Wrap Text
OML - OLD MUTUAL PLC - Interim results for the six months ended 30 June 2011
OLD MUTUAL PLC
ISIN CODE: GB0007389926
JSE SHARE CODE: OML
NSX SHARE CODE: OLM
ISSUER CODE: OLOML
OLD MUTUAL PLC
5 August 2011
Interim results for the six months ended 30 June 2011
Operational delivery continues, on track for 2012 targets
Financial Summary(1) H1 2011 Movement
Adjusted operating profit before tax (IFRS basis) GBP845m 15%
Adjusted operating earnings per share (IFRS basis) 9.3p 12%
Net client cash flows - LTS GBP2.4bn (GBP0.3bn)
Net client cash flows - USAM (GBP6.4bn) (GBP1.2bn)
Funds under management GBP302.8bn 1%(2)
Group ROE (annualised) 13.1% +20bps
Adjusted MCEV per share 209.9p 43.3p(30
Interim dividend 1.5p 36%
Total profit after tax for the financial period GBP632m GBP252m(4)
1) All numbers refer to core continuing businesses except for total profit after
tax. Percentage movements are shown on a constant currency basis.
2) Compared to 31 December 2010.
3) Compared to 30 June 2010.
4) Compared to H1 2010 as reported in IFRS consolidated income statement.
Strong financial performance
- Profits up 15% at GBP845 million
- EPS up 12% to 9.3p
- Interim dividend up 36% to 1.5p
- Strong performance from Emerging Markets, with South African Mass Foundation
APE sales up 49%
- Continued growth on UK platform with sales of GBP2.8 billion
Strategic and operational delivery continues
- On track to meet the ROE, cost and debt reduction targets
- Developing operational and product synergies across our businesses
- US Life sale completed
Robust financial position
- FGD surplus at GBP2.0 billion
- Strong cash generation and net GBP0.5 billion of debt repaid as at 31 July
2011
- Adjusted MCEV 209.9p per share at 30 June 2011 (8.4p uplift due to sale of US
Life)
- Less than GBP5 million exposure to sovereign debt of Portugal, Ireland, Italy,
Greece and Spain
- Only USD40 million exposure to US Government debt
Julian Roberts, Group Chief Executive, commented:
"Old Mutual is a resilient and robust group and this has been a successful half
year for us. We have improved our operational performance and the impact of our
cost control programme is now clearly visible in our results.
"Current economic conditions in some of the markets where we operate are highly
uncertain and we remain cautious over the timing of any recovery. We have a good
mix of Emerging Markets and developed world business. We are well placed to grow
in Africa and Latin America, which are enjoying both GDP and population growth.
In Europe, we are increasingly able to provide our retail customers with the
choice and transparency they demand and to take the opportunities created by the
changes in regulatory regimes.
"We remain on track to achieve our 2012 targets and despite volatile markets
will continue to make further progress against our strategic goals as and when
shareholder value can be created."
Group Chief Executive`s Review
Old Mutual plc
Interim Results for the six months ended 30 June 2011
Enquiries
External Communications
Patrick Bowes UK +44 (0)20 7002 7440
Investor Relations
Aleida White UK +44 (0)20 7002 7287
Media
William Baldwin-Charles +44 (0)20 7002 7133
+44 (0) 7834 524 833
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 instruments.
** Adjusted operating earnings per ordinary share is calculated on the same
basis as adjusted operating profit. It is stated after tax attributable to
adjusted operating profit and non-controlling interests. It excludes income
attributable to Black Economic Empowerment (BEE) trusts of listed subsidiaries.
The calculation of the adjusted weighted average number of shares includes own
shares held in policyholders` funds and BEE trusts.
Cautionary statement
This announcement has been prepared solely to provide additional information to
shareholders to assess the Group`s strategies and the potential for those
strategies to succeed. It should not be relied on by any other party or for any
other purpose.
This announcement contains forward-looking statements with respect to certain of
Old Mutual plc`s plans and its current goals and expectations relating to its
future financial condition, performance and results. By their nature, all
forward-looking statements involve risk and uncertainty because they relate to
future events and circumstances that are beyond Old Mutual plc`s control,
including, among other things, UK domestic and global economic and business
conditions, market-related risks such as fluctuations in interest rates and
exchange rates, policies and actions of regulatory authorities, the impact of
competition, inflation, deflation, the timing and impact of other uncertainties
or of future acquisitions or combinations within relevant industries, as well as
the impact of tax and other legislation and other regulations in territories
where Old Mutual plc or its affiliates operate.
As a result, Old Mutual plc`s actual future financial condition, performance and
results may differ materially from the plans, goals and expectations set forth
in Old Mutual plc`s forward-looking statements. Old Mutual plc undertakes no
obligation to update any forward-looking statements contained in this
announcement or any other forward-looking statements that it may make.
Notes to Editors:
A webcast of the presentation and Q&A will be broadcast live at 9:00am (BST),
(10:00am (CET)/10:00am (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 6624519#:
UK/International +44 (0)20 7136 6283
US +1 212 444 0412
Sweden +46 (0)8 5352 6408
South Africa (toll-free) +27 11 019 7016
Playback (available for 14 days from 8 March), using passcode 6624519#:
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 interim results can
be found on the website. This contains key financial data for 2011 and 2010.
Foreign exchange rates
GBP/ZAR exchange rates GBP/SEK exchange rates
Average Closing Average Closing
exchange exchange exchange exchange
rate rate rate rate
H1 2011 11.14 10.86 10.30 10.16
H1 2010 11.49 11.45 11.27 11.63
FY 2010 11.31 10.28 11.14 10.42
GBP/EUR exchange rates GBP/USD exchange rates
Average Closing Average Closing
exchange exchange exchange exchange
rate rate rate rate
H1 2011 1.15 1.11 1.62 1.61
H1 2010 1.15 1.22 1.53 1.50
FY 2010 1.16 1.16 1.55 1.55
Review of Operations
Introduction
This has been a period of good operational performance and strong profit growth
for Old Mutual. IFRS basis adjusted operating profit (IFRS AOP or AOP) was up
15% on the comparative period from improved trading results and we expect the
initial impact of operational improvements to provide a more significant
contribution to earnings in the future. This improved performance was made
against a backdrop of continued economic uncertainty in a number of our markets.
We continue to focus on our strategy and we remain on track to meet our 2012
targets.
The Group is in a strong financial position. At 30 June 2011 our FGD surplus was
GBP2.0 billion and we had total liquidity headroom of GBP1.7 billion.
Strategy Update
We continue to make good progress in delivering the strategy that we set out in
March 2010. This is to build a long-term savings, protection and investment
group by leveraging the strength of our people and capabilities in South Africa
and the rest of the world, which will enhance value for both our customers and
shareholders, increase our international cash earnings and enhance our overall
return on equity.
Our progress against the targets that we set to achieve by the end of 2012 has
been maintained. As at 30 June 2011 we have delivered GBP82 million of run rate
expense savings versus our target of GBP100 million, and have delivered a return
on equity for the Long Term Savings business of 18.8%, above our target of 16%-
18%. At 31 July 2011 we had repaid a net GBP482 million of debt and are
confident of achieving our GBP1.5 billion debt reduction target by the end of
2012.
We have continued to rationalise our business and reduce its complexity. On 7
April 2011 we announced the completion of the sale of US Life to Harbinger Group
Inc for USD350 million. We have announced that we are closing our Swiss
operation to new business. We will maintain our strict value criteria for
deciding which businesses remain within the Group.
We are increasing our focus on the consumer by rolling out new and revamped
products across our businesses and aligning our business models to the needs of
our customers. We continue to look at ways of improving synergies across our
businesses and have recently agreed to outsource the South African IT, voice and
data infrastructure network services of Old Mutual, Nedbank and Mutual & Federal
to Dimension Data. The agreement is expected to generate significant local
savings for the operating businesses involved over the next five years.
We have always been clear that any corporate activity we undertake must create
demonstrable value for shareholders. In this context, and given the difficult
and uncertain economic climate Switzerland was put into run-off rather than sold
and the new US Asset Management (USAM) management team is focusing on building
margins, improving investment performance and driving growth as preparation for
a potential IPO.
Dividend
The Board has considered the position in respect of an interim dividend for
2011, and is declaring a dividend of 1.5p per share (or its equivalent in other
currencies). The increase reflects our progress in the first half, the Board`s
confidence in the outlook and also an intention to rebalance the interim and
final payouts towards approximately a one third:two thirds ratio. A scrip
alternative will be offered to eligible shareholders.
Further details about the interim dividend and scrip dividend alternative can be
found in the separate announcement (Ref 76/11) released by the Company this
morning.
Long Term Savings (LTS)
Our LTS division delivered strong results for the year with operating profits of
GBP474 million up 3% on a constant currency basis. This was driven by strong
profit growth in our Emerging Markets business. LTS APE Life sales for the half
year were down 3%, however unit trust sales were up 10% on a constant currency
basis. Funds under management (FUM) increased and underlying margins improved.
We have built on last year`s progress in implementing the LTS strategy. We have
delivered GBP67 million of run rate savings against the targeted cost reduction
of GBP75 million. In the Nordic business, we have removed 331 roles from the
business in the first half of the year. Wealth Management has met its targeted
GBP45 million in cost savings in July, well ahead of the end of 2012 target.
We are leveraging off the expertise, knowledge and skills we have in South
Africa to help grow our other LTS businesses. We launched the South African
protection product, Greenlight, in Mexico under the name of Skandia Vive and we
expect Greenlight to be launched into other territories in due course.
LTS: Emerging Markets
Our South African business delivered a strong performance with APE life sales up
11% and unit trust sales up 16%. The Mass Foundation Cluster delivered an
exceptional performance, with APE Life sales up 49% driven by a combination of
the increase in the number of advisers, improved productivity from advisers and
improved collection of premiums and persistency. Against a very strong
comparative period, Retail Affluent showed flat regular premium sales, with
single premium sales down 15% at R4.6 billion. We have continued to introduce
new products: in our Corporate segment we have recently launched South Africa`s
first group disability product that provides 100% income protection; and in the
Mass Foundation segment we have launched a `pay-when-you-can` family funeral
plan.
We have made significant progress in preparing our advisers in South Africa to
ensure that they pass the FAIS regulatory exams, the deadline for which has been
postponed for six months until 30 June 2012. This is an onerous process and one
that may have an impact on our sales although it is too early to quantify what
this will be.
Emerging Market Net Client Cash Flow (NCCF) improved from an outflow of R2.4
billion in the first half of 2010, to an outflow of R0.2 billion in this period.
Within this, South African NCCF improved by R3.8 billion, although remaining
negative, and the rest of the Emerging Markets business delivered a positive
flow of R1.2 billion. FUM decreased by 1% to R582 billion due to lower market
levels.
OMIGSA had a positive half year, with AOP up 13% on the prior period and
investment performance for the half remaining stable. Additionally, during the
period, OMIGSA secured R9.0 billion of commitments for its innovative Housing
Impact Fund for South Africa which aims to provide 120,000 low cost houses and
is currently in the process of raising funds for a South African agriculture
fund and an African infrastructure fund. OMIGSA also launched a shariah
compliant asset allocation fund during the half.
In the Rest of Africa, Namibia saw good performance in Retail Mass and Retail
Affluent in both regular premium sales, up 24%, and single premium sales, up
18%. During the period we launched two new unit trusts in Swaziland and we will
introduce the first unit trust product into Malawi in the second half. In Kenya,
we signed an agreement with PesaPoint, the country`s leading independent ATM
network, allowing our customers to use the ATM network to pay their premiums and
make investments. In the second half of 2011, we will be launching a revised
suite of products for the Kenyan mass market and are currently exploring the
possibility of broadening our distribution channels. In Zimbabwe, we have rolled
out a revamped suite of products.
The first half of the year saw a 14% uplift in life APE sales in Mexico and the
Retail Mass team is making good progress and currently accounts for 15% of
sales. We further diversified our distribution channels in China through a
national distribution deal with Bank of China which will help build on the good
first half of this year, with sales up 80% on the comparative period. Our JV in
India with Kotak reported 81% growth in single premium sales.
LTS: Nordic
Nordic business performed well in the first half of the year, with sales up 12%
and underlying profits, excluding restructuring charges and a one off private
equity gain in the comparative period, were strong. NCCF for the period was
SEK4.3 billion, down 7% on the first half of 2010, with FUM at SEK142.7 billion,
down 2% from 31 December 2010.
The introduction of tied agents to Denmark, coupled with innovative products,
has led to excellent sales growth, up 64%. We believe that through our tied
agency force we are well positioned to prosper from the result of the ban on
commission which was introduced on 1 July 2011 in Denmark. In Sweden, retail
premium sales rose 9% including strong single premium sales from our Depa
product. Mutual fund sales were down 14% as clients switched into attractive
savings accounts in Skandiabanken.
Our new management team has made excellent progress in restructuring the
business with a reduction in headcount by 331 during the first half. We are
continuing to improve our product offerings and the revamped Depa pension
product was released in June in Sweden. In the second half of this year, we will
launch an Occupational Pension version of the Depa product.
LTS: Retail Europe
Retail Europe had an encouraging first half, with APE sales up 11% against a
backdrop of volatile markets and cautious consumer sentiment. New distribution
initiatives, combined with our cost saving programme, saw the value of new
business increase by 50% over the comparative period. NCCF of EUR196 million was
down marginally on the comparator with FUM at EUR5.7 billion also down
marginally from 31 December 2010.
We have continued to see good growth in Poland, with APE up 22%, driven through
increased marketing activity and via new distribution partners in the IFA and
bank channels. We launched new products in Germany and Austria in the first
half. The new branch in Cape Town, which provides customer service processing
and IT support for Retail Europe is functioning well and has processed more than
30,000 transactions. It currently has 25 employees which we expect to grow to 50
as we reach full capacity.
Following a detailed review of operations, we announced the closure of
Switzerland to new business, as it was unable to meet our criteria for scale or
adding value to another part of the company.
LTS: Wealth Management
Wealth Management had another strong half year, building on the successful
operational performance of 2010. Although life sales were down against the first
half of 2010, which benefited from the tax shield in Italy, margins improved
further. The cost reduction programme has met its GBP45 million target nearly
eighteen months early. NCCF excluding Italy was up 6%.
