Wrap Text
Old Mutual plc Interim results for the six months ended 30 June 2012
OLD MUTUAL PLC
ISIN CODE: GB00B77J0862
JSE CODE: OML
NSX SHARE CODE: OLM
ISSUER CODE: OLOML
8 August 2012
Old Mutual plc Interim results for the six months ended 30 June 2012
Good strategic and operational progress
Financial Summary (1) H1 2012 H1 2011 Movement
Operating metrics - constant currency basis
Adjusted operating profit before tax (IFRS basis)* GBP791m GBP709m 12%
Adjusted operating earnings per share (IFRS basis)** 8.7p 8.5p 2%
Net client cash flows - LTS GBP1.4bn GBP2.0bn GBP(0.6)bn
Net client cash flows USAM2 GBP2.2bn GBP(2.0bn) GBP4.2bn
Funds under management (3) GBP260.7bn GBP264.7bn (2)%
Financial metrics - as reported
Group return on equity (annualised) 12.9% 15.1% (220bps)
Interim dividend for the year 1.75p 1.50p 17%
Total profit after tax attributable to equity holders of the parent GBP931m GBP738m 26%
Adjusted Group MCEV per share (3) 218.1p 194.1p 24.0p
Surplus generated (4) GBP381m GBP521m GBP(140)m
(1) Except for total profit after tax and adjusted Group MCEV per share and Surplus generated, all figures in the table are in respect of core continuing
businesses only and the 2011 comparatives have been restated accordingly. The disposal of Nordic was the most material disposal in the period. Figures
have also been adjusted for the impact of the share consolidation where applicable.
(2) USAM excludes NCCF from Dwight and OMCap, which were sold in the period. H1 2011 also excludes Lincluden, which was sold in December 2011.
(3) Comparative as at 31 December 2011.
(4) Surplus generated is the adjusted net worth of the operating business units not required to support capital requirements.
(5) Core continuing Group NCCF includes Nedbank NCCF of GBP0.8 billion.
Financial and operational highlights
- IFRS AOP up 12% to GBP791 million; interim dividend up 17%; and core continuing Group NCCF of GBP4.4 billion 2,5
- Targets: cost reduction met; ROE and margins on track
- A further GBP603 million of debt repaid in 2012, less than GBP450 million left to hit GBP1.5 billion target
- Completion of sale of Nordic and GBP1 billion special dividend paid 7 June 2012
Expanding our African footprint
- Continued strong sales and margins in South African mass market, and excellent sales momentum in emerging markets
- Nigerian life acquisition expected to complete Q3; and considering entry into the Nigerian non-Life market
- Nedbank delivers another excellent six months, driven by growth in NII, NIR and improved impairments
Growing Wealth Management
- Merger of OMAM UK and Skandia Investment Group to create asset management engine to power Wealth Management
- UK Platform GBP1.2 billion NCCF
- Post-RDR pricing structure for UK Platform unveiled
Turning around US Asset Management
- Positive NCCF of GBP2.2 billion (2)
- Continued trend of improved investment performance; margins strengthening
Julian Roberts, Group Chief Executive, commented:
"Against a backdrop of sustained low growth and falling interest rates we continue to deliver good strategic and operational
progress. We are expanding in attractive African markets; introducing new products across the Group; and today are
unveiling our UK Platform pricing ahead of the introduction of the Retail Distribution Review.
"We have built a portfolio of resilient, high quality and cash generative businesses. Although economic conditions remain
uncertain, we remain confident that we have the right offering, the right people and exposure to both emerging and developed
markets that will allow us to continue to create value for both shareholders and customers."
Old Mutual plc results for the six months ended 30 June 2012
Enquiries
External Communications
Patrick Bowes UK +44 (0)20 7002 7440
Kelly de Kock SA +27 (0)21 509 8709
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 Summary on the front page of this announcement are used,
whether in the Financial Summary, the Group Chief Executive's Review, the Group Finance Director's Review or the Business Review,
the following definitions apply:
* For core life assurance and general insurance businesses, adjusted operating profit is based on a long-term investment return, including
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 core businesses, adjusted operating profit excludes goodwill
impairment, the impact of acquisition accounting, revaluations of put options related to long-term incentive schemes, profit/(loss) on
acquisition/disposal of subsidiaries, associated undertakings and strategic investments, and fair value profits/(losses) on certain Group debt
movements, but includes dividends declared to holders of perpetual preferred callable securities. Bermuda, which is non-core and Nordic
and US Life, which are discontinued and non-core, are not included in adjusted operating profit.
** Adjusted operating earnings per 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 trusts of listed
subsidiaries. The calculation of the adjusted weighted average number of shares includes own shares held in policyholders' funds and Black
Economic Empowerment trusts.
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 relating 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 and South African 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 out in its 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 on the Interim results and Q&A will be broadcast live at 9:00 am (GMT), (10:00 am (CET)/11:00 am
(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 pass-code 693086#:
UK/International +44 (0)20 3140 0668
US +1 631 510 7490
South Africa +27 (0)11 019 7051
Playback (available for 14 days from 8 August 2012), using pass-code 382367#:
UK/International +44 (0)20 3140 0698
US +1 877 846 3918
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 financial data
for 2012 and 2011.
Appreciation / Appreciation /
(depreciation) of local (depreciation) of local
H1 2012 H1 2011 currency FY 2011 currency
Rand Average Rate 12.52 11.14 (12)% 11.64 (8)%
Closing Rate 12.84 10.86 (18)% 12.56 (2)%
USD Average Rate 1.58 1.62 2% 1.60 1%
Closing Rate 1.57 1.61 2% 1.56 (1)%
Review of Operations
Strong financial performance
Old Mutual's performance in the first six months of the year reflected the benefit of our substantial exposure to emerging markets and
the resilience of the Group's operations in the face of the continued challenging macro-economic environment, including falling interest
rates. During the half we saw excellent operational performance and good profit growth, with IFRS basis adjusted operating profit (IFRS
AOP or AOP) up 12% on a constant currency basis to GBP791 million. The reported results of the Group's businesses were affected by
a significant depreciation of the rand against sterling, with the average rand rate declining during the period by 12%. Group return on
equity (ROE) was down 2.2% as a result of the sale of Nordic. The Group is in a strong financial position, with reduced debt levels. We
have made substantial returns of capital to both equity and debt holders and have increased our interim dividend to 1.75p (or its
equivalent in other applicable currencies).
A resilient and sustainable business
We have substantially restructured the Group and it is now comprised of high quality, resilient businesses which have maintained profit
margins and continued to generate increasing amounts of cash. In the six months to 30 June 2012 NCCF was GBP3.8 billion, as
reported from core operations, against outflows of GBP4.2 billion in the comparative period on a constant currency basis, and funds
under management (FUM) at continuing businesses increased 6%. We are particularly pleased with the sales performance of our
Emerging Markets business and its uplift in APE margins to 22%.
Substantial presence in fast growing African markets
Our bias toward the higher growth emerging markets, and in particular sub-Saharan Africa, has ensured that we have maintained our
momentum, notwithstanding the demanding macro-economic environment. The growth in these markets is underpinned by a number of
structural factors: a growing and sizeable population that is entering the formal economy for the first time and is keen to protect and
increase its wealth and assets; strong domestic GDP growth; growing political stability; and an underpenetrated financial services
sector. We believe that the recent economic growth in the African continent is a sustainable, long-term trend.
Our expansion into other attractive markets in sub-Saharan Africa continues. As part of our African growth strategy, we will follow a strict
approach in picking the markets in which to operate: we will either target countries with significant populations where we see the
opportunity to roll out our Mass Foundation business; or countries with pockets of populations which we believe we can service with
existing products and expertise outside of the Mass Foundation business. Our expansion will be through a combination of organic
growth and bolt-on acquisitions.
We are awaiting final regulatory approval for our acquisition of Oceanic Life in Nigeria. We have had an experienced integration team in
Lagos for some time and the process of launching our life business there is progressing well. Old Mutual Nigeria will be the hub for our
expansion in West Africa and we are looking at options both in Nigeria and Ghana to gain scale. In East Africa, we are making progress
with our plans to expand further in Kenya and the rest of the region.
Nedbank has had another excellent half with profits up 27%. We remain pleased with the benefits of our controlling shareholding in
Nedbank and see opportunities for our Emerging Markets business to work closely with Nedbank as we expand further into sub-
Saharan Africa.
Mutual & Federal is working closely with Old Mutual Emerging Markets to identify opportunities and synergies as we expand our African
business. As part of this strategy, Mutual & Federal is actively considering entering the Nigerian market.
We are seeing real benefits from the change programme at Mutual & Federal through improved service levels, which, over time, should
lead to improved performance. In South Africa, there is evidence of a marked softening in premium rates, which will have an impact on
margins at this stage of the underwriting cycle. We are increasing our penetration in the mass market through our investment in iWyze.
Modern, low-risk European businesses
Unsurprisingly, conditions for our European businesses, collectively known as Wealth Management, have been more challenging, with
continued uncertainty about the Euro affecting consumer confidence. The UK market has also been impacted by advisers preparing for
the Retail Distribution Review (RDR). However we remain confident that our modern, low-risk, predominantly unit linked businesses are
advantageously positioned in the markets and segments where they operate.
The platform market in the UK and in International has continued to grow, albeit with lower single premium sales since the end of the
first half of 2011.
We have appointed Paul Feeney as Chief Executive of the Wealth Management business and he will be responsible for driving its
growth. Our focus for this business will be to widen the product set, deepen penetration of our own asset management provision and
further reduce costs with a continued focus on efficiency.
While platforms remain the growth areas for affluent and high net worth clients, there has begun to be demand from both customers and
IFAs for the provision of packaged investment solutions, rather than simple access to open architecture. We believe the implementation
of RDR will see a significant number of IFAs offering restricted advice and this will further support the need for product providers to
deliver such solutions to customers.
The merger of Skandia Investment Group and OMAM UK has created an asset management platform that we will use to develop a
wider range of solutions for clients. We are currently in discussions with a limited number of high quality asset managers to develop a
range of fund solutions that we believe will meet the majority of the needs of our customers and IFAs, post-RDR. We believe that this
will drive revenue growth in Wealth Management over time. We expect to start seeing the benefits of this in 2013.
We were pleased with the decision to ban cash rebates in the latest RDR paper issued by the Financial Services Authority (FSA) and
the progress towards certainty in the regulatory regime. Banning cash rebates is in the customer's best interests given that our
customers invest in funds and not cash, it is correct that any rebates should be in the form of units in those funds. The UK Platform is
already compliant with the new FSA rules for unit rebates. Today we are revealing our new pricing model for the UK Platform which is
designed to be competitive, simple and customer-focused.
Turnaround in US Asset Management continues
In the US, our Asset Management business has seen positive flows in the first half of the year overall. In the second quarter, the very
volatile conditions saw clients taking a conservative approach to asset allocation and awarding new mandates. Our management team
continues to drive growth and target an improvement in margins and investment performance. During the period we disposed of two
boutiques that did not fit with our focus on long-term, institutionally-driven, active asset management.
Accelerated operational change
The past six months have been characterised by a disciplined focus on operational change within the Group. The pace of this change
has accelerated with the planning for the integration of the Nigerian life business; restructuring in each of our asset management
businesses; progress in developing new products and platform services in Wealth Management, and a managed transition away from
regular premium products in some of our Wealth Management Europe markets.
Our customers are key to our success
Focusing on the customer remains key to our success and we continue to embed this philosophy across the Group and among our
employees. Historically, financial services firms have not always been as focused on customers and their needs as they should have
been. At Old Mutual, we believe our future success will be driven by ensuring that our customers are always a priority and that we earn
and maintain their trust.
With that in mind, and ahead of schedule, our business in South Africa is embracing the Financial Services Board's (FSB) Treating
Customers Fairly initiative. We have also launched new products in a number of our territories tailored to our customers' needs: in
Kenya, we have launched the first unit trust that can be bought via a mobile phone (i-INVEST); a new living annuity with a guarantee in
South Africa (Life Saver) for the Retail Affluent market; and a new product suite in the International offshore business. We will continue
to appraise our product suite and ensure it meets our customers' financial needs.
Focusing on the future
The Group continues to trade at a discount to its MCEV, in common with many of its peers, and in current market conditions we believe
the way that we will address closing this gap is through continued and sustainable improvements in our operational performance. The
strict criteria for keeping businesses within the Group will be maintained, as will the focus of our efforts to grow where returns are
highest. We are laying the foundations for sustainable business success through our people, products and capabilities and ensuring that
we transfer these assets into high growth areas. We are staffing our Africa expansion teams with both local talent and by giving our best
people from other territories the opportunity to work in these growing businesses.
We face numerous operating challenges, whether regulatory burdens and change in Europe or South Africa, or societal issues such as
unemployment and poor educational standards. However, as we complete our restructuring programme, we can look forward to
developing alongside the societies where we operate and continuing to build shareholder and wider stakeholder value for the future. We
will do this in a cost-effective and disciplined way and our staff will be the key change agents to achieve this.
Outlook
We have built resilient, high quality and cash generative businesses. Although economic conditions remain uncertain, we remain
confident that we have the right offering, the right people and exposure to both emerging and developed markets that will allow us to
continue to create value for both shareholders and customers.
Julian Roberts
Group Chief Executive
8 August 2012
Group Finance Director's Review
GBPm
H1 2011 H1 2011
(constant (as
Group highlights (1) H1 2012 currency) % change reported) % change
Adjusted operating profit (IFRS basis, pre-tax) 791 709 12% 785 1%
Adjusted operating earnings per share (IFRS basis) 8.7p 8.5p 2% 9.4p (7)%
Group net margin (2) 49bps 43bps 6bps 46bps 3bps
Return on equity (annualised) (3) 12.9% 15.1% (220)bps
Life assurance sales APE basis 561 609 (8)% 637 (12)%
Non-covered business sales (4) 6,861 6,254 10% 6,582 4%
LTS net client cash flow (GBPbn) 1.4 2.0 (30)% 2.0 (30)%
Net client cash flows (GBPbn) (5) 4.4 0.3 >100% 0.4 >100%
Funds under management (GBPbn) 260.7 264.7 (2)% 267.2(6) (2)%
Interim dividend for the year 1.75p 1.50p 17%
Total profit after tax attributable to equity holders of the parent 931 738
(1) The figures in the table are in respect of core continuing businesses only. The comparatives have been restated accordingly.
