuda is set out below:
Overview
The business continued to perform well against its strategy with significant
enhancements delivered in 2010 including business service improvements,
further enhancements to liability management and to management information to
improve the dynamic management of exposures and further de-risk the Guaranteed
Minimum Accumulation Benefits (`GMABs`) attached to certain of the in-force
variable annuities.
Surrender activity in 2010 occurred largely in respect of variable annuity
contracts without GMABs, with the business instituting a focused conservation
strategy supported by high customer interaction in order to retain as much
of this profitable business as possible. Surrender behaviour with respect to
variable annuity contracts with GMABs is directly influenced by the
differential between the value of the underlying funds and the nominal
level of the guarantee, as well as the financial circumstances of the
policyholder. The recovery across global equity markets, particularly in
the fourth quarter in 2010, resulted in an increase in the number of
contracts where the underlying fund values were greater than the level of
the guarantee. This resulted in a sharp increase in the levels of contracts
with GMABs surrendering in the fourth quarter of 2010, with overall surrender
activity across GMAB contracts for the year at close to double 2009 levels
(2010: 1,211 policies; 2009: 638 policies). Further gains across global
equity markets in 2011 would be expected to result in increased levels of
surrenders across variable annuity contracts with GMABs, accelerating the
run-off of these contracts. Ultimately, surrender activity will determine the
speed of the run-off and the extent and timing of any associated capital,
or cash release for this business. In February 2011, the business launched an
offer to account holders with non-Hong Kong UGO contracts permitting them to
surrender their contracts without incurring penalties. The special offer
increased the rate and number of surrenders across this book, further
derisking the business. The take-up rate was 6.2% at 4 March 2011.
Management will continue to assess demand for similar such offers in the
future.
IFRS Results
The IFRS pre-tax profit for the year for the Bermuda business was $34
million (2009: $34 million), with financial performance benefiting from
lower guarantee losses as a result of the improved effectiveness of the
hedging programme, improved basis risk management, favourable equity markets
and currency movements. The impact of the dynamic hedging programme over
the course of 2010 was also beneficial in reducing losses in respect of
GMABs and favourable equity markets over the course of the year further
resulted in lower GMAB reserve requirements at the end of the year.
MCEV Results
The 2010 operating MCEV earnings resulted in a loss after tax of $36 million,
a marginal decrease relative to the comparative period. Operating earnings
include negative corrections and modelling changes in 2010 compared to
significant positive corrections and modelling changes in 2009. This is
however partially off-set by much improved persistency experience variances
in 2010 and large negative persistency assumption changes in 2009 that were
not repeated.
In addition to the effects above, other significant movements affecting the
closing MCEV related to the movement in GMAB reserve requirements due to
market performance and changes in economic conditions, net of the effects of
hedging guarantees. Performance benefited from favourable equity and currency
markets, with improved basis risk management and effectiveness of the hedging
programme. This was dampened by reductions in interest rates as hedges were
lifted early on in the year.
Reserves
Of total insurance liabilities of $6 106 million (2009: $6 741 million),
$4 495 million (2009: $4 688 million) is held in the separate account,
relating to variable annuity investments where all risk is borne by
policyholders. The remaining reserves amount to $1 611 million (2009: $2 053
million), which is split into $672 million (2009: $766 million) in respect of
GMAB/GMDB liabilities on the variable annuity business, and $939 million
(2009: $1 290 million) in respect of policyholder liabilities which are
supported by the fixed income portfolio (these liabilities include deferred
and fixed indexed annuity business as well as variable annuity fixed interest
investments). Non-separate account reserves are calculated on a
policy-by-policy basis, updated frequently and verified independently.
GMAB/GMDB reserve calculations rely on the mapping of policyholder
investment funds to hedgeable indices to determine market-consistent
assumptions. Fund mapping updates are performed at least quarterly, the
results of which better allocate exposures to Asian and other emerging
markets (which require higher levels of reserving given their higher inherent
volatility) thereby improving the accuracy of the reserve calculations.
Overall, this market-consistent valuation methodology is guided by the
fund mapping process. Throughout the year, the business continued to
maintain a very significant statutory capital surplus against its minimum
required capital of $250 000, ending the year with statutory surplus
capital of $625 million (2009: $586 million).
Investment portfolio
No defaults or impairments were recorded during 2010 (2009: $20 million).
The net unrealised position improved to a gain of $31 million as at 31
December 2010 ($29 million loss as at 31 December 2009) as a result of
derisking efforts within the portfolio through the sale of a number of
holdings off-setting gains and losses and the narrowing of corporate
spreads. The book value of the portfolio reduced from $1.0 billion at the
end of 2009 to $0.8 billion as at 31 December 2010, largely as investments
were sold to meet surrender activity and withdrawals. The fixed income
portfolio remained at an average credit quality of A2 (Moody`s rating scale),
with investment grade quality holdings continuing to represent more than
90% of the portfolio. As at 31 December 2010, the book value of the
investment portfolio with a market value to book value ratio of 80% or
less was $3 million (compared to $71 million at 31 December 2009).
Management of hedging
Over the course of 2010, the business continued to dynamically manage
the underlying economics of the hedging programme in order to strike a
balance between the potential changes in the income statement, available
cash, liquidity and transactional costs arising from movements in market
levels. A number of adjustments to the hedging programme were made over the
course of 2010 as a result of turbulent market conditions, with the business
ending the year approximately 57% hedged against adverse equity and foreign
exchange market movements. The accumulated unrealised profit or loss, as
measured by the stop-loss metric from the time the current hedge framework
was implemented on 17 September 2009 was a gain of $145 million by 31 December
2010 (2009: $104 million). The hedging team evaluates the hedging strategy,
including the most appropriate level of hedges on a continuing basis, with
any proposed changes to the strategy subject to strict oversight. The
stop-loss protocol established in September 2009 remains in place, and
continues to be monitored daily by Group to ensure that a common understanding
of the resultant impact on capital, cash and profit and loss on a timely
basis.
Outlook
Whilst turbulent market conditions could have a material impact, the
business has performed credibly over the past year, with the key priorities
for 2011 focused on continuing this momentum through continued efforts to
derisk the GMAB exposure in the variable annuity book, through a range of
measures. These include execution against the stated dynamic hedging strategy
to contain key risk exposures; continued implementation of the conservation
strategy to better retain profitable non-guaranteed business, supported by
enhanced customer and service offerings; ongoing prudent management of
capital and liquidity; ongoing evaluation of risk management and key
business decision-making processes across the business to align with
Group`s Enterprise Risk Management framework; and maintenance of cost
discipline, with a focus on delivering further planned expense reductions.
Solvency II, Risk Allocation and iCRaFT and Financial Controls Initiative
project update
Our integrated Capital, Risk and Finance Transformation (`iCRaFT`) project
is progressing well. The Group has entered the FSA`s internal model approval
process, and is on track to deliver all requirements for Solvency II compliance.
We were the first major UK retail group to submit our Group QIS5 results and
the Self Assessment Questionnaire in respect of the internal model to the
FSA. In 2011, we will enter the `Use Test` phase, during which we will
demonstrate the extent to which we have embedded the new tools and processes,
and will hold dry runs of selected Solvency II processes. We expect to be
ready to make our full internal model application at the earliest date
that the FSA is ready to accept such submissions.
In the LTS showcase presented on 13 October 2010, we published the Group`s
target risk profile versus current risk profile, along with a range of risk
preferences, which considered the trade-offs between capital required to back
different classes of liabilities, the risk assumed when underwriting these
liabilities, and the margins available from doing so. The work that we have done
is focused on ensuring that we deploy capital to underwrite risks that increase
shareholder value, within a framework that fully protects promises made to
policyholders. The Business Planning process requires Business Units to define
and adopt their risk strategies, indicating how they intend to manage their
existing liabilities and which products they wish to offer in future, within the
framework of applying capital to these risks in order to create value at the BU
level. We are satisfied that we are making good progress with this activity, and
that we are achieving our objective to delivering better outcomes, within a
stronger risk, capital and value framework.
In 2010, we completed the implementation of our Financial Controls Initiative
project putting in place an internal certification framework across all the
Group`s financial reporting processes to a standard broadly equivalent to the US
Sarbanes-Oxley requirements.
Tax and non-controlling interests
The effective tax rate on adjusted operating profits was 23% (2009: 25%). The
effective rate reduced as an increased proportion of profits were earned on low-
taxed dividends and capital profits, utilisation of group relief against taxable
UK income in appreciating markets, and the benefit of secondary tax on companies
(STC) credits in OMSA. This was partially off-set by increased provisions and
deferred tax assets not being recognised on losses arising in the UK. Looking
forward, and depending on profit mix, we would anticipate the long-term
effective tax rate on AOP returning to the 25% to 28% range.
The non-controlling interests` share of adjusted operating profit increased by
GBP34 million reflecting the minority share of higher Nedbank earnings,
supported by the strengthening of the Rand.
Risks and Uncertainties
There are a number of potential risks and uncertainties that could have a
material impact on the Group`s performance and cause actual results to differ
materially from expected and historical results.
Whilst world economic conditions have improved from a year ago a number of other
factors could impact the Group`s ability to create value. Increasingly,
governments are recognising the need for effective retirement provision, which
provides future opportunities. At the same time, the regulatory environment is
moving towards more transparency and providing consumers with more choice,
protection and better value for money. Whilst we believe that many of our
products align with this requirement, increased consumerism could lead to
adverse reputational outcomes across the industry, which may have an impact on
our business even though our products may not be the ones leading to such
outcomes. Regulatory developments are also impacting on commission structures.