The UK Platform continues to grow with gross sales increasing 7% against the
comparative period and with gross UK sales at GBP3.4 billion, up from GBP3.3
billion in the first half of 2010. Wealth Management NCCF growth was strong with
net inflows of GBP1.8 billion. We have focused our sales approach on higher
value IFAs and early indications are that we are winning a higher share of
wallet. Despite new entrants to the market and increasing competition, we
maintained our 6% share of the total UK savings market.
Continental Europe saw APE sales decrease by 43% against the comparative period,
as a result of the tax shield granted to Italian residents in the comparative
period. Sales in Italy on an APE basis were GBP40 million during the first half
of 2011 (H1 2010: GBP84 million). Sales in the International business declined
by 12% as the result of a planned decline in our lower margin regular premium
business and a focus on the higher margin single premium business, which had the
consequence of a marked increase in VNB.
SIG`s assets under management continued to grow thanks to the strong performance
of its core multi and single manager funds. Its increasingly popular risk
targeted Spectrum fund range now exceeds GBP1 billion in FUM while its sales
capability now covers more than 20 countries across four continents.
Nedbank
Nedbank had a very strong six months with headline earnings increasing by 28.8%
to R2.77 billion and diluted headline earnings per share up 26.3% to 600 cents.
Profits were driven by ongoing strong non-interest revenue (NIR) growth,
improving margins and lower retail impairments. This growth was achieved while
continuing to invest for the future and strengthening portfolio impairments
given the uncertain economic conditions. Given the improvement in operating
performance, the Nedbank dividend increased by 25%.
Nedbank Retail increased its earnings from R133 million in the first half of
2010 to R826 million in this period and its ROE from 1.7% to 9.9%. The new
strategy of focusing on customers by growing the client base while leveraging
product lines is proving successful and is generating high levels of NIR growth
and a significantly improving credit loss ratio.
While Nedbank Capital`s earnings reduced by 5.9% on the comparative period, the
other Clusters performed strongly: Nedbank Corporate achieved earnings growth of
24.0% driven by improved margins, fair value adjustments and improved income
from its private equity property portfolio; Nedbank Business Banking`s earnings
were up 3.9%, which reflected the difficult conditions for small and medium-
sized businesses; and Nedbank Wealth achieved good earnings growth of 16.6%.
The balance sheet remained well capitalised with the core Tier 1 capital
adequacy ratio increasing to 10.7%. Nedbank`s liquidity buffers were increased
by R9 billion and the funding profile continued to lengthen to 27% in
preparation for Basel 3.
Mutual & Federal
Mutual & Federal had a very positive first half with a strong underwriting
result, despite competitive market conditions, and an improved ROE of 15.8%.
Business lines were favourably impacted by improved underwriting and a slight
reduction in claims.
The decrease in claims ratio to 64.6% from 68.5% had a positive impact on
profits as we contained claims costs and most portfolios delivered satisfactory
returns. Our businesses in Namibia and Botswana continued to make a satisfactory
contribution. During the period Mutual & Federal paid dividends of R938 million.
Peter Todd was appointed Chief Executive in January and is building a team to
address the business challenges including strengthening the market facing areas
and implementation of the step-change programme. Mutual & Federal will continue
to improve its IT systems and service and will look to grow its contribution
from alternative channels. The direct insurance initiative, iWYZE, is
progressing well and is continuing to meet the targets we have set.
US Asset Management
USAM profits improved by 25% due to a change in asset mix, seed gains and
tighter expense control. FUM were USD260 billion at 30 June 2011, up USD1
billion from 31 December 2010 as equity market appreciation was offset by net
cash outflows.
Investment performance improved significantly over the past six months, with the
one-year outperformance of 73% of USAM`s assets against benchmark an important
leading indicator. Net outflows have continued with USD10.4 billion during the
period of which USD6.3 billion were from short-term, lower margin products.
Gross inflows for the period totalled USD14.7 billion (H1 2010: USD14.6
billion), with long-term fixed income products and US value investment seeing
good inflows. Gross outflows were USD25.1 billion for the half (H1 2010: USD22.6
billion), largely driven by outflows from stable value, large cap value equity
and quant products. Although investment performance is improving, we do not
anticipate that the current trend in outflows, particularly in stable value,
will reverse in this financial year.
Our new Chief Executive Peter Bain has commenced a strategic global distribution
effort in order to leverage USAM`s reach and is focusing on addressing various
initiatives to increase margin. With continuing improvement in investment
performance we believe that cash flows will improve but this may take time.
Outlook
Current economic conditions in some of the markets where we operate are highly
uncertain and we remain cautious. We have a good combination of emerging markets
and capital efficient developed market businesses and we are well placed to
withstand any market volatility.
Julian Roberts
Group Chief Executive
5 August 2011
Group Finance Director`s Review
GROUP RESULTS
Overview of Interim 2011 results
GBPm
H1 2010
(constant
Group Highlights(1) H1 2011 currency) % Change
AOP (IFRS basis, pre-tax) 845 734 15%
Adjusted operating earnings per share (IFRS
basis) 9.3p 8.3p 12%
Life assurance sales - APE basis 763 786 (3%)
Unit trust/mutual fund sales(2) 6,806 5,947 14%
Return on equity(3) 13.1%
Net client cash flows (GBPbn) (3.6) (1.7) (>100%)
LTS net client cash flows (GBPbn) 2.4 2.7 (11%)
Funds under management (GBPbn) 302.8 300.4 4 1%
Interim dividend for the year 1.5p
Total profit after tax for the financial
period 632
H1 2010
(as reported) % Change
AOP (IFRS basis, pre-tax) 714 18%
Adjusted operating earnings per share (IFRS basis) 8.1p 15%
Life assurance sales - APE basis 769 (1%)
Unit trust/mutual fund sales(2) 5,865 16%
Return on equity(3) 12.9% 20bps
Net client cash flows (GBPbn) (2.0) (80%)
LTS net client cash flows (GBPbn) 2.7 (11%)
Funds under management (GBPbn) 309.3(4) (2)%
Interim dividend for the year 1.1p 36%
Total profit after tax for the financial period 380 66%
1) The figures in the table are in respect of core continuing businesses only
and the H1 2010 comparatives have been restated accordingly.
2) Includes all non-covered business sales.
3) ROE is calculated as core business IFRS AOP (post-tax) divided by average
shareholders` equity (excluding the perpetual preferred callable securities).
4) As at 31 December 2010.
Overview
During the six months ended 30 June 2011 (`H1 2011` or `the period`) Old Mutual
showed strong growth in profits compared to the six months ended 30 June 2010
(`H1 2010` or `the comparative period`).
AOP earnings per share were up 15% to 9.3p for H1 2011 (H1 2010: 8.1p). AOP on a
pre-tax basis was GBP845 million for the period, an increase of GBP131 million
on H1 2010. On a constant currency basis profits have increased by GBP111
million with notable improvements in underwriting profitability in Emerging
Markets, increased non-interest revenue income in our South African banking
business, improvement in operating performance at USAM and a strong underwriting
performance at Mutual & Federal. This improved result has been achieved after
expensing restructuring charges of GBP14 million, an approximate GBP35 million
charge in respect of a modelling change for Emerging Markets` Corporate
business, and booking a GBP20 million private equity gain in Emerging Markets.
Group net margin (measured as profit before tax on average assets) increased by
4.7 basis points over the period from 42.6 basis points to 47.3 basis points.
The increase was driven by a strong improvement in the net margin at Nedbank,
partially offset by reduced margins in the LTS business, which were boosted last
year by Nordic private equity gains and UK policyholder tax smoothing.
Return on equity increased to 13.1%, primarily as a result of the increased
profits despite an increase in the Group`s equity base given the high scrip
dividend take-up for the final dividend for 2010 and foreign exchange impacts.
There was a Group net client cash outflow of GBP3.6 billion in the period,
primarily due to net outflows of GBP6.4 billion in USAM in the period. However,
for the half year in aggregate net inflows continued in all our European
businesses and in our Emerging Markets business, excluding PIC outflows. USAM`s
investment performance improved significantly and gross inflows into its
affiliates` long-term strategies were higher than the comparative period.
On a constant currency basis FUM increased by 1% driven by positive NCCF in LTS
and positive market returns in USAM. The Dow Jones, S&P-500 and the MSCI World
rose by 7%, 5% and 4% respectively during the period. The FTSE rose by 1%, but
the JSE All Share Index fell by 1% and the SAX ALSI (Stockholm) fell by 4%
during the period.
Dividends
The Board has declared a dividend of 1.5p per share and will continue with a
progressive dividend policy over time to achieve cover of at least 2.5 times our
earnings, consistent with our Group strategy. The Board intends to rebalance the
interim and final payouts towards approximately a one third:two thirds ratio. We
will offer a scrip dividend election to eligible shareholders.
Exposure to Sovereign Debt in Portugal, Italy, Ireland, Greece, Spain and the US
The Group`s exposure to the sovereign debt of Portugal, Italy, Ireland, Greece
and Spain remains very low. At June 2011 the Group had less than GBP5 million
exposure to bonds issued by the Italian and Spanish Governments and no exposure
to the debt issued by the Greek, Irish or Portuguese Governments. The exposure
to US Government debt is USD40 million.
Management Discussion and Analysis of Results for H1 2011
The principal businesses of the Group are the Long Term Savings (LTS) division,
Nedbank, Mutual & Federal and US Asset Management. 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.
GBPm
H1 2010
(constant
AOP analysis H1 2011 currency) % Change
Long Term Savings 474 461 3%
Nedbank 359 274 31%
Mutual & Federal 47 34 38%
US Asset Management 47 37 27%
927 806 15%
Finance costs (60) (68) 12%
LTIR on excess assets 18 16 13%
Net interest payable to non-core operations (9) (9) -
Other net income and expenses (31) (11) (182%)
AOP 845 734 15%
H1 2010*
AOP analysis (as reported) % Change
Long Term Savings 447 6%
Nedbank 266 35%
Mutual & Federal 33 42%
US Asset Management 40 18%
786 18%
Finance costs (68) 12%
LTIR on excess assets 16 13%
Net interest payable to non-core operations (9) -
Other net income and expenses (11) (182%)
AOP 714 18%
* The six months ended 30 June 2010 has been restated to reflect US Life as
discontinued
Financial Performance
LTS AOP was favourably impacted by foreign exchange with the Rand and Swedish
Krona strengthening against Sterling. On a constant currency basis, LTS AOP
increased by 3% driven by Emerging Markets with improved profits in Life &
Savings and OMIGSA and reduced project spend against the comparative period.
Nedbank`s earnings increased during the period driven by strong non-interest
revenue (NIR) growth, improving margins and lower retail impairments.
Mutual & Federal delivered a strong underwriting result in the first half of
2011 with Credit Guarantee risks performing particularly well, and reduced
claims in many of the other divisions.
USAM AOP benefited from revenue growth driven by positive markets, gains on seed
capital, and improvements in investment performance fees.
Finance costs decreased as a result of the reduction in debt levels during the
period. However, due to a higher rate on the recent issue of a GBP500 million 10
year bond we expect a modest rise in net finance charges for the remainder of
2011. Future finance charges will depend on the execution of our debt reduction
programme. Total interest cover has increased during the period.
LTIR on excess assets increased due to a large increase in the asset base, set
off by a marginal decline in the long-term rate from 9.4% in 2010 to 9.0% in
2011.
The increase in other net income and expenses from GBP11 million in H1 2010 to
GBP31 million in H1 2011 is primarily due to the non-recurrence of a GBP16
million stamp duty reserve tax refund in H1 2010.
Long Term Savings
Key performance statistics for the LTS division are as follows:
GBPm
Emerging
H1 2011 Markets Nordic Retail Europe
NCCF (GBPbn) - 0.4 0.2
FUM (GBPbn) 53.6 14.0 5.2
AOP (IFRS basis) (pre-tax) 299 60 22
Unit trust/mutual fund sales(2) 3,158 305 11
Life assurance sales (APE) 255 126 36
PVNBP (covered business) 1,656 736 276
Value of new business (covered business) 38 28 3
Operating MCEV earnings (covered
business) (post-tax) 188 63 (6)
(VNB + Exp Var)/MCEV (covered business) 7.3% 3.7% 0.6%
Wealth
H1 2011 Management Total
NCCF (GBPbn) 1.8 2.4
FUM (GBPbn) 57.7 130.5
AOP (IFRS basis) (pre-tax) 93 474
Unit trust/mutual fund sales(2) 2,454 5,928
Life assurance sales (APE) 346 763
PVNBP (covered business) 2,977 5,645
Value of new business (covered business) 39 108
Operating MCEV earnings (covered business) (post-tax) 100 345
(VNB + Exp Var)/MCEV (covered business) 5.5% 5.3%
GBPm
H1 2010 (as reported (1)) Emerging Retail
Markets Nordic Europe
NCCF (GBPbn) (0.2) 0.4 0.2
FUM as at 31 December 2010 (GBPbn) 57.0 13.9 5.0
AOP (IFRS basis) (pre-tax) 269 58 25
Unit trust/mutual fund sales(2) 2,729 324 12
Life assurance sales (APE) 223 102 32
PVNBP (covered business) 1,561 553 243
Value of new business (covered business) 38 25 2
Operating MCEV earnings (covered business)
(post-tax) 144 63 24
(VNB + Exp Var)/MCEV (covered business) 4.5% 6.4% (1.1)%
H1 2010 (as reported (1)) Wealth
Management Total
NCCF (GBPbn) 2.3 2.7
FUM as at 31 December 2010 (GBPbn) 55.9 131.8
AOP (IFRS basis) (pre-tax) 95 447
Unit trust/mutual fund sales(2) 2,207 5,272
Life assurance sales (APE) 412 769
PVNBP (covered business) 3,611 5,968
Value of new business (covered business) 31 96
Operating MCEV earnings (covered business) (post-tax) 64 295
(VNB + Exp Var)/MCEV (covered business) 3.9% 4.3%
1) The six months ended 30 June 2010 has been restated to reflect US Life as
discontinued.
2) Includes all non-covered business sales.
Emerging Markets profits improved largely due to better results in Retail
Affluent, Mass Foundation Cluster and OMIGSA, and Wealth Management underlying
profits increased as a result of higher FUM.
LTS NCCF decreased by GBP0.3 billion to GBP2.4 billion. Wealth Management UK
platform NCCF continued to grow but this was offset by reduced inflows from
Continental Europe, as a result of the end of the Italian tax shield that
generated a sales boost in 2010. Net client cash inflows increased in the Retail
segment of Emerging Markets.