(2) Ratio of AOP before tax to average assets under management in the period.
(3) ROE is calculated as core business IFRS AOP (post-tax) divided by average ordinary shareholders' equity (i.e. excluding the perpetual preferred callable
securities).
(4) Includes unit trust, mutual fund and other non-covered sales.
(5) Total NCCF excludes NCCF from USAM's Dwight and OMCap affiliates, which were sold in the period. H1 2011 also excludes Lincluden, which was sold in
December 2011.
(6) At 31 December 2011.
Overview
During the six months to 30 June 2012 (H1 2012' or the period') Old Mutual showed strong growth in profits compared to the six
months to 30 June 2011 (2011') on a constant currency basis. Pre-tax AOP was GBP791 million, an increase of GBP82 million on a
constant currency basis, with increased profitability in our Long-Term Savings and banking businesses in emerging markets. AOP
earnings per share were up 2% to 8.7p on a constant currency basis. The weakening in the rand to sterling average exchange rate
reduced sterling earnings, such that on a reported basis profits increased by only GBP6 million.
Group net margin (measured as profit before tax on average funds under management and average banking assets at Nedbank)
increased by 6 basis points from 43 basis points to 49 basis points on a constant currency basis. The increase was driven by a strong
improvement in the net margin at Nedbank. In Wealth Management the net margin, excluding the previously reported smoothing for
policyholder tax, has reduced from 32 basis points to 30 basis points, mainly as a result of an increase in funds under management
following the inclusion of OMAM UK for the first time in H1 2012. In Emerging Markets net margin reduced by 8 basis points largely due
to increased funds under management following the inclusion of Zimbabwe, Kenya, Malawi and Swaziland for the first time in H1 2012.
Core Group ROE decreased from 15.1% to 12.9%. H1 2011 ROE was restated from 13.1%, as reported, to exclude Nordic net average
assets of GBP1.8 billion and earnings of GBP58 million. The proceeds from the Nordic disposal in March 2012 increased the Group's
equity base, as used in the calculation of H1 2012 ROE, by GBP2.1 billion. The equity base was reduced by the payment of around
GBP1 billion as a Special Dividend on 7 June 2012.
Life assurance annual premium equivalent (APE) sales were down 8% to GBP561 million, Emerging Markets APE sales increased,
driven by continued strong protection sales in our Mass Foundation Cluster (MFC) and Retail Affluent client segments. Wealth
Management APE sales were flat compared to Q1, but were down overall compared to H1 2011, with continuing weakened investor
sentiment.
Non-covered business sales, including unit trust and mutual fund sales, were up 10%, driven by strong sales in OMIGSA's Dibanisa and
Liability-Driven Investment boutiques, and Old Mutual Unit Trusts and acsis. Non-covered business sales in Wealth Management were
impacted by the deterioration in investment sentiment in Europe. However, reported sales were up 8% due to the inclusion of sales from
OMAM (UK) for the first time.
The Group had strong positive net client cash flow (NCCF) of GBP3.8 billion (H1 2011: GBP4.2 billion outflow). The improvement was
primarily due to improved NCCF in USAM, following improved investment performance by a number of key strategies. Both of our LTS
businesses saw positive NCCF during the period. In early July there was a Public Investment Corporation (PIC) outflow of R12.6 billion
(GBP1.0 billion) from OMIGSA's Electus boutique, as PIC continued to disinvest from third party managers.
FUM decreased by 2% on a constant currency basis, with positive NCCF and positive market movements offset by the divestment of
Dwight and OMCap by USAM. FUM increased by 6% during the period after excluding the FUM of GBP20 billion at Dwight and OMCap.
Over the period the FTSE was broadly flat, but the S&P 500, the MSCI World and the JSE All Share indices rose by 8%, 4% and 5%
respectively.
The rand to sterling average exchange rate weakened by 12% against sterling. This negatively impacted sterling earnings from our
South African businesses. The US dollar average rate strengthened by 2%. This positively impacted sterling earnings from USAM. The
30 June 2012 rand closing rate was 2% lower than 31 December 2011. The US dollar closing rate was also lower, down 1% against 31
December 2011. Both foreign exchange closing rate movements negatively affected sterling FUM.
There has been a significant downwards shift in long-term interest rates in South Africa in the first half of 2012, and in particular towards
the end of the half-year, with the 10-year government bond yield used as the Financial Soundness Valuation (FSV) rate decreasing from
8.2% at December 2011 to 7.6% at June 2012. This economic change had an unfavourable impact on IFRS AOP for Emerging Markets
and in particular for the Retail businesses.
Dividends and consolidation of shares
Special Dividend
A Special Dividend of 18p per share, amounting to approximately GBP1 billion in aggregate, and the final dividend for 2011 of 3.5p per
share, which amounted to a further approximately GBP194 million in aggregate, were paid to shareholders on 7 June 2012. The Special
and Ordinary Dividends were paid by reference to the Company's shares in issue before the 7-for-8 share consolidation that took effect
on 23 April 2012.
Interim dividend for 2012
In accordance with its stated policy for interim dividends, the Board has considered the position in respect of the interim dividend for
2012 and has declared the payment of a dividend of 1.75p per Ordinary Share (or its equivalent in other applicable currencies). No scrip
dividend alternative is available in relation to this dividend. The 2011 interim dividend was 1.50p.
The Board has taken into account the effect of the 7-for-8 share consolidation on the base 2011 dividend per share in its calculation of
the 2012 interim dividend.
Dividend policy
As previously reported, the Board intends to pursue a progressive dividend policy consistent with our strategy, having regard to overall
capital requirements, liquidity and profitability, and targeting dividend cover of at least 2.5 times IFRS AOP earnings over time. We
continue to expect to set interim dividends routinely at about 30% of the prior year's full dividend.
Sources of earnings
GBPm
H1 2011 H1 2011
H1 2012 (constant currency)1 % change (as reported)(1) % change
Revenue
Fees 1,019 1,013 1% 1,031 (1)%
Underwriting (2) 713 667 7% 745 (4)%
Nedbank net interest income (3) 567 481 18% 541 5%
Nedbank non-interest revenue 640 552 16% 620 3%
Net other revenue 185 170 9% 186 (1)%
Total revenues 3,124 2,883 8% 3,123 -
Expenses
Finance costs (75) (60) 25% (60) 25%
Administration expenses & other expenses (1,757) (1,655) 6% (1,802) (2)%
Acquisition expenses (501) (459) 9% (476) 5%
Total expenses (2,333) (2,174) 7% (2,338) -
AOP before tax and non-controlling interests 791 709 12% 785 1%
(1) The comparative period has been restated to reflect Nordic as discontinued.
(2) Underwriting includes net income from writing insurance products (protection, annuity and general insurance).
(3) Presented net of impairments.
Sources of earnings are analysed on a constant currency basis below.
Fees increased by 1% to GBP1,019 million. The increase was driven by Emerging Markets, which more than offset decreases in
USAM, reflecting the disposals of affiliates and changes in the asset mix. Fees include asset-based fees, transactional fees,
performance fees and premium-based fees, earned on unit-linked investment contracts and Asset Management revenues.
Underwriting increased 7% to GBP713 million. The increase was mainly driven by higher mortality profits in Emerging Markets and
lower claims costs within Wealth Management.
Nedbank net interest income (NII) was up 18% to GBP567 million, net of impairments, due to an increase in the net interest margin, an
increase in interest earning assets and a reduction in impairment provisions.
Nedbank non-interest revenue (NIR) was up 16% to GBP640 million. NIR includes service charges, trading income, commission and
transactional fees. The increase was due to higher trading income, higher commission and fees, higher transactional volumes and
increased insurance revenues.
Net other revenue was up 9% to GBP185 million.
Debt costs were up 25% to GBP75 million. The increase was driven by the servicing costs of the 8% coupon on the GBP500 million 10-
year bond issued in June 2011 and the GBP5 million cost of reconfiguring swaps, associated with balance sheet management at the
Nordic business in Q2 2012. We anticipate lower finance charges in the future as the benefits of the Group's debt reduction programme
flow through.
Administration expenses increased by 6% to GBP1,757 million, with increased costs in Nedbank (primarily due to higher staffing to
service increased volumes) and Emerging Markets (driven by project costs and the inclusion of the other African businesses in the
second half of 2011). Wealth Management costs were flat, with expense savings funding investment and development spend.
Acquisition expenses increased by 9% to GBP501 million, primarily due to increased new business volumes in Emerging Markets and
increased trail commission in Wealth Management, due to improved market performance year-on-year, which more than offset the
impact of lower new business volumes.
Operating profit analysis
GBPm
H1 2011 H1 2011
(constant (as
AOP Analysis H1 2012 currency)(1) % change reported)(1) % change
Long-Term Savings 384 382 1% 414 (7)%
Nedbank 406 320 27% 359 13%
Mutual & Federal 34 42 (19)% 47 (28)%
US Asset Management 42 41 2% 39 8%
866 785 10% 859 1%
Finance costs (75) (60) (25)% (60) (25)%
LTIR on excess assets 25 16 56% 18 39%
Net interest payable to non-core operations (13) (9) (44)% (9) (44)%
Corporate costs (25) (28) 11% (28) 11%
Other net income 13 5 160% 5 160%
AOP 791 709 12% 785 1%
(1) The comparative period has been restated to reflect Nordic as discontinued.
AOP from operating units in constant currency increased 11%, primarily as a result of a 27% increase in Nedbank's AOP.
LTS profits were 1% up on H1 2011. Emerging Markets AOP increased by 8% to GBP289 million, benefiting from improved mortality
and disability experience, strengthening of the Corporate Investment Guarantee Reserve in H1 2011 which was not repeated in H1
2012, the release of margins in respect of legacy structured products in Retail Affluent and the consolidation of other African countries.
This was partly offset by less favourable persistency experience mainly due to the change in the persistency assumptions at the end of
2011, and an increase in central expenses due to higher share-based payment provisions and increased investment in technology. In
addition, certain external factors adversely impacted profitability in the South African retail businesses, in particular the decrease in the
10-year government bond yield from 8.2% at December 2011 to 7.6% at June 2012 which resulted in higher policyholder liabilities, and
the impact of tax changes (increased capital gains tax rate and the introduction of dividend withholding tax) on policyholder funds.
AOP in Wealth Management fell to GBP95 million (H1 2011: GBP115 million), due to lower FUM related fees and because H1 2011
benefited from policyholder tax smoothing of GBP16 million.
Nedbank's profits grew strongly, driven by 11% growth in NII, 16% growth in NIR and continued improvement in impairments.
M&F recorded several large claims, particularly in its Commercial business line, and experienced a softening underwriting environment.
M&F's Rest of Africa and credit guarantee businesses continued to deliver strong profit growth.
USAM's profits from continuing operations were down 1%, due to a change in asset mix towards lower margin fixed income products.
USAM's reported profits were up 2% with lower restructuring costs during the period.
LTIR on excess assets increased by 56% due to an increase in the average asset base. The long-term rate for Emerging Markets
remained at 9.0% for 2012. The 2012 long-term rates for Mutual & Federal and Wealth Management are 8.6% (2011: 9.0%) and 1.5%
(2011: 2.0%) respectively.
Corporate costs decreased 11% to GBP25 million due to our ongoing efforts to reduce corporate costs in line with the Group's
previously announced targets.
The other net income increased to GBP13 million (H1 2011: GBP5 million), primarily due to foreign exchange gains and interest on cash
held following the sale of the Nordic business. These gains are offset by lower seed capital gains.
Group cost savings and ROE and margin targets
At the 2009 Preliminary Results and Strategy Update, the Group introduced three-year ROE and cost-saving targets, progress against
these targets is set out below.
ROE and margin targets H1 2012 H1 2011 Target
Long-Term Savings
Emerging Markets (1) 22% 26% 20%-25%
Wealth Management (2) 14% 14% 12%-15%
LTS Total 19% 21%(3) 16%-18%
USAM operating margin (4) 20% 17% 25%-30%
(1) Within Emerging Markets, African and Asian ROE is calculated as return on allocated capital.
(2) Wealth Management ROE is calculated as IFRS AOP (post tax) divided by average shareholders' equity, excluding goodwill, PVIF and other acquired
intangibles.
(3) LTS H1 2011 ROE has been restated to exclude Nordic.
(4) USAM margin is stated after non-controlling interests and excluding gains/losses on seed capital but makes no adjustment for affiliates held for sale or
disposed in the period. The results for the comparative period have been restated accordingly to exclude gains on seed capital and the transfer of OMAM UK to
Wealth Management.
Emerging Markets ROE decreased to 22% at the half year, with slightly lower reported post-tax profits and an increased allocated
capital base, supporting growth and expansion plans in Africa. Wealth Management ROE was stable at 14%, with lower operating
profits offset by a more efficient capital base, following capital flows to Group in the second half of 2011.
USAM's operating margin improved from 17% at H1 2011 to 20% on a reported basis, following the disposal of a number of affiliates.
USAM's operating margin from continuing business, excluding seed gains and losses, was 22% after non-controlling interests and 26%
before non-controlling interests.
Nedbank ROE (excluding goodwill) was 15.7%, an improvement of 2.0% on H1 2011, but was 2.4% below Nedbank's medium-to-long
term target of 5% above the average cost of ordinary shareholders' equity.
GBPm
Cumulative
Cumulative H1 2012 cost
run-rate cost incurred to 2012 run-
Cost reduction targets savings incurred date rate target
Long-Term Savings
Emerging Markets 20 - - 5
Wealth Management 64 - 56 60
LTS Total 84 - 56 65
USAM 15 - 20 10
Group-wide corporate costs 14 1 1 15
Total 113 1 77 90
We have delivered more than the GBP90 million run-rate savings announced in March 2010. The original GBP100 million target was re-
stated to exclude Nordic following its sale.
Wealth Management delivered GBP59 million of its 2012 cost saving target of GBP60 million at 31 December 2011 and has delivered
an additional GBP5 million since then. USAM delivered GBP15 million of savings in 2009 and 2010.
