Wrap Text
Old Mutual plc Interim Results for the half year ended 30 June 2013
Old Mutual
ISIN CODE: GB00B77J0862
JSE SHARE CODE: OML
NSX SHARE CODE: OLM
ISSURE CODE: OLOML
NEWS RELEASE
Ref 61/13
Wednesday, August 7, 2013
Old Mutual plc interim results for the half year ended 30 June 2013
Strong financial performance
- Adjusted operating profit up 14% to GBP801 million (H1 2012: GBP701 million*), up 1% as reported (H1 2012: GBP790 million)
- Strong net client cash flow across the Group: net inflows of GBP9.1 billion (H1 2012: GBP3.5 billion*)
- Funds under management up 9% to GBP289.3 billion (31 December 2012: GBP265.5 billion*)
- GBP460 million free surplus generated (H1 2012: GBP457 million)
- Earnings per share of 9.3p (H1 2012: 7.6p*)
- Interim dividend of 2.1p, up 20%
Strategic delivery
Good progress in emerging markets:
- South African Mass Foundation APE sales up 17%, adviser numbers up 13% since year end
- Significant developments in African strategy: footprint expanded in Ghana, Nigeria and Kenya
- Emerging Markets (ex-South Africa) gross sales up 49%
- Nedbank headline earnings up 13%
Strong growth in Wealth:
- Gross Wealth sales up 26% to GBP6.7 billion (H1 2012: GBP5.4 billion)
- Gross platform sales in Q2 of GBP1.3 billion (Q1: GBP0.9 billion), as market adapted to RDR
- Strengthened asset management capability in the UK
Sustained improvement in US Asset Management:
- NCCF at GBP6.9 billion ($10.6 billion), with positive flows into most affiliates
Julian Roberts, Group Chief Executive, commented:
"This has been another good six months for Old Mutual, with our Emerging Markets business in particular performing very well. Our US
Asset Management business had a very strong half, substantially contributing to our positive net client cash flows which represented 7%
of opening funds under management on an annualised basis.
"Additionally, we have taken significant steps in our plans to expand into the African markets that we have identified as key to our
success, and we have continued to grow our Wealth business.
"We are working with our retail customers in South Africa to help them through a challenging economic environment. We are seeing
improved conditions in the US and the UK, and sub-Saharan Africa continues to grow strongly. We are focused on delivering our strategy
and maintaining our financial discipline. We are clear on our priorities and confident that we will continue to deliver sustainable value to
our shareholders and customers."
Part 1 2013 Interim Review
Old Mutual plc interim results for the half year to 30 June 2013
Enquiries
External Communications
Patrick Bowes UK +44 20 7002 7440
Dominic Lagan UK +44 20 7002 7190
Kelly de Kock SA +27 21 509 8709
Media
William Baldwin-Charles +44 20 7002 7133
+44 7834 524 833
Notes to the Financial Summary on the front page of this announcement
* Figures stated on a constant currency basis
- Constant currency figures are calculated by translating local currency prior period figures at the prevailing exchange rates for the period under
review.
- Core continuing operations exclude the results of the Nordic business disposed of during 2012 and the Bermuda business which is classified
as non-core.
- Adjusted operating profit before tax and adjusted operating earnings per share are defined in the basis of preparation for the reconciliation of
adjusted operating profit to profit after tax in Part 4 Financial Information.
- Free surplus generated is the adjusted net worth of the operating business units not required to support capital requirements. The total surplus
generated is presented for core continuing businesses only, with Nedbank's contribution equal to Old Mutual plc's share of its dividend.
Cautionary statement
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, global, and UK and South African
domestic, 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, the future acquisitions or
combinations within relevant industries, as well as the impact of tax and other legislation and 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 UK time (10:00 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 50639431#:
UK/International +44 20 3139 4830
US +1 718 873 9077
South Africa +27 21 672 4008
Playback (available for 14 days from Wednesday, 7 August 2013), using pass-code 640672#:
UK/International +44 20 3426 2807
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 our website. This contains financial data for 2013 and
2012.
Sterling exchange rates
Appreciation/
(depreciation) of local
H1 2013 H1 2012 currency
South African Rand Average Rate 14.23 12.52 (14)%
Closing Rate 15.08 12.84 (17)%
US Dollar Average Rate 1.54 1.58 3%
Closing Rate 1.52 1.57 3%
Group Review
Overview
Strong underlying profit growth...
Old Mutual maintained its strong operational performance in the first six months of 2013 recording adjusted operating profit (AOP) growth on an
IFRS basis of 14%, in constant currency, to GBP801 million. On a reported currency basis, AOP was up 1% from GBP790 million in the first half of
2012. The Group's free surplus generation increased to GBP460 million, against GBP457 million for the first half of 2012.