FUM for LTS at 30 June 2011 decreased by 1% to GBP130.5 billion (31 December
2010: GBP131.8 billion). On a constant currency basis FUM increased by GBP1.2
billion from GBP129.3 billion at 31 December 2010, driven by positive NCCF
offset by negative market movements and the divestment of Lararfonder, an
unprofitable component of Nordic mutual fund assets.
Mutual fund sales in LTS were up by 12% to GBP5,928 million, with continued
strong sales in Wealth Management and Emerging Markets` South African and Latin
American businesses. Sales of mutual funds, which make up the bulk of Wealth
Management and a large proportion of South African Retail Affluent sales, are
not included in the APE margin, PVNBP or Value of New business calculations
since they do not fall under the definition of covered business.
The Emerging Markets business accounts for 63% of the LTS IFRS AOP earnings (H1
2010: 60%), 41% of LTS FUM (H1 2010: 43%), and 33% of LTS APE sales (H1 2010:
29%).
Covered business performance
APE Sales decreased by 3% for the LTS division on a constant currency basis but
APE sales in Emerging Markets, Nordic and Retail Europe were strongly up. Strong
growth in Mass Foundation Cluster regular premiums in Emerging Markets and very
strong sales growth in Nordic`s Danish business were offset by lower sales in
Wealth Management, primarily as a result of the one-off Italian tax shield in
2010.
Regular premium business showed strong growth in the Emerging Markets business
driven by the Mass Foundation Cluster, Rest of Africa and Asia & Latin America.
Wealth Management, Nordic and Retail Europe showed strong growth in single
premiums.
The market-consistent value of new business (VNB) improved for LTS driven by
strong UK platform sales and higher margin International business in Wealth
Management and higher margin sales in Nordic`s Danish businesses.
Across LTS as a whole, new business APE margins have improved to 14% for H1 2011
(H1 2010: 13%), primarily driven by Wealth Management. In Wealth Management, the
APE margin increased from 8% to 11%, with beneficial product mix in the
International off-shore business, lower acquisition costs in the UK business,
and positive persistency and rebate experience. Retail Europe`s APE margin
increased from 6% to 8% reflecting improved pricing and successful expense
management. The APE margin in Emerging Markets decreased from 17% to 15% as
increased high margin sales from Mass Foundation Cluster were offset by lower
sales and reduced margin in Retail Affluent, and a reduced margin in Corporate
due to a change in the mix of business sold. In Nordic, the APE margin decreased
from 25% to 23% as a result of assumption changes in Q4 2010 and a lower
proportion of top-ups on existing contracts. For LTS as a whole the PVNBP margin
improved to 1.9% (H1 2010: 1.4%).
A key metric by which we judge the performance of the business is Group Value
Creation for the LTS covered business. It measures the contribution to return on
embedded value from management actions of writing profitable new business and
managing expense, persistency, risk and other experience compared to that which
was assumed. The metric improved by 100 basis points to 5.3%, driven by an
increase in Emerging Markets, due to improved persistency experience in Mass
Foundation Cluster and improved mortality and morbidity experience in both Mass
Foundation Cluster and Retail Affluent, and an increase in Wealth Management,
aided by strong growth in VNB with favourable changes in product mix. The metric
for Nordic decreased as a result of positive experience variances in H1 2010,
relating to the divestment of a private equity holding and positive fund rebate
experience.
Outlook
We see positive market dynamics for all of our markets and we are taking further
steps to create efficient methods to deliver our business and tailor our
distribution to our customers, primarily single premium sales to Affluent market
segments and regular premium sales to Developing market segments. We have
successfully transferred products between territories and expect to see further
benefit in this regard over time.
We see further scope in the field of IT and centralised processing to improve
margin and maintain a higher level of IT controls. This will allow local sales
teams to operate with lower overheads and high operating leverage. This is
demonstrated by the recent signing of a second generation communications
outsourcing agreement worth approximately R2.5 billion over a five-year term
with Dimension Data and its partner Telkom. The flexibility built into this new
outsourcing contract will help us to deliver improved services as well as
significant cost reductions across South Africa.
Our Emerging Markets business continues to seek growth opportunities by
leveraging the strength and core competencies within its South African business.
Management is also focused on the new regulatory requirements on its sales force
in South Africa. The FSA has recently indicated that it intends to consult
further on charging but there is currently no change to the timetable for the
introduction of Retail Distribution Review (RDR), which will take effect from 31
December 2012. Our Wealth Management business is well-placed for the proposed
RDR changes, with a portion of the current charging structure for new business
already written on the basis of client-agreed fees for platform use. We are
currently considering our plans to introduce a fully unbundled charging
structure. Nordic management is focused on improving sales, particularly in
respect of cross selling between insurance and banking, and improving the
distribution and product offerings to enhance NCCF. In Retail Europe there have
been a number of initiatives to further leverage its Skandia branch in South
Africa.
Further discussion on the outlook for 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.
ROE and margin targets H1 2011 FY 2010 FY 2009 Target
Long Term Savings*
Emerging Markets ** 26% 25% 23%** 20%-25%
Nordic 12% 11% 12% 12%-15%
Retail Europe 13% 20% 9% 15%-18%
Wealth Management 14% 14% 8% 12%-15%
LTS Total 18.8% 18.5% 14.8% 16%-18%
USAM Operating Margin 20% 18% 18% 25%-30%
* ROE is calculated as IFRS AOP (post-tax) divided by average shareholders`
equity, excluding goodwill, PVIF and other acquired intangibles.
** Within Emerging Markets, OMSA is calculated as return on allocated capital,
and 2009 is adjusted for 2010 LTIR rates.
Good progress is being made by businesses in meeting the ROE targets. At the end
of June 2011, Emerging Markets and Wealth Management were comfortably within
their target range. Nordic was at the lower end of the target, due to the one-
off costs associated with the cost reduction programme. Excluding these costs,
Nordic ROE was 12.8%. Retail Europe`s ROE has reduced since last year, largely
due to ongoing restructuring costs, but it remains on track to deliver its
required level of return by 2012.
USAM has made progress with its operating margin and improved seed gains and
performance fees have been earned.
GBPm
Cumulative
run rate savings 2011 YTD
Cost reduction targets at H1 2011 Cost to achieve
Long Term Savings*
Emerging Markets - -
Nordic 16 9
Retail Europe 7 2
Wealth Management 44 3
LTS Total 67 14
USAM 15 -
Group-wide corporate costs - -
Total 82 14
Cumulative cost 2012 run rate
Cost reduction targets incurred to date target
Long Term Savings*
Emerging Markets - 5
Nordic 14 10
Retail Europe 7 15
Wealth Management 43 45
LTS Total 64 75
USAM 20 10
Group-wide corporate costs - 15
Total 84 100
We are well advanced in delivering the reduction in the cost base of our
businesses as announced in March 2010, with GBP82 million of run rate savings
met. Wealth Management has substantially delivered its 2012 target of GBP45
million. Nordic exceeded its headcount reduction target in H1 2011 and now moves
to the second phase of its cost reduction programme. Retail Europe has achieved
GBP7 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 savings in 2010. The newly formed LTS global IT function has
made significant steps forward to become an effective operation across all our
LTS businesses.
The costs of executing the cost reduction process is restricting 2011 profits
from these businesses, and will continue to do so until the programmes are
completed. Costs to achieve these savings in H1 2011 totalled GBP14 million.
Restructuring costs of GBP9 million were incurred at Nordic in the period. Total
Nordic restructuring costs are anticipated to be approximately GBP24 million in
2011, in order to deliver additional identified savings. Retail Europe costs to
achieve include an element of dual running costs, while activity is transitioned
to South Africa.
Summary MCEV results
p
Adjusted Group MCEV per share at 31 December 2010 202.2
Adjusted operating Group MCEV earnings per share 9.8
Covered business 6.6
Non-covered business 3.2
Below the line effects (2.1)
Economic variances and other earnings (1.3)
Foreign exchange and other movements (6.8)
Dividends paid to ordinary and preferred shareholders (3.1)
Nedbank market value uplift 4.6
BEE and ESOP adjustments 1.1
Mark to market of debt (2.2)
Proceeds of US Life 3.7
Elimination of US Life MCEV 3.4
Retention of OM Re (previously part of US Life) 1.3
Impact of issue of new shares (2.8)
Adjusted Group MCEV per share at 30 June 2011 209.9
The adjusted Group MCEV per share increased by 4% (or 7.7p) from 202.2p at FY
2010 to 209.9p at H1 2011 (H1 2010: 166.6p).
The adjusted operating Group MCEV earnings per share increased by 1.6p from 8.2p
(10.6p including US Life) to 9.8p for H1 2011.
Covered business operating MCEV earnings per share increased by 0.5p from 6.1p
for H1 2010 (8.5p including US Life) to 6.6p for H1 2011, as a result of:
- A strong positive contribution from experience variances, largely attributable
to favourable mortality and persistency experience;
- An improved contribution from new business; and
- An adverse contribution from methodology changes.
Non-covered business operating earnings per share increased by 1.1p from 2.1p
for H1 2010 to 3.2p for H1 2011 as a result of:
- Higher profits in the asset management businesses, arising from higher FUM;
and
- Higher sterling profits in the banking business due to greater fee income and
lower bad debt charges.
A substantial component of the increase in adjusted Group MCEV per share during
2011 was due the impact of the sale of US Life, which resulted in an uplift of
GBP451 million (8.4p).
Free surplus generation
The Group generated GBP521 million of free surplus in the period (H1 2010:
GBP246 million) of which GBP312 million (H1 2010: GBP206 million) was generated
by the LTS division. GBP313 million (2010: GBP204 million) was generated from
covered business (which includes US Life and Bermuda). We anticipate that the
value of our in-force business will generate at least GBP1 billion by the end of
2012 and approximately GBP3 billion by the end of 2015. Over 65% of this surplus
is expected to come from non-Emerging Market entities. Non-covered business
generated GBP208 million (H1 2010: GBP42 million) from banking, property &
casualty and asset management.
Sources and uses of free surplus
Gross inflows from core and continuing operations were GBP690 million (H1 2010:
GBP497 million) and new business spend was GBP231 million (H1 2010: GBP227
million). Total free surplus generated from core operations of GBP521 million is
significantly higher than the GBP176 million in H1 2010 due to higher transfers
from the VIF and positive experience in the life businesses, improved profits in
the non-covered businesses and a lower transfer to capital requirements in
Nedbank.
Debt strategy, activity profile and maturities
We have set a target to reduce the Group`s debt by GBP1.5 billion by the end of
2012, while ensuring that the Group`s balance sheet and the holding company
liquidity continue to be prudently managed. In 2010 the Group repaid net GBP110
million of debt and in January 2011 we repaid a GBP300 million Lower Tier 2
security at a cash cost of GBP397 million (as this had been swapped into Swedish
Krona upon issue in 2006). In July 2011 we bought back EUR550 million of an
existing EUR750 million bond, and we have an option to call the remaining EUR200
million in January 2012. The Group has followed the FSA`s requirements and given
six months advance notice of its right to call the remaining EUR200 million.
Notwithstanding such notice, the Board at this time has not made any decision
and is not making any representation to bondholders as to whether it will call
the bond at the first call date.
The Group issued a GBP500 million 10 year Tier 2 bond in June 2011, which is
expected to be compliant with the anticipated Solvency 2 requirements and
qualifies as Tier 2 capital for FGD purposes.
We are confident of our ability to generate sufficient group liquidity to meet
our debt reduction target without recourse to capital markets either for IPO
proceeds or any sale of shares in Nedbank. A final release of GBP130 million of
cash as a result of selling US Life is expected by the end of 2012 and other
initiatives are also being pursued, including the planned legal transfer of
certain parts of the Emerging Markets businesses to our South African operations
for up to GBP300 million in cash. The election in H1 2011 by many shareholders
to receive scrip dividend allowed for approximately GBP90 million of cash that
would otherwise have been used to make dividend payment to be retained and it
can be used to repay debt. We expect these scrip elections to continue. We are
assuming that Old Mutual Bermuda can meet its obligations to its customers from
its own resources over the next 18 months; our current forecasts suggest that it
can.
In the medium term the Group has further first calls on debt instruments
amounting to GBP728 million in 2015 and GBP500 million in 2016 as well as USD750
million retail preferred instrument, which is callable quarterly. In 2020 we
have a call on a further GBP350 million instrument. The GBP500 million 10 year
bond issued in June 2011 is callable in 2021.
Liquidity
In April 2011 the Group renewed its bank facilities by negotiating a five-year,
GBP1.2 billion, syndicated revolving credit facility, which was strongly
supported by 17 banks.
At 30 June 2011, the Group had available cash and committed facilities of GBP1.7
billion (31 December 2010: GBP1.4 billion). Of this, cash on hand at the holding
company was GBP0.7 billion (31 December 2010: GBP0.4 billion); a significant
proportion of this was used to settle the EUR550 million bond tender in early
July 2011.
In addition to the cash and available resources referred to above at the holding
company level, each of the individual businesses also maintain liquidity to
support their normal trading operations. During the period a total of R938
million (GBP84 million) of special & ordinary dividends were paid by Mutual &
Federal as a consequence of their implementation of a revised capital management
strategy.
Group (excluding Nedbank) net debt movements (IFRS basis)
GBPm
H1 2011 H1 2010 FY 2010
Opening net debt (2,436) (2,273) (2,273)
Inflows from businesses 337 184 433
Outflows to businesses (35) (118) -
Holding company expenses and
interest costs (110) (102) (188)
Change in cash from net repayment/
issue of debt 94 (44) (110)
Gross debt raised (500) - (10)
Gross debt repaid 406 44 120
(94) 44 110
Ordinary dividends paid (net of scrip
dividend elections) (29) (37) (65)
Equity issuance 3 2 4
Other movements (64) (149) (334)
Closing net debt (2,334) (2,493) (2,436)
Net decrease/increase) in debt 102 (220) (163)
In addition to the GBP406 million of debt repaid during the period and the
GBP500 million of debt issued, the Group repaid a further EUR550 million of debt
in July 2011. The Group`s gross nominal debt as at 31 July 2011 was GBP2,750
million compared to gross nominal debt of GBP3,162 million as at 31 December
2009.
At a Group holding Company level, net inflows from businesses improved from an
inflow of GBP66 million in H1 2010 to an inflow of GBP302 million in H1 2011.