Run-rate savings of GBP3 million were delivered in H1 2012 in respect of Group wide corporate costs giving a total run rate saving to
date of GBP14 million. We continue to look for further cost efficiencies, including reallocating resources to take account of the Group's
reduced geographic spread.
Regulatory changes in Europe and South Africa, such as Solvency II (due to be implemented in January 2014), Solvency Assessment
and Management (due to be implemented in January 2015) and Treating Customers Fairly continue to result in additional costs.
Summary MCEV results
The adjusted Group MCEV per share increased by 12.4% (or 24.0p) from 194.1p at 31 December 2011 to 218.1p at 30 June 2012,
based on a share count for MCEV purposes of 4,887 million shares (31 December 2011: 5,562 million). The increase was primarily due
to the sale of Nordic and the subsequent share consolidation, the uplift in Nedbank's market value and positive operating earnings. The
payment of the Special Dividend on 7 June 2012 reduced MCEV per share by 18.0p.
Adjusted operating Group MCEV earnings per share decreased by 1.8p to 8.0p including Nordic and decreased by 1.0p to 7.5p
excluding Nordic. Non-covered business operating earnings increased by 0.1p and now represent over 40% of total operating earnings.
Covered business operating MCEV earnings per share decreased by 1.9p to 4.7p including Nordic and decreased by 1.1p to 4.3p
excluding Nordic. The decreases were a result of:
- Closer alignment of persistency experience to assumption changes made at 31 December 2011, expense losses (including higher
central costs) and tax experience losses in Emerging Markets; and
- Rebate experience in Wealth Management that was more closely aligned to assumption changes made at 31 December 2011.
Non-covered business operating earnings per share increased by 0.1p to 3.3p including Nordic and increased 0.1p to 3.2p excluding
Nordic. The increases were a result of:
- Higher earnings from the banking businesses, with Nedbank's earnings benefiting from higher NII (higher interest earning banking
assets) and NIR (increases in commissions, fees and investment revenue); partially offset by
- Lower Emerging Markets asset management earnings.
67% of the adjusted Group MCEV (pre-debt and net other business) at 30 June 2012 was in the emerging markets (including Nedbank
and M&F) with 23% in Europe and 10% in the US.
Adjusted Group MCEV per share p
Adjusted Group MCEV per share at 31 December 2011 (1) 194.1
Covered business 4.7
Non-covered business 3.3
Adjusted operating Group MCEV earnings per share (1) 8.0
Economic variances and other earnings 2.7
Foreign exchange and other movements (4.4)
Dividends paid to ordinary and preferred shareholders (3.3)
Nedbank market value adjustment 10.3
BEE and ESOP adjustments (0.2)
Mark to market of debt (1.5)
Impact of share consolidation 26.8
Net proceeds from Nordic sale 3.6
Special dividend (18.0)
Below the line effects 16.0
Adjusted Group MCEV per share at 30 June 2012 (1) 218.1
(1) The weighted average number of shares used to calculate adjusted Group MCEV per share and adjusted operating Group MCEV earnings per share do
not include preference shares.
During the period Old Mutual owned on average 54.6% of Nedbank. At 30 June 2012, the market capitalisation of Nedbank was R83.5
billion, equivalent to GBP6.5 billion (31 December 2011: R69.6 billion; GBP5.5 billion). On a constant currency basis, Nedbank's market
capitalisation increased by GBP1.1 billion from GBP5.4 billion at 31 December 2011, due to a 20% increase in share price over the
period.
Free surplus generation
The Group generated GBP381 million of free surplus (H1 2011: GBP521 million), of which GBP311 million (H1 2011: GBP312 million)
was generated by the LTS division. Covered business generated GBP251 million (H1 2011: GBP313 million). We expect the value of
our remaining in-force business will generate a surplus of about GBP1.5 billion over the next three years. Almost 60% of this surplus is
expected to come from Wealth Management.
Non-covered business generated GBP130 million (H1 2011: GBP208 million), with the reduction largely from banking where additional
capital was required to support the growing book.
Sources and uses of free surplus
Gross inflows from core and continuing operations were GBP554 million (H1 2011: GBP613 million) and new business investment was
GBP154 million (H1 2011: GBP202 million). Total free surplus generated from core operations of GBP381 million was lower than the
GBP554 million in H1 2011 due to higher transfers to Nedbank for operational capital requirements, lower experience variances
following the operating assumption changes made at the end of 2011 and rand depreciation.
Capital, liquidity and leverage
Debt strategy, activity profile and maturities
At 1 August 2012 the Group had repaid GBP1.05 billion of the initial GBP1.5 billion debt repayment target, including GBP110 million of
debt (net of debt raised) in 2010, GBP339 million of debt (net of debt raised) in 2011 and a further GBP603 million in the seven month
period to 1 August 2012. The Group intends to repay the remaining GBP0.45 billion of the initial targeted debt repayment during H2
2012, subject, where appropriate, to regulatory approval.
A further GBP200 million of debt will be repaid in due course, in accordance with the plans set out in the shareholder circular relating to
the Nordic sale. Any decisions regarding the repayment of further debt will take account of capital treatment and the economic impact of
the repayment and, where appropriate, will be subject to regulatory approval. We intend to use a total of GBP1.1 billion of the net
proceeds of the Nordic sale to reduce indebtedness.
During the first half of 2012 we repaid the remaining 200 million of the 750 million Eurobond. On 19 July 2012 the Group announced a
tender to repurchase debt for an aggregate consideration of GBP450 million across three instruments; being the GBP500 million Senior
maturing 2016, the 500 million Tier 2 callable 2015 and the GBP350 million Tier 1 callable 2020. The tender was subsequently
increased to GBP459 million, due to high demand, and was satisfied in its entirety against the first of these instruments on 1 August
2012.
In the medium-to-long term the Group has further first calls on debt instruments amounting to GBP637 million in 2015 and GBP350
million in 2020. In addition the Group has GBP112 million maturing in 2016, representing the amount outstanding on the Senior bond
following the tender, and a $750 million retail preferred instrument, which is callable quarterly at our option, subject to regulatory
approval. The GBP500 million 10 year Tier 2 bond issued in June 2011 matures in 2021.
Liquidity
At 30 June 2012, the Group had available liquid assets and undrawn committed facilities of GBP2.4 billion (31 December 2011: GBP1.5
billion). Of this GBP2.4 billion, available liquid assets at the holding company were GBP1.4 billion (31 December 2011: GBP0.4 billion);
a proportion of this was used to settle the tender of debt instruments on 1 August 2012.
Old Mutual will continue to execute its programme of cash realisations from previously announced intra-group restructurings. This will
enhance Old Mutual's future capital flexibility and liquidity.
In addition to the cash and available resources referred to above at the holding company, each of the individual businesses also
maintains liquidity to support its normal trading operations.
Group (excluding Nedbank) debt movements (IFRS basis) net of holding company cash
GBPm
H1 2012 H1 2011 FY 2011
Opening debt (net of holding company cash) (2,002) (2,436) (2,436)
Inflows from businesses 2,234 337 684
Outflows to businesses (503) (35) (57)
Holding company expenses and interest costs (137) (110) (233)
Change in cash from net repayment / issue of debt (144) 94 (339)
Gross debt raised - (500) (500)
Gross debt repaid 144 406 839
Debt repaid net of debt raised 144 (94) 339
Ordinary and special dividends paid (net of scrip (517) (29) (48)
dividend elections) by Group holding company
Other movements (13) (61) 88
Closing debt (net of holding company cash) (938) (2,334) (2,002)
Decrease/(increase) in debt (net of holding company
cash) 1,064 102 434
At a Group holding company level, net inflows from businesses improved from GBP302 million in H1 2011 to GBP1,731 million in H1
2012. The net inflows in H1 2012 included remittances arising from the sale of Nordic, Dwight and OMCap totalling GBP2,154 million.
In June 2012, the Group returned approximately GBP1 billion of the proceeds of the Nordic sale to ordinary shareholders via a Special
Dividend. The parent company paid around GBP0.5 billion, with the remainder paid to shareholders on the branch registers in Africa by
Old Mutual Life Assurance Company South Africa (OMLACSA) and the Group's other African life companies. OMLACSA funded these
payments through the sale of Old Mutual Holdings (Bahamas) Limited to Old Mutual plc. Consequently Group outflows to businesses
include the GBP0.5 billion contribution to the funding of the Special Dividend to South African shareholders.
The increase in cash consumed by holding company expenses and interest costs was primarily attributable to higher interest costs
associated with the 8% GBP500 million 10 year bond issued in June 2011 and an increase in share based payments.
Financial Groups Directive results
The Group's regulatory capital surplus, calculated under the EU Financial Groups Directive (FGD), at 30 June 2012 was GBP2.3 billion.
The surplus reflects the approval of the Group's Interim Financial Statements by the Group's auditors. The surplus was GBP2.0 billion at
31 December 2011. The GBP2.3 billion FGD surplus represented a coverage ratio of 168%, compared to 154% at 31 December 2011.
The FGD surplus was increased by GBP0.3 billion from the statutory profits of Emerging Markets and Wealth Management. The profit
on the sale of Nordic increased the FGD surplus by GBP1.6 billion. This was largely offset by the payment of GBP1.2 billion in special
and ordinary dividends on 7 June 2012.
The 30 June 2012 FGD surplus was reduced by GBP0.4 billion following the Bermuda Monetary Authority's (BMA) enactment of its new
Class E Prudential rules in December 2011. We have agreed with the BMA that our Bermuda business should now directly hold capital
resources comparable to those required under Solvency II, as calculated by the Group's existing internal capital model, which were
previously held centrally. The FGD rules require the Group to take account of local restrictions on capital resources in its Group FGD
surplus calculation. The internal movement in Group capital has had no impact on either the overall level of Economic Capital required
by the Group, which is the basis on which the Board manages capital and capital surplus planning, or on the Group's existing Economic
Capital buffer. The change to the Bermudan capital calculation had been anticipated in the plans agreed with the FSA for the recent
debt tender exercise.
The future level of capital required for the Bermuda business on both an economic and a regulatory basis will be influenced by the
extent and nature of the run-off of the book and the level of investment hedge in place.
The Group's subsidiary businesses continue to have strong local statutory capital cover.
Exposure to sovereign debt in Portugal, Italy, Ireland, Greece, Spain and France
At 30 June 2012 the Group had no direct exposure to the sovereign debt of Portugal, Italy, Ireland, Greece and Spain. The exposure to
French sovereign debt at 30 June 2012 was less than GBP0.5 million.
Corporate disposals and acquisitions and related party transactions
In addition to the sale of its Nordic operations to Skandia Liv for GBP2.1 billion, the Group also sold two of its US Asset Management
affiliates, Dwight and OMCap.
The Group announced the sale of its Finnish business to OP-Pohjola osk in December 2011. The process for the sale of this business,
which is managed as part of Skandia International, is proceeding well and is expected to be completed during Q3 2012.
The Group expects to complete the acquisition of Oceanic Life in Nigeria during Q3 2012.
In Zimbabwe, the Group has reached agreement with the Zimbabwe Ministry of Youth Development, Indigenisation and Empowerment
to implement an indigenisation plan. Under the terms of this agreement beneficial ownership of 25% of the equity of Old Mutual
Zimbabwe Limited will be transferred to beneficiaries, including certain clients, pensioners, staff, strategic partners and a youth fund.
The remaining 75% of the equity will be transferred to a subsidiary of Old Mutual South Africa, as part of the programme to align the
Group's organisational structure with its operational management. The initial consideration for the transfer will be R1.1 billion, with
deferred consideration of R0.5 billion potentially payable in 2015, subject to valuation. The initial and deferred consideration is subject to
regulatory approval. Old Mutual plc received a $15.0 million (GBP9.5 million) pre-tax dividend from the Zimbabwean business on 5 July
2012.
We expect to complete the transfer of the Group's Colombian and Mexican businesses to Old Mutual South Africa in 2012 for a
consideration of around GBP100 million, subject to regulatory approval. The new organisational structure will reflect the operational
management of the businesses. We continue to proceed with arranging the transfer of certain other emerging markets subsidiaries to
align their legal structure with their operational management.
In July 2012, a Group holding company recapitalised Old Mutual Bermuda in response to the new Bermudan solvency requirements.
The additional capital comprised of $250 million of new loan notes, $260 million of Group seed investments and cash of $61 million.
Previously capital required in respect of Bermuda was held within the holding company's resources.
Statutory Results
Reconciliation of Group AOP and IFRS profits
GBPm
H1 2012 H1 2011(1)
Adjusted operating profit 791 785
Adjusting items (145) 66
Non-core operations (including Bermuda)(2) 53 34
Profit before tax (net of policyholder tax) 699 885
Income tax attributable to policyholder returns 34 24
Profit before tax 733 909
Total tax expense (241) (178)
Profit from continuing operations after tax 492 731
Profit from discontinued operations after tax 595 150
Profit after tax for the financial year 1,087 881
Other comprehensive income (420) (499)
Total comprehensive income 667 382
Attributable to
Equity holders of the parent 546 340
Non-controlling interests
Ordinary shares 91 11
Preferred securities 30 31
Total non-controlling interests 121 42
Total comprehensive income 667 382
(1) The comparative period has been restated to reflect Nordic as discontinued.
(2) Non-core operations relates to Bermuda with the exception of GBP4 million of inter-segment revenue and the profit from discontinued operations after tax,
with these reflecting the results of Nordic.
Adjusting items
The key adjusting items excluded from AOP, but included in IFRS profits, were:
- A GBP64 million charge in respect of other acquisition accounting adjustments primarily relating to the remaining Skandia
businesses (i.e. excluding Nordic), which Old Mutual acquired in 2006 (mainly the amortisation of acquired present value of in-force
business); and
- A GBP49 million charge for short-term fluctuations in investment return, largely as a result of lower returns on cash and bonds in
South Africa.