Across the Group we recorded net client cash flow (NCCF) of GBP9.1 billion, up 160% on the comparative period, and our funds under
management (FUM) stood at GBP289.3 billion, up 9% since 31 December 2012.
...in uncertain conditions
The macro-economic environment continued to be unpredictable and markets remained volatile. The prospect of the US Federal Reserve tapering
quantitative easing had a significant effect on emerging market currencies, with the rand declining 16% against the dollar and 14% against sterling.
Equity markets were higher than in the corresponding period of 2012 with the average value of the FTSE 100 in the period 12% higher than last
year, and the JSE All-Share on average 19% higher.
While the forecast real GDP growth rate for South Africa in 2013 has been revised downward by the IMF to 2.0%, it remains ahead of much of the
developed world. Sub-Saharan African GDP is forecast to grow by 5.1% this year in real terms, up from 4.9% last year.
Despite the external uncertainties, our businesses continued to perform strongly, demonstrating that we are focused on the right markets, and on
the right segments of those markets.
However, Mutual & Federal, our Property & Casualty (P&C) business, produced a disappointing set of results, albeit in tough conditions. We have
changed the management team and have taken steps to improve underwriting performance and business discipline. We expect that this will take
some time to have a demonstrable effect.
Mutual & Federal remains integral to the successful delivery of our strategy in Africa. We continue to explore ways of ensuring that Old Mutual,
Mutual & Federal and Nedbank work more closely together.
A financially strong and cash generative Group...
We have a strong balance sheet, with a low level of indebtedness. The Group has a track record of delivering strong underlying cash returns.
...which is resilient and focused on growth
Our business is focused on markets where growth is driven by long-term structural factors. Additionally, these are markets where we have a
competitive advantage through our expertise, experience and product offering. As a result, despite the uncertain economic environment for many of
our customers, we have continued to see retail savings grow. Whether in the emerging markets of Africa or the developed markets of Europe, our
customers understand the imperative of saving and are increasingly trusting Old Mutual to be the custodian of their assets.
Delivering our strategy...
At our preliminary results for 2012, we outlined our four strategic priorities: expanding in the growth markets of South Africa; developing our African
footprint; growing Old Mutual Wealth; and improving and growing the US Asset Management business. We have made good progress with these
priorities, as well as focusing on operational delivery and efficiency. We have made good progress in expanding our footprint in Africa, with the
Group having spent or committed R925 million in the first half of this year.
...with continued growth in the Emerging Markets...
Sub-Saharan Africa as a whole has continued to see strong growth in the first six months of the year and this has been reflected in another
excellent period for our Emerging Markets business. We saw gross sales climb by 17% to R76 billion, NCCF improved by R3.2 billion to R11.1
billion and FUM increased to R765 billion, up 6%.
In South Africa, the Mass Foundation Cluster continued its growth path, with life APE sales up 17% on the comparative period, bolstered by an
increase in the number of agents and a continued focus on our customer base. We now have more than 4,200 Mass Foundation agents in South
Africa, up from 3,750 at the year end, with productivity remaining high. The increasing shift from life to non-life product sales in Retail Affluent was
reflected in non-covered sales up 21% from H1 2012. Retail Affluent life sales were up 3% to R1.2 billion with protection sales more subdued.
Within Retail Affluent, we have developed a tailored product range directed toward the wealth management market including custodial, advice and,
in due course, stockbroking capability. Our Corporate business had a particularly good half, with sales up 56% to R677 million due to a number of
large annuity deals.
The Rest of Africa has had an excellent first half of the year, with APE life sales up 23% to R368 million. Life sales benefited from a good
performance and large deal in Namibia, favourable foreign exchange and good corporate deals in Zimbabwe, and the inclusion of Old Mutual
Nigeria for the first time.
We have previously said that there are four territories in which we must have scale to build a successful African business: South Africa; Nigeria;
Ghana; and Kenya. We have taken a number of significant steps to achieve this ambition, while remaining mindful of our strict capital allocation
criteria.
We completed the acquisition of the Nigerian life business from Oceanic. It is now trading as Old Mutual Nigeria and we have more than 117,000
customers in the country. We are aiming to roll out a suite of retail mass market products in Nigeria in the second half of 2013. In Ghana, we have
acquired a majority stake in Provident Life Assurance Company, subject to regulatory approvals.