The inflow in the period included a remittance from US Life for GBP216 million.
The holding company made ordinary dividend payments in the period of GBP29
million and offered a scrip dividend election. The total other movements of
GBP64 million are in respect of foreign exchange movements, the revaluation of
the fair value of Group bonds relating to improved credit spreads, changes in
the fair value of associated derivatives and other net flows.
Financial Groups Directive Results
The Group`s regulatory capital surplus, calculated under the EU Financial Groups
Directive, at 30 June 2011 was GBP2.0 billion. Following the notice given to the
FSA of its right to call the EUR750 million bond the Group followed the FSA`s
requirements and excluded the instrument from the regulatory capital surplus
calculations as at 30 June 2011. If this instrument had been included in the
calculation the surplus would have been GBP2.7 billion, and on a like-for-like
basis the surplus at 31 December 2010 was GBP2.4 billion and GBP1.5 billion at
31 December 2009. The reported result at 31 December 2010 was GBP2.1 billion
after deducting the GBP300 million bond that was called in January 2011.
The like-for-like increase since 31 December 2010 comprises statutory profits in
Emerging Markets and Nedbank and the issue of the GBP500 million bond in June.
These increases have been offset by the impact of the US Life sale (GBP100
million) and by the payment of Group ordinary and preferred dividends.
The FGD surplus of GBP2.0 billion represented a coverage ratio of 150%, compared
to 146% at 31 December 2010. The Group comfortably met the recent stress tests
as required under the EU-wide Solvency 2 project.
The Group`s FGD surplus is calculated using the `deduction and aggregation`
method, which determines 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 a business unit`s stand-alone
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.
Our subsidiary businesses continue to have strong local statutory capital
cover.
Business unit ratios H1 2011 FY 2010 H1 2010
OMLAC(SA) 4.1x 3.9x 3.9x
Mutual & Federal 1.45x 2.02x 1.84x
Nordic 6.4x 9.8x 11.0x
UK 5.1x 2.8x 3.6x
Nedbank* Core Tier 1: 10.7% Core Tier 1: 10.1% Core Tier 1: 9.9%
Tier 1: 12.4% Tier 1: 11.7% Tier 1: 11.5%
Total: 15.2% Total: 15.0% Total: 14.8%
* This includes unappropriated profits.
The recent transfer of the Skandia UK Holding Company from Nordic to the Group
holding company has led to a reduction in Nordic`s capital cover during the
period. Mutual & Federal`s capital cover has also reduced following the payment
of R938 million in dividends.
Our Group regulatory capital, calculated in line with the FSA`s prudential
guidelines, is structured in the following way:
H1 2011
Regulatory capital GBPm %
Ordinary Equity 4,902 80
Other Tier 1 Equity 633 10
Tier 1 Capital 5,535 90
Tier 2 1,984 32
Deductions from total capital (1,403) (22)
Total Capital Resources 6,116 100
FY 2010*
Regulatory capital GBPm %
Ordinary Equity 5,269 77
Other Tier 1 Equity 653 10
Tier 1 Capital 5,922 87
Tier 2 2,336 35
Deductions from total capital (1,502) (22)
Total Capital Resources 6,756 100
H1 2010
Regulatory capital GBPm %
Ordinary Equity 4,228 69
Other Tier 1 Equity 623 10
Tier 1 Capital 4,851 79
Tier 2 2,584 42
Deductions from total capital (1,351) (21)
Total Capital Resources 6,084 100
* Capital as reported to FSA. Numbers may vary slightly to those reported in
Annual Report and Accounts 2010.
Regulatory capital under Solvency 2
Two key areas for the group in respect of regulatory capital under Solvency 2
are:
- The discussion on the treatment of EPIFP (Expected Profits In Future
Premiums), as to whether it should be fully eligible to be treated as Tier 1
capital under Solvency 2 continues. No consensus has yet been reached between
the different European bodies.
- We await the completion by regulators of the initial equivalence assessments
of the first three non-EEA jurisdictions, one of which is Bermuda.
Results are due in November.
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. During
the period the sale of US Life was completed. We will explore certain
reinsurance arrangements with anticipated completion by the end of 2012. We have
closed the Swiss business in Retail Europe to new business and continue to
pursue cash generating corporate activities to achieve the Group debt repayment
and investment goals.
Following the consolidation in 2010 of operational management of all of the Old
Mutual Group`s Emerging Markets businesses under a unified management team based
in Johannesburg, we now plan to effect the legal transfer for value of the
Group`s ownership interest of those businesses. The fair value of these
interests will be determined independently but is expected to be up to GBP300
million.
Bermuda
The business continued to execute against its run-off strategy of risk reduction
while managing for value, including ongoing business service improvements,
enhancements to liability management and further de-risking initiatives targeted
specifically at the Guaranteed Minimum Accumulation Benefits (GMABs) of the in-
force book.
Surrender activity is being proactively managed through further service
enhancements and fund expansion, with conservation strategies focused on the
non-
Universal Guarantee Option book of business (circa USD1.7 billion). In excess of
50 funds are currently open on the platform, including a number of new funds
added in the reporting period. Engagement with distributors is ongoing, with a
strengthening advisor-focused strategy to continue to develop the customer
proposition and experience. OMB is maintaining high levels of customer service
through continued operational and service improvements.
Total surrender activity during the period was higher than in H1 2010, amounting
to 9% of the 2010 year-end book. This was a result of initiatives allowing
account holders with non-Hong Kong Universal Guarantee Option policies the
opportunity to surrender their contracts without incurring penalties. These
initiatives increased the rate, value and number of surrenders across this book,
with overall surrender activity across GMAB contracts for the period at over
four and a half times H1 2010 levels (June 2011: 2,020 policies; June 2010: 446
policies). Management will continue to assess demand for similar offers in the
future. We believe that future surrender behaviour will be influenced by the
extent to which the underlying fund values of the policyholders are close to the
level of the guarantee.
Reserves in respect of GMAB/GMDB liabilities to which shareholders are exposed
reduced by USD42 million (31 December 2010: USD673 million) as a result of the
positive performance of equity markets and a weakening dollar.
There have been no investment losses in the period to date and realisations of
the fixed income portfolio in the period have been achieved with no net loss
compared to holding value. The portfolio has a current average rating of A3
(Moody`s rating scale).
We continue to monitor daily liability positions and adjust our hedges to manage
risk, liquidity and capital accordingly. The hedge portfolio was actively
managed over H1 2011 and at 30 June 2011 the business maintained a 55% hedge
coverage over equities (31 December 2010: 58%), 22% over foreign exchange (31
December 2010: 39%) and nil on interest rates (31 December 2010: nil).
As disclosed in our Preliminary Results of 2010, Bermuda remains a non-core
business, and as such its profits are excluded from the Group`s IFRS AOP.
However, the interest charged on internal loans from Bermuda to Group Head
Office are charged to AOP. IFRS pre-tax profit of USD79 million was favourably
impacted by the guarantee performance in Q2 2011 and partially hedged positions
(2010: USD83 million loss). Given current equity market conditions, the business
still expects some volatility in earnings in the medium term. Statutory capital
was USD654 million at 30 June 2011 (31 December 2010: USD625 million). No
further capital injection is anticipated other than in extremely adverse
scenarios.
Risk Allocation, Solvency 2 and iCRaFT and Financial Controls Initiative update
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 during the period.
The new Solvency 2 internal model being developed in our integrated Capital,
Risk and Finance Transformation (iCRaFT) project 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 and hence support better informed decision-
making.
The iCRaFT project is progressing to plan and is on track to deliver the
requirements for Solvency 2 compliance. Despite the ongoing uncertainty in
respect of certain Solvency 2 detailed implementation measures we remain
confident in our current design. We are now entering a phase of the project in
which we will demonstrate the extent that we have embedded the new tools and
risk management processes. This marks a significant milestone in the project and
ensures that the iCRaFT deliveries are being integrated into business processes
and are adding insight in our key risk decisions. This will place us in a
favourable position for the `Use Test` requirements under Solvency 2.
The Group has implemented an internal controls framework which is designed to
mitigate the risk of material misstatement in the Group`s financial reporting
numbers. The control environment is subject to ongoing assessment by management
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements across all relevant reporting units.
Tax and non-controlling interests
Overall, the effective tax rate on AOP is 22.6%, 21.7% in the comparative period
and 23.4% for the full 2010 year. Factors affecting the June 2011 AOP tax rate
compared to June 2010 and December 2010 include a decreased proportion of
profits being earned on low-taxed dividends and capital profits and increased
secondary tax on companies (STC) costs on dividends, offset by prior year
adjustments in OMSA and a reduction in the UK tax rate.
Looking forward we would anticipate that the full year effective tax rate on AOP
would be around 24% depending on market conditions, profit mix and no
significant change in strategic direction.
The non-controlling interests` share of AOP increased by 20% to GBP151 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.
The Group continues to monitor external factors, including market and regulatory
developments, which could have an adverse effect on the ability of the Group to
create value and continue to meet Group and individual entity capital
requirements and day to day liquidity needs.
The market remains competitive and competition for customers is increasing from
both traditional and new players in all markets. We continue to enhance our
product development process to deliver product offerings that are fit for
purpose (based on feedback received from customers and distributors), remain
competitive (by re-pricing products as a result of the economic climate,
demographic experiences and also the competitive environment) and
closing/discontinuing products where they are no longer viable. We have clear
governance structures in place to support this process by providing Group
policies, standards and a framework of clear accountability for all decision-
makers.
The implementation of Solvency 2 requirements continues to dominate the industry
and there is still some uncertainty about the details of the directive. Old
Mutual is well-positioned to meet increased regulatory expectations. The Group
provides a co-ordination role in relation to the FSA, which is the lead
regulatory authority for Old Mutual plc under the Financial Groups Directive,
and liaises with them regularly.
The Group is assessing the implications of the US Foreign Account Tax Compliance
Act (FATCA). The legislation will require foreign (non-US) financial
institutions (FFIs) to report to the US Internal Revenue Service (IRS) on
financial accounts held by US taxpayers. Non-compliant FFIs may have tax
withheld on US source income and on the proceeds from US assets.
The implementation of the Group operating model is continuing. 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.
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 and business planning process.
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
5 August 2011
Business Review
GBPm
Summarised Financial Information IFRS
results (as reported) H1 2011 H1 2010(1) % Change
AOP (IFRS basis)(pre-tax) 845 714 18%
Adjusted operating earnings per share
(IFRS basis) 9.3 8.1 15%
Basic earnings per share 9.7p 5.1p 90%
IFRS profit after-tax 632 380 66%
Sales statistics
Life assurance sales - APE basis 763 769 (1)%
Life assurance sales - PVNBP basis 5,645 5,968 (5)%
Value of new business 108 96 13%
Unit trust/mutual fund sales 6,806 5,865 16%
MCEV results
Adjusted Group MCEV (GBPbn) 11.6 9.1(5) -
Adjusted Group MCEV per share 209.9p 166.6p(5) -
AOP Group MCEV earnings (post-tax and
non-controlling interests) 529 440 20%
Adjusted operating Group MCEV
earnings per share 9.8p 8.2p 20%
Financial metrics
Return on equity(2) 13.1% 12.9% -
Return on Group MCEV 11.0% 11.2% -
Net client cash flows (GBPbn) (3.6) (2.0) (80%)
Funds under management (GBPbn) 302.8 309.3(3) (2%)
Interim dividend 1.5p 1.1p 36%
FGD(4) (GBPbn) 2.0 2.1(3) (5%)
Net asset value per share 150.8p 153.6p -
1) The six months ended 30 June 2010 has been restated to reflect US Life as
discontinued.
2) ROE is calculated as core business IFRS AOP (post-tax) divided by average
shareholders` equity (excluding the perpetual preferred callable securities).
3) As at 31 December 2010.
4) The Group`s regulatory capital surplus, calculated under the EU Financial
Groups Directive, at 30 June 2011 was GBP2.0 billion. The Group has followed the
FSA`s requirements, and has given it six months advance notice of its right to
call a EUR750 million Lower Tier 2 instrument at the first call date of 18
January 2012. As a result of that notice, the Lower Tier 2 instrument has been
excluded from the regulatory capital surplus calculations as at 30 June 2011.
Notwithstanding such notice, the Board at this time has not made any decision
and is not making any representation to Bondholders as to whether it will call
the bond at the first call date. On a like-for-like basis, the regulatory
capital surplus at 30 June 2011 was GBP2.7 billion.
5) Includes US Life.
GBPm
Group return on equity* H1 2011 H1 2010 FY 2010
AOP including accrued hybrid dividends - core
operations 503 433 855
Opening shareholders` equity excluding hybrid
capital - core operations 7,472 6,591 6,591
Half year shareholders` equity excluding
hybrid capital - core operations 7,872 6,877 6,877
Closing shareholders` equity excluding hybrid
capital - core operations - - 7,472
Average shareholders` equity - core operations 7,672 6,734 6,980
Return on average equity (annualised) 13.1% 12.9% 12.2%
* ROE is calculated as core business IFRS AOP (post-tax) divided by average
shareholders` equity (excluding the perpetual preferred callable securities).
GBPm
Group debt summary H1 2011 H1 2010 FY 2010
Debt securities in issue at book value 539 622 550
Liquid assets held centrally (694) (309) (438)
Derivative (asset)/liability related to
senior debt - (5) -
Senior debt (155) 308 112
Hybrid capital and preferred securities 1,146 1,146 1,146
Subordinated debt 1,447 1,069 1,198
Derivative (asset)/liability related to
hybrid capital (104) (30) (20)
Total subordinated debt 2,489 2,185 2,324
Total net debt 2,334 2,493 2,436
Adjusted Group MCEV 11,605 9,068 11,030
Senior gearing (1.1%) 2.7% 0.8%
Total gearing 16.7% 21.6% 18.1%
GBPm
Debt H1 2011 H1 2010 FY 2010
MCEV basis 3,195 2,619 2,829
Total book value of debt 3,132 2,837 2,894
GBPm
Interest cover H1 2011 H1 2010* FY 2010
Finance costs 60 68 128
Less reserve movements, revaluation of
borrowed funds and derivative assets/
liabilities - (6) (2)
Interest payable 60 62 126
Preferred security costs 19 20 39
Total debt costs 79 82 165
Less African debt costs (12) (12) (24)
Total debt costs (excluding Africa) 67 70 141
AOP before tax and minority interests 845 714 1,481
Less non-controlling interests of
Nedbank & M&F pre-tax earnings (178) (133) (268)
Add back finance costs included in AOP 60 62 126
AOP before tax and debt service costs 727 643 1,339
Total interest cover 9.2 times 7.8 times 8.1 times
AOP before tax and debt service costs 905 776 1,608
Less Africa AOP (705) (565) (1,234)
Non-Africa AOP before tax and debt
service costs 200 211 374
Hard interest cover 3.0 times 3.0 times 2.6 times
* The six months ended 30 June 2010 has been restated to reflect US Life as
discontinued.