The increased regulatory activity may increase the cost of doing business and
drive margins down, resulting in a more competitive environment and competition
for customers is increasing from both traditional and new players in all
markets.
Continued economic uncertainty has contributed to lower consumer confidence, and
may influence product preferences to lower risk investment products and affect
termination experience in respect of existing and new business. There is also an
increased drive from consumers for products with increased capital protection
rather than complexity. Movements in asset prices lead to changes in funds under
management and the fees that the Group earns from those funds. In instances
where these lead to reduced fund values and fees, such movements will have an
adverse impact on earnings.
The Group monitors these uncertainties, takes appropriate actions wherever
possible, and continues to meet Group and individual entity capital requirements
and day to day liquidity needs. Progress has been made with the US Life sale,
effective management of Bermuda Variable Annuity guarantee risks and initial
activity to explore the US Asset Management IPO.
The implementation of the new operating model is almost complete. Changes
designed to implement the `strategic controller` model at the Group level
through revision of the governance structure and processes, clarifying roles and
responsibilities of Group and Business Units, and increasing Group presence on
Business Unit Boards and Committees are progressing. Risks remain and may arise
from the implementation of cost reduction programmes, streamlining of businesses
and processes and other strategic initiatives. Business Performance Executives
were appointed in 2010 and form a key part of the Operating Model, increasing
engagement and understanding between the Group Head Office and Business Units,
focusing on strategic delivery and informing the appropriate decisions.
The Group continues to strengthen and embed its risk management framework, with
increasing importance placed upon ensuring business decisions are within Risk
Appetite, and that risk exposures are monitored against Appetite, allocated
limits and budgets. Risk Appetite limit allocation is now a key part of the
Business Planning Process and the Group is progressing in embedding the Risk
Appetite process by increased challenge on risks and management actions, as part
of the Quarterly Business Reviews.
The Board of Directors has the expectation that the Group has adequate resources
to continue in operational existence for the foreseeable future. Accordingly,
they continue to adopt the going concern basis in preparing the financial
statements contained in this announcement.
Philip Broadley
Group Finance Director
8 March 2011
Summarised Financial Information
GBPm GBPm
FY 2010 FY 2009 % change
IFRS results
Adjusted operating profit (IFRS
basis)(pre-tax)* 1 481 1 133 31%
Adjusted operating earnings per share (IFRS
basis)* 16.0 11.6 38%
Basic loss per share (6.5p) (7.8p) 17%
IFRS profit/(loss) after tax (24) (118) 80%
Sales statistics
Life assurance sales - APE basis 1 583 1 381 15%
Life assurance sales - PVNBP basis 12 155 10 217 19%
Value of new business 172 167 3%
Unit trust/mutual fund sales 10 305 7 567 36%
MCEV results
Adjusted Group MCEV (GBPbn) 11.0 9.0 22%
Adjusted Group MCEV per share 202.2p 171.0p 18%
Adjusted operating profit Group MCEV
earnings (post-tax and
non-controlling interests) 830 562 48%
Adjusted operating Group MCEV earnings per
share 15.5p 10.7p 45%
Financial metrics
Return on equity* 12.2% 9.1%
Return on Group MCEV 10.9% 10.7%
Net client cash flows (GBPbn) (6.2) (2.7) (130%)
Funds under management 322.8 285.0 13%
Interim dividend 1.1p - -
Final dividend 2.9p 1.5p 93%
FGD (GBPbn) 2.1 1.5 40%
* The year ended 31 December 2009 has been restated to reflect US Life as
discontinued.
Long Term Savings: Emerging Markets
Good results combined with strong growth in regular premium sales
2010 2009 % change
Highlights (Rm)
Adjusted operating profit (IFRS basis, pre-tax) 6 099 5 879 4%
Return on local equity 25% 25%
Return on allocated capital (OMSA only) 25% 26%
Life assurance sales (APE) 5 505 5 178 6%
Unit trust/mutual fund sales 41 488 36 421 14%
PVNBP 36 975 37 339 (1%)
Value of new business 972 853 14%
APE margin 18% 16%
PVNBP margin 2.6% 2.3%
Operating MCEV earnings (covered business,
post-tax) 3 877 2 794 39%
Return on embedded value (covered business,
post-tax) 13.2% 9.8%
2010 2009 % change
Highlights (Rbn)
Net client cash flows (NCCF) 0.2 (20.5) 101%
Total funds under management 585.7 518.4 13%
Overview
Equity markets in the Emerging Markets have enjoyed a strong year, with the JSE
increasing by 16%. The South African Rand appreciated 13% against the US Dollar
and 14% against Sterling. Low inflation contributed to interest rate cuts in
South Africa from 10.5% to 9%.
We continue to focus on innovation and product improvements which will benefit
our customers. In South Africa we developed and launched a new direct short-term
insurance product, iWYZE, in conjunction with Mutual & Federal - and its success
has exceeded expectations. Old Mutual Corporate launched Old Mutual SuperFund,
the largest multi-employer or umbrella fund in South Africa with over 300,000
members, to provide a simple, affordable and strictly-governed platform enabling
employees to save for their retirement. We launched the Futuregrowth Agri-Fund
in March, focusing on responsible equity investments in agricultural land, agri-
businesses and farming infrastructure. As a Socially Responsible Investment
fund, it seeks long-term returns and tangible social and developmental impacts.
We have made progress towards our goal of becoming our customers` most trusted
partner, evidenced by the number of awards received during the year - including
our third Ask Afrika Orange Index award for service excellence in the long-term
insurance business category, and the number one position in South Africa`s 500
best managed companies.
We are integrating social, environmental and economic principles into our core
business. Old Mutual South Africa (OMSA) achieved Level 2 Broad Based Black
Economic Empowerment (BBBEE) status in October 2010. Furthermore, OMIGSA
attracted more than R8 billion from institutional investors into social
infrastructure investment.
Our sales improved in the year, notably in the second half. This resulted in a
6% increase in APE sales compared to 2009, and we benefited from improved
persistency. Our NCCF improved significantly, and we see increasing
contributions from new markets, with non-South African NCCF higher than South
African NCCF (excluding PIC flows).
We made good progress towards implementation of Solvency II as part of the
overall Group programme, and also in respect of the South African equivalent
framework known as SAM (Solvency Assessment and Management), launched in 2010 by
the South African regulator.
IFRS AOP results
IFRS AOP (pre-tax) increased by 4% from R5 879 million to R6 099 million, with
strong asset management profits (up 62% to R1 550 million), partially off-set by
lower long-term investment return (R1 221 million compared to R1 658 million in
2009).
2010 2009 % change
Rm
Long-term business adjusted operating profit 3 328 3 263 2%
Asset management adjusted operating profit 1 550 958 62%
Long-term investment return (LTIR) 1 221 1 658 (26%)
Adjusted operating profit (IFRS basis) (pre-tax) 6 099 5 879 4%
The growth in long-term business profits is mainly due to the significant
improvement in Retail persistency in 2010 following the significant
strengthening of the basis in 2009 as well as continued business effort to
improve retention experience. Good investment performance in the annuity and
permanent health insurance (PHI) portfolios and increased asset-based fees due
to higher equity market levels also contributed to profit growth. The comparable
2009 life profits benefited from a number of large non-recurring items,
including the impact of assumption changes and profits from the Nedbank joint
ventures in the first five months of 2009. Excluding these items, underlying
life profits increased by 37% over the comparative period.
Asset management profits grew significantly as a result of higher fees being
earned from higher funds under management (FUM), stronger performance fees in
OMIGSA, a first full-year contribution from ACSIS (acquired in the second
half of 2009), a higher contribution from OMF due to growth in the business,
and mark-to-market profits in Old Mutual Specialised Finance (OMSFIN). These
were partially offset by lower transactional income.
The LTIR decreased by 26% to R1 221million in 2010 reflecting the reduced rate
applied to OMLAC(SA) assets due to the implementation of a higher ratio of cash
to equity in the asset portfolio backing the Capital Adequacy Requirement.
Life APE sales summary
APE sales increased by 6% from R5 178 million to R5 505 million, driven largely
by strong growth in regular premium sales across the majority of our Emerging
Markets businesses.