For the results for the six months to 30 June 2012 the IFRS operating results of the African businesses of Zimbabwe, Kenya, Malawi,
Swaziland and Nigeria have been included in the Group's income statement and adjusted operating profit. These businesses were
consolidated for the first time for the year ended 31 December 2011. Related to this a profit equal to the net asset value of the
underlying businesses at 1 January 2011, being the fair value of the Group's investment in these operations for the assets and liabilities
acquired, was recognised in the IFRS profits. This profit was not included in adjusted operating profit for the six months to 30 June 2011
and the exclusion of this one-off gain from H1 2011 is the main driver in the difference in H1 2012 adjusting items compared to H1 2011.
Non-core business units - Bermuda
Bermuda remains a non-core business. Its results are excluded from the Group's IFRS AOP, although the interest charged on
intercompany loans from Bermuda to Group Head Office continues to be charged against AOP.
The IFRS post-tax profit for the period was $76 million (H1 2011: $76 million), driven by the Guaranteed Minimum Accumulation
Benefits (GMAB) performance, reflecting the positive impact of higher equity markets and gains on equity options. The total hedge gain
for H1 2012 was $61 million (H1 2011:$19 million), which included realised profits on the option hedging of $25 million.
The GMAB reserve in respect of universal guarantee option (UGO) contracts relates to the full period of the contracts, including the five-
year anniversary top-up of 105% of total premiums, the 10-year 120% top-up of total premiums and any high water mark contracts. The
UGO GMAB reserve decreased by $184 million since 31 December 2011 to $851 million, mainly due to improved overall equity market
performance and increased UGO surrenders over the second quarter. It was $794 million at Q1 2012.
Fifth anniversary payments began on 5 January 2012 and will continue through until August 2013. At 30 June 2012, the total cash cost
of fifth anniversary top-up payments to policyholders in respect of the UGO GMAB liabilities over the next 14 months was estimated at
$559 million (31 December 2011: $689 million; 31 March 2012: $463 million). The actual cash cost will be affected by any changes in
policyholders' account values until the fifth anniversary date of each policy, offset by hedge gains or losses.
In March 2012, Bermuda enhanced its hedging strategy by implementing a structured option-based hedging arrangement. This strategy
protects against the risk from further equity market declines increasing the cash cost of the fifth-year anniversary of UGO contract top-
up obligations, while maintaining the potential to realise gains if equity markets move higher.
The existing futures based dynamic hedging strategy remains in place for the variable annuity book exposure beyond five years. Also,
the exposure to currency movements impacting the UGO top-ups will continue to be dynamically hedged. At 30 June 2012 dynamic
hedge coverage was 38% over equities (31 December 2011: 54%) and 41% over foreign exchange (31 December 2011: 53%), with
interest rates remaining un-hedged (31 December 2011: nil).
Of total insurance liabilities of $4,138 million (31 December 2011: $4,831 million), $2,761 million (31 December 2011: $3,130 million)
was held in a separate account relating to variable annuity investments. Of the remaining reserves, $871 million (31 December 2011:
$1,061 million) relates to guarantee liabilities on the variable annuity business, and $506 million (31 December 2011: $640 million)
related to other policyholder liabilities (these liabilities include deferred and fixed indexed annuity business as well as variable annuity
fixed credited interest investments).
At the overall level of hedging in place at 30 June 2012, a 1% fall in equity market levels would have increased the GMAB reserve by
approximately $4 million net of hedging.
Our reserving assumes that surrender rates for contracts that have received a five-year anniversary top-up will be around 55% for the
non-Hong Kong book and 20% for the Hong Kong contracts. Rates have been higher on the first 3,600 contracts to reach their fifth
anniversary date, with around 70% surrenders on the non-Hong Kong book and 50% surrenders on the Hong Kong book. There were
28,098 active GMAB contracts at 30 June 2012.
There has been no change in the assumptions used to calculate the GMAB reserve at 30 June 2012. We will review the assumptions
again during H2 2012. If surrenders continued at the current rate, then the GMAB reserve at 30 June 2012 would have benefited by
between 10% and 15% from an assumption change.
Based on best estimates, the fifth anniversary top-ups can be met from Bermuda's own resources, without recourse to the intercompany
loan notes.
At 31 July 2012 fifth anniversary top-up payments to UGO GMAB policyholders was estimated at $468 million and the UGO GMAB
reserve was $758 million. Surrenders on contracts reaching their fifth anniversary guarantee continued at the same higher than
expected rate during July 2012.
Further information on Bermuda is included in the Business Review Appendix.
Income tax attributable to policyholder returns
Under IFRS, tax on policyholder investment returns is included in the Group's IFRS tax charge rather than being offset against the
related income. The impact is to increase IFRS profit before tax, with a corresponding increase to the IFRS tax charge. In the six
months to June 2012, tax on policyholder investment returns was GBP34 million (H1 2011: GBP24 million), GBP11 million attributable
to Wealth Management and GBP23 million attributable to Emerging Markets. In H1 2011, a pre-tax smoothing adjustment in respect of
Wealth Management's previous years' deferred tax assets gave rise to a profit of GBP16 million. No such gain was recorded in H1
2012.
Total tax expense
The effective tax rate (ETR) on AOP has increased from 24% in June 2011 (restated to exclude Nordic) to 27% in June 2012. Over 88%
of the 2012 AOP tax charge relates to Emerging Markets and Nedbank. Movements in these business units have a correspondingly
large impact on the Group's ETR. This increase was largely a result of:
- An increased proportion of AOP arising in Nedbank (51% in 2012, 46% in 2011), which has a higher ETR than the rest of the Group.
- A 2% increase in Nedbank's ETR to 28%, due to increased STC costs in 2012 and the impact of the increase in the capital gains tax
rate on deferred tax balances.
- A return to a more normal ETR of 24% (2011: 22%) in Emerging Markets. The lower rate in 2011 was due mainly to the release of
over-provisions in earlier years.
- These factors have been partially offset by reduced tax in Wealth Management, principally driven by the reduction in ETR at
Skandia UK, where market fluctuations resulted in exempt dividend income being allocated to the shareholder, and at USAM, where
the interest deduction had a larger impact than in the prior period.
Looking forward, and depending on market conditions and profit mix, we would expect the ETR on AOP in future periods to range
between 25% and 27%.
Discontinued operations Nordic
Profit from discontinued operations includes a GBP595 million profit on the disposal of Nordic in H1 2012. This was comprised of
GBP405 million profit from the transaction and GBP350 million of foreign exchange gains due to the recycling of foreign exchange
translation gains from other comprehensive income to the income statement. These gains were offset by losses on the unwind of SEK
hedging arrangements of GBP102 million, a tax charge of GBP8 million and expenses of GBP50 million associated with the transaction.
These included adviser fees and project costs incurred in migrating IT services, previously provided from the Nordic business to
alternative suppliers and locations.
H1 2011 included profits of GBP130 million from US Life.
Other comprehensive income
Other comprehensive income for the period was a loss of GBP420 million driven by the recycling of the foreign exchange reserves
associated with Nordic from other comprehensive income through the income statement and unrealised foreign exchange losses,
largely on the net asset value of the South African businesses.
Non-controlling interests
Non-controlling interests' share of total comprehensive income was GBP121 million (H1 2011: GBP42 million), mainly reflecting non-
controlling interests' share of Nedbank's profit.
Risk allocation and Solvency II
The Group's economic capital models form an important component of the risk exposure and limit-setting framework. Our economic
capital approach is based on market-consistent principles which also underlie the Solvency II framework. Through our dedicated
Solvency II project we have developed our economic capital models to meet Solvency II requirements. These models were embedded
during 2011 and continue to be enhanced both in terms of methodology and efficiency. The development of these models adds value to
risk-based decision-making by quantifying risk exposures, and enables overall decision-making to be better informed. We believe that
our economic capital approach facilitates better risk management which in turn allows the Group strategy to be more effectively
reviewed and challenged from a risk perspective and also to be aligned with the overall Group risk strategy.
Our models show a comfortable level of surplus capital over the Group solvency capital requirement (SCR). In carrying out stress tests
using adverse economic scenarios there was no plausible scenario that reduced the Group's capital below the SCR level. There remain
elements of the Solvency II framework which need to be finalised (e.g. equivalence, discount rate methodology, contract boundaries)
however, these will not threaten the group's regulatory solvency position.
In addition to delivering the economic capital model developments, the Solvency II project is working towards a submission to the FSA's
internal model approval process in line with our peers. There are continued delays in reaching agreement on aspects of Solvency II
across Europe, thus there is increasing risk of delay in the Solvency II timetable beyond 1 January 2014. Old Mutual is working to a half-
year 2013 deadline for the final internal model approval application and to a 1 January 2014 deadline for implementation. Old Mutual is
monitoring national implementation plans across each European country in which we have insurance entities, and note that the FSA is
also working towards these timelines. We believe that we are currently on track to deliver all requirements for Solvency II compliance.
Risks and uncertainties
A number of potential risks and uncertainties could have a material impact on Group performance and cause actual results to differ
materially from expected and historical results.
Old Mutual continues to operate in difficult economic conditions; however the overall profile of the Group is stable despite the current
turmoil in the eurozone, which continues to have ramifications for the global economy. Nonetheless, the Group continues to show that it
is resilient and well capitalised.
The most significant risks in the Group are similar to those previously reported, although priorities are changing slightly. In particular, the
LTS Wealth Management strategy and governance in readiness for RDR remains a top priority, although there are indications that part
of the regulatory changes may be delayed until 2014. The implementation of Solvency II requirements, which are not yet fully defined,
continues to consume considerable industry resources and Old Mutual is continuing with the delivery of the internal model application to
the FSA.
Whilst the current regulatory environment is stable, we expect to see a growing intensity of regulation over time.
There are some risks that are evolving, for example a greater proportion of unsecured credit risk and interest rate risk from a low
interest rate environment in our emerging markets businesses. The growing trend in scrutiny around governance is driving the need to
provide assurance that our businesses are delivering the desired regulatory outcomes. A number of our regulators continue in their
move towards a twin peaks regulatory model. We can see from the recent focus of our regulators that increased oversight of business
conduct will continue to be a key theme.
Growing regulatory focus on the product lifecycle will place greater demands on boards and compliance teams to provide assurance
that:
- ongoing monitoring of legacy product risks are being managed effectively; and
- our businesses are delivering on our commitments to customers, including customer service.
We continue to embed tools, methodology and improved processes and governance frameworks that will enhance the management and
monitoring of risk and capital to create value. Progress is continually driven by the Group's desire to enhance its risk management
practices and the appropriate behaviours to underpin them.
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. The Group is progressing in embedding the risk appetite
process by increased challenge on risks and management actions as part of the quarterly business reviews.
The Board of Directors believe that the Group has adequate resources to continue in operational existence for the foreseeable future.
Accordingly, they continue to adopt the going concern basis for preparing accounts.
Philip Broadley
Group Finance Director
8 August 2012
GBPm
Summarised financial information IFRS results (as reported) H1 2012 H1 20111 % Change
Basic earnings per share 19.2p 14.7p 31%
IFRS profit/(loss) after tax attributable to equity holders of the parent 931 738 26%
Sales statistics
Life assurance sales APE basis 561 637 (12)%
Life assurance sales PVNBP basis 4,122 4,909 (16)%
Value of new business 74 80 (7)%
Non-covered business sales (2) 6,861 6,582 4%
MCEV results (3)
Adjusted Group MCEV (GBPbn) 10.7 10.84 (1)%
Adjusted Group MCEV per share 218.1p 194.1p4 12%
AOP Group MCEV earnings (post-tax and non-controlling interests) 418 529 (21)%
Adjusted operating Group MCEV earnings per share 8.0p 9.8p (18)%
Financial metrics
Return on equity (annualised) (5) 12.9% 15.1%
Return on Group MCEV (3) 9.0% 11.0%
Net client cash flows (GBPbn) 3.4 (4.5) 176%
Funds under management (GBPbn) 263.0 269.44 (2)%
Interim dividend 1.75p 1.50p 17%
FGD (GBPbn) 2.3 2.0 15%
Net asset value per share 148.9p 155.1p (4)%
(1) The comparative period has been restated to reflect Nordic as discontinued.
(2) Includes mutual funds, unit trust and other sales.
(3) Includes Nordic and US Life.
(4) As at 31 December 2011.
(5) ROE is calculated as core business IFRS AOP (post-tax) divided by average ordinary shareholders' equity (i.e. excluding the perpetual preferred callable
securities).
GBPm
Group return on equity (1) H1 2012 H1 2011 FY 2012
AOP including accrued hybrid dividends core operations 416 445 855
Opening shareholders' equity excluding hybrid capital core operations 5,857 5,788 5,788
Half-year shareholders' equity excluding hybrid capital core operations 6,996 5,987 5,987
Closing shareholders' equity excluding hybrid capital core operations - - 5,857
Average shareholders' equity core operations 6,427 5,888 5,877
Return on average equity (annualised) 12.9% 15.1% 14.6%
(1) ROE is calculated as core business IFRS AOP (post-tax) divided by average ordinary shareholders' equity (i.e. excluding the perpetual preferred callable
securities).
GBPm
Group debt summary 30-Jun-12 31-Dec-11 30-Jun-11
Debt securities in issue at book value 507 507 539
Liquid assets held centrally (1,383) (441) (694)
Senior debt (net of holding company cash) (876) 66 (155)
Hybrid capital and preferred securities 1,146 1,146 1,146
Subordinated debt 747 876 1,447
Derivative (asset)/liability related to hybrid capital (79) (86) (104)
Total subordinated debt 1,814 1,936 2,489
Total debt (net of holding company cash) 938 2,002 2,334
Adjusted Group MCEV 10,660 10,794 11,840
Senior gearing (net of holding company cash) (7.6%) 0.5% (1.1%)
Total gearing 8.1% 15.6% 16.5%
GBPm
Book value of debt 30-Jun-12 31-Dec-11 30-Jun-11
MCEV basis 2,459 2,515 3,195
IFRS basis 2,400 2,529 3,132
GBPm
Interest cover1 H1 2012 FY 2011 H1 2011
Total interest cover 7.5 times 7.7 times 8.4 times
Hard Interest cover 1.7 times 1.7 times 2.1 times
(1) Total interest cover and hard interest cover ratios exclude Nordic profits in current and prior periods.