Long Term Savings: Emerging Markets
Encouraging results combined with strong growth in regular premium sales
Rm
Highlights H1 2011 H1 2010 % Change
AOP (IFRS basis, pre-tax) 3,347 3,099 8%
Return on equity* 26% 27% -
Life assurance sales (APE) 2,846 2,560 11%
Unit trust/mutual fund sales and other
non-life sales 35,187 31,357 12%
PVNBP 18,458 17,931 3%
Value of new business 422 441 (4%)
APE margin 15% 17% -
PVNBP margin 2.3% 2.5% -
Operating MCEV earnings (covered business,
post-tax) 2,101 1,650 27%
Return on embedded value (covered business,
post-tax) 13.3% 11.9% -
Net client cash flows (NCCF) (Rbn) (0.2) (2.4) 92%
Rbn
H1 2011 FY 2010 % Change
Funds under management 581.8 585.7 (1%)
* ROE is calculated as IFRS AOP (post-tax) divided by average shareholders`
equity, excluding goodwill, PVIF and other acquired intangibles, for the rest of
Africa and Asia and Latin America, whilst within Emerging Markets, OMSA is
calculated as return on allocated capital.
Overview
A new leadership team was put in place at the beginning of April and the
Emerging Markets business has been organised into Life and Savings, with Retail
Affluent, Mass Foundation Cluster (MFC), Corporate, the Rest of Africa and Asia
& Latin America under the leadership of Ralph Mupita, and OMIGSA with all our
boutiques under the leadership of Diane Radley. We are pleased with the new
focus that this structure has brought to our businesses.
Equity markets have been volatile in the first half of 2011 and have not
repeated the strong gains recorded in the second half of 2010. The JSE All Share
fell by 1% in the first half of 2011 and markets in Colombia and Mexico declined
by 9% and 5% respectively. However, the South African economy remains
comparatively strong. Despite the continuing low interest rates South African
inflation has increased from 3.5% at the end of 2010 to 4.6% at the end of May,
driven by fuel and electricity price increases, although inflation still remains
within the Reserve Bank target range of 3% and 6%. Unemployment remains high.
Year-on-year GDP growth was 3.6% in the first quarter of 2011. Other Emerging
Markets economies also achieved positive year-on-year GDP growth. Chinese GDP
grew 9.5% for the second quarter of 2011 and Mexico and Colombia grew by 2.4%
and 5.1% respectively in the first quarter of 2011.
Our MFC business performed exceptionally well in the first half of the year with
Life APE sales growth of 49%, mainly due to an increase in adviser numbers,
higher productivity levels and improved premium collection. We have continued to
focus on expanding our distribution network and in South Africa we have achieved
significant growth in the retail sales force, up 19% on June 2010. This
investment in manpower, training and accreditation, combined with the new jobs
created through our iWYZE and Old Mutual Finance (OMF) offerings, underlines our
commitment to sustainable job creation in South Africa. Retail Affluent sales
were muted on the back of a highly effective single premium product campaign in
2010, and management actions on product mix and training time on regulatory
exams in 2011. Corporate sales improved following a large inflation-linked
annuity deal in the second quarter.
In the first week of July an adapted version of South Africa`s Greenlight
product was officially launched in Mexico as Skandia Vive, a significant step in
our expansion into selected emerging markets. The product is the first pure risk
product that we sell in Mexico and offers life and disability cover, with South
Africa providing the back-office servicing, IT and product support. In China we
have secured a national distribution agreement with the Bank of China which
should improve production over the remainder of the year.
Once again, Old Mutual South Africa won a number of awards, including three
Imbasa Yegolide Awards (designed to recognise and reward those service providers
who render excellent service to funds) for Employee Benefit Administrator of the
Year, for the second year in a row, OMIGSA`s Absolute Return Investments
boutique as Hedge fund provider of the year and FutureGrowth received the
Socially Responsible investor of the year award.
AOP grew by 8% to R3,347 million driven by higher sales and improved asset
management results.
Net client cash flow
Excluding Public Investment Corporation (PIC) outflows, NCCF was positive
improving from a net outflow of R1.4 billion in the first half of 2010 to a net
inflow of R2.2 billion in the first half of 2011. PIC outflows were R2.4 billion
in H1 2011 compared to R1.0 billion in H1 2010. No further PIC outflows are
expected in the second half of 2011. Total NCCF improved from a net outflow of
R2.4 billion in the first half of 2010 to a net outflow of R0.2 billion in the
period.
Retail South African NCCF improved significantly from R1.4 billion in H1 2010 to
R4.3 billion in H1 2011 benefitting from positive net flows into non-life
businesses with ACSIS securing a large deal worth R1.4 billion during the first
quarter. MFC has reported steady growth mainly as a result of high sales
volumes, improved persistency due to enhanced debit order premium collection and
reduced maturity pay-outs. Corporate had increased single and regular premium
flows and excluding PIC outflows OMIGSA has reported a slightly lower net
outflow of R2.3 billion compared to outflows of R2.6 billion in the first half
of 2010. This is largely a result of R1.5 billion money market outflow at
FutureGrowth and Symmetry in 2011, and a R300 million outflow at Old Mutual
Property.
While not included in NCCF, OMIGSA has R9.0 billion committed to its Housing
Impact Fund. Responsible Funds are an important part of our commitment to
helping build South African infrastructure and increasing jobs for all parts of
society.
The rest of our Emerging Markets businesses delivered positive NCCF of R1.2
billion, a reduction from R2.8 billion in the comparative period. In the Latin
America business recent market volatility caused higher surrenders in the
Colombian Corporate segment and money market fund. This was offset by continued
retention efforts resulting in lower surrenders in the voluntary pension fund.
NCCF for Mexico was in line with the comparative period. In Namibia, NCCF
decreased by R0.7 billion to a net outflow of R0.3 billion as a result of lower
unit trust inflows.
Funds under management
FUM decreased by 1% from 31 December 2010 to R581.8 billion as a result of lower
market levels. Of the total, R488 billion (FY 2010: R498 billion) is managed in
South Africa.
OMIGSA received three Raging Bull awards with OMUT`s Mining and Resources Fund
(Best Outright Performance over three years to the end of December 2010) and
Marriott`s Dividend Growth Fund receiving two awards (Best Domestic Equity
General Fund and Best Broad-Based Domestic Equity Fund on a Straight Performance
basis).
IFRS AOP results
IFRS AOP (pre-tax) increased by 8% from R3,099 million to R3,347 million, with
strong growth in profits for Retail Affluent (up 30% to R1,358 million) and MFC
(up 48% to R802 million).
Rm
H1 2011 H1 2010 % Change
Retail Affluent 1,358 1,048 30%
Mass Foundation Cluster 802 543 48%
Corporate 67 548 (88%)
Rest of Africa 84 107 (21%)
Asia & Latin America 97 86 13%
LTIR 575 602 (4%)
Life and Savings 2,983 2,934 2%
OMIGSA 682 604 13%
Central expenses and administration (318) (439) 28%
AOP (IFRS basis, pre-tax) 3,347 3,099 8%
Life and Savings profits benefited from improved mortality and morbidity
experience in the retail businesses and improved persistency experience in MFC
mainly due to continued retention efforts and positive investment variances.
This was offset by an approximately R400 million increase in the Investment
Guarantee Reserve for the Corporate business due to modelling changes related to
dynamic policyholder behaviour on Smoothed Bonus products. The LTIR decreased by
4% to R575 million following the reduction in the LTIR rate from 9.4% in 2010 to
9.0% in 2011. The reduction of the LTIR rate reflects the anticipation of lower
cash returns on assets supporting the Capital Adequacy Requirement in South
Africa.
Despite the comparative period including significant performance fees and mark
to market profits in Old Mutual Specialised Finance (OMSFIN), OMIGSA has
reported profit growth of 13% mainly due to private equity gains and higher base
fees earned on FUM, which were partly offset by lower transactional income.
Central expenses have reduced mainly due to a release of share-based payment
provisions and lower project costs.
Life APE sales summary
APE sales increased by 11% from R2,560 million to R2,846 million, largely due to
strong growth in regular premium sales in MFC.
Rm
By Cluster: Gross single premiums
New business H1 2011 H1 2010 +/-%
South Africa
Mass Foundation
Cluster 12 6 100%
Retail Affluent 4,614 5,448 (15%)
Corporate 3,023 2,098 44%
OMIGSA 810 1,305 (38%)
Total South Africa 8,459 8,857 (5%)
Rest of Africa* 312 265 18%
Total Asia & Latin
America** 112 101 11%
Total Emerging
Markets 8,883 9,223 (4%)
By Product:
New business H1 2011 H1 2010 +/-%
South Africa
Savings 6,309 7,100 (11%)
Protection - 4 (100%)
Annuity 2,150 1,753 23%
Total South Africa 8,459 8,857 (5%)
Rest of Africa* 312 265 18%
Total Asia & Latin
America** 112 101 11%
Total Emerging
Markets 8,883 9,223 (4%)
By Cluster: Gross regular premiums
New business H1 2011 H1 2010 +/-%
South Africa
Mass Foundation
Cluster 952 640 49%
Retail Affluent 647 645 0%
Corporate 205 226 (9%)
OMIGSA - - -
Total South Africa 1,804 1,511 19%
Rest of Africa* 109 88 23%
Total Asia & Latin
America** 45 38 21%
Total Emerging
Markets 1,958 1,637 20%
By Product:
New business H1 2011 H1 2010 +/-%
South Africa
Savings 886 692 28%
Protection 918 819 12%
Annuity - - -
Total South Africa 1,804 1,511 19%
Rest of Africa* 109 88 24%
Total Asia & Latin
America** 45 38 18%
Total Emerging
Markets 1,958 1,637 20%
By Cluster: Total APE
New business H1 2011 H1 2010 +/-%
South Africa
Mass Foundation
Cluster 953 641 49%
Retail Affluent 1,109 1,189 (7%)
Corporate 507 437 16%
OMIGSA 81 129 (37%)
Total South Africa 2,650 2,396 11%
Rest of Africa* 140 115 22%
Total Asia & Latin
America** 56 49 14%
Total Emerging
Markets 2,846 2,560 11%
By Product:
New business H1 2011 H1 2010 +/-%
South Africa
Savings 1,517 1,402 8%
Protection 918 819 12%
Annuity 215 175 23%
Total South Africa 2,650 2,396 11%
Rest of Africa* 140 115 22%
Total Asia & Latin
America** 56 49 14%
Total Emerging
Markets 2,846 2,560 11%
By Cluster: Total PVNBP
New business H1 2011 H1 2010 +/-%
South Africa
Mass Foundation
Cluster 4,092 3,080 33%
Retail Affluent 8,011 8,638 (7%)
Corporate 4,462 3,944 13%
OMIGSA 810 1,305 (38%)
Total South Africa 17,375 16,967 2%
Rest of Africa* 827 729 13%
Total Asia & Latin
America** 256 235 9%
Total Emerging
Markets 18,458 17,931 3%
By Product:
New business H1 2011 H1 2010 +/-%
South Africa
Savings 10,513 10,726 (2%)
Protection 4,713 4,488 5%
Annuity 2,149 1,753 23%
Total South Africa 17,375 16,967 2%
Rest of Africa* 827 729 13%
Total Asia & Latin
America** 256 235 9%
Total Emerging
Markets 18,458 17,931 3%
* Rest of Africa represents Namibia only
** Asia & Latin America represents Mexico only
OMSA
Single premium sales
Single premium sales decreased by 5% due to a 15% reduction in Retail Affluent
sales following exceptional sales volumes in the comparative period, which
resulted from very competitive Fixed Bond pricing. Retail Affluent annuity sales
have been negatively impacted by prevailing low interest rates with customers
seeking alternative investment options, as reflected in the 10% growth in living
annuity sales. Corporate sales increased by 44% due to improved annuity and
savings sales, which have benefited from strong flows into smoothed bonus
savings products and a large inflation linked annuity transaction, which was
secured in the second quarter.
Regular premium sales
Regular premium sales grew by 19% relative to the comparative period through 49%
growth in MFC sales which benefited from an increase in the number of advisers,
improved adviser productivity and improved debit order premium collection at
early policy durations. Retail Affluent sales were in line with the comparative
period. Corporate sales decreased by 9%, primarily due to lower risk sales as
large scheme wins in 2010 were not repeated, partly offset by a 70% increase in
savings sales driven by improved Evergreen and non-umbrella sales. Evergreen
sales into Symmetry are now being reported as regular premium sales in
Corporate.
Rest of Emerging Markets
Namibian regular premium sales increased by 24% following good Retail Mass
performance in the Traditional channel and Retail Affluent sales increased by
17% driven by improved sales through the broker channel. Corporate regular
premium sales increased by 51% due to significant business secured in June.
Single premium sales increased by 18% with strong Max Investments sales in
Retail Affluent, partly offset by lower annuity sales as 2010 included a
significant outsourcing deal.
Sales growth of 14% in Asia & Latin America was largely due to an 18% increase
in regular premium sales in Mexico, relative to the comparative period,
benefiting from an increase in financial planner numbers and improved
productivity. The Retail Mass distribution team introduced in December 2010 is
continuing to make good progress and new contracts represent 15% of total sales.
Life APE sales in China increased by 80% from CNY49 million in the first half of
2010, when sales were negatively impacted by a short-term interruption to the
Bank of China distribution channel in Beijing, to CNY88 million in the first
half of 2011. Sales benefited from the new product and distribution strategy.
China continues to benefit from high growth rates in telemarketing, which was a
new channel introduced in early 2010. India has reported healthy growth in
single premium business and Group business, which has offset weaker regular
premium sales to date. The Indian market is adjusting to the new unit-linked
regulations implemented in September 2010.