By Cluster: Gross single premiums
New business (Rm) 2010 2009 +/-%
OMSA
Mass Foundation Cluster* 14 16 (13%)
Retail Affluent 9 620 8 751 10%
Institutional** 7 892 9 205 (14%)
Total OMSA 17 526 17 972 (2%)
Rest of Africa*** 475 528 (10%)
Total New Markets**** 231 432 (47%)
Total Emerging Markets 18 232 18 932 (4%)
By Product:
OMSA 2010 2009 +/-%
Savings 14 062 13 874 1%
Protection 6 2
Annuity 3 458 4 096 (16%)
Total OMSA 17 526 17 972 (2%)
Rest of Africa*** 475 528 (10%)
Total New Markets**** 231 432 (47%)
Total Emerging Markets 18 232 18 932 (4%)
By Cluster: Gross regular premiums
New business (Rm) 2010 2009 +/-%
OMSA
Mass Foundation Cluster* 1 571 1 452 8%
Retail Affluent 1 381 1 213 14%
Institutional** 454 360 26%
Total OMSA 3 406 3 025 13%
Rest of Africa*** 196 195 1%
Total New Markets**** 79 64 23%
Total Emerging Markets 3 681 3 284 12%
By Product:
OMSA 2010 2009 +/-%
Savings 1 654 1 390 19%
Protection 1 752 1 635 7%
Annuity - -
Total OMSA 3 406 3 025 13%
Rest of Africa*** 196 195 1%
Total New Markets**** 79 64 23%
Total Emerging Markets 3 681 3 284 12%
By Cluster: Total APE
New business (Rm) 2010 2009 +/-%
OMSA
Mass Foundation Cluster* 1 572 1 454 8%
Retail Affluent 2 343 2 088 12%
Institutional** 1 244 1 281 (3%)
Total OMSA 5 159 4 823 7%
Rest of Africa*** 244 247 (1%)
Total New Markets**** 102 108 (6%)
Total Emerging Markets 5 505 5 178 6%
By Product:
OMSA 2010 2009 +/-%
Savings 3 060 2 773 10%
Protection 1 753 1 639 7%
Annuity 346 411 (16%)
Total OMSA 5 159 4 823 7%
Rest of Africa*** 244 247 (1%)
Total New Markets**** 102 108 (6%)
Total Emerging Markets 5 505 5 178 6%
By Cluster: Total PVNBP
New business (Rm) 2010 2009 +/-%
OMSA
Mass Foundation Cluster* 6,994 6,767 3%
Retail Affluent 16,345 15,413 6%
Institutional** 11,788 12,831 (8%)
Total OMSA 35,127 35,011 0%
Rest of Africa*** 1,363 1,653 (18%)
Total New Markets**** 485 675 (28%)
Total Emerging Markets 36,975 37,339 (1%)
By Product:
OMSA 2010 2009 +/-%
Savings 22,441 21,785 3%
Protection 9,228 9,132 1%
Annuity 3,458 4,094 (16%)
Total OMSA 35,127 35,011 0%
Rest of Africa*** 1,363 1,653 (18%)
Total New Markets**** 485 675 (28%)
Total Emerging Markets 36,975 37,339 (1%)
* Previously described as Retail Mass.
** Institutional sales include Corporate and OMIGSA life sales.
*** Rest of Africa represents Namibia only.
**** New Markets represents Latin America only.
OMSA
Regular premium sales
Regular premium sales grew by 13% compared to 2009 and by 25% in the second half
of 2010 compared to the first half, with particularly strong growth in savings
sales in the second half in the Mass Foundation Cluster which benefited from
lower overall cancellation rates, higher average premiums, improved adviser
productivity and significant improvement in the direct channel sales
performance.
Retail Affluent sales growth was driven by Max Investments savings products,
experiencing 21% and 31% growth for Life and LISP wrappers respectively in 2010,
following the stabilisation of the economic outlook. Greenlight experienced a
lower than expected growth of 6% over 2009 in some measure due to increased
turnover of the Retail Affluent sales force. Corporate sales increased by 26% in
2010 - driven primarily by savings sales in the umbrella market, where the
Evergreen umbrella fund grew its membership by two-thirds to just over 56, 000.
Corporate risk sales grew strongly due to our success in selling a number of new
policies to large schemes in this highly competitive market. Corporate sales
have more than doubled since 2008 due to innovative product introductions.
Single premium sales
Single premium sales decreased by 2% relative to 2009, due mainly to lower
institutional flows. Retail Affluent achieved strong Investment Frontiers Fixed
Bond sales in the first half and an increase in new contracts issued to clients
with unclaimed maturities. Annuity sales declined by 16%, driven by lower CPI-
linked annuity sales in the Corporate segment as very few annuity tenders
floated in 2010 were concluded. With-profit annuity sales did show a marked
improvement, increasing by 48% as we continued to lead in this market segment.
Retail Affluent annuity sales stabilised in the fourth quarter, following
improvements in annuity rates, to end marginally below the 2009 level.
Rest of Emerging Markets
Namibian regular premium sales in the Retail Mass and Retail Affluent segments
increased by 6% and 5% respectively, mainly as a result of solid sales growth
from tied agents despite difficult economic conditions. Corporate segment
regular premium sales decreased by 14% due to lower Orion sales volumes. Single
premium sales decreased by 10%, with lower new business inflows from both Retail
Affluent and Corporate businesses.
Sales growth of 36% in Mexico was largely driven by the introduction of a
minimum premium for the regular premium savings product in the first half of
2010, implemented as a consequence of working closely with South Africa. We
introduced a Retail Mass distribution team in December. We will continue to grow
this team in the coming months and its pipeline is very promising. Included in
the 2009 comparative is R28 million APE relating to the Chilean business which
was sold in 2009.
APE sales in China increased by 77% from CNY92 million in 2009 to CNY163 million
in 2010, despite poor sales during the first half. The significant improvement
in the second half is mainly due to increased management focus on sales,
supported by execution of our joint venture`s product and channel
diversification strategy (new bank, broker and telemarketing products were
launched during the second half). The reopening of the Bank of China
distribution channel in Beijing (with the assistance of our JV partner),
following a three-month suspension of sales during the first half of 2010,
further contributed to this improvement. Sales at our Indian Joint Venture,
Kotak Mahindra Old Mutual Life Insurance, increased by 6% compared to 2009.
A more detailed analysis of sales by segment is included in the Financial
Disclosure Supplement, available at www.oldmutual.com.
Unit Trust Sales
Unit trust/mutual fund sales summary
New business (Rm) 2010 2009 +/-%
OMSA 21 452 18 384 17%
Rest of Africa 5 360 4 546 18%
New Markets 14 676 13 491 9%
Total Emerging Markets 41 488 36 421 14%
In South Africa, unit trust sales recovered in the second half of 2010 following
a weak first half. We achieved growth of 17% from the 2009 level, mainly due to
significant flows into Old Mutual Unit Trust money market funds during the third
quarter and improved flows into OMIGSA`s Marriott affiliate following revised
asset allocations.
In the rest of Emerging Markets, unit trust sales also performed well. Namibian
sales increased by 18% to R5.4 billion following strong inflows from
institutional and corporate clients as a result of more competitive investment
returns. Unit trust sales in Mexico and Colombia (COLMEX) were 9% ahead of the
prior year in rand (25% in US$), with strong growth in Colombia resulting from a
successful marketing campaign and stronger relationships with corporate and
institutional customers. We increased productivity, with greater sales from
fewer advisers. Mexico benefited from a large scheme acquired in September 2010
and improved performance in both fixed income and equity portfolios.
Value of new business and margins
The value of new business increased by 14% to R972 million, with a strengthening
performance during the course of the year. The APE margin increased from 16% to
18% due to a higher proportion of sales of higher-margin smoothed-bonus
and with-profit annuities in OMSA`s Corporate business and Investment
Frontier Fixed Bonds in Retail Affluent.
MCEV results
Operating MCEV earnings (post-tax) increased by 39% from the 2009 level. This
was mainly due to positive experience variances and operating assumption changes
in 2010, compared to negative variances in 2009. The improvement in experience
variances is mainly due to an improvement in persistency, partly due to the 2009
assumption changes, and partly because management actions improved persistency.
These were partially off-set by a significant decrease in the expected existing
business contribution due to the reduction in 1 year swap yields during 2009.
In addition to the effects above, other significant movements affecting the
closing MCEV include a large positive impact from economic variances due to a
combination of better than assumed equity returns and the effect of the changes
in the shape of the swap yield curve. This was partially off-set by modelling
enhancements to the economic scenario generator used to calculate the investment
guarantee reserve, which caused a decrease in the margin (buffer) held to
protect against future market volatility, resulting in less value being released
as profits in the future. The net impact of these resulted in a growth in MCEV
of 16% over 2010.
Net client cash flow
NCCF for the year was R0.2 billion, a significant improvement on 2009 outflows
of R20.5 billion.
South African NCCF benefited from significantly lower PIC outflows of R5.1
billion (R16.2 billion in 2009), improved inflows across a number of OMIGSA
boutiques (mainly Electus and Futuregrowth), improved net flows in retail
businesses and lower outflows in Corporate. Excluding PIC outflows, OMSA`s NCCF
for the second half of 2010 was positive R1.8 billion compared to negative R6.3
billion in the second half of 2009. Further PIC outflows are expected in 2011.
Overall, OMIGSA investment performance (over three years) was average, with
satisfactory performance in specialist areas contrasted against mixed
performance in our balanced capabilities.
The rest of our Emerging Markets business delivered R7.6 billion in NCCF. NCCF
in Colombia and Mexico increased by 12% from R4.3 billion in 2009 to R4.8
billion in 2010. The Colombian business attracted new customers within targeted
segments, experiencing lower surrenders on core products and improved sales of
Retail voluntary products. In Namibia, NCCF increased by R1.0 billion to R1.4
billion due to improved unit trust inflows and R672 million inflows from the
rebalancing of the Government Institutions Pension Fund portfolios.
Funds under management
FUM increased by 13% to R586 billion as a result of higher market levels and
overall neutral NCCF for the year. Of the total, R498 billion (2009: R449
billion) is in South Africa.
Outlook
We have confidence in the underlying performance of the business, despite the
low investment return assumptions in 2011 and mark-to-market gains recorded in
the asset management results in 2010. We will continue to strive for a balance
that combines strong risk management and governance with a culture that
encourages innovation, across our four main strategic themes:
- Continuing to invest in our Emerging Market business
- Improving OMIGSA`s investment performance and value creation for customers
- Putting the customer at the centre of our business
- Enhancing our high-performance culture and further developing our Emerging
Markets management team
Growing our sales force remains a priority, as does promoting a savings culture
in Emerging Markets, designing and adapting products that are relevant to a wide
range of customers, and providing easier access to financial services for our
customers across our businesses.