In Kenya, we are in the process of acquiring a majority stake in Faulu Kenya, which we expect to complete before the end of the year. Faulu has
around 400,000 customers in Kenya and an excellent distribution network with more than 100 "bricks and mortar" distribution outlets, plus a
distribution agreement with the Kenyan Post Office. We will look to leverage off Faulu's existing customer and distribution network to sell our retail
insurance products. In addition, we have made significant strides in growing organically and now have approximately 400 agents in Kenya. In the
first half of 2013, Old Mutual Kenya launched a personal pension plan aimed at providing Kenyans, of all income levels, access to affordable
retirement savings, as well as an occupational umbrella pension scheme for small to medium-sized enterprises.
In Latin America & Asia, non-covered sales increased significantly, up 39% to R13.7 billion following the winning of an asset management mandate
in Colombia and higher sales of retail investment products in Mexico. APE Life sales were up due to favourable exchange rates, strong sales of a
new single premium investment product and the reclassification of Asian sales from non-covered to covered sales.
...a strong performance from Nedbank...
This has been another very good six months for Nedbank, with headline earnings up 13.3%. Non-interest revenue was up 15.4% on the
comparative period with commission and fee income up 14%, insurance income up 15% and strong trading income. Net interest income grew 6.9%
supported by growth in average interest-earning banking assets of 6.1%. Continued consumer stress and more conservative provisioning
methodologies in personal loans led to impairments increasing to R3.3 billion (H1 2012: R2.7 billion) and the credit loss ratio (CLR) increasing to
1.31% (H1 2012: 1.11%). Nedbank has agreed to acquire 36.4% of the Mozambican bank, Banco Unico, subject to regulatory approval.
...but a challenging environment for Property & Casualty...
The tough operating environment for short term insurers continued into the first six months of 2013. While gross written premiums grew by 18%
during the period, the underwriting margin of -2.7% (2012: 2.5%) was affected by the frequency and severity of claims, although this was partly
mitigated by tight control of operating expenses.
Raimund Snyders was appointed as the new Chief Executive of Mutual & Federal on 10 June 2013 with a clear remit to improve the performance of
the business. Raimund will report directly to Paul Hanratty, Group Operating Officer. During the six months, Mutual & Federal underwent an
organisational restructure and is now aligned along three business segments: Personal; Commercial & Africa; and Corporate & Niche. The new
structure will enable us to create greater focus and accountability within the business.
As we previously indicated, the Old Mutual and Mutual & Federal African businesses are co-ordinated by a single country head in each territory.
The country head is responsible for driving growth across business lines. This process is proceeding well. The acquisition of the Nigerian P&C
business from Ecobank is expected to complete in H2 2013.
... good progress in Wealth...
The Wealth business had a solid first six months of the year, improving markedly in the second quarter, with gross sales of GBP6.7 billion, up 26%
on the comparative period, mainly due to improving sales in Old Mutual Global Investors (OMGI). FUM was up 9% to GBP75.2 billion due to
positive NCCF and higher equity markets.
In the UK, we saw NCCF onto the platform up 8% to GBP1.3 billion, and gross sales of GBP2.3 billion, slightly ahead of the first half of 2012.
Following the challenging start to the year, we have seen the UK financial services industry adapt to the introduction of the Retail Distribution
Review (RDR) and we have seen a growing momentum in sales. We now have GBP25.0 billion of assets on the platform, assisted by strong
markets.
The International business had a much improved six months, with NCCF of GBP254 million, up from GBP61 million in H1 2012, and gross sales of
GBP931 million were up 20% on the prior period. The improvement was due to improved sales in all regions, with the exception of the UK which
had a challenging first quarter due to the uncertainty created by the implementation of the RDR.
OMGI had a strong start to the year with GBP3.5 billion of gross sales. Gross platform sales into OMGI managed money increased to 15%, up from
12% in the comparative period. Increasing the amount of money that flows through our platform into funds run in-house is a critical part of Old
Mutual Wealth reaching its GBP300 million AOP target in 2015. We have seen strong inflows into the Global Strategic Bond, UK Alpha, UK Select
Equity and Global Equity Absolute Return funds. During the period we have strengthened the UK equity team, and will look to broaden our range of
investment styles in the future. The anticipated outflows from the low margin Nordic business, following its sale in 2012, continued and reached
GBP782 million at the end of the first half. We expect the final GBP500 million to GBP700 million of Nordic outflows over the next 12 months.
...and a sustained improvement in USAM...
US Asset Management has maintained its improvement with an excellent six months, recording NCCF of $10.6 billion with positive inflows into most
of our affiliates. FUM for continuing operations now stands at $229.8 billion, up 10% at the end of 2012, due to the NCCF and market appreciation.
... a 20% increase in dividend is supported by our strong capital position...