Business local statutory capital cover 30-Jun-12 31-Dec-11 30-Jun-11
OMLAC(SA) 3.6x 4.0x 4.1x
Mutual & Federal 1.5x 1.5x 1.5x
UK 2.9x 2.0x 5.1x
Nedbank (1,2) Core Tier 1: 10.6% Core Tier 1: 11.0% Core Tier 1: 10.7%
Tier 1: 12.1% Tier 1: 12.6% Tier 1: 12.4%
Total: 14.4% Total: 15.3% Total: 15.2%
Bermuda (estimated) 1.3x (3) 2.3x n/a
(1) This includes unappropriated profits.
(2) H1 2012 Nedbank capital ratios are calculated on a Basel II.5 basis. H1 2011 is calculated on a Basel II basis.
(3) Based on Bermuda's new regulatory regime, subject to approval of the Bermudan regulator.
30-Jun-12 31-Dec-111 30-Jun-11
Regulatory capital GBPm % GBPm % GBPm %
Ordinary Equity 5,024 87% 4,565 80% 4,902 80%
Other Tier 1 Equity 588 10% 593 10% 633 10%
Tier 1 Capital 5,612 97% 5,158 90% 5,535 90%
Tier 2 1,885 33% 1,903 33% 1,984 32%
Deductions from total capital (1,723) (30)% (1,360) 23% (1,403) (22)%
Total capital resources 5,774 100% 5,701 100% 6,116 100%
(1) Capital as reported to FSA. Numbers may vary slightly to those reported in Annual Report and Accounts 2011.
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 all the business units' net capital resources,
calculated as each 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 all the business units' capital requirements. 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 the Group's major business units have robust local solvency
surpluses, a number of them do not make a positive contribution to the Group's FGD position. The Group regulatory capital was
calculated in line with the FSA's prudential guidelines.
Business Review
Long-Term Savings
Continued operational delivery despite difficult market conditions, especially in UK and Europe
GBPm
H1 2012 H1 2011 H1 2011
Constant
Reported currency % Change Reported % Change
Long-Term Savings (1)
AOP (IFRS basis, pre-tax) 384 382 1% 414 (7)%
NCCF (GBPbn) 1.4 2.0 (30)% 2.0 (30)%
FUM (GBPbn) (2) 117.2 107.4 9% 108.5 8%
Life assurance sales (APE) 561 609 (8)% 637 (12)%
PVNBP 4,122 4,727 (13)% 4,909 (16)%
Non-covered sales (3) 6,517 5,353 22% 5,704 14%
Value of new business 74 76 (3)% 80 (8)%
APE margin 14% 13%
PVNBP margin 1.8% 1.6%
Operating MCEV earnings (covered business, post-tax) 204 282 (28)%
Adjusted MCEV (covered business) (2) 5,875 5,713 3%
Return on Embedded Value (4) 7.7% 10.0%
(VNB + Experience variance)/MCEV (covered business) (4) 3.0% 5.7%
GBPm
H1 2012 H1 2011 H1 2011
Constant
Reported currency % Change Reported % Change
Emerging Markets
AOP (IFRS basis, pre-tax) (5) 289 267 8% 299 (3)%
NCCF (GBPbn) 0.6 - n/a - n/a
FUM (GBPbn) (2) 51.7 48.8 6% 49.9 4%
Life assurance sales (APE) (6) 254 227 12% 255 -
PVNBP (6,7) 1,498 1,474 2% 1,656 (10)%
Non-covered sales (3) 3,851 2,888 33% 3,239 19%
Value of new business (6,7) 52 34 53% 38 37%
APE margin (6,7) 22% 15%
PVNBP margin (6,7) 3.5% 2.3%
Operating MCEV earnings (covered business, post-tax) 144 188 (23)%
Adjusted MCEV (covered business) (2,7) 3,331 3,167 5%
Return on Embedded Value (4,7) 10.2% 13.3%
(VNB + Experience variance)/MCEV(covered business) (4,6,7) 4.0% 7.4%
GBPm
H1 2012 H1 2011 H1 2011
Constant
Reported currency % Change Reported % Change
Wealth Management
AOP (IFRS basis, pre-tax) 95 115 (17)% 115 (17)%
NCCF (GBPbn) 0.8 2.0 (60)% 2.0 (60)%
FUM (GBPbn) (2) 65.5 58.6 12% 58.6 12%
Life assurance sales (APE) 307 382 (20)% 382 (20)%
PVNBP 2,624 3,253 (19)% 3,253 (19)%
Non-covered sales (3) 2,666 2,465 8% 2,465 8%
Value of new business 22 42 (48)% 42 (48)%
APE margin 7% 11%
PVNBP margin 0.8% 1.3%
Operating MCEV earnings (covered business, post-tax) 60 94 (36)%
Adjusted MCEV (covered business) (2) 2,544 2,546 -
Return on Embedded Value (4) 4.6% 7.0%
(VNB + Experience Variance)/MCEV (covered business) (4) 1.7% 4.3%
(1) The comparative period has been restated to reflect Nordic as discontinued.
(2) Comparative information for FUM and Adjusted MCEV (covered business) are presented as at 31 December 2011.
(3) Includes unit trust, mutual fund and other sales.
(4) RoEV and (VNB + Experience Variance)/MCEV (covered business) were calculated in local currency, except for LTS where they were calculated on a
reporting currency basis.
(5) H1 2012 includes Namibia, Zimbabwe, Kenya, Malawi, Swaziland, Nigeria and expenses associated with the central African team. Prior year comparatives
include Namibia and expense associated with the central African team only.
(6) Premiums in respect of MFC Credit Life sales have been included in APE sales for the first time in H1 2012 but are excluded from PVNBP and value of new
business.
(7) PVNBP, value of new business, APE margin and PVNBP margin represent Namibia only, i.e. exclude Zimbabwe, Kenya, Malawi and Swaziland (the other
African countries), in the current and comparative periods. The other African countries were also excluded from Adjusted MCEV per share in the comparative
period. The return on embedded value and (VNB + Exp Var)/MCEV metrics for the comparative period excluded the other African countries from opening
MCEV when calculated.
On a reported basis the Emerging Markets business accounts for: 75% of the LTS IFRS AOP earnings, 44% of LTS FUM and 45% of
LTS APE sales.
The analysis below is presented on a constant currency basis, save as noted below.
IFRS AOP results
- Overall LTS AOP increased 1% to GBP384 million.
- Emerging Markets AOP increased by 8% to GBP289 million, benefiting from improved mortality and disability experience,
strengthening of the Corporate Investment Guarantee Reserve in H1 2011 which was not repeated in H1 2012, the release of
margins in respect of legacy structured products in Retail Affluent and the consolidation of other African countries. This was partly
offset by less favourable persistency experience mainly due to the change in the persistency assumptions at the end of 2011, due to
persistency improvements in 2011, and an increase in central expenses due to higher share-based payment provisions and
increased investment in technology. In addition, certain external factors adversely impacted profitability in the South African retail
businesses, in particular the decrease in the 10-year government bond yield from 8.2% at December 2011 to 7.6% at June 2012,
which resulted in an increase in the present value placed on certain policyholder liabilities, and the impact of tax changes (increased
capital gains tax rate and the introduction of dividend withholding tax) on policyholder funds.
- Wealth Management AOP decreased by 17% to GBP95 million, with H1 2011 benefiting from policyholder tax prior year smoothing
of GBP16 million compared to nil in H1 2012. Excluding the impact of prior year policyholder tax smoothing underlying AOP
decreased by 4%, reflecting lower FUM related fees.
Net client cash flow (NCCF)
- Overall LTS NCCF decreased by GBP0.6 billion to GBP1.4 billion.
- Emerging Markets NCCF improved to GBP0.6 billion, with strong inflows into OMIGSA's Dibanisa and OMSFIN's Liability Driven
Investment boutiques while the prior period included a large PIC outflow of around GBP200 million (R2.4 billion). However, a PIC
outflow of GBP1.0 billion (R12.6 billion) from OMIGSA's Electus boutique took place in July 2012. There is now only an insignificant
amount of assets managed for the PIC in traditional asset classes.
- Wealth Management NCCF decreased to GBP0.8 billion, due to market uncertainty impacting sales levels. UK Platform NCCF was
GBP1.2 billion (H1 2011: GBP2.0 billion), reflecting a challenging market, advisers distracted by RDR and a subdued UK tax year-
end. Outflows in the UK Legacy business remain lower than anticipated. Total gross sales on the UK Platform were GBP2.2 billion
(H1 2011: GBP2.8 billion).
Funds under management
- Overall LTS FUM at 30 June 2012 was up 9% to GBP117.2 billion.
- Emerging Markets FUM increased by 6% to GBP51.7 billion, mainly due to a general improvement in equity markets and increased
NCCF supported by strong growth in life and non-life sales.
- Wealth Management FUM was up 12% to GBP65.5 billion, with positive NCCF, higher equity markets at the end of the period and
the addition of GBP3.9 billion of FUM for OMAM UK for the first time. FUM included UK assets of GBP34.2 billion (31 December
2011: GBP33.1 billion). Of the UK assets, UK Platform assets totalled GBP20.4 billion, an 8% rise from the 31 December 2011
level, further solidifying Wealth Management's position as one of the largest participants in this market.
Life sales summary
- Overall LTS APE sales decreased by 8% to GBP561 million.
- In Emerging Markets, South African regular premium sales increased by 18%, with strong performance in all segments. Continued
momentum in MFC sales delivered excellent growth of 22% as a result of a higher sales force, improved productivity and the
inclusion of OMF Credit Life sales of GBP8 million (R100 million) for the first time in H1 2012. Retail Affluent and Corporate sales
increased by 12% and 13% respectively.
- South African single premium sales decreased by 19%. Retail Affluent sales have been impacted mainly by lower fixed bond, living
annuity and guaranteed annuity sales, partly offset by legacy to new generation product conversions. Corporate single premium
sales in H1 2011 include a large inflation linked annuity transaction, which was not repeated in H1 2012.
- The consolidation of the other African countries increased APE sales by GBP10 million (R130 million).
- Sales in Asia & Latin America increased by 23%, benefiting from an increase in sales from savings products.
- Sales in Emerging Markets' Chinese joint venture, Old Mutual-Guodian increased by 68%, mainly due to strong regular premium
sales in the period.
- Wealth Management continued to grow its single premium business on the UK Platform. Platform sales totalled GBP118 million of
the total GBP147 million total UK sales on an APE basis.
- APE sales in the UK Legacy market were GBP29 million, a decrease of GBP17 million reflecting the managed reduction in product
range available and improved institutional sales.
- In the offshore International market, sales decreased by 21% to GBP84 million, with concern relating to the eurozone and
uncertainty surrounding our Qualified Recognised Overseas Pension Schemes (QROPS) proposition resulting in a decreased
demand for single premium offshore solutions.
- Sales in Wealth Management Europe decreased by 17% to GBP76 million, with a managed reduction in regular premium products
in certain markets.
Non-covered sales, including unit trust, mutual fund and other non-covered sales
- Overall LTS non-covered sales were up 22% to GBP6,517 million.
- In Emerging Markets, unit trust & mutual fund sales increased by 28% mainly due to higher OMUT and acsis sales. Strong sales in
money market and offshore products in the Colombian Unit Trust business are also being experienced. Other non-life sales
improved by 38%, mainly due to increased flows in OMIGSA's Dibanisa and Liability Driven Investment boutiques.
- In Wealth Management, UK mutual fund sales fell 21% to GBP1,460 million, reflecting weaker markets. International non-covered
sales included GBP474 million of sales from OMAM (UK) for the first time.
Margins and value of new business (as reported)
- Across LTS as a whole, new business APE margins increased to 14% from 13% and present value of new business premiums
(PVNBP) margin improved to 1.8% (H1 2011: 1.6%). The improvement was in Emerging Markets. Value of new business (VNB)
decreased by 3% to GBP74 million, with improved margin and increased sales volumes in Emerging Markets offset by lower sales
volumes in Wealth Management.
- In Emerging Markets, VNB improved strongly by 53% to GBP52 million, with a significant increase in the APE margin from 15% to
22%. The improvement in margin is mainly attributable to a change in persistency assumptions at December 2011, reflecting
improved persistency in 2011, and favourable changes in economic assumptions at December 2011, and the positive impact of
dividend withholding tax replacing Secondary Tax on Companies (STC). Improved product mix and expense control in Retail
Affluent and Corporate have further contributed to the increase in margins.
- In Wealth Management the APE margin decreased to 7% (H1 2011: 11%) and PVNBP margin decreased to 0.8% (H1 2011: 1.3%).
The VNB in Wealth Management reduced by GBP20 million to GBP22 million, driven by lower sales volumes and changes in the
sales mix away from International offshore products.
Operating MCEV earnings (as reported)
- Overall LTS operating MCEV earnings decreased by 28% to GBP204 million.
- In Emerging Markets, operating MCEV earnings (post-tax) decreased by 23% to GBP144 million. The main contributor to this
reduction was significantly lower positive operating experience variances. The good mortality experience from 2011 has continued
into the first half of 2012. However, the retention experience is significantly lower than in the prior period following the assumption
changes that were made in December 2011, the final releases in 2011 of previously established short-term termination provisions
and less favourable retail persistency in the first half of 2012. Despite the decrease in operating MCEV earnings, total MCEV
earnings (post-tax) increased by 22%, benefiting from positive economic variances due to a combination of earning higher than
assumed investment returns on policyholder and shareholder funds and a material reduction in swap and bond yields over the
period. Return on embedded value (RoEV) decreased from 13.3% to 10.2% due to decreased MCEV operating earnings.
- In Wealth Management MCEV operating earnings post tax decreased by GBP34 million to GBP60 million, resulting from lower new
business volumes and a positive modelling change in H1 2011 that was not repeated. RoEV decreased from 7.0% to 4.6% due to
decreased MCEV operating earnings.
Value creation (as reported)
- 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 expenses, persistency, risk and other experience compared to what had been assumed. This metric reduced to 3.0%
from 5.7% in LTS (excluding Nordic), reflecting lower VNB in Wealth Management and lower positive operating variances.