With these strategies in place we are well positioned to optimise business
opportunities in 2011 and further strengthen a highly successful Emerging
Markets business.
Long Term Savings: Nordic
Improved profitability, higher funds under management and strong APE margin
2010 2009 % change
Highlights (SEKm)
Adjusted operating profit (IFRS basis, pre-tax) 1 227 737 66%
Return on local equity* 11% 12%
Life assurance sales (APE) 2 238 2 819 (21%)
Unit trust/mutual fund sales 6 466 4 708 37%
PVNBP 12 292 13 774 (11%)
Value of new business 460 526 (13%)
APE margin 21% 19%
PVNBP margin 3.7% 3.8%
Operating MCEV earnings (covered business,
post-tax) 503 965 (48%)
Return on embedded value (covered business,
post-tax) 3.3% 8.1%
2010 2009
Highlights (SEKbn)
Net client cash flows (SEKbn) 7.4 11.6 (36%)
Funds under management 145.4 127.2 14%
* Return on local equity is IFRS AOP (post-tax) divided by average shareholders`
equity, excluding goodwill, PVIF and other acquired intangibles
Overview
The economies in the Nordic countries experienced a strong recovery in 2010,
with positive GDP growth (estimated at 5.6% in Sweden, 2.0% in Denmark and 2.2%
in Norway). The Swedish equity market grew by 23% in 2010.
The Nordic business delivered a strong IFRS AOP result in 2010. With changes in
the management team, including a new CEO Marten Andersson, we are delivering on
our key priorities of strengthening distribution power and product offerings,
stimulating future NCCF growth, increasing operational efficiency to secure
profitable growth, and optimising structures and risk frameworks to unlock
value. However, we face a challenging year of change for the business in
delivering our 2011 operating sales, efficiency and profitability targets in a
rapidly changing business environment.
The Nordic business is making good progress towards the implementation of
Solvency II, as a component of the overall Group Solvency II initiative.
Life sales summary
APE sales at SEK2 238 million were down by 21% compared to 2009, following
management action in the Swedish Retail segment to close the unprofitable Link
Regular product in late 2009. The APE of the Corporate business decreased by
14%, mainly due to slower sales of the highly competitive TPS Regular product.
Denmark performed strongly, with product success in the unit-linked and
healthcare markets. APE grew by 22% to SEK514 million.
Gross single premiums
New business (SEKm) 2010 2009 +/-%
Sweden
Corporate 1 429 1 471 (3%)
Retail 3 672 4 288 (14%)
Total Sweden 5 101 5 759 (11%)
Denmark
Total Denmark 1 280 547 134%
Total Nordic 6 381 6 306 1%
Gross regular premiums
New business (SEKm) 2010 2009 +/-%
Sweden
Corporate 1 033 1 221 (15%)
Retail 181 601 (70%)
Total Sweden 1 214 1 822 (33%)
Denmark
Total Denmark 386 366 5%
Total Nordic 1 600 2 188 (27%)
Total APE
New business (SEKm) 2010 2009 +/-%
Sweden
Corporate 1 176 1 368 (14%)
Retail 548 1 030 (47%)
Total Sweden 1 724 2 398 (28%)
Denmark
Total Denmark 514 421 22%
Total Nordic 2 238 2 819 (21%)
Total PVNBP
New business (SEKm) 2010 2009 +/-%
Sweden
Corporate
Retail
Total Sweden 9 001 11 260 (20%)
Denmark
Total Denmark 3 291 2 514 31%
Total Nordic 12 292 13 774 (11%)
Unit trust/mutual fund sales summary
Mutual fund sales of SEK6,466 million were up 37% on 2009. This was driven by
improved retail investment activity spurred by rising global equity markets.
However, fourth quarter sales showed a decrease compared to the same period in
2009 due to changing product demand and customer behaviour in Skandiabanken.
2010 2009 +/-%
New business (SEKm)
Skandiafonder 2 431 1 510 61%
Skandiabanken 4 035 3 198 26%
Total Nordic 6 466 4 708 37%
IFRS AOP results
The IFRS AOP (pre-tax) increased by 66% to SEK1 227 million compared to 2009.
The key driver behind the improvement was higher client funds, which increased
fund-based fees and rebates in the long-term business. In particular the unit-
linked business performed strongly in the second half. A gain realised from
divestment of a private equity holding in the first half contributed profit of
SEK126 million.
2010 2009 % change
SEKm
Long-term business adjusted operating profit 1 016 502 102%
Banking business adjusted operating profit 181 193 (6%)
Asset management adjusted operating profit 30 42 (29%)
Adjusted operating profit (IFRS basis, pre-tax) 1 227 737 66%
The Healthcare business showed a strong turnaround in 2010 as pricing and
product changes and underwriting discipline helped stabilise claims costs in the
Lifeline business - which delivered AOP of SEK26 million compared to a negative
SEK42 million in 2009. The 2010 figure includes divestment costs of SEK20
million for the Lifeline branch in Norway.
Skandiabanken results were below 2009 levels, due mainly to lower net interest
income and increased development costs. Skandiabanken Sweden suffered from the
exceptionally low base interest rate during the first half, although this
increased towards the end of the year. Credit losses remain very low (0.09% in
2010 compared to 0.14% in 2009), reflecting the traditionally low-risk nature of
our lending business. Skandiabanken Norway grew its profits, due mainly to
higher net interest income.
Value of new business and margins
The value of new business decreased compared to 2009 - driven by lower new
sales, negative operating assumption changes for anticipated price pressure in
the Corporate segment, and expectations of more adverse persistency in the
future. The APE margin increased from 19% to 21% due to a more profitable
business mix resulting from a higher proportion of TPS business sales in Sweden
and Match product sales in Denmark.
MCEV results
Operating MCEV earnings after tax declined to SEK503 million, due to the
negative assumption changes driving the decline in the value of new business.
However, total MCEV increased over the year, due mainly to positive client fund
performance.
Net client cash flow
NCCF for the year was SEK7.4 billion, a decrease of 36% compared to 2009. This
was driven by a combination of higher surrenders (because of higher fund value
and an increase in partial surrenders), lower single premium sales and higher
paid-ups in the occupational pension business.
Funds under management
FUM were SEK145.4 billion at 31 December 2010, up 14% from the previous year.
The increase is mainly due to the positive movement of equity markets.
The investment performance in the Swedish unit-linked portfolio was good in the
fourth quarter, and our average client enjoyed investment performance of 6.2%
for the quarter and 10.9% for the year. Clients have generally increased their
risk exposure, with the majority of all net investments being allocated to
Swedish, Asian and Emerging Markets equity funds. Fund performance has been
strong over the 12-month period, with 63% of our funds performing above average
compared to their peers.
Outlook
The economic outlook for 2011 is positive, with forecast GDP growth of over 3%
in Sweden and Norway and around 2% in Denmark, and public spending is under
control. We believe household incomes will increase, that the debate over credit
expansion is turning the emphasis towards savings, and increased activity in the
equity market is attracting inflows. As a result of this, the Nordic savings
market is expected to grow despite some ongoing concerns around the continued
high level of unemployment. The competitive environment will continue to be
challenging, with competition pushing down fee levels. The market is heading
towards further fragmentation into two main segments: the advised market, with
high levels of added value from financial advisers, and the `self-service`
market.
Management action continues to focus on improved sales, healthy margins over the
long-term, reductions in the cost base, and improvement of the distribution and
product offerings to enhance NCCF. We delivered cost savings of GBP2.5 million
in 2010. In 2011, cost reduction activity will increase and we estimate
restructuring costs of GBP30 million in the year.
Long Term Savings: Retail Europe
Foundations laid for further development of the business
2010 2009 % change
Highlights (EURm)
Adjusted operating profit (IFRS basis) (pre-tax) 60 25 140%
Return on local equity* 20% 9%
Life assurance sales (APE) 80 75 7%
Unit trust/mutual fund sales 27 27 -
PVNBP 597 603 (1%)
Value of new business 9 (6) 150%
APE margin 11% (8%) -
PVNBP margin 1.4% (1.0%)
Operating MCEV earnings (covered business,
post-tax) 77 (49) 157%
Return on embedded value (covered business,
post-tax) 12.8% (7.9%)
2010 2009 % Change
Highlights (EURbn)
Net client cash flows 0.5 0.6 (17%)
Funds under management 5.8 4.7 23%
* Return on local equity is IFRS AOP (post-tax) divided by average shareholders`
equity, excluding goodwill, PVIF and other acquired intangibles.
Overview
GDP growth improved in all our markets throughout 2010 following government
stimulus packages and better conditions in export markets. Although labour
markets improved in Germany and Switzerland, unemployment in Austria and Poland
increased slightly. Equity markets rebounded from their 2009 lows, with the
German DAX index posting a 2010 gain of 16%. Our customers continued to demand
primarily guaranteed products and IFAs still view unit-linked policies with
caution, preferring traditional life policies.
In the light of these challenges, Retail Europe`s performance in 2010 has been
very positive. Our sales improved on 2009 levels, primarily driven by Germany
and Poland, we continued the formation of the Retail Europe organisation, and we
reduced operating costs.
In addition to our sales and marketing activities, which were focused on the end
customer, we also developed initiatives to maintain and grow relationships with
our existing distribution partners. These initiatives, underpinned by strong
cost containment, ensured significant improvement in our IFRS, MCEV and value of
new business, with IFRS profits more than doubling. The transfer of our IT and
client administration functions to South Africa continues, and our office in
South Africa was officially opened in December 2010.