Unit trust/mutual fund sales and other non-life sales
Rm
New business H1 2011 H1 2010 +/-%
OMSA 9,058 7,784 16%
Rest of Africa 1,608 2,258 (29%)
Asia & Latin America 7,078 6,231 14%
Total unit trust & mutual fund sales 17,744 16,273 9%
Other non-life sales 17,443 15,084 16%
Total Emerging Markets 35,187 31,357 12%
Total unit trust sales rose by 9%. In South Africa, unit trust sales grew by 16%
to R9.1 billion, driven by growth in Max LISP and Galaxy sales, increased
Marriott inflows and higher reinvested distributions. Sales in Namibia declined
by 29% to R1.6 billion as the significant inflows from two corporate clients
during the first half of 2010 were not repeated in 2011. Unit trust sales in
Latin America were 14% ahead of the comparative period with strong growth in
Colombian voluntary and mandatory pension flows, driven by initiatives focused
on attracting new customers and a marketing campaign looking at cross-selling
opportunities. Mexican sales benefited from a larger financial planner sales
force and improved productivity.
Other non-life sales (in excess of unit trust/mutual fund sales) grew by 16% to
R17.4 billion for H1 2011, driven by growth in the ACSIS business.
Value of new business and margins
The value of new business decreased by 4% to R422 million despite an increase in
sales volumes due to a reduction in new business margins, with the APE margin
decreasing from 17% in the first half of 2010 to 15% in the first half of 2011.
APE margin was 3%, 29% and 8% for Retail Affluent, MFC and Corporate
respectively. Increased high-margin sales from MFC were offset by lower value of
new business in Retail Affluent as a result of lower sales, a less profitable
sales mix and erosion of new business profitability of fixed bonds. The value of
new business in Corporate has also decreased. This was caused by a less
profitable sales mix due to a shift from with-profit annuities to CPI-linked
annuities.
MCEV results
Operating MCEV earnings (post-tax) increased by 27% compared with the first half
of 2010. Operating experience variances were significantly higher than the
comparative period, with improved experience variances for mortality in the
retail businesses, persistency and expenses. However, these variances are caused
partly by seasonality, non-recurring variances from releases from reserves and
the unusually high mortality experience profit on one of our major products in
the first half of the year. These positive experience variances were partly
offset by the increase in the Investment Guarantee Reserve for Corporate
business and by a significant reduction in the expected existing business
contribution due to the reduction in one-year swap yields during 2010.
Other significant movements affecting the closing MCEV include positive
investment variances on our annuity portfolios which were partly offset by
negative investment variances on policyholder funds due to lower than expected
investment returns and an increase in the swap yield, at most terms, causing a
reduction in VIF.
The overall growth in Emerging Markets MCEV was 7.3% for the first half of 2011.
Outlook
We continue to make significant progress towards achieving our strategic
objectives of investing in our Emerging Markets businesses by focusing on our
customers and promoting a savings culture in the emerging markets in which we
operate. While we anticipate that the full potential impacts of the FAIS
regulatory exams in South Africa will only emerge in 2012, we have implemented
extensive training plans and other measures to assist our representatives in
passing the exams in advance of the revised 30 June 2012 deadline. We have
accelerated our Retail Affluent and Corporate sales training in the first half
of 2011 and expect the emphasis of training in the second half of 2011 will be
on the MFC.
Our key areas of focus for the second half of the year will be to continue
driving strong sales growth and seeking growth opportunities by leveraging the
strength and core competencies of the wider Group.
Long Term Savings: Nordic
Increased underlying profits and continued strong APE margin
SEKm
Highlights H1 2011 H1 2010 % Change
AOP (IFRS basis, pre-tax) 618 655 (6%)
Return on equity* 11.7% 11.7%
Life assurance sales (APE) 1,295 1,154 12%
Unit trust/mutual fund sales 3,142 3,647 (14%)
PVNBP 7,584 6,235 22%
Value of new business 293 284 3%
APE margin 23% 25%
PVNBP margin 3.9% 4.6%
Operating MCEV earnings (covered business,
post-tax) 647 712 (9%)
Return on embedded value (covered business,
post-tax) 8.4% 9.5%
Net client cash flows (SEKbn) 4.3 4.6 (7%)
SEKbn
H1 2011 FY 2010
Funds under management 142.7 145.4 (2%)
* Return on equity is IFRS AOP (post-tax) divided by average shareholders`
equity, excluding goodwill, PVIF and other acquired intangibles.
Overview
The Nordic economies are showing a higher degree of stability than much of the
rest of Europe. Although GDP growth has been strong in recent years, especially
in Sweden, the Nordic economies are relatively small and are dependent on
foreign trade and as a result currencies and equity markets have inevitably been
impacted by the European economic turbulence. The Swedish stock exchange (OMX
Stockholm 30) fell by 7% in the first half of 2011. Excluding restructuring
costs of SEK96 million the Nordic business delivered a strong IFRS AOP result in
H1 2011. Changes in the management team have helped refocus the business in
delivering its key priorities; strengthening distribution power and improving
the product offering to customers, stimulating future NCCF growth, increasing
operational efficiency to secure profitable growth, and optimising structures
and risk frameworks to unlock value. Product development has been accelerated
with the release of the Depa pension product in June and a bank savings account,
distributed by our internal sales force, which generated deposit inflows of
approximately SEK 1.1 billion during the period. The business has implemented
voluntary staff redundancy plans in H1, under which 331 employees have left the
business, and is well placed to meet efficiency and profitability targets in a
rapidly changing business environment.
The Nordic business is making good progress towards the implementation of
Solvency 2, as a component of the overall Group Solvency 2 initiative, and is
also implementing new UCITS and bank regulatory frameworks.
Net client cash flow
NCCF during the period was SEK4.3 billion, a decrease of 7% against the
comparative period. This was driven by a combination of the higher value of
surrenders (due to the higher policy fund values), and an increase in partial
surrenders in the occupational pension business and lower mutual fund sales.
Funds under management
FUM was SEK142.7 billion at 30 June 2011, down 2% from the position at 31
December 2010. The decline is mainly due to the declining stock markets and the
divestment of Lara fonder (SEK1.8 billion at 31 December 2010), an unprofitable
part of Skandia mutual funds, partially offset by positive NCCF in the period.
Life sales summary
SEKm
Gross single premiums
New business H1 2011 H1 2010 +/-%
Sweden
Corporate 716 897 (20%)
Retail 2,500 1,865 34%
Total Sweden 3,216 2,762 16%
Denmark
Total Denmark 1,115 442 152%
Total Nordic 4,331 3,204 35%
Gross regular premiums
New business H1 2011 H1 2010 +/-%
Sweden
Corporate 534 542 (1%)
Retail 81 117 (31%)
Total Sweden 615 659 (7%)
Denmark
Total Denmark 247 175 41%
Total Nordic 862 834 3%
Total APE
New business H1 2011 H1 2010 +/-%
Sweden
Corporate 606 631 (4%)
Retail 330 304 9%
Total Sweden 936 935 0%
Denmark
Total Denmark 359 219 64%
Total Nordic 1,295 1,154 12%
Total PVNBP
New business H1 2011 H1 2010 +/-%
Sweden
Corporate
Retail
Total Sweden 5,117 4,885 5%
Denmark
Total Denmark 2,467 1,350 83%
Total Nordic 7,584 6,235 22%
APE sales of SEK1,295 million were up 12% compared to H1 2010, driven by strong
sales performance in Denmark but also due to improved retail sales in Sweden.
APE sales in the Swedish Retail business increased by 9%, with strong single
premium sales in the Depa product. Depa sales have benefited from improved
investment alternatives within the product and increased focus during the
period. The growth of the Corporate business was restricted by the delay to the
launch of the Occupational Pension version of the Depa product, now due to be
launched during H2. In addition, current market conditions favour guarantee
products, which we currently do not provide under Skandia Link. The introduction
of Tied Agents and innovative products in Denmark led to excellent new sales
growth during the period. Skandia is well positioned to take advantage of the
ban on commission in Denmark introduced on 1 July 2010 and is increasing market
share. Denmark now accounts for 28% of the total Nordic APE sales.
Unit trust/mutual fund sales summary
Mutual fund sales of SEK3,142 million were down 14% on H1 2010, as turbulent
stock markets led clients to switch funds to attractive savings accounts in
Skandiabanken.
SEKm
New business H1 2011 H1 2010 +/-%
Skandia fonder 1,131 1,390 (19%)
Skandiabanken 2,011 2,257 (11%)
Total Nordic 3,142 3,647 (14%)
IFRS AOP results
IFRS AOP (pre-tax) was SEK618 million (H1 2010: SEK655 million). The H1 2010
result included a one-off income of SEK126 million related to a divestment of a
private equity holding. H1 2011 includes restructuring costs of SEK96 million.
The staff restructuring process came to an end on 30 June. A headcount reduction
of 331 was achieved, marginally ahead of target. Excluding these one-off items,
the underlying result in H1 2011 increased 35% compared to H1 2010. This
increase is due to higher fund-based fees and rebates in the unit-linked
business, improved net interest margin in Skandiabanken and lower administrative
expenses (excluding restructuring costs).
SEKm
H1 2011 H1 2010 % Change
Long-term business AOP 516 554 (7%)
Banking business AOP 87 88 (1%)
Asset management AOP 15 13 15%
AOP (IFRS basis, pre-tax) 618 655 (6%)
Skandiabanken results were in line with 2010 levels. An increase in net interest
income, driven by increased market interest rates, was partially offset by
increased restructuring costs. Credit losses remain very low at 0.06% in H1 2011
(H1 2010: 0.11%), reflecting the traditionally low-risk nature of our lending
business. Deposits increased by 8% compared to H1 2010 and we have seen a strong
inflow in the second quarter driven by attractive interest rates and sales by
our internal sales force. In a Norwegian customer poll, Skandiabanken had the
most satisfied banking customers for the 10th year in a row.
In Q2 Sweden`s Supreme Court ruled that past income received from fund rebates
would not be taxable.
Value of new business and margins
The value of new business increased, driven by positive new sales in Skandia
Link Denmark. The APE margin reduced from 25% to 23% following assumption
changes made in Q4 2010 and a lower level of top-ups.
MCEV results
Operating MCEV earnings after tax decreased to SEK647 million (H1 2010: SEK712
million). The reduction in H1 2011 is primarily due to restructuring expenses
and a change in the modelling of tax on expenses. Without these two non-
recurring effects operating MCEV earnings after tax would be SEK795 million, a
strong increase from 2010. The 2010 comparative period was also positively
affected by the SEK126 million realised gain from the Private Equity divestment.
Outlook
The economic outlook for 2011 remains positive and interest levels are expected
to rise as the economy continues to expand. The Nordic savings market is
expected to grow, although the environment is competitive with significant
pressure on fees and volatile markets driven by the uncertainties regarding the
deficits in other European countries. The long-term savings market is splitting
into an advised market with high levels of service from financial advisers, and
a `self service` market. Management continues to focus on improving sales,
especially via cross selling and up selling activities combining insurance and
banking; creating and maintaining sustainable margins; delivering the next phase
of the cost savings targets, and improving the distribution and product
offerings to enhance NCCF. Our restructuring programme, with the announced
voluntary redundancies is designed to prepare the business for a sustainable
future. In H2 2011, cost reduction activity will continue and we estimate
restructuring costs of approximately SEK240 million (GBP24 million) for the full
year.
Long Term Savings: Retail Europe
Solid first half year with increasing sales
EURm
Highlights H1 2011 H1 2010 % Change
AOP (IFRS basis) (pre-tax) 25 29 (14%)
Return on equity* 13% 20%
Life assurance sales (APE) 41 37 11%
Unit trust/mutual fund sales 13 14 (7%)
PVNBP 317 279 14%
Value of new business 3 2 50%
APE margin 8% 6%
PVNBP margin 1.0% 0.7%
Operating MCEV earnings (covered business,
post-tax) (7) 27
Return on embedded value (covered business,
post-tax) 0.6% 5.1%
Net client cash flows (EURbn) 0.2 0.2 -
EURbn
H1 2011 FY 2010 % Change
Funds under management 5.7 5.8 (2%)
* Return on equity is IFRS AOP (post-tax) divided by average shareholders`
equity, excluding goodwill, PVIF and other acquired intangibles.
Overview
GDP growth and unemployment rates improved in all markets in which Retail Europe
operates. This was driven by state stimulus packages and strong export
conditions. Equity markets were volatile during the period and varied by market.
The German DAX posted a gain of 6.7% during the period. Customer sentiment
remained cautious in Germany and Austria with demand primarily for guaranteed
products. IFAs in these markets currently prefer traditional life policies,
given the uncertain outlook, and this has led to a challenging sales
environment, given our focus on unit-linked contracts.
Retail Europe`s performance in H1 2011 has been encouraging with growth in
sales. We continued to bed down changes to the Retail Europe organisation
including the relocation of certain administration activities to South Africa.
We also developed initiatives to maintain and grow relationships with our
existing distribution partners. These initiatives, underpinned by strong cost
containment, ensured improvement in our value of new business, which improved by
50% over the comparative period.
Following a detailed review of operations, we have decided to cease writing new
business in Switzerland. Significant staff reductions have been communicated and
initiatives to protect the value of in force have been implemented.
AOP IFRS was EUR25 million, EUR4 million lower than H1 2010.
Net client cash flow
NCCF was EUR196 million for H1 2011 slightly down on H1 2010, due to the
increase in fund values of surrenders resulting from equity market growth over
2010. Persistency levels were improved year-on-year.
Funds under management
FUM of EUR5.7 billion at 30 June 2011 was marginally lower than 31 December
2010, driven by lower stock market performance outside of Germany.
Sales
APE sales increased 11% to EUR41 million due to increased new sales of single
premiums in Germany and regular premium business in Poland. Our market share in
Germany increased compared to H1 2010.
EURm
Gross Single Premiums
New business H1 2011 H1 2010 +/-%
Germany 20 16 25%
Poland 9 10 (10%)
Austria 4 4 -
Switzerland 6 6 -
Total Retail Europe 39 36 8%
Gross Regular Premiums
New business H1 2011 H1 2010 +/-%
Germany 12 13 (8%)
Poland 10 7 43%
Austria 9 9 -
Switzerland 6 4 50%
Total Retail Europe 37 33 12%
Total APE
New business H1 2011 H1 2010 +/-%
Germany 14 15 (7%)
Poland 11 9 22%
Austria 9 9 -
Switzerland 7 4 75%
Total Retail Europe 41 37 11%
Total PVNBP
New business H1 2011 H1 2010 +/-%
Germany 123 123 -
Poland 61 51 20%
Austria 57 61 (7%)
Switzerland 76 44 73%
Total Retail Europe 317 279 14%
The sales volumes in Poland benefited from increased marketing activity and new
distribution partners in the IFA channels and the newly developed bank channel.