Outlook
- Emerging Markets continued its growth into Africa with the proposed acquisition of Oceanic Life in Nigeria, subject to regulatory
approval. We are well positioned to leverage our established business bases in South Africa, Namibia and Zimbabwe. Using our
expertise in these businesses we are able to design and export relevant products and low cost IT infrastructure.
- In South Africa we continue to support our advisers to pass the FAIS regulatory exams and we are comfortable with the progress we
have made in mitigating the risk to our sales and retention. The FSB has granted a concession to retail mass advisers who have not
passed the exams by the September and December due dates these advisers will be restricted from selling complex products
such as retirement annuities but will continue to be able to sell simple financial products.
- We continue to see good prospects to grow our businesses in South Africa and the rest of the emerging markets, however we
remain cautious about the outlook, in particular given slower GDP growth and lower long-term government bond yields in South
Africa and the risk of the eurozone crisis transmitting into Emerging Markets.
- The new management team at Wealth Management is focussed on the integration of operations into one business and growing the
asset management proposition following the combination of SIG and OMAM (UK) during the period. We expect that new business
sales in Wealth Management will remain challenging for the rest of the year given the macro-economic environment. Our focus will
continue to be towards business which has an inherently more attractive return signature. In the UK focus on readiness for RDR
compliance on 1 January 2013 is the main priority.
- We continue to make good progress on our preparations for RDR. In Q4 2012 we will launch our new flexible adviser charging
structure on the Platform and introduce a new unbundled' charging structure for clients, subject to final FSA rules on rebates. A
prototype of the new online process will be available from Q3 2012.
- The combination of Wealth Management's Continental Europe business and the Retail Europe business into Wealth Management
Europe has proceeded well during the first half of 2012. We continue to review the product portfolio and customer service offering
and are in the process of amending organisational structures accordingly.
- We anticipate the completion of the sale of our Finnish business in Q3 2012. Post-tax profits for the business were approximately
GBP12 million for 2011.
Long-Term Savings - Emerging Markets (rand)
Rm
Adjusted operating profit H1 2012 H1 2011 % Change
Retail Affluent 1,339 1,358 (1)%
Mass Foundation Cluster 481 802 (40)%
Corporate 591 67 782%
Rest of Africa1 226 84 169%
Asia & Latin America 79 97 (19)%
LTIR 784 575 36%
Life and Savings 3,500 2,983 17%
OMIGSA(2) 508 682 (26)%
Central expenses and administration (388) (318) (22)%
AOP (IFRS basis, pre-tax) 3,620 3,347 8%
(1) The current period includes Namibia, Zimbabwe, Kenya, Malawi, Swaziland, Nigeria and expenses associated with the central African team. Prior year
comparatives represent Namibia and expenses associated with the central African team only. Namibian AOP and central African expenses in H1 2012 were
R113 million.
(2) From H1 2012, Old Mutual Unit Trusts is reported as part of Retail Affluent only and no longer also as part of OMIGSA together with a subsequent
elimination within central expenses. Prior period comparatives have not been restated.
APE Sales
Rm
Single premium APE Gross regular premiums Total APE
H1 H1 % H1 H1 % H1 H1 %
By Cluster:
2012 2011 Change 2012 2011 Change 2012 2011 Change
South Africa
Mass Foundation Cluster 1 1 - 1,165 952 22% 1,167 953 22%
Retail Affluent 413 462 (11)% 725 647 12% 1,138 1,109 3%
Corporate 203 302 (33)% 232 205 13% 435 507 (14)%
OMIGSA 70 81 (14)% - - - 70 81 (14)%
Total South Africa 687 846 (19)% 2,122 1,804 18% 2,810 2,650 6%
Rest of Africa (1) 65 32 103% 235 108 118% 299 140 114%
Asia & Latin America (2) 11 10 10% 58 46 26% 69 56 23%
Total Emerging Markets 763 888 (14)% 2,415 1,958 23% 3,178 2,846 12%
Rm
Single premium APE Gross regular premiums Total APE
H1 H1 % H1 H1 % H1 H1 %
By Product:
2012 2011 Change 2012 2011 Change 2012 2011 Change
Emerging Markets
Savings 596 672 (11)% 1,118 1,014 10% 1,714 1,686 2%
Protection - - - 1,297 944 37% 1,297 944 37%
Annuity 167 216 (23)% - - 167 216 (23)%
Total Emerging Markets 763 888 (14)% 2,415 1,958 23% 3,178 2,846 12%
(1) APE sales include Namibia, Zimbabwe, Kenya, Malawi and Swaziland. Prior year comparatives represent Namibia only. Total Namibian life APE sales in
the current period amount to R169 million.
(2) Asia & Latin America represents Mexico only.
Non-covered sales
Rm
Unit trust / mutual fund sales Other non-covered sales Total non-covered sales
H1 H1 % H1 H1 % H1 H1 %
2012 2011 Change 2012 2011 Change 2012 2011 Change
South Africa 11,675 9,058 29% 23,285 17,277 35% 34,960 26,335 33%
Rest of Africa (1) 2,082 1,608 29% 1,355 166 716% 3,437 1,774 94%
Asia & Latin America 8,937 7,078 26% 880 988 (11)% 9,817 8,066 22%
Emerging markets 22,694 17,744 28% 25,520 18,431 38% 48,214 36,175 33%
(1) Rest of Africa includes Namibia, Zimbabwe, Kenya, Malawi and Swaziland. Prior year comparatives represent Namibia only. Total Namibian non-covered
sales in the current period amount to R2,192 million.
Rm
Old Mutual Finance H1 2012 H1 2011 % Change
Lending book (gross) 6,331 4,621 37%
Sales 2,974 2,324 28%
NPAT/average lending book 1 3.3% 2.5%
Loan approval rate 32.6% 41.0%
Impairments: average lending book 15.0% 13.3%
Branches 181 134 35%
Staff 1,612 1,235 31%
(1) Net profit after tax (NPAT)/average lending book is stated after capital charges.
H1 2012 sales reflected our conservative approach to lending, following evidence of increased client debt levels. Impairment provisions
rose compared to H1 2011. 191 new staff members were appointed during the period.
Long-Term Savings - Wealth Management (sterling)
APE sales
GBPm
Gross single premiums Gross regular premiums Total APE
H1 H1 % H1 H1 % H1 H1 %
2012 2011 Change 2012 2011 Change 2012 2011 Change
UK market
Pensions 928 1,084 (14)% 31 43 (28)% 124 151 (18)%
Bonds 187 244 (23)% - - - 18 25 (28)%
Protection - - - 4 4 - 4 4 -
Savings - - - 1 3 (67)% 1 3 (67)%
Total UK 1,115 1,328 (16)% 36 50 (28)% 147 183 (20)%
Of which UK Platform 1,007 1,160 (13)% 18 21 (14)% 118 137 (14)%
Of which UK Legacy 108 168 (36)% 18 29 (38)% 29 46 (37)%
International
Unit-linked 61 136 (55)% 7 17 (59)% 13 30 (57)%
Bonds 560 643 (13)% 15 12 25% 71 77 (8)%
Total International 621 779 (20)% 22 29 (24)% 84 107 (21)%
Wealth Management Europe
Unit-linked 507 556 (9)% 25 37 (32)% 76 92 (17)%
Total Wealth Management 2,243 2,663 (16)% 83 116 (28)% 307 382 (20)%
Non-covered sales(1)
GBPm
H1 H1 %
2012 2011 Change
Institutional 322 244 32%
Mutual Funds 610 883 (31)%
ISA 528 718 (26)%
Total UK market 1,460 1,845 (21)%
Of which UK Platform 1,138 1,602 (29)%
Of which UK Legacy 322 243 33%
International markets (2) 1,187 601 98%
Wealth Management Europe 19 19 -
Total Wealth Management 2,666 2,465 8%
(1) Non-covered sales includes unit trust, mutual fund and other non-covered sales.
(2) H1 2012 includes International sales of GBP474 million from OMAM (UK), which was transferred from USAM to
Wealth Management during the period.
Nedbank
Nedbank continued to build on the momentum created over recent years and to deliver on its key strategic focus areas
Rm
Highlights H1 2012 H1 2011 % Change
AOP (IFRS basis, pre-tax) 5,090 4,002 27%
AOP (IFRS basis) (pre-tax) (GBPm) 406 359 13%
Headline earnings(1) 3,468 2,772 25%
Net interest income(1) 9,642 8,683 11%
Non-interest revenue(1) 8,265 7,139 16%
Net interest margin(1) 3.53% 3.43%
Credit loss ratio(1) 1.11% 1.21%
Cost to income ratio(1) 55.5% 55.9%
Return on Equity(1) 14.1% 12.2%
Return on Equity (excluding goodwill)(1) 15.7% 13.7%
Core Tier 1 ratio(1,2) 10.6% 10.7%
(1) As reported by Nedbank in its report to shareholders for six months ended 30 June 2012.
(2) H1 2012 was calculated on Basel II.5 basis. H1 2011 was calculated on Basel II basis.
The full text of Nedbank's results for the six months ended 30 June 2012, released on 1 August 2012, can be accessed on our website
http://www.oldmutual.com/ir/pressReleases/viewPressRelease.jsp?pressItem_id=18484. The following is an edited extract:
Banking and economic environment
After a positive start to the year the global market environment worsened in the second quarter, led by the deepening recession in the
eurozone. Activity in major emerging markets such as China has also weakened and conditions in the USA remain tough.
Given that Europe, the USA and China are SA's largest trading partners, the growth of SA's gross domestic product (GDP) slowed to
2.7% in the first quarter of 2012, from 3.1% in 2011, following lower levels of production and exports.
Although the rate of domestic spending has declined, low interest rates continue to support the modest household demand for credit,
while transactional banking volumes remain favourable.
Corporate credit demand continued to improve in early 2012. However, since the second quarter, business confidence has weakened,
which could lead to the private sector delaying capital expenditure and focusing on efficiency rather than expansion.
Review of results
Nedbank performed well for the six months ended 30 June 2012 (the period') and made good progress in delivering on its key strategic
focus areas.
Nedbank achieved strong headline earnings growth of 25.1% to R3,468 million for the period (June 2011: R2,772 million). This was
driven by 11.0% growth in net interest income (NII), 15.8% growth in non-interest revenue (NIR), continued improvement in impairments
and responsible expense management combined with investment for growth.
Diluted headline earnings per share (DHEPS) increased 23.5% to 741 cents (June 2011: 600 cents) and diluted basic earnings per
share increased 24.9% to 747 cents (June 2011: 598 cents).
The increase in return on assets (ROA) to 1.07% and a slight decrease in gearing supported an increase in the return on average
ordinary shareholders' equity (ROE), excluding goodwill, to 15.7% (June 2011: 13.7%) and ROE to 14.1% (June 2011: 12.2%).
Nedbank generated an economic profit (EP) of R578 million (June 2011: R146 million).
The balance sheet remains well capitalised with the Basel II.5 core Tier 1 capital ratio at 10.6% (December 2011: pro forma 10.5%).
During the period Nedbank lengthened its liquidity duration, resulting in the long-term funding profile increasing to 27.0% (December
2011: 25.0%), while liquidity buffers were increased to R26 billion (December 2011: R24 billion).
Tangible net asset value per share grew by 10.1% (annualised) from 9,044 cents in December 2011 to 9,500 cents in June 2012.
Delivering value to all our stakeholders
The significant impact of unsound banking practices on the economic condition of many countries around the world is a salutary
reminder of the profound responsibilities that banks have as custodians of a nation's savings and as mobilisers of the efficient
deployment of capital in laying the foundation for economic growth and job creation activity to flourish.
The SA banking industry has further enhanced its historically strong reputation as a consequence of the long-established sound and
traditional banking practices adopted within a well-managed and regulated environment.
Nedbank continued to deliver on its vision of building Africa's most admired bank by all its stakeholders and making a positive
contribution to SA and the other countries in which we operate through our positioning as a bank for all, providing relevant banking
services to the broader population and offering great-value banking.
The highlights during this period with respect to each of our key stakeholders include:
- For staff: In striving to make Nedbank a great place to work we seek to have engaged employees who feel valued and able to
contribute and communicate fully our employee and corporate culture survey feedback is important and cultural entropy has
improved to worldclass levels of 10%; we have been rated an employer of choice among graduates; and we have invested in skills
development, with 1,100 managers undergoing Nedbank's personal mastery programmes and more than 500 employees
participating in our management development programmes and 134 graduates in our graduate development programme.
- For clients: We have paid out R69 billion in new loans; launched various new innovative solutions and products such as Approve-
it, MyFinancialLife, the Nedbank App Suite, the Nedbank 4 Me client value proposition, the Dezign Student Account, the Green
Savings Bond, Nedbank Small Business Friday and the revamped Simply Biz website; kept fee increases at or below inflation;
and increased our footprint by 76 new staffed outlets and 385 ATMs year-on-year. Over the past 12 months Nedbank Retail
increased its client base by 11.7% and Business Banking added 177 new transactional banking clients, while all the other clusters
continued to deepen client relationships.
- For shareholders: We have generated a 22.3% total shareholders' return; declared a half-year dividend of 340 cents per share;
delivered R578m EP; achieved a credit ratings upgrade from Fitch Ratings; and created significant value through our broad-based
black economic empowerment scheme by creating R4.4 billion in value since inception, R1.9 billion of which has vested. Nedbank
also received the Euromoney Best South African Bank 2012 award.
- For regulators: We have continued to strengthen capital and liquidity levels to remain well positioned for Basel III and the Solvency
Assessment and Management insurance regime; contributed to working groups on new regulation and made direct and indirect
cash taxation contributions of R3.3 billion for the period.
- For communities: We have achieved the No 1 ranking of JSE top 50 companies in the Financial Mail 2012 Top Empowered
Companies index; contributed R41m to social development; spent R2.9 billion on local procurement; launched the first Green
Savings Bond in SA; opened our third building with the 4-Star Green Star rating at Menlyn Maine; and won the Financial Times African
and Middle East Sustainable Bank of the Year 2012 award and the African Business Environmental Sustainability in Africa 2012
award.