Although the Retail Europe business expects to be a Standard Formula entity
under Solvency II, we have made excellent progress as part of the Group iCRaFT
programme in ensuring that all of our processes and governance structures will
be Solvency II compliant.
Life sales summary
APE sales reached EUR80 million, an increase of 7% compared to 2009. Sales in
Poland increased markedly, while Austria and Switzerland showed a slight
decline. Although the unit-linked market in Germany has declined slightly, we
increased our share of this market from 1.9% in the fourth quarter of 2009 to
2.2% in the fourth quarter of 2010.
Gross Single Premiums
2010 2009 +/-%
New business (EURm)
Germany 31 24 29%
Poland 21 14 50%
Austria 7 6 17%
Switzerland 14 15 (7%)
Total Retail Europe 73 59 24%
Gross Regular Premiums
2010 2009 +/-%
New business (EURm)
Germany 29 27 7%
Poland 18 12 50%
Austria 17 19 (11%)
Switzerland 9 11 (18%)
Total Retail Europe 73 69 6%
Total APE
2010 2009 +/-%
New business (EURm)
Germany 32 30 7%
Poland 20 14 43%
Austria 18 19 (5%)
Switzerland 10 12 (17%)
Total Retail Europe 80 75 7%
Total PVNBP
2010 2009 +/-%
New business (EURm)
Germany 278 260 7%
Poland 114 87 31%
Austria 109 142 (23%)
Switzerland 96 114 (16%)
Total Retail Europe 597 603 (1%)
The main driver of increased sales was new product launches. In Germany we
launched the new single premium Investmentpolice product towards the end of the
year, combining the tax benefits of a unit-linked contract with the transparency
of a pure investment contract. In Poland we launched a new regular premium
product, and in Switzerland we launched Easy Combi. All these launches were
successful and we expect their impact to continue in 2011. We also made
concerted efforts to improve our distributor relationships through marketing
campaigns designed to support our partners during these difficult times.
IFRS AOP results
IFRS AOP has increased significantly to EUR60 million, due to improved results
in all countries. The main factors were lower administration expenses and higher
fees - driven by higher fund-based fees resulting from improved equity markets.
Net client cash flow
NCCF was EUR465 million for the year. The decline of EUR86 million on 2009
reflected the increase in fund values of surrenders due to positive equity
markets, although persistency levels were broadly stable year on year.
Funds under management
FUM of EUR5.8 billion at 31 December 2010 reflected a rise of 23% compared to
2009, largely driven by positive stock market performance.
Value of new business and margins
The value of new business increased by EUR15 million to EUR9 million, with a
PVNBP margin for the year of 1.4% and an APE margin of 11%. The main reasons for
the improvement were higher new sales and successful expense management.
MCEV results
The operating MCEV earnings after tax increased by over EUR100 million to EUR77
million compared to 2009, driven by positive experience variances and positive
assumption changes for rebates and persistency.
Outlook
We anticipate that macro-economic factors will continue to have a significant
impact on our markets in 2011. The development of equity and bond markets will
continue to be the key to restoring consumer confidence after the financial
crisis. Our customers will also be impacted by unemployment levels and their own
sense of job security. Ongoing Solvency II developments and the low interest
rate environment will also provide challenges for traditional insurers. While
this should be positive for the unit-linked market, it may intensify
competition.
Our focus in 2011 is to extend our product range and distribution through growth
initiatives in Germany and Poland. At the same time we will maintain our focus
on capital efficiency and cost containment through our consolidated base in
Berlin and our operations in South Africa. We will incur further implementation
costs for outsourcing the administration and IT support teams to South Africa
but will gain scope for operational leverage in due course.
Long Term Savings: Wealth Management
A very positive year for Wealth Management
2010 2009 % change
Highlights (GBPm)
Adjusted operating profit (IFRS basis, pre-tax) 197 106 86%
Return on local equity* 14% 8%
Life assurance sales (APE) 734 617 19%
Unit trust/mutual fund sales 4 507 3 210 40%
PVNBP 6 380 5 042 27%
Value of new business (post-tax) 66 49 35%
APE margin 9% 8%
PVNBP margin 1.0% 1.0%
Operating MCEV earnings (covered business,
post-tax) 112 (4)
Return on embedded value (covered business,
post-tax) 6.1% (0.3%)
2010 2009 % change
Highlights (GBPbn)
Net client cash flows (GBPbn) 3.9 2.5 56%
Funds under management 55.9 46.9 19%
* Return on local equity is IFRS AOP (post-tax) divided by average shareholders`
equity, excluding goodwill, PVIF and other acquired intangibles
Overview
Wealth Management enjoyed a very positive year in 2010. We achieved significant
year-on-year sales growth, margins improved and the cost reduction programme
delivered GBP35 million of run-rate savings which contributed to improved
profitability. The FTSE100 grew by 9% during the year, contributing to continued
positive investor sentiment which in turn led to strong growth in FUM across our
markets.
Sales grew across the business, particularly in the UK and Continental Europe.
We continue to see a rapid shift in the UK towards both platform business with
an insurance wrapper and mutual fund products. Although we do not target growth
in market share as a KPI, Skandia UK`s market share continued to grow in the
third quarter of 2010, to 7.4% across all industry channels compared to 6.4% in
the fourth quarter of 2009, suggesting the increased importance of the platform
model. This is a record for Skandia in the UK and compares to a range of 3.5% to
5.5% over 2001 - 2007. The scale of our UK Platform, and our investment to
deliver reliability and flexibility, position us ideally to lead and benefit
from this industry shift; we are actively looking at how to further enhance our
platform offering and rationalise our suite of products over the coming year.
We are making good progress in building the Wealth Management operations and
systems on a single operating model. We have also made excellent progress in
implementing our Solvency II readiness programme, in conjunction with the
Group-led iCRaFT initiative.
Throughout 2010, SIG`s highly successful Spectrum range of risk-targeted funds
has been launched on all the UK`s major financial adviser platforms. The FUM of
Spectrum exceeded the GBP750 million mark, and this range has now been
successfully exported to Sweden as the Skala range.
Life covered sales summary
APE sales were GBP734 million, a 19% increase on 2009. This is mainly
attributable to sales on the UK and in Continental Europe, which improved by 28%
(GBP76 million) and 50% (GBP52 million) respectively compared to 2009.
Gross single premiums
2010 2009 +/-%
New business (GBPm)
UK
Pensions 2 021 1 452 39%
Bonds 597 473 26%
Protection - -
Savings - -
Total UK 2 618 1 925 36%
International
Unit-linked 324 190 71%
Bonds 1 253 1 154 9%
Total International 1 577 1 344 17%
Continental Europe
Unit-linked 1 490 971 53%
Total Wealth Management 5 685 4 240 34%
Unit trust/mutual fund sales summary
2010 2009 +/-%
New business (GBPm)
UK 3 256 2 090 56%
International 1 228 1 100 12%
Continental Europe 23 20 15%
Total Wealth Management 4 507 3 210 40%
Gross regular premiums
2010 2009 +/-%
New business (GBPm)
UK
Pensions 71 70 1%
Bonds - -
Protection 10 8 25%
Savings 9 5 80%
Total UK 90 83 8%
International
Unit-linked 44 63 (30%)
Bonds 23 39 (41%)
Total International 67 102 (34%)
Continental Europe
Unit-linked 9 6 50%
Total Wealth Management 166 191 (13%)
Unit trust/mutual fund sales summary
New business (GBPm)
UK
International
Continental Europe
Total Wealth Management
Total APE
2010 2009 +/-%
New business (GBPm)
UK
Pensions 273 216 26%
Bonds 60 47 28%
Protection 10 8 25%
Savings 9 5 80%
Total UK 352 276 28%
International
Unit-linked 77 83 (7%)
Bonds 148 153 (3%)
Total International 225 236 (5%)
Continental Europe
Unit-linked 157 105 50%
Total Wealth Management 734 617 19%
Unit trust/mutual fund sales summary
New business (GBPm)
UK - - -
International - - -
Continental Europe - - -
Total Wealth Management - - -
Total PVNBP
2010 2009 +/-%
New business (GBPm)
UK
Pensions
Bonds
Protection
Savings
Total UK 3 023 2 289 32%
International
Unit-linked
Bonds
Total International 1 826 1 741 5%
Continental Europe
Unit-linked 1 531 1 012 51%
Total Wealth Management 6 380 5 042 27%
Unit trust/mutual fund sales summary
New business (GBPm)
UK - - -
International - - -
Continental Europe - - -
Total Wealth Management - - -
The strong UK Platform performance reflects the continued conversion of IFAs to
platform business and particularly strong sales during the first half in the
lead-up to the end of the tax year. APE sales of GBP239 million were up GBP100
million on 2009. Second half volume growth decreased, with re-registering
activity slowing and a greater impact from the UK holiday season. The majority
of the mutual fund sales growth is from the platform, where buoyant markets and
increased ISA allowances made positive contributions in 2010 and late 2009.
Gross inflows onto the platform were GBP5.2 billion in 2010 (2009:GBP3.3
billion) - an indicator of our proposition`s success.
Continental Europe APE sales volumes of GBP157 million were strongly ahead of
2009`s GBP105 million. Italy has been the main contributor to increased Europe
sales, with very high sales earlier in the year partially driven by changes in
tax legislation. The period covered by these tax changes has now expired, and
volume growth has returned to normal levels as we continue to make progress
through good distributor relationships.