Distribution activities showed increased focus on external events and
relationship management with new and existing business partners. We successfully
launched new products in the first half year in Austria and Germany.
IFRS AOP results
IFRS AOP (pre-tax) decreased EUR4 million to EUR25 million in the period. This
was due to slightly higher costs for our South African relocation activities,
given the duplication of costs in the handover period, and increased sales
related expenses and was partially offset by higher fund fees resulting from
higher average market levels.
Value of new business and margins
The value of new business increased by EUR1.2 million to EUR3.3 million, with a
PVNBP margin for the half year of 1.0% and an APE margin of 8%. The main reasons
for the improvement were higher new sales, driven in part by new tariffs, and
successful expense management.
MCEV results
Operating MCEV earnings after tax decreased by EUR33.7 million from the
comparative period to a loss of EUR6.8 million, driven by a methodology change
in calculating costs for non-hedgeable risks (CNHR).
Outlook
Macro-economic factors continue to have a significant impact on our markets in
2011. The ongoing volatility of equity and bond markets have not supported
consumer confidence in the unit-linked markets.
However, we have made significant progress in meeting our 2012 targets and have
begun several strategic growth initiatives, most notably in Poland, to build
scale and leverage our Skandia branch in South Africa, while maintaining our
rigorous cost and capital management controls.
Long Term Savings: Wealth Management
A strong start for Wealth Management
GBPm
Highlights H1 2011 H1 2010 % Change
AOP (IFRS basis, pre-tax) 93 95 (2%)
Return on equity* 14% 15%
Life assurance sales (APE) 346 412 (16%)
Unit trust/mutual fund sales 2,454 2,207 11%
PVNBP 2,977 3,611 (18%)
Value of new business (post-tax) 39 31 26%
APE margin 11% 8%
PVNBP margin 1.3% 0.9%
Operating MCEV earnings (covered business,
post-tax) 100 64 56%
Return on embedded value (covered business,
post-tax) 9.0% 6.7%
Net Client Cash Flows (GBPbn) 1.8 2.3 (22%)
GBPbn
H1 2011 FY 2010 % Change
Funds under management 57.7 55.9 3%
* Return on equity is IFRS AOP (post-tax) divided by average shareholders`
equity, excluding goodwill, PVIF and other acquired intangibles.
Overview
Wealth Management continued to build on its strong operational performance in
2010. Overall gross sales levels remained constant with 2010 levels while
margins improved further. The cost reduction programme has already delivered its
end of 2012 target of GBP45 million of run-rate savings in July, 17 months
earlier than planned, which contributed further to improved profitability. FUM
remained at record levels for the business with NCCF continuing to make a good
contribution to overall fund growth.
Covered new business sales were 16% below the levels recorded in the comparative
period, where the tax shield granted to Italian residents caused an increase in
sales. This shield expired at the end of H1 2010 and the markets and sales
levels have returned to more normal levels in Italy since then. Sales in Italy
on an APE basis were GBP40 million during the first half of 2011 (H1 2010: GBP84
million).
Sales on the UK Platform continued to grow with a 7% increase against the
comparative period. APE Platform sales were up 10%. Gross sales for the UK were
GBP3.4 billion in H1 2011 compared to GBP3.3 billion in H1 2010. We have taken a
targeted sales approach focusing on higher value IFAs in order to increase our
share of their total sales. This is an ongoing initiative with early indications
that we are already winning a higher `share of wallet`. As previously
highlighted, following a product review in advance of RDR, we decided to close
some legacy products to new business in 2010 and are actively planning for
widening our platform product portfolio.
VNB for Wealth Management overall improved by 26% and APE margin increased to
11% in H1 2011 from 8% in H1 2010. This was largely driven by actions to improve
product mix in the International off-shore products.
On an underlying basis (excluding the smoothing of policyholder tax) profits for
Wealth Management increased by 34%, driven by higher FUM and reduced expenses,
although on a reported basis AOP decreased by GBP2 million to GBP93 million.
Our highly successful Spectrum fund range now has FUM in excess of GBP1 billion.
The risk adjusted profile of the fund has proved popular with customers, and the
performance of the range of funds has been excellent since launch. Other UK
platforms now offer Spectrum on their platforms too; this is a strong
endorsement for this fund range. The Skandia Shield protected investment product
has now also been made available to ISA clients following its launch earlier
this year, and we are now starting to see strong flows into this fund. The
performance of the funds managed by Skandia Investment Group, our in-house fund
manager, continues to improve quarter on quarter.
Net client cash flow
NCCF for the period was GBP1.8 billion, down 22% on H1 2010 when they were
boosted by the high sales in the Italian market during the Italian tax shield.
Excluding Italian NCCF, total NCCF increased from GBP1.6 billion in H1 2010 to
GBP1.7 billion in H1 2011. The UK platform business continued to deliver
approximately GBP1 billion of NCCF per quarter.
Funds under management
FUM grew in line with strong NCCF of GBP1.8 billion to GBP57.7 billion a 3% rise
in the last six months and an 18% rise from the 30 June 2010 level. This
represents a substantial rise on the comparable period in 2010. Markets at 30
June 2011 were flat compared to 31 December 2010. FUM included UK assets of
GBP35.3 billion (31 December 2010: GBP33.9 billion). Of the UK assets, SIS
platform assets totalled GBP18.7 billion, a 12% rise in the last six months and
a 41% rise from the 30 June 2010 level, further solidifying our position as one
of the largest participants in this market.
Sales
APE sales decreased by 16% to GBP346 million. This was mainly attributable to
lower sales in Italy. Unit Trust fund sales rose by 11% to GBP2,454 million
predominantly in the UK.
GBPm
Gross single premiums
Life new business H1 2011 H1 2010 +/-%
UK market
Pensions 1,084 1,136 (5%)
Bonds 244 296 (18%)
Protection - -
Savings - -
Total UK 1,328 1,432 (7%)
Of which UK platform 1,159 1,067 9%
International markets
Unit-linked 134 174 (23%)
Bonds 643 633 2%
Total International 777 807 (4%)
Continental Europe markets
Unit-linked 520 936 (44%)
Total Wealth Management 2,625 3,175 (17%)
Gross regular premiums
Life new business H1 2011 H1 2010 +/-%
UK market
Pensions 43 40 8%
Bonds - -
Protection 4 5 (20%)
Savings 3 5 (40%)
Total UK 50 50 -
Of which UK platform 21 18 17%
International markets
Unit-linked 17 28 (39%)
Bonds 12 12 -
Total International 29 40 (28%)
Continental Europe markets
Unit-linked 4 3 33%
Total Wealth Management 83 93 (11%)
Total APE
Life new business H1 2011 H1 2010 +/-%
UK market
Pensions 151 153 (1%)
Bonds 25 30 (17%)
Protection 4 5 (20%)
Savings 3 5 (40%)
Total UK 183 193 (5%)
Of which UK platform 137 125 10%
International markets
Unit-linked 30 45 (33%)
Bonds 77 76 1%
Total International 107 121 (12%)
Continental Europe markets
Unit-linked 56 98 (43%)
Total Wealth Management 346 412 (16%)
Total PVNBP
Life new business H1 2011 H1 2010 +/-%
UK market
Pensions
Bonds
Protection
Savings
Total UK 1,557 1,654 (6%)
Of which UK platform 1,283 1,168 10%
International markets
Unit-linked
Bonds
Total International 881 997 (12%)
Continental Europe markets
Unit-linked 539 960 (44%)
Total Wealth Management 2,977 3,611 (18%)
GBPm
H1 H1
Mutual fund new business 2011 2010 +/-%
UK market 1,891 1,666 14%
International markets 555 525 6%
Continental Europe markets 8 16 (50%)
Total Wealth Management 2,454 2,207 11%
The market context for our UK business continues to evolve as an increasing
number of IFAs convert their business to platforms. Our strong
platform sales in the period reflect this, with APE sales totalling GBP137
million of the total GBP183 million sales in the UK, an increase of 10% on
sales of GBP125 million on the comparative period. We continued to experience
strong single premium pension business, although this was slightly
down on the comparative period. UK mutual fund sales grew strongly up 14% in the
period. As in the prior year, we benefited from the seasonality
of the tax year-end, along with increased ISA allowances.
APE sales in the UK Legacy market of GBP46 million decreased by GBP22 million
from GBP68 million in the equivalent period in 2010. This decrease reflects a
reduction in the range of legacy products being offered in 2011.
In the offshore International market APE sales decreased by 12% to GBP107
million. This was the result of a managed decline in our lower margin
regular premium business across the international markets to focus on higher
margin, single premium products. As a consequence, the APE margin from
international improved from 14% in H1 2010 to 23% in H1 2011. This was the main
driver of the improvement in VNB for the Wealth Management business.
Continental Europe APE sales decreased by 43% to GBP56 million. This represented
a 44% increase on the first half of 2009, which we consider to
be a more appropriate comparator period given the impact of the one-off tax
shield in Italy in 2010.
IFRS AOP results
IFRS AOP (pre-tax) decreased by 2% to GBP93 million. Adjusting for the effects
of policyholder tax profit grew by 34% for Wealth Management driven by higher
FUM balances and reduced absolute levels of expenses. Smoothing of policyholder
tax gave rise to a profit of GBP36 million in H1 2010 and GBP14 million in H1
2011. There will be no further impact from policyholder tax smoothing from 2011.
Net margin post-tax
Underlying net margin post-tax (excluding the smoothing for policyholder tax)
has improved from 24 basis points in H1 2010 to 25 basis points in H1 2011. This
is as a result of the business gaining operational leverage as FUM increase and
the expense base becoming more efficient through the benefits of the cost
reduction programme. Margin increases have been achieved with the backdrop of
continued development spend, in particular on IT infrastructure in the run up to
RDR, and the transition of the UK business from the current legacy products to
new products on the platform offerings. Wealth Management delivered the targeted
GBP45 million of run rate savings in July 2011.
Value of new business and margins
The value of new business increased by GBP8 million to GBP39 million and the APE
margin and PVNBP margin increased to 11% (H1 2010: 8%) and 1.3% (H1 2010: 0.9%)
respectively. The increase in margins is predominately driven by a more
beneficial product mix in International due to increased focus on higher margin
portfolio bond products and lower acquisition costs. Margins also increased due
to favourable experience from economic assumption changes and positive impacts
from persistency and rebate assumption changes made at the end of December 2010.
MCEV results
MCEV operating earnings post-tax increased by GBP36 million to GBP100 million
for H1 2011, reflecting modelling changes in the Platform business, favourable
experience variances (persistency and rebates) and an increase in VNB.
MCEV increased by 4% from GBP1,977 million at the end of 2010 to GBP2,063
million at H1 2011. This was driven predominantly by operating earnings and
positive economic variances, partially offset by transfers from covered
business.
Return on Embedded Value increased from 6.7% in H1 2010 to 9.0% in H1 2011.
Outlook
Based on the results for the first half of the year, and continuing positive
investor sentiment, our outlook for 2011 remains optimistic. Our 2011 sales
continue to be in line with our expectations. We expect sales and retail NCCF
momentum in the UK to increase once clarity around RDR is achieved and as a
result of our plan to widen our product offering on the UK Platform.
A further paper on the Retail Distribution Review (RDR) was issued by the FSA in
August 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
something akin to a 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.
Despite having achieved our cost targets, our focus on cost reduction will
continue and we remain confident that we will meet our 2012 ROE targets.
Nedbank Group (Nedbank)
Strong earnings growth while further strengthening portfolio impairments
Rm
Highlights H1 2011 H1 2010 % Change
AOP (IFRS basis, pre-tax) 4,002 3,052 31%
AOP (IFRS basis) (pre-tax) (GBPm) 359 266 35%
Headline earnings* 2,772 2,153 29%
Net interest income* 8,683 8,082 7%
Non-interest revenue* 7,139 6,158 16%
Net interest margin* 3.43% 3.34%
Credit loss ratio* 1.21% 1.46%
Cost to income ratio* 55.9% 55.3%
Return on Equity* 12.2% 10.7%
Return on Equity (excluding goodwill)* 13.7% 12.2%
Core Tier 1 ratio* 10.7% 9.9%
* As reported by Nedbank in its report to shareholders as at 30 June 2011.
Certain of the Nedbank`s reporting ratio calculations have been adjusted to
reflect the move from simple average to daily average measures of the
denominator. Comparatives have been restated accordingly.
The full text of Nedbank`s results for the six months ended 30 June 2011,
released on 1 August 2011, can be accessed on our website
http://www.oldmutual.com/mediacentre/pressReleases/viewPressRelease.jsp'pressIte
m_id=14827. The following is an edited extract:
Economic environment
Global demand has slowed in 2011 as industrial production and consumer spending
in China and other large emerging markets moderated due to tighter monetary
conditions. In many developed markets the fragile recovery faltered as surging
oil prices and reduced fiscal and monetary stimulus negatively impacted consumer
confidence and spending. In addition, concerns remain about the scale and
increasing cost of sovereign debt in many parts of Europe.
Locally, real GDP grew at an annualised rate of 4.8% in the first quarter of
2011. Conditions softened in the second quarter, with the mining and
manufacturing sectors in particular having been impacted by the loss of momentum
in global markets and the strong rand. Capacity utilisation and confidence
levels remain low, resulting in limited demand for corporate credit.
In the retail sector household loan growth was mostly from continued demand for
unsecured loans and instalment sales. Mortgage advances growth remained
depressed as buyers continue to be cautious in line with the flat outlook for
house prices, high levels of consumer debt and increased living costs.
Given the weak global environment, domestic growth is largely dependent on
further fixed-investment spending and an ongoing improvement in consumption
levels.
Review of results
Nedbank produced strong earnings growth for the six months ended 30 June 2011 in
line with the guidance provided in the trading statements released in July this
year.
Headline earnings increased by 28.8% to R2,772 million and profit from
operations before taxation and non-trading and capital items was up 36.1%.
Diluted headline earnings per share (HEPS) increased by 26.3% from 475 cents to
600 cents. Diluted basic earnings per share increased by 26.2% from 474 cents to
598 cents.