Cluster performance
Headline earnings (Rm) ROE (%)
H1 2012 H1 2011(1) % change H1 2012 H1 2011(1)
Nedbank Capital 683 546 25.1% 24.1% 21.0%
Nedbank Corporate (2) 864 753 14.7% 22.2% 24.5%
Nedbank Business Banking 433 461 (6.1)% 20.5% 22.8%
Nedbank Retail 1,194 863 38.4% 11.8% 9.3%
Nedbank Wealth 356 288 23.6% 29.3% 25.4%
Operating units 3,530 2,911 21.3% 17.5% 16.1%
Centre (2) (62) (139) 55.4%
Total 3,468 2,772 25.1% 14.1% 12.2%
(1) H1 2011 restated for enhancements to capital allocation methodologies in 2012.
(2) Restated for transfer of the Rest of Africa Division from Nedbank Corporate to the centre.
Nedbank Capital's headline earnings grew 25.1% to R683 million (June 2011: R546 million). The results were mainly driven by NIR
growth of 42.4%, underpinned by strong growth in trading as well as fee and commission income, and partly offset by lower private
equity income. EP of R311 million and a ROE of 24.1% were achieved.
Nedbank Corporate grew headline earnings by 14.7% to R864 million (June 2011: R753 million) from strong growth in NIR,
transactional activity and deposits, together with reduced impairments. ROE of 22.2% was achieved as a result of an improvement in
the ROA to 1.03%, and the cluster grew EP to R353 million.
While sustaining a high ROE of 20.5%, Nedbank Business Banking's 6.1% reduction in headline earnings and lower EP for the period of
R156 million are reflective of the challenging economic cycle adversely impacting the small- and medium-enterprise (SME) sector. Good
progress was made in new client acquisitions and cross-sell, while maintaining outstanding risk management practices reflected in the
credit loss ratio of 0.41%.
Nedbank Retail's accelerating momentum is reflected in 38.4% headline earnings growth and improving ROE to narrow the gap in
relation to the cost of equity. This is testimony to the excellent progress strategically and financially in repositioning the cluster. Diligent
execution of the distinctive client-centred growth strategy and effective risk management practices resulted in strong client gains,
increased transactional and lending volumes, and lower impairments, while also further strengthening balance sheet impairments and
expanding distribution.
Nedbank Wealth generated strong earnings growth of 23.6% to R356 million (June 2011: R288 million). NII increased 8.4% supported
by international wealth management and BoE Private Clients increasing NII 19.7% and 13.4% respectively. Further support came from
good insurance earnings growth of 39.1% and total assets under management increasing 18.3% to R125.5 billion.
The Rest of Africa Division delivered a strong increase in headline earnings of 60.5%. This division was previously housed in Nedbank
Corporate and is now managed at Nedbank Group level, with earnings included in headline earnings at the centre.
Further segmental information is available on Nedbank's website at www.nedbankgroup.co.za under the Financial information' section.
Financial performance
Net interest income (NII)
NII grew 11.0% to R9,642 million (June 2011: R8,683 million), underpinned by 7.7% (annualised) growth in average interest-earning
banking assets (June 2011: 5.9%).
The net interest margin (NIM) increased to 3.53% from the comparative period (June 2011: 3.43%) and the full 2011 year (December
2011: 3.46%), supported by sustained momentum in asset mix changes, offset by the cost of lengthening the liquidity profile and holding
higher liquid asset buffers.
Impairments charge on loans and advances
Nedbank's credit loss ratio continued to improve to 1.11% (June 2011: 1.21%) from reduced levels of specific impairments, driven by
better asset quality, reduced defaulted advances, higher levels of repayments and improved risk management. Portfolio impairments of
11 basis points included the strengthening of balance sheet impairments on the performing home loans and personal loans book.
(%)
Credit loss ratio analysis H1 2012 FY 2011 H1 2011
Specific impairments 1.00% 1.02% 1.10%
Portfolio impairments 0.11% 0.12% 0.11%
Total credit loss ratio 1.11% 1.14% 1.21%
Nedbank Retail and Nedbank Corporate were the main drivers of the group's improved credit loss ratio. In Nedbank Retail home
loan impairments continued to improve, while bad debt recoveries increased from effective collection processes. Nedbank
Capital's impairments charge reflects the increasing pressures in the operating environment.
(%)
% banking Through-the-
advances cycle target
Credit loss ratio H1 2012 H1 2011 FY 2011 ranges
Nedbank Capital 10.1% 1.41% 0.86% 1.23% 0.10 0.35
Nedbank Corporate (1) 32.2% 0.30% 0.35% 0.29% 0.20 0.35
Nedbank Business Banking 12.1% 0.41% 0.40% 0.54% 0.55 0.75
Nedbank Retail 39.7% 2.00% 2.24% 1.98% 1.50 2.20
Nedbank Wealth 4.0% 0.46% 0.41% 0.25% 0.20 0.40
Total 1.11% 1.21% 1.14% 0.60 1.00
(1) The Rest of Africa Division was previously reported in Nedbank Corporate and is now reported at the centre.
Defaulted advances declined 14.1% from R25,418 million at June 2011 and 9.6% (annualised) from R22,928 million at December 2011
to R21,838 million. Nedbank's total coverage ratio increased from 50.1% at December 2011 to 52.9%, and portfolio provisions of R200
million raised at the centre in the prior year were not released.
Non-interest revenue (NIR)
NIR grew strongly, increasing by 15.8% to R8,265 million (June 2011: R7,139 million), clearly demonstrating the inherent strength of the
Nedbank franchise and the increasing number of South Africans choosing to bank with Nedbank. NIR growth was primarily driven by:
- good growth in commission and fee income of 14.6% from increases in transactional and lending volumes, net client acquisitions
while keeping fee increases at or below the inflation rate and deepening cross-sell across the client base;
- excellent growth in insurance income of 29.2% from increased sales and a positive claims experience; and
- trading income growing 35.9% following strong performance in the fixed-income, credit and commodities (FICC) business in the
Global Markets Division of Nedbank Capital.
Private equity income increased slightly to R139 million (June 2011: R137 million), following strong realisations in Nedbank Capital
mostly offset by prudent valuations of unrealised investment portfolios as well as lower dividend income received in both Nedbank
Capital private equity and Nedbank Corporate property private equity. Negative fair-value adjustments of R125 million (June 2011: R61
million profit) were recorded in the designated-asset-and-liability hedged portfolios.
The NIR-to-expenses ratio continued to increase to 83.2% (December 2011: 81.5%), boosted by the strong growth in NIR. Nedbank is
showing excellent progress towards the medium-to-long-term NIR-to-expenses target of 85.0%.
Expenses
Nedbank maintained good cost discipline, resulting in an improved NIR-to-expenses growth delta of 3.3% and a slight improvement in
the efficiency ratio to 55.5% (June 2011: 55.9%).
Expenses increased 12.5% to R9,939 million (June 2011: R8,838 million), comprising 7.0% relating to business-as-usual activities,
2.1% relating to growth initiatives and 3.4% relating to variable compensation.
The main contributors to the increase in expenses were:
- remuneration costs increasing 11.1% mostly from headcount growth of 1.7% and inflation-related annual salary increases of 6.5%;
- short-term incentive (STI) costs increasing 46.6% due to the 25.1% increase in headline earnings and just under 300% increase in
EP, as well as the heavier phasing of the 2011 STI accrual into the second half of 2011, and as such the growth rate should be
more in line with earnings growth for the full year;
- long-term incentive costs increasing by R67 million to R198 million, as 2011 contained reversals of costs for the period from 2009 to
2011 when certain of the associated corporate performance targets were not met and the related incentive awards lapsed; and
- volume-driven costs, such as computer processing, card and marketing costs, growing in support of revenue-generating business
activities.
Taxation
The taxation charge and effective tax rate increased to R1,399 million (June 2011: R1,013 million) and 27.9% (June 2011: 25.7%)
respectively. This was mainly the result of:
- an increase in capital gains tax (CGT) from 14.0% to 18.65%; and
- an increase in secondary tax on companies (STC) of R86 million, compared with 2011, from a reduction in available STC credits
due to the termination of the STC regime effective 1 April 2012 and the full H2 2011 dividend being subjected to STC.
Statement of financial position
Capital
Nedbank implemented Basel II.5 capital criteria with effect from 1 January 2012. In line with the pro forma ratio disclosed to the market
the 2011 year-end Basel II core Tier 1 capital ratio of 11.0% decreased to 10.5% under Basel II.5.
Strong organic earnings, partially offset by the distribution of Nedbank's final 2011 dividend in April 2012 and growth in advances,
resulted in Nedbank's Basel II.5 core Tier 1 capital ratio in June 2012 increasing to 10.6%. Capital ratios are anticipated to increase
further during the remainder of 2012 as a result of ongoing risk-weighted asset optimisation initiatives and earnings growth.
The draft SA regulations incorporating the impact of Basel III have been issued, although some key aspects still have to be finalised.
Overall Nedbank remains in a strong position to meet the draft capital requirements as currently anticipated. Revised internal targets
incorporating Basel III will be communicated to the market once the regulations have been finalised.
(%)
30-Jun-12 31-Dec-11 30-Jun-11 Internal
ratio ratio ratio target range
(Basel II.5) (Basel II) (Basel II) (Basel II)
Core Tier 1 ratio 10.6% 11.0% 10.7% 7.5 to 9.0
Tier 1 ratio 12.1% 12.6% 12.4% 8.5 to 10.0
Total capital ratio 14.4% 15.3% 15.2% 11.5 to 13.0
(Ratios calculated include unappropriated profits.)
Further details will be available in Nedbank's 30 June 2012 Pillar 3 Report released on 17 September 2012 and published on Nedbank's
website at www.nedbankgroup.co.za.
Capital allocation to businesses
Enhancements relating to the internal economic capital allocation to line clusters included an upward revision to the amount of capital
allocated to the clusters from 10.0% to 11.0%. Enhancements were also made to the allocation of capital impaired against intangible
assets, previously held at the centre. These enhancements resulted in a dilution of the line clusters' ROE performance, given higher
capital levels. Headline earnings and ROE numbers for the line clusters for the comparative period were restated on a like-for-like basis.
These enhancements had no impact on Nedbank's overall headline earnings, capital levels and ROE ratio.
Funding and liquidity
Nedbank remains well funded, with a strong liquidity position, underpinned by a further lengthening of its funding profile, growth of the
deposit base, a strong loan-to-deposit ratio of 95.6% and a low reliance on interbank and foreign currency funding.
The average long-term funding ratio increased to 27.0% (June 2011: 26.1%; December 2011: 25.0%), supported by the successful
issuance in March 2012 of R1.7 billion senior unsecured debt, strong growth in the Nedbank Retail Savings Bond to R5.9 billion since its
launch in March 2011, and the recent launch of the Green Savings Bond. Growth in the surplus liquid asset buffer to R26 billion for
June 2012 (June 2011: R16 billion; December 2011: R24 billion) also contributed to a stronger liquidity position.
The South African Reserve Bank (SARB) announcement during the period that SA banks would have access to committed liquidity
facilities (CLFs) of up to 40% of the Basel III liquidity coverage ratio (LCR) net cash outflows to meet LCR requirements in 2015 has
been positively received by the market and is in line with the approaches implemented in other similar markets. This provides clarity on
how the LCR will be adopted by SA banks given the limited availability of level 2 assets in SA and is favourable for credit extension and
economic growth in SA.
Loans and advances
Nedbank loans and advances grew 7.1% (annualised) to R514 billion (December 2011: R496 billion).
Loans and advances by cluster are as follows:
Rm
% Change
30-Jun-12 31-Dec-11 (annualised)
Banking activity 49,538 48,558 4.1%
Trading activity 30,674 19,952 >100%
Nedbank Capital 80,212 68,510 34.3%
Nedbank Corporate 156,537 155,010 2.0%
Nedbank Business Banking 59,061 58,272 2.7%
Nedbank Retail 187,577 183,663 4.3%
Nedbank Wealth 19,053 19,624 (5.9)%
Other 11,086 10,969 2.1%
Total 513,526 496,048 7.1%
During the period gross new advances payouts increased to R69 billion (six months to June 2011: R52 billion).
Overall advances growth continues to be shaped by Nedbank's portfolio tilt strategy of focusing on business activities that generate
higher EP. Nedbank Retail's advances growth was underpinned by strong growth in personal loans, credit card business and motor
finance, partially offset by a slight decrease in home loans following the retail home loans strategy of positioning Nedbank Retail as the
primary client interface with differentiated risk-based pricing. The environment for Nedbank Business Banking's SME clients remains
challenging and has impacted demand for credit and the risk profile of this market segment. Nedbank Corporate's advances growth of
2.0% comprises advances growth of 6.4% in Corporate Banking and a decrease of 1.0% in Commercial Property Finance. The pipelines
in the wholesale banking areas remain strong, although growth in the second half of the year is likely to be affected by weak global
market conditions and lower levels of business confidence.
Deposits
Deposits increased 6.1% (annualised) to R537 billion (December 2011: R521 billion).
In line with Nedbank's funding strategy of lengthening the term deposit book and optimising the mix of deposits, call and term deposits
increased 8.1% and cash management deposits grew 23.0%. Negotiable certificates of deposit (NCDs) decreased 11.9%.
Given the challenging environment with interest rates at 38-year lows, current accounts decreased 5.1% and savings accounts showed
moderate growth of 6.6%.
Economic outlook
The difficult global macro environment and recession in Europe have led to softer GDP growth in key emerging markets including SA.
SA's GDP is now forecast to grow by 2.5% in 2012 as a result of lower production and weaker exports in agriculture, manufacturing and
mining. Interest rates are at 38-year lows and are expected to remain flat for the rest of the year, however, there is downside risk should
there be a further slowdown in economic growth rates.
Lower levels of real wage growth and increased concerns around job security are anticipated to result in decreased consumer spending.
Consumer credit demand should continue to grow, but is at risk of slowing down given decreasing levels of consumer confidence.
Business confidence remains weak, with the private sector remaining cautious and continuing to delay capital expenditure. Government
and the public sector still have robust infrastructure plans, and, if implemented, are expected to support wholesale advances growth.
Prospects
In the light of Nedbank's 2012 forecast for GDP growth and interest rates, Nedbank's financial guidance for the full year is currently as
follows:
- Advances growth at mid single digits.