APE sales volumes of GBP225 million in the offshore International market were 5%
lower than the GBP236 million achieved in 2009, impacted by a managed decline in
regular premium sales in Finland as a result of legislation changes in 2009.
The UK Legacy business APE sales volumes of GBP113 million were down by GBP24
million compared to 2009, due to a shift in market sentiment towards platform
offers. Following a review of the legacy products, we decided to close some
legacy products to new business.
IFRS AOP results
IFRS AOP (pre-tax) increased by 86% to GBP197 million - primarily due to higher
FUM, which provided a healthy boost to returns on equity because of the
operating leverage in the business. FUM growth remains strongly positive, driven
by NCCF and market growth.
As previously reported, the prior year AOP results benefited from the structural
tax efficiency applicable to UK companies writing unit-linked business in the
UK, together with the smoothing of previous years` deferred tax assets. These
assets arose during the significant market volatility of the preceding two years
where falls in the value of policyholder assets resulted in the recognition of
significant deferred tax assets in the IFRS income statement, which were spread
forward under AOP. The pre-tax smoothing for 2010 gave rise to a profit of GBP71
million, a similar amount to 2009. For 2011, the pre-tax impact will be a profit
of GBP27 million, falling to nil thereafter. Within the MCEV earnings, these
profits are recognised as they arise as investment variances.
With continued equity and bond market growth, the UK Life Companies have moved
into a full XSI tax position. This raises the effective tax rate because it
means that only a relatively small proportion of the Life dividend income is
treated as belonging to the shareholder. This has increased the overall
effective tax rate for Wealth Management to 22% in 2010. (2009: 19%).
Value of new business and margins
The value of new business increased by GBP17 million to GBP66 million due to
strong sales in UK Platform and Continental Europe combined with operating
assumption changes at year-end 2010 across all markets in Wealth Management.
This was partially offset by economic assumption changes in UK and Continental
Europe (as a result of decreased assumed growth rates and increased future
inflation) and the shift from UK Legacy to UK Platform offerings.
2010 PVNBP margin was level with 2009 at 1.0%, as growth in volumes and cost
reductions were fully offset by the shift to the UK Platform offering, the
decline in regular premium business sales and higher acquisition expenses in
International.
MCEV results
Covered business adjusted operating MCEV post-tax earnings increased by GBP116
million to GBP112 million. 2009 was significantly impacted by operating
assumption changes reflecting surrender experience in International and UK
Legacy. In 2010 VNB was higher and overall we saw a significant improvement in
experience effects, especially persistency and rebates. However, persistency has
worsened on the UK Legacy pension business as the market anticipates the
implementation of the Retail Distribution Review. This has resulted in some
product closures and consequently the MCEV assumptions have been strengthened.
Planned return on MCEV was lower than in 2009 as a result of the reduction in
the one-year yield on risk free investments.
Net client cash flow
NCCF for the year was GBP3.9 billion - up 56% on 2009, driven by strong
contributions from the UK Platform and Italy, which outweighed surrenders in the
UK Legacy book.
Funds under management
FUM grew 19% to GBP55.9 billion, driven by strong NCCF and the positive market
movements.
Outlook
Our outlook for 2011 is optimistic, based on continuing positive investor
sentiment. So far 2011 sales are in line with our expectations but below those
of the prior year which included the one-off positive impact of the Italian tax
shield and particularly significant UK Platform sales in the build up to the
2010 tax year-end. These were helped by April 2010 changes in pension rules
coupled with rising investor confidence at the time of the 2010 ISA season.
We anticipate continued strong support for the platform model in all our markets
and the shift in the UK market towards a simplified investment and pension
product suite. Following the closure of a number of our UK Legacy products
during 2010, we have put retention strategies in place for this part of the
business - anticipating that we will continue to see net client outflows from
this book of business in the build-up to implementation in 2013 of the changes
resulting from the Retail Distribution Review. We expect final clarification of
the review in a Policy Statement during the first half of 2011. We believe that
we are well-placed for the RDR changes since a large proportion of our new
business is already written on the basis of client-agreed adviser remuneration.
In addition, we are considering plans to introduce a fully unbundled charging
structure, under which we will pass on rebates to the customer in advance of
December 2012.
Our focus on cost reduction will continue and we remain confident that we will
meet our 2012 expense and ROE targets.
Nedbank Group (Nedbank)
Solid earnings growth
2010 2009 % change
Highlights (Rm)
Adjusted operating profit (IFRS basis, pre-tax) 6 799 6 192 10%
Headline earnings** 4 900 4 277 15%
Net interest income** 16 608 16 306 2%
Non-interest revenue** 13 215 11 906 11%
Net interest margin** 3.35% 3.39%
Credit loss ratio** 1.36% 1.52%
Cost to income ratio** 55.7% 53.5%
ROE** 11.8% 11.8%
ROE (excluding goodwill)** 13.4% 13.4%
Core Tier 1 ratio 10.1% 9.9%
2010 2009 % change
As reported (GBPm)
Adjusted operating profit (IFRS basis) (pre-tax) 601 470 28%
** As reported by Nedbank in its report to shareholders as at 31 December 2010
Certain of the Nedbank`s reporting ratio calculations have been adjusted. The
ratios for ROE have been restated with the denominator changing from simple
average to daily average for equity and total asset values, respectively. The
calculation of the credit loss ratio has been changed from simple - average
advances to daily-average banking advances (thereby excluding trading advances
from the calculation). Comparatives have been restated accordingly.
The full text of Nedbank`s results for the year ended 31 December 2010, released
on 28 February 2011, can be accessed on Nedbank`s website
http://www.nedbankgroup.co.za/financial/2010AnnualResults/downloads/NedbankGrou
p.pdf. The following is an extract:
Banking environment
`Real gross domestic product (GDP) in South Africa grew by 2.8% in 2010 compared
with a decline of 1.7% in 2009. The local economy had a strong start to the
year, primarily driven by improved global demand for commodities and a rebound
in manufacturing production off the depressed levels of 2009.
Economic activity was also boosted by strong infrastructural spending ahead of
the FIFA 2010 World Cup and by the event itself, with consumer spending rising
steadily for most of the year. However, fixed investment by the private sector
contracted for the second year off the elevated levels seen in 2008.
Growth in both the emerging and some parts of the developed world surprised on
the upside, underpinned by China`s economic strength and continued demand for
commodities and capital goods. Massive liquidity injections by major central
banks and historically low interest rates helped to stimulate economic growth
further, particularly in emerging economies. In contrast, the underlying
economic and financial environment remained fragile in the developed world, with
fiscal difficulties in parts of Europe and America, continued weakness in credit
markets, limited employment growth and inflationary concerns returning in
emerging economies.
Household finances improved in South Africa as debt started to decrease and
interest rates eased to the lowest levels in 36 years. The recovery in the
credit cycle has proved to be more modest compared with previous cycles.
Household demand for credit was contained by the consumer debt burden remaining
relatively high, increased regulatory requirements, policy uncertainty and
employment growth only resuming late in the year. Against this background the
ratio of household debt to disposable income declined marginally to 78.2% from
just over 80% at the end of 2009. At the same time debt service costs decreased
to 7.5%, the lowest level since June 2006, and are now at a level that is more
conducive to improving economic growth in the consumer sector.
In the corporate sector excess capacity and uncertainty over the sustainability
of the local and global recovery limited spending. Government fixed- investment
spending, although continuing to contract, emerged as the main foundation for
growth.
Review of results
Nedbank showed solid earnings growth in a challenging economic environment.
After a strong fourth quarter Nedbank finished the year with earnings marginally
ahead of management`s expectations set out in the third quarter trading update.
Headline earnings increased by 14.6% from R4 277 million to R4 900 million.
Diluted headline earnings per share increased by 8.7% from 983 cents to 1 069
cents, slightly above the forecast range of 0% to 8% provided in the third
quarter trading update. Diluted earnings per share (DEPS) decreased by 5.3% from
1 109 cents to 1 050 cents. As previously reported, 2009 DEPS included a once-
off International Financial Reporting Standards (IFRS) revaluation gain of R547
million (after taxation) from the acquisition and consolidation of the Nedbank
Wealth joint ventures.
Nedbank recorded a return on average ordinary shareholders` equity (ROE),
excluding goodwill, of 13.4% and a ROE of 11.8%.
Nedbank maintained its well-capitalised balance sheet with core Tier 1 capital
at 10.1% (2009: 9.9%), while advances grew by 5.5%, with market share gains in
most lending classes aside from home loans.
The net asset value per share grew by 8.0% from 9 100 cents in December 2009 to
9 831 cents in December 2010. This is a pleasing result given the increase in
the average number of shares in issue following the acquisition of the joint
ventures from Old Mutual and scrip dividend distributions last year.
Financial performance
Net interest income (NII)
NII increased by 1.9% to R16 608 million (2009: R16 306 million) and Nedbank`s
net interest margin held up well at 3.35% (2009: 3.39%), despite the impact of
lower interest rates. Average interest-earning banking assets increased by 3.0%
(2009 growth: 9.0%).
Margin compression was less than expected. Margin pressure primarily resulted
from a smaller endowment from lower average interest rates and the cost of
lengthening the funding profile. This was partially off-set by the widening of
margins from asset pricing and a change in asset mix, including strong growth in
Nedbank`s retail motor finance and personal loans businesses, a relative
prime/Johannesburg Interbank Agreed Rate (JIBAR) reset benefit as a result of
less aggressive interest rate cuts during 2010 compared with 2009, and a decline
in the market cost of term liquidity during the last quarter of the year.