Earnings growth was driven by ongoing strong non-interest revenue (NIR) growth,
improving margins and lower retail impairments. This growth was achieved while
continuing to invest for the future and strengthening portfolio impairments.
Return on assets increased from 0.75% to 0.92% for the period. This increase,
together with a decline in gearing to 13.3 times, resulted in Nedbank`s return
on average ordinary shareholders` equity (ROE), excluding goodwill, increasing
from 12.2% to 13.7%. ROE increased from 10.7% to 12.2% for the period.
The balance sheet remained well-capitalised, with the core Tier 1 capital
adequacy ratio increasing to 10.7% (December 2010: 10.1%), while Nedbank`s Tier
2 capital position was reduced when the R1.5 billion Ned 5 bond was repaid in
April 2011 and not replaced. Nedbank`s liquidity buffers were increased by R9.0
billion and the long-term funding profile continued to lengthen to 27.0%, all
this in proactive preparation for Basel III.
Net asset value per share grew by 6.1% (annualised) from 9,831 cents in December
2010 to 10,128 cents in June 2011.
Cluster performance
Total operating cluster headline earnings increased strongly by 43.0% from
R2,015 million to R2,881 million. Nedbank Retail increased earnings from R133
million in 2010 to R826 million and, importantly, improved ROE from 1.7% to
9.9%. The repositioning of Nedbank Retail is being driven through a client-
centred strategy of growing the primary-client base while leveraging the strong
product lines. This has generated high levels of NIR growth and a significantly
improving credit loss ratio, notwithstanding the continued strengthening of
portfolio impairments.
Nedbank Capital`s earnings reduced by 5.9% on the comparative period, with fee
income down from lower market activity, and the credit loss ratio showed a
slight deterioration from the prior period`s elevated level. Nedbank Capital
reported an increase of 4.3% in its NIR from trading. There has been some margin
compression in foreign exchange flow businesses, and the market provided limited
trading opportunities.
Nedbank Corporate achieved strong earnings growth of 24.0%, driven by improved
margins, fair-value adjustments and improved income from its property private-
equity portfolio.
Nedbank Business Banking`s earnings were up 3.9%, reflecting the difficult
conditions being experienced in the small to medium-sized business sector. In
spite of this the cluster achieved an improvement in margins, above-inflation
growth in fees and commission, primary-client acquisitions and deepened cross-
sell.
Nedbank Wealth achieved good earnings growth of 16.6%, with strong contributions
from insurance and asset management together with an improvement in the
international wealth management businesses. Apart from strong growth in advice-
based sales of financial planning, local Wealth Management had a disappointing
performance in the first half of the year as a result of subdued activity and
higher impairments.
Further segmental information is available on Nedbank`s website at
www.nedbankgroup.co.za.
Outlook
Domestic economic growth of 3.5% is currently anticipated for the full year.
Increases in international food and fuel prices are expected to push inflation
to the upper limit of the target band of 3% to 6% in the final quarter of 2011.
Nedbank expects interest rates to remain at current levels for the balance of
2011, with increases currently expected from the first quarter of 2012. Asset
growth is expected to remain at conservative levels due to slow employment
growth, relatively high levels of debt compared with historic levels, increases
in electricity and fuel costs, and concerns about the possibility of interest
rate hikes in 2012.
The growth in the South African economy will be dependent on global economic and
financial developments, further fixed and infrastructure investment and ongoing
improvement in consumption levels. Economic activity is expected to be subdued
for the balance of 2011. However, corporate credit demand is expected to improve
slightly as the recovery in capital expenditure builds momentum and demand for
funding increases. The operating environment for small and medium-sized
businesses remains challenging.
Government infrastructure spending will be relatively insensitive to the
economic cycle, with substantial amounts set aside to accelerate social and
economic infrastructure as announced in this year`s National Budget. The flow of
this investment should improve as the year progresses, but is only expected to
accelerate in 2012.
The retail banking sector should continue to improve modestly as a result of
transactional volume growth, with lending activity remaining much the same as in
this reporting period.
Prospects
For the full year Nedbank currently expects:
* interest margins to remain at similar levels to those of the first half;
* banking advances to grow in the lower to mid-single digits;
* impairments to continue improving, with the credit loss ratio reducing but
remaining above the upper end of Nedbank`s target range of 0.60% to 1.00%;
* NIR (excluding fair-value adjustments) to grow at double digits; and
* expenses to grow in early double digits, but to remain less than NIR growth.
The balance sheet remains liquid, strongly capitalised and in a good position to
take advantage of growth opportunities as they arise.
Nedbank has had a positive start to the year and remains in a good position to
deliver growth in 2011 earnings in excess of its medium- to long-term financial
target.
Shareholders are advised that these forecasts have not been reviewed or reported
on by Nedbank`s auditors.
Mutual & Federal (M&F)
Strong performance following renewed focus
Rm
Highlights H1 2011 H1 2010 % Change
Underwriting result 187 88 113%
Long-term investment return (LTIR) 316 310 10%
Restructuring costs - (14)
AOP (IFRS basis, pre-tax) 503 384 31%
Gross premiums 4,361 4,205 4%
Earned premiums* 3,448 3,396 2%
Claims ratio 64.6% 68.5%
Combined ratio 94.7% 97.4%
Solvency ratio 63.5% 62.0%
Return on equity 15.8% 14.5%
* Gross of inter-company
Overview
Mutual & Federal delivered an improved ROE and strong underwriting result in the
first half of 2011. All business lines benefited from improved underwriting and
a slight reduction in commercial and corporate claims, despite seasonally heavy
rains in the period.
iWYZE, our direct insurance joint venture with Old Mutual Emerging Markets, is
progressing well. It is meeting its growth targets, and is on track to deliver
underwriting profitability in accordance with expectations.
We are also making good progress in our preparation for Solvency 2 and its
equivalent in South Africa, Solvency Assessment and Management (SAM).
Underwriting and IFRS AOP results
Premiums increased modestly against the comparative period, primarily through
inflation adjustments. Increased competition from new direct players has
restricted growth in the personal business area but Commercial business lines
continue to perform well. Profitability overall was positively impacted by the
decrease in the claims ratio from 68.5% to 64.6%, as claims costs were
successfully contained. Most risk portfolios delivered satisfactory returns and
Credit Guarantee risks performed particularly well. The operations in Namibia
and Botswana continued to deliver a satisfactory contribution.
Expenses increased largely due to development costs associated with iWYZE and
expenditure related to SAM as well as investment in the strategic step-change
programme.
Outlook
In 2011 we anticipate continued benefits of increased collaboration with the
wider Old Mutual Group. With new management structures in place, we have begun
delivering on the three-year strategic step-change plan focusing on growth while
improving operating efficiencies across the business.
We have restructured our capital base and following the payment of almost R1.0
billion of dividends we anticipate a reduction in LTIR earnings but a positive
impact on ROE due to the resulting lower Equity levels.
We will continue to develop growth in association with our intermediary partners
and grow our market share through improving systems and service. In 2011 we
anticipate a growing contribution from alternative channels including iWYZE,
niche business and underwriting management agencies. These initiatives are
designed to grow revenue while improving expense ratios and so mitigate the
impact of any softening in rates in 2011 and 2012 following the recent strong
underwriting environment.
US Asset Management
Profits up 25% on higher average FUM, as management aligns business for future
growth
USDm
Highlights H1 2011 H1 2010 Change
AOP (IFRS basis, pre-tax) 76 61 25%
Return on Capital 4.4% 4.2%
Operating margin 20% 17%
Net client cash flows (USDbn) (10.4) (8.0) (30%)
USDbn
H1 2011 FY 2010 % Change
Funds under management 260 259 -
Overview
US Asset Management (USAM) is a global, multi-boutique business comprised of 18
distinct affiliated investment firms which offer over 160 diverse investment
strategies. The business provides institutionally driven active investment
management and seeks to generate consistent positive alpha. USAM provides
strategic capabilities to our affiliates that help them deliver superior
investment performance, innovative offerings, and service to their clients.
At 30 June 2011, FUM across all affiliates totalled USD260 billion, up
marginally by USD0.9 billion from 31 December 2010. Equity market appreciation
was substantially offset by net cash outflows. While investment performance in
long-term products improved during the period, short term products, in
particular stable value funds, continued to experience net cash outflows.
Management focus is on improving net client cash flow, margins and investment
performance.
Investment performance
Long-term investment performance improved during the period across equity, fixed
income and alternative products. For the one-year period ended 30 June 2011, 73%
of assets outperformed benchmarks, up from 43% at 31 March 2011. Over the three-
and five-year periods to 30 June, 42% and 62% of assets outperformed benchmarks.
Since 31 March 2011, the percentage of assets beating benchmarks has improved
over each of the one-, three- and five-year periods. Management remains
confident that its multi-boutique model, which encourages autonomous investment
processes and retention of investment talent, will deliver investment
outperformance over the full market cycle. Improving investment performance
throughout the business continues to be a focus for the remainder of 2011 and
beyond.
IFRS AOP results
IFRS AOP of USD76 million increased 25% over the comparative period due to
higher revenues combined with expense control. Revenue growth of 7% was driven
by positive markets, including gains on seed capital, and improvements in
investment performance fees. Operating expenses before variable compensation
grew less than 3%.
Management fees were up USD6.9 million or 2% over the comparative period. This
increase was largely driven by a 2% increase in average FUM over the first half
of 2010. Performance and transactions fees were up USD3.9 million from H1 2010
to USD5.1 million. Seed capital investment returns were up USD14.6 million over
the comparative period, primarily due to strong market performance in the first
quarter.
FUM-driven expenses increased marginally as a result of higher average FUM than
the comparative period. Operating margin of 20% was up 300 basis points compared
with the period ended 30 June 2010. The improvement was largely driven by
increases in seed capital investment returns.
Net client cash flows
USDbn
H1 2011 Opening FUM Gross inflows Outflows
Short-term flows 42.3 1.0 (7.3)
Long-term flows 216.4 13.7 (17.8)
Total 258.7 14.7 (25.1)
Market
H1 2011 Net outflows and other Closing FUM
Short-term flows (6.3) 0.4 36.4
Long-term flows (4.1) 10.9 223.2
Total (10.4) 11.3 259.6
USDbn
H1 2010 Opening FUM Gross inflows Outflows
Short-term flows 47.5 1.9 (4.8)
Long-term flows 213.2 12.7 (17.8)
Total 260.7 14.6 (22.6)
Market
H1 2010 Net outflows and other Closing FUM
Short-term flows (2.9) (0.9) 43.6
Long-term flows (5.1) (8.6) 199.6
Total (8.0) (9.5) 243.2
While investment performance has improved significantly over the last 6 months,
particularly as measured by one-year performance, net outflows have continued
through the first half of the year. Net client cash outflows totalled USD10.4
billion for the period (comparative period: USD8.0 billion). Net outflows from
short-term products were USD6.3 billion (comparative period: USD2.9 billion).
Net outflows from long-term strategies for the period were USD4.1 billion
(comparative period: USD5.1 billion). Net long-term strategy outflows improved
compared with long term net outflows of USD8.2 billion in the second half of
2010.
Gross inflows during the period totalled USD14.7 billion (comparative period:
USD14.6 billion), with long-term fixed income products continuing to experience
significant gross inflows. During the period, USD4.4 billion of gross inflows
came from new client accounts.
Gross outflows totalled USD25.1 billion for the period (comparative period:
USD22.6 billion), largely driven by outflows from stable value funds, large cap
value equity, and quantitative products (such as global, international and
130/30). Gross outflows from long-term strategies for the period were USD17.8
billion compared to USD17.8 billion in the six month period to 30 June 2010 and
USD23.4 billion for the six month period to 31 December 2010. Outflows in Large
Cap Value, EAFE and quantitative strategies were seen across the market in Q1 of
2011.
We continue to improve our analysis and management processes in identifying and
better managing assets at risk.
Funds under management
FUM ended the period at USD260 billion, up USD1 billion from 31 December 2010,
as positive market returns were substantially offset by net client cash
outflows. USD223 billion (86%) of total FUM was in long-term investment products
and USD37 billion (14%) was in short-term products, compared to a mix of 82% and
18% at 30 June 2010. Long-term investment products were broadly diversified
across equities (USD132 billion, 59%), fixed income (USD62 billion, 28%) and
alternative investments (USD29 billion, 13%). Short-term products comprised
stable value funds (USD36 billion, 97%) and cash (USD1 billion, 3%).
Non-US clients currently account for 29% of FUM. International, emerging
markets, and global equity products account for 22% of the FUM.
Product developments
USAM affiliates launched several new products during the period. Ashfield
Capital Partners, LLC and Echo Point Investment Management, LLC both launched
global equity product extensions and Acadian Asset Management LLC and Rogge
Global Partners launched emerging markets product extensions.
Outlook
The return of public markets to more normal trading fundamentals, which began in
2010, has continued in 2011, providing the opportunity for USAMs` value and
quantitative managers to continue to outperform their benchmarks. The one-year
outperformance by 73% of USAM`s assets is an important leading indicator of a
future turn in net flows. While three-year returns remain below benchmark in a
number of key products, we expect the near term positive trend to result in
client decisions to maintain their relationships with our largest managers. Cash
flows for Institutional mandates are often lumpy in nature, and there is often a
lag between the turn of performance, the slowing of outflows, and the increase
of inflows. However, assuming a continuation of the positive performance trends
for long-term assets, USAM expects improved, though still negative, long-term
flows in the second half of the year, with continued progress in 2012.
The 25% increase in AOP over the comparative period indicates progress in the
business. The 2011 full year result is unlikely to show a similar growth rate
given ongoing outflows, investment in the business, and the level of seed
capital gains experienced in the second half of last year. The challenge of net
outflows is the key issue facing USAM. Achieving positive net flows, combined
with appreciating markets, will drive the accomplishment of our other goals
including increasing AOP growth and improving operating margins. In addition,
USAM continues to invest for the future by funding the growth plans of several
smaller affiliates who have strong products and performance but sub-scale asset
bases. Although these investments currently impact operating margin by
approximately 4% we believe that these affiliates are positioned to become
engines of growth in the future.
With a new management team in place, we continue to refine and execute the
growth strategy for USAM. We are committed to developing our non-US distribution
capability, and we expect to report further progress on the execution of the
business plan at the year-end.
Date: 05/08/2011 08:00:09 Supplied by www.sharenet.co.za
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