In line with our dividend policy, the Board is declaring an interim ordinary dividend per share of 2.1 pence, this being 30% of the prior year's total
dividend and a 20% increase on the 2012 interim dividend payment. Our capital position remains strong, with a Financial Groups Directive (FGD)
surplus of GBP2.1 billion representing a coverage ratio of 160%.
...while playing our part in the societies where we operate
An important part of the success in our strategy to build out across Africa will be our ability to demonstrate that we are a responsible corporate
citizen in the eyes of governments, regulators and, most importantly, our customers. We provide products that help address poverty, income
inequality, social instability and health issues and we do this in a manner that is fair to our customers. We invest into education programmes, often
in partnership with national governments, to highlight the risks of consumer debt and the benefits of savings.
We responsibly invest the premiums we collect and have a strong history of successfully investing these premiums in infrastructure projects
including low-cost housing, public utilities, schools, agriculture and healthcare. As a result, we redeploy a portion of a nation's savings into
enhancing the quality of its collective future. For example, in Zimbabwe, we have agreed to build a 3,000 home residential development in Harare.
We are one of the largest investors in infrastructure in South Africa, and manage more than R10 billion of infrastructure assets.
We are confident in our future prospects
We aim to provide affordable financial services to our customers. We see risks to our customers from low savings rates and high levels of
indebtedness but believe that education and financial planning can help. We are working with our retail customers in South Africa to help them
through a challenging economic environment. We are seeing improved conditions in the US and the UK, and sub-Saharan Africa continues to grow
strongly. We are focused on delivering our strategy and maintaining our financial discipline. We are clear on our priorities and confident that we will
continue to deliver sustainable value to our shareholders and customers.
Group Financial Highlights
GBPm
H1 2012 H1 2012
(constant (as
Group highlights(1) H1 2013 currency) Change reported) Change
Adjusted operating profit (IFRS basis, pre-tax) 801 701 14% 790 1%
Adjusted operating earnings per share (IFRS basis) 9.3p 7.6p 22% 8.6p 8%
Group net margin(2) 49bps 48bps 1bps 52bps (3)bps
Return on equity(3) 13.7% 13.0% 70bps
Net free surplus 460 422 9% 457 1%
Gross sales 12,096 9,940 22% 10,564 15%
Emerging Markets 5,355 4,584 17% 5,208 3%
Old Mutual Wealth(4) 6,741 5,356 26% 5,356 26%
Net client cash flow (GBPbn) 9.1 3.5 3.7
Funds under management (GBPbn)(5) 289.3 265.5 9% 262.2 10%
Interim dividend for the year 2.10p 1.75p 0.35p
(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 on an annualised basis 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)From Q2 2012 OMAM(UK) has been reported within Old Mutual Wealth rather than USAM. Comparatives have not been restated
(5)FUM movement compared to year end 31 December 2012
Adjusted operating profit (AOP) and net free surplus
Pre-tax AOP for H1 2013 was GBP801 million, an increase of 14% on a constant currency basis with growth in our life and savings and banking
business in Africa and in Old Mutual Wealth and US Asset Management. AOP earnings per share were up 22% to 9.3p on a constant currency
basis. The weakening in the rand to sterling average exchange rate reduced sterling earnings such that the profits increased on a reported basis by
only 1%.
Net free surplus of GBP460 million was generated in the period representing 93% of AOP generated by the business units after tax and non-
controlling interests. GBP201 million of cash was remitted by the operating units.
Group net margin
Constant currency Group net margin increased by 1 basis point from 48 to 49 basis points. The increase was due to higher net margins in Emerging
Markets, USAM and Old Mutual Wealth, partially offset by lower net margins in Nedbank and Property & Casualty.
Return on equity
Core Group ROE was 13.7%, against a comparable H1 2012 ROE of 13.0% (restated following the adoption of the revised accounting standard,
IAS 19 'Employee Benefits') with earnings growing faster than the growth in retained equity.
Gross sales
Gross sales for Emerging Markets grew 17% to GBP5,355 million. Sales growth in Latin America & Asia and Corporate in South Africa were
particularly strong, with further support from Retail Affluent. Gross sales in Old Mutual Wealth were GBP6,741 million, led by UK Platform and
OMGI inflows.
Net client cash flow
The Group had strong positive NCCF of GBP9.1 billion (H1 2012: GBP3.5 billion net inflow). USAM saw significant net client cash inflows of
GBP6.9 billion (H1 2012: GBP1.4 billion), reflecting improved 3-year investment performance as well as positive market trends. Old Mutual Wealth
NCCF was GBP0.8 billion; the positive net inflows reflecting the momentum in our proposition as we attract new customers and further enhance our