Impairments charge on loans and advances
The credit loss ratio on the banking book improved to 1.36% for the period
(2009: 1.52% (restated)).
The reduction in the impairments charge was driven mostly by Nedbank Retail,
particularly in the secured portfolios that had lagged the recovery in the
unsecured portfolios. Lower interest rates and the stabilising of job losses
contributed to the retail credit loss ratio improving significantly from 3.17%
in 2009 to 2.67%. Nedbank further strengthened its provisioning by reducing
certain security assumptions in specific impairments, increasing levels of
portfolio provisioning on debt restructures of R97 million and lengthening the
bad debt emergence period assumptions within Nedbank Retail home loans at an
additional cost of R114 million within portfolio impairments.
The credit portfolios in Nedbank Corporate, Nedbank Business Banking and Nedbank
Wealth are of high quality and credit loss ratios remained within or below the
respective clusters` through-the-cycle levels. Nedbank Capital impairments
increased in the higher-risk private equity portfolio.
Defaulted advances declined by 1.04% to R26 765 million (2009: R27 045 million).
Defaulted advances to total advances decreased from its peak of 6.01% in June
2010 to 5.63%. Total impairment provisions increased by 14.6% to R11 226 million
(2009: R9 798 million) resulting in strengthened coverage ratios.
Non-interest revenue (NIR)
Nedbank`s focus on NIR generated growth across all the clusters. NIR increased
11.0% to R13 215 million (2009: R11 906 million). On a comparable basis NIR
growth was 10.5% after adjusting for the acquisitions in 2009 of the Nedbank
Wealth joint ventures and before fair-value adjustments. The ratio of NIR to
expenses improved to 79.6% (2009: 78.8%).
Core fee and commission income grew strongly by 13.7% (like-for-like growth of
11.2%, adjusting for the Nedbank Wealth joint ventures) through volume growth,
new products and new client acquisitions. Nedbank reduced its retail
transactional banking charges in 2006 and 2007. Since then price increases have
been modest, with 2010 increases in line with inflation, resulting in current
banking charges being similar to 2005 levels.
Insurance income grew 39.8% (18.4% on a like-for-like basis, adjusting for the
Nedbank Wealth joint ventures) primarily as a result of the provision of
insurance on a fast-growing personal loans book as well as the introduction of
new products and improved levels of cross-selling.
Trading income increased by 13.9% to R2 096 million (2009: R1 841 million). In
2009 interest rates decreased at a rapid pace and created favourable trading
conditions. Low volatility in the first half of 2010 resulted in difficult
conditions for global markets and continued pressure on foreign exchange volumes
and margins. This was offset by improved equity trading in the second half of
the year.
Private equity markets remained constrained throughout the year. Listed-
property private equity investments showed some modest gains. Overall NIR from
the private equity portfolios decreased by 25.0%.
NIR was negatively impacted by R213 million (2009: R6 million profit) over the
period as a result of the adverse fair-value adjustments of Nedbank`s
subordinated debt resulting from the narrowing of credit spreads. Nedbank
Corporate also reflected a negative fair-value adjustment of R55 million (2009:
R72 million profit) due to a downward movement in the yield curve and related
convexity in the fixed-rate advances book and associated interest rate swaps.
Expenses
Nedbank has maintained a strong cost discipline over an extended period,
resulting in the increase in expenses remaining below the market guidance given
at the beginning of 2010. Expenses grew by 9.9% to R16 598 million (2009: R15
100 million). The increase was partly due to the acquisition of the Nedbank
Wealth joint ventures and the consolidation of Merchant Bank of Central Africa.
Expenses increased by 8.5% on a comparable basis.
Taxation
The taxation charge (excluding taxation on non-trading and capital items)
increased by 10.9% to R1 366 million (2009: R1 232 million) arising from profit
growth adjusted for dividend income as a proportion of total income being lower
than in 2009, the lower provision for secondary tax on companies, owing to an
increase of shareholders (81.5%) who elected to take scrip for the 2009 final
dividend distribution (2008 final dividend distribution: 32.0%), and the reduced
accounting effect from structured finance transactions that continued to unwind.
The effective tax rate increased marginally from 20.2% to 20.7%.
Non-trading income
Income after taxation from non-trading and capital items decreased to a R89
million loss from a R549 million profit in 2009. The main component of this was
an anticipated R34 million write-down on Imperial Bank computer software
following the acquisition. The 2009 profit arose from the accounting-related
revaluation of BoE (Pty) Limited and Nedgroup Life Assurance Company Limited on
the acquisition of the remaining shares in the joint ventures.
Capital
Nedbank`s capital adequacy ratios remain well above its internal targets and
marginally ahead of December 2009. This resulted from ongoing capital and risk-
weighted asset optimisation, a strategic focus on `managing for value` and a
0.6% increase in capital from higher levels of scrip takeup and other share
issues for staff incentives and black economic empowerment (BEE) structures.
This growth was off-set by the approximately 1.3% negative impact on Nedbank`s
capital adequacy ratios from the cash acquisition of 49.9% of Imperial Bank and
the treatment of capitalised software as an intangible asset rather than as a
fixed asset for capital adequacy purposes.
FY 2010 ratio FY 2009 ratio
Capital adequacy
Core Tier 1 ratio 10.1% 9.9%
Tier 1 ratio 11.7% 11.5%
Total capital ratio 15.0% 14.9%
Target range Regulatory minimum
Capital adequacy
Core Tier 1 ratio 7.5% to 9.0% 5.25%
Tier 1 ratio 8.5% to 10.0% 7.00%
Total capital ratio 11.5% to 13.0% 9.75%
* Capital adequacy ratios include unappropriated profit.
Liquidity
Nedbank` s liquidity position remains sound. Nedbank continues to focus on
diversifying its funding base, lengthening its funding profile and maintaining
appropriate liquidity buffers. Nedbank increased its long-term funding ratio
from increased capital market issuances under the domestic medium-term note
programme (R6.23 billion) and also increased the duration in the money market
book. Nedbank`s liquidity position is further supported by a strong loan-to-
deposit ratio of 97% and a low reliance on interbank and foreign currency
funding. Nedbank is able to leverage off its favourable retail, commercial and
wholesale deposit mix, which compares well with domestic industry averages.
Loans and advances
Nedbank continued to make good progress in improving asset quality, and active
management of the bank`s portfolios towards higher economic profit businesses
resulted in slower asset growth in selected areas. Nedbank grew advances ahead
of the industry at 5.5% to R475 billion (2009: R450 billion).
Deposits
Deposits increased by 4.5% to R490 billion (2009: R469 billion). Optimising the
mix of the deposit book remains a key focus in reducing the high cost of longer-
term and professional funding. This is critical as banks compete more
aggressively for lower-cost deposit pools with longer behavioural duration and
as they start to take cognisance of the possible Basel III liquidity ratios. Low
interest rates, coupled with low domestic savings levels and the deleveraging of
consumers, led to modest growth in retail deposits during 2010. Relatively
higher deposit growth in the wholesale sector indicated increasing working
capital and available capacity among corporates. Throughout the year demand for
higher-yielding negotiable certificates of deposit remained strong within the
professional funds and corporate markets.
Outlook
Lower domestic interest rates and rising levels of income should boost consumer
spending. Together with improving global demand, this is expected to increase
confidence levels and lead to better consumer demand and capital formation in
2011 and further momentum in 2012.
Retail banking credit growth should fare better as household credit demand
improves, house prices edge higher and impairments moderate. Corporate markets
are expected to show modest improvement, while the small and medium enterprise
(SME) market is likely to remain under pressure until fixed-investment activity
improves.
Government spending should continue to underpin growth, although this is
expected to be limited by the reduction in fiscal deficits over the medium term.
Government`s stronger focus on job creation is also positive and much will
depend on the ability to create a more enabling environment for business growth.
Key to this will be improvements in the building of infrastructure and a more
conducive and certain regulatory and policy environment to reduce the medium-
term constraints on economic growth.
Nedbank is well-placed for earnings growth in 2011 and remains on track to meet
its medium- to long-term financial targets in 2013. Nedbank will continue to
invest to generate sustainable revenue growth, underpinned by ongoing cost
optimisation and efficiency improvements. Growing the bank`s overall franchise
and maintaining momentum on the turnaround in the Retail Cluster, supported by a
liquid and well-capitalised balance sheet, are key to delivering sustainable
growth.
Margins should widen slightly, given that interest rates are expected to remain
unchanged, and hence the negative effect of assets repricing quicker than
liabilities out to three months will decrease. In addition, the cost of term
liquidity is expected to decline as more expensive deposits mature and as below-
trend economic growth continues, albeit at higher levels than last year. Overall
advances growth is expected to be in the mid to upper single digits.
Impairments are expected to continue reducing in line with the improved quality
of assets supported by asset pricing on new advances that appropriately reflects
risk and the related cost of funds. The credit loss ratio is currently expected
to decrease but to remain above Nedbank`s target range in 2011.
Transactional volumes are expected to increase as the economy improves and
Nedbank`s focus on growing primary clients is maintained.