- NIM to increase slightly from the 3.46% level for the 2011 full year.
- The credit loss ratio to continue improving to within the upper end of Nedbank's target range of 0.60% to 1.00%.
- NIR (excluding fair-value adjustments) to grow at low double digits, maintaining ongoing improvements in Nedbank's NIR-to-
expenses ratio.
- Expenses, including investing for growth, to increase by mid to upper single digits.
- Nedbank to maintain strong capital ratios and continue to strengthen funding and liquidity in preparation for Basel III.
Nedbank's financial guidance for 2012 as set out above remains largely unchanged from that given earlier in the year, with the
exception of an upward revision of the margin, which was previously expected to remain at the December 2011 level of 3.46% and is
now anticipated to be slightly above this level.
The SARB is expected to finalise Basel III capital levels for SA banks in the second half of 2012. Once the Basel III capital levels have
been set, Nedbank will be in a position to finalise its Basel III capital targets, review the current dividend policy of 2.25 to 2.75 times and
communicate this to the market at the release of the 2012 annual results.
Building on the growth momentum from the first half of 2012, Nedbank remains on track to achieve its earnings growth for the year in
line with its medium-to-long-term financial target (GDP plus consumer price index (CPI) plus 5%).
Mutual & Federal
Solid performance in a soft market
Rm
Highlights H1 2012 H1 2011 % Change
Underwriting margin 2.5% 5.3%
Underwriting result 91 184 (51)%
Long-term investment return (LTIR) 300 316 (5)%
AOP (IFRS basis, pre-tax) 426 527(1) (19)%
Gross written premiums 4,607 4,361 6%
Net earned premiums 3,710 3,448 8%
Claims ratio 67.2% 64.6%
Combined ratio 97.5% 94.7%
International Solvency ratio 65.3% 63.5%
Return on equity 12.0% 15.8%
(1) H1 2012 included 50% of the losses incurred by iWyze, M&F's direct insurance joint venture with Emerging Markets, the remaining 50% was recognised in
Emerging Markets. H1 2011 included 100% of the losses incurred by iWyze.
Overview
- M&F delivered strong policy count growth during the period, supported by improved service levels and competitive rates.
- Gross written premiums grew 5.6%. We continued to focus on premium growth in our alternative distribution channels, including
underwriting management agencies and direct through iWyze.
- The company remains well capitalised with a 65% international solvency ratio (the ratio of net assets to net premiums). We continue
to make good progress in our preparation for Solvency II and its South African equivalent, Solvency Assessment and Management
(SAM).
Underwriting and IFRS AOP results
- The underwriting margin of 2.5% (2011: 5.3%) was impacted by increased claims and lower rates but benefited from the
containment of costs.
- AOP was 19% down due to a decrease in the underwriting result and a marginal decrease in the LTIR due to the lower prescribed
rate applied in 2012.
- ROE decreased from 15.8% to 12.0% reflecting the reduction in underwriting profit.
- Claims in H1 2012 were impacted by three large fire claims in the Commercial division.
- Expenses were well managed and the variance was well below inflation.
- The Credit Guarantee operation and the operations in the rest of Africa continued to perform strongly.
Outlook
- Evidence from the market in South Africa indicates a marked softening in rates which will impact margins at this stage of the
underwriting cycle.
- We will continue to focus on cost containment and managed premium growth in the second half of 2012, particularly through
increased contributions from alternative channels. The benefits from the change program have seen an improvement in our service
levels, which we anticipate will continue to contribute to policy count growth.
- We will continue to partner Old Mutual Emerging Markets in the rest of Africa to identify opportunities and exploit synergies.
US Asset Management
Continuing operations generated 7% growth in FUM and operating margin of 26%
$m
Highlights H1 2012 H1 2011 % Change
Reported results(1)
AOP (IFRS basis, pre-tax) 66 65 2%
Operating margin, before non-controlling interests 24% 20%
Operating margin, after non-controlling interests 20% 17%
Net client cash flows ($bn) 2.5 (10.4) 124%
30-Jun-12 31-Dec-11 % Change
Funds under management ($bn) (1) 208.1 231.5 (10)%
$m
H1 2012 H1 2011 % Change
Results from continuing operations (1)
AOP (IFRS basis, pre-tax) 70 71 (1)%
Operating margin, before non-controlling interests 26% 25%
Operating margin, after non-controlling interests 22% 22%
Net client cash flows ($bn) 3.5 (3.2) 209%
30-Jun-12 31-Dec-11 % Change
Funds under management ($bn) (1) 208.1 194.1 7%
(1) H1 2011 and 2012 amounts from continuing operations exclude OMAM (UK), which was transferred to Wealth Management during the period. H1 2012
reported results include one quarter of OMAM (UK) NCCF. H1 2011 reported results include OMAM(UK), but have been restated to exclude seed gains,
which are now captured at the Group level.
IFRS AOP results and operating margin
Reported results
- IFRS AOP was up 2% to $66 million (H1 2011: $65 million), with lower restructuring costs, lower variable compensation and
reduced operating expenses incurred in connection with affiliates disposed of during the period.
- AOP operating margin before non-controlling interests increased to 24% (H1 2011: 20%), largely due to the divestiture of several
affiliate firms since H1 2011.
Results from continuing operations
- Continuing operations excludes the results of OMCap, Lincluden, Dwight Asset Management and OMAM (UK), as well as $1.0
million of restructuring costs in H1 2012 and $6.5 million in H1 2011.
- IFRS AOP from continuing operations of $70 million was generally flat (H1 2011: $71 million).
- Management fees were down 4% versus H1 2011. While average AUM was broadly unchanged, our asset mix has shifted toward
fixed income over the past 12 months, which generally has a lower revenue yield. Performance fees increased $12.1 million to
$13.3 million.
- AOP operating margin before non-controlling interests improved 100 basis points to 26%, due to lower share based payment
expenses and sales commissions.
Investment performance in continuing operations
- For the one-year period ended 30 June 2012, 76% of assets outperformed benchmarks, compared to 86% at 30 June 2011.
- Over the three- and five-year periods to 30 June 2012, 55% and 62% of assets outperformed benchmarks, compared to 48% and
56% at 30 June 2011.
Funds under management and net client cash flows
$bn
Flows from disposed
Flows from continuing of or held for sale
operations affiliates Total
H1 2012 H1 2011 H1 2012 H1 2011 H1 2012 H1 2011
Opening FUM 194.1 200.3 37.4 58.0 231.5 258.3
Gross inflows 15.9 11.8 1.3 2.9 17.2 14.7
Gross outflows (12.4) (15.0) (2.3) (10.1) (14.7) (25.1)
Net outflows 3.5 (3.2) (1.0) (7.2) 2.5 (10.4)
Disposals - - (30.8) - (30.8) -
Transferred to Wealth Management - - (6.2) - (6.2) -
Market and other 10.5 10.4 0.6 0.9 11.1 11.3
Closing FUM 208.1 207.5 - 51.7 208.1 259.2
Reported results
- FUM ended the period at $208.1 billion (31 December 2011: $231.5 billion).
- The disposal of Dwight Asset Management Company LLC during the period reduced FUM by $30.2 billion, while the disposal of
OMCap reduced FUM by $0.6 billion.
- NCCF totalled $2.5 billion (H1 2011: $10.4 billion outflow), relating mostly to continuing operations.
Results from continuing operations
- FUM increased $14.0 billion or 7% to $208.1 billion (31 December 2011: $194.1 billion) driven by $10.5 billion of market
appreciation and $3.5 billion of positive net client cash flows. Positive market returns and enhanced investment performance in the
first quarter of 2012 were partially offset by increasingly volatile markets experienced in the second quarter.
- FUM consists primarily of long-term investment products diversified across equities ($114.5 billion, 55%), fixed income ($62.4
billion, 30%) and alternative investments ($31.2 billion, 15%).
- Net client cash inflows of $3.5 billion improved over the comparative period (H1 2011: $3.2 billion outflow), with positive NCCF in Q1
offset by net client cash outflows in Q2.
- Gross inflows totalled $15.9 billion (H1 2011: $11.8 billion), primarily relating to lower-fee US and global fixed income products.
$5.5 billion of gross inflows came from new client accounts.
- Gross outflows totalled $12.4 billion (H1 2011: $15.0 billion), driven primarily by outflows from US and international equities,
alternatives, and global fixed income products.
- Non-US clients currently account for 33% of FUM (31 December 2011: 34%). International equity, emerging markets, global equity,
and global fixed income products account for 48% of the FUM (31 December 2011: 46%).
Corporate developments
- The sale of USAM's fixed income affiliate, Dwight Asset Management Company LLC, to Goldman Sachs Asset Management closed
on 15 May 2012.
- As previously announced, the sale of USAM's domestic retail business, OMCap, to Touchstone Investments closed on 13 April
2012, with USAM affiliates continuing to sub-advise 13 of the 17 mutual funds that were part of the transaction.
- In June 2012, we announced additional executive appointments and organisational changes to further align USAM's executive
structure with its strategic objectives. Key among these was the appointment of Linda Gibson as Head of Global Distribution. In her
new role, Ms Gibson will advance USAM's strategy of building core institutional distribution capabilities in global markets to
meaningfully contribute to our affiliates' global expansion efforts. Aidan Riordan, previously Senior Vice President and Director of
Affiliate Management, will succeed Ms Gibson as Head of Affiliate Management.
Outlook
- Net client cash flows should remain positive in aggregate for 2012, assuming a stable market environment and positive trends in
investment performance continue.
- Following the recent divestiture of several affiliate firms and assuming a continuation of positive net client cash flows and investment
performance, USAM expects to achieve its continuing operating margin target of 25-30% for 2012, pre non-controlling interests and
excluding seed gains/losses.
Non-core business Bermuda (additional disclosures)
Bermuda remains a non-core business. Its results are excluded from the Group's IFRS AOP, although the interest charged on internal
loans from Bermuda to Group Head Office is charged to AOP.
MCEV results
- The 2012 operating MCEV earnings resulted in a gain after tax of $35 million (H1 2011: $15 million). The improvement was mainly
due to higher than expected lapses on the UGO business.
- Total MCEV earnings including economic variances and other non-operating variances was a gain of $118 million (H1 2011: $37
million), primarily due to an improvement in capital markets.
Reserve development
The sensitivity to capital markets on UGO GMAB contracts is highlighted in the table below, showing quarterly UGO GMAB reserves
and estimated fifth-anniversary guarantees over the past 24 months:
$m
Guarantee Estimated top-up payment of
reserves for meeting UGO GMAB fifth-
Period UGO GMAB anniversary guarantees (1)
30-Jun-10 996 775
30-Sep-10 824 458
31-Dec-10 660 334
31-Mar-11 573 303
30-Jun-11 620 346
30-Sep-11 1,144 738
31-Dec-11 1,035 689
31-Mar-12 794 463
30-Jun-12 851 559
(1) Estimated cash cost before gains on hedge options.
Policyholder account values
The development of the Bermuda policyholder account values are shown below:
$m
Period 30-Jun-12 31-Dec-11 % Change
Account Value: GMAB 2,495 2,858 (13)%
Account Value: Non-GMAB 772 912 (15)%
Total Account Value 3,267 3,770 (13)%
- There were $648 million of surrenders across the whole Bermuda book (H1 2011: $732 million), amounting to 15% of the total 31
December 2011 account value. The decrease in 2012 is primarily attributable to initiatives allowing UGO contract holders to
surrender their contracts without penalty charges in 2011.
- A total of 2,039 UGO contracts were surrendered (H1 2011: 2,020 contracts), amounting to approximately 7% of total UGO
contracts. 3,633 UGO contracts reached their fifth anniversary, of which 1,888 were surrendered.
- Our reserving assumes that surrender rates for contracts that have received a five-year anniversary top-up will be around 55% for
the non-Hong Kong book and 20% for the Hong Kong UGO contracts. Rates have been higher on the first 3,600 contracts to reach
their fifth anniversary, with around 70% surrenders for the non-Hong Kong book and 50% for the Hong Kong book.
Risk management and investment portfolio update
- Overall, the book value of the fixed income portfolio reduced from $0.6 billion at 31 December 2011 to $0.5 billion at 30 June 2012,
largely due to the sale of investments to meet surrender activity and withdrawals.
- The net unrealised position on the investment portfolio was a gain of $29 million (31 December 2011: $29 million gain) with some
portfolio re-structuring undertaken to reduce bank exposure.
- There have been no investment losses and no impairment or credit defaults in the period.
- The portfolio has a current average rating of A3 (Moody's rating scale) with investment grade quality holdings continuing to
represent more than 80% of the portfolio.
- The book value of assets in the investment portfolio with a market value to book value ratio of 80% or lower was zero (compared to
zero at 31 December 2011).
- The bond portfolio which forms part of shareholder assets is invested to match the duration of obligations to policyholders and has a
running yield of 5%, higher than the 3% interest credited to certain policyholders.
Treasury management of Bermuda business assets
The Bermuda business assets backing the liabilities include:
$m
30-Jun-12 31-Dec-11 % Change
Cash 154 256 (40)%
Fixed income general account portfolio 506 543 (7)%
Collateral for hedge assets 22 91 (76)%
Intercompany loan 780 830 (6)%
Separate Account assets 2,761 3,130 (12)%
Other assets 397 309 28%
Total Assets 4,620 5,159 (10)%
- As the most active period of the fifth anniversary guarantee payments approaches, the business will seek to sell assets from its
fixed income portfolio and use the proceeds, together with the other liquid assets, to meet its liabilities, which include cash
requirements of the top-ups as they fall due.
- Collateral posted for the hedge assets will adjust as the liabilities develop and could be released as the business evolves. The
intercompany loan is structured in tranches allowing capital and treasury management flexibility, if cash is required from this source.
Capital and surplus
- Statutory capital increased to $363 million at 30 June 2012 (31 December 2011: $291 million), reflecting the improved profitability
for the first half of the year. Capital allocated to the business on a local level takes into account the intercompany loan from the
business to the Group.
- BMA regulatory capital developments are discussed further in the Group Finance Director's Review.
Sponsor: Merrill Lynch South Africa Proprietary Limited
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