Nedbank`s medium-term targets remain unchanged.`
Mutual & Federal (M&F)
Strong performance following renewed focus
2010 2009 % change
Highlights (Rm)
Underwriting result 519 140 271%
Long-term investment return (LTIR) 639 791 (19%)
Restructuring costs (8) (13) 38%
Income from associates 12 - -
Adjusted operating profit (IFRS basis, pre-tax) 1 162 918 27%
Gross premiums 8 442 8 456 -
Earned premiums 6 859 6 874 -
Claims ratio 63.8% 68.7%
Combined ratio 92.4% 98.0%
Solvency ratio 73% 56%
Return on equity 19.0% 21.2%
2010 2009 % change
As reported (GBPm)
Adjusted operating profit (IFRS basis, pre-tax) 103 70 47%
Overview
Mutual & Federal delivered a very strong underwriting result in 2010, with
exceptional performance from the commercial, corporate and credit insurance
portfolios assisted by a relatively benign claims environment. As a result of
seasonal weather factors our performance in the second half is traditionally
stronger than the first half, which is affected by heavy rains. This was
particularly marked in 2010, when our performance steadily improved throughout
the year after a weak first quarter, also helped by the absence of significant
fire claims.
We were pleased to record an improvement in client service in 2010. This was
confirmed when we took second place in the Ask Afrika survey on short-term
insurance, which assesses customer service standards. The year also marked our
first entry into the direct insurance market, with the launch of our iWYZE
initiative in May. This has progressed extremely well, although it will continue
to require investment in the near term. We are also making good progress in our
preparation for Solvency II and its equivalent in South Africa, which is known
as Solvency Assessment and Management (or SAM).
Underwriting and IFRS AOP results
Premiums remained flat on 2009 levels, largely as a result of the cancellation
in late 2009 and early 2010 of some unprofitable portfolios that had
consistently run at claims ratios above 80%. Our claims ratio decreased from
68.7% to 63.8% due to the favourable trading environment and focused management
of claims costs.
The improving quality of our book of business, combined with a focus in 2010 on
claims costs and improved pricing, allowed the business to deliver an
underwriting result of 7.6%. Our operations in Namibia and Botswana continued to
generate about 11% of our underwriting result between them.
Our expenses increased by 13% - primarily driven by inflation and profit-related
pay, given the improved underwriting result.
Solvency margin
There has been a pleasing improvement in the solvency ratio (the ratio of net
assets to net premiums) from 56% to 73%. This reflects the capital generated
from the much-improved underwriting result and investment income.
Outlook
In 2011 we will be continue to see the benefits of increased collaboration with
OMSA, both in further growth of the iWYZE initiative, and as we identify
opportunities for capital optimisation. Under our new Managing Director, Peter
Todd, we have begun delivering our three-year strategic step-change plan. This
aims to enhance profitability by focusing on growth while improving operating
efficiencies across the business. However, the benign local claims environment
in 2010 is likely to see a softening in rates in 2011, which will put some
pressure on underwriting margins.
While we will continue to maintain our focus on the broker market and look to
grow our share of this channel through improved systems and service, 2011 will
see a growing contribution from alternative channels. Besides the expected
growth from iWYZE, we will increase our focus on niche businesses through
alternative channels.
Following the successful buy-out of minorities in 2010, the business is well
positioned to extract more value from full membership of the Old Mutual Group.
Coupled with a strong balance sheet and a greater focus on building new
distribution channels, this should see us grow revenue while improving our
expense ratios.
US Asset Management
Profits up 4% on higher average FUM, improving investment performance as markets
began returning to fundamentals
2010 2009 % change
Highlights ($m)
Adjusted operating profit (IFRS basis, pre-tax) 135 130 4%
Return on Capital 4.2% 4.1%
Operating margin 18% 18%
Net client cash flows ($bn) (18.0) (7.1) (254%)
Funds under management ($bn) 259 261 (1%)
2010 2009 % change
As reported (GBPm)
Adjusted operating profit (IFRS basis, pre-tax) 87 83 5%
Overview
USAM`s global, multi-boutique business comprises 18 distinct investment
affiliates and over 160 investment strategies. FUM across all affiliates
totalled $259 billion, of which $217 billion (84%) was in long-term investment
products and $42 billion (16%) was in short-term products. Long-term
investment products were broadly diversified across equities ($127 billion,
49%), fixed income ($60 billion, 23%) and alternative investments
($29 billion, 11%).Short-term products comprised stable value funds
($41 billion, 16%) and cash ($1 billion, <1%). The business continues to
invest in growth by expanding investment capabilities and growing its global
client base through international distribution capabilities.
USAM profits improved 4% over 2009 due primarily to higher average FUM, although
year-end FUM were flat versus 2009. Gains from market appreciation and net
inflows into fixed income products were offset by net outflows from equity,
alternative and stable value products. Investment performance improved during
the year, particularly in the second half, as markets showed signs of returning
to more traditional, fundamental factors and rewarding disciplined investment
styles accordingly.
In February 2011 we announced the appointment of Peter Bain as USAM`s new Chief
Executive Officer. Peter has over two decades of experience in leading and
advising asset management firms, and his appointment is a key milestone in the
firm`s growth plans.
Investment performance
Investment performance improved during the year across global equity, non-US
equity and fixed income products. US equity strategies underperformed for the
year as a whole, but showed improvement in the fourth quarter as the return to
fundamentals began to appear in US markets. Stable value products underperformed
due to the impact of prior years` underperformance in current-year returns.
In aggregate, 51% of FUM across all strategies outperformed their
respective benchmarks for the year, while 38% and 67% of FUM outperformed
over three- and five-year time periods. This compared to 51%, 58% and 61%
in 2009. Excluding short-term products, 60%, 45% and 60% of long- term
assets outperformed over one-, three- and five-year periods. Management
remains confident that its multi-boutique model, which encourages investment
conviction and retention of investment talent, will deliver investment
outperformance over full market cycles.
IFRS AOP results
IFRS adjusted operating profit increased 4% or $5 million to $135 million in
2010, benefiting from higher average FUM. Management fees were up $50 million or
8%, while other revenues were flat. Performance fees increased during the second
half compared to the second half of 2009, reflecting recent improvements in
investment performance.
Operating margin and cost management
Operating margin of 18% was consistent with 2009, although we realised annual
expense savings of $23 million through restructuring actions undertaken in 2009.
Total expenses were 8% or $46 million higher than 2009. The increase was driven
by higher variable compensation, in line with revenue growth, one-time charges
associated with acceleration of the DAC write-off given net cash outflows in
2010, and equity plan implementations.
Net client cash flows
Net client cash outflows totalled $18 billion (2009: $7.1 billion) as net
inflows into fixed income products were offset by outflows in equity,
alternative and stable value products. Similar trends were observed in our US
peer group. Net outflows were primarily driven by rebalancing-related
withdrawals from continuing clients as both institutions and individuals
continued to favour fixed income over equity investments during the year. The
bulk of the net outflows were concentrated in three affiliates and were weighted
towards the second half, traditionally a peak period for mandate changes. Gross
inflows from new accounts exceeded $10 billion as all 18 USAM affiliates won new
business during the year, with fixed income and international equity products
attracting the bulk of new investment.
Funds under management
FUM were $259 billion at the year-end (2009: $261 billion). The USAM business is
broadly diversified, with for example international and global equity products
accounting for 22% of the FUM. Non-US clients accounted for 29% of FUM. The
addition of Echo Point Investment Management in October brought $1.7 billion in
FUM, while the sale of Thomson Horstmann & Bryant reduced FUM by $1.7 billion.
The restructuring of the discontinued US Life business portfolio resulted in the
transfer of $5.4 billion of FUM from USAM during the year.
Affiliate developments
Echo Point Investment Management began operation as a USAM affiliate on 1
October 2010, launching with $1.7 billion in FUM in international growth
equities. During the fourth quarter the firm received additional investment
commitments from two current clients as it demonstrated its ability to operate
effectively in a multi-boutique structure.
Product and distribution developments
Barrow, Hanley, Mewhinney & Straus surpassed $1.9 billion FUM in its
international value product as investors bought into this non-US equity
application of the firm`s proven expertise in value investing. The firm also
launched a global equity product in the fourth quarter, and with a mandate from
Old Mutual`s South African business, the product now has $1.0 billion in FUM.
Larch Lane Advisors launched the Alpha Evolution Fund, a fund of hedge funds
that leverages the firm`s expertise in early-stage hedge funds by identifying
and investing in smaller and/or newer funds. Target investors for Alpha
Evolution are primarily institutions that are unable to commit to a long lock-up
of their capital because of liquidity guidelines, but want the potential
benefits of an investment in early-stage hedge funds.
USAM affiliates launched several new UCITS vehicles in 2010 to tap global
investors` growing preference for registered pooled vehicles. Rogge Global
Partners (Global High Yield), Acadian Asset Management (Emerging Market
Equities) and Heitman (Global REIT) each introduced new UCITS products that
expand the global marketability of their respective investment capabilities.
Our global distribution continued to expand, with the addition of new staff and
the opening of an office in the Middle East. We continue to focus our US retail
distribution efforts on professional buyer channels that value the institutional
orientation of USAM affiliates.
Outlook
During the recent period of market dislocation, investors and their advisers
increased their focus on macro investment performance rather than investing on a
fundamentals basis. Many USAM affiliates found it challenging to deliver
superior performance in these conditions, and this contributed to net cash
outflows. However, 2010 saw the beginning of a return to fundamentals-based
investing and our investment performance improved as a result. If US markets
maintain this trend in 2011, we are well positioned to achieve further
improvements in investment performance and, over time, a reversal of net client
cash outflows. In an environment where investors begin to increase their risk
appetite and migrate towards equities, our extensive equity product portfolio is
positioned to capture its share of growing flows. The growing attractiveness of
non-US equity exposure in both investment allocation and equity management
should favour the USAM business model and strategy.
Date: 08/03/2011 09:08:03 Supplied by www.sharenet.co.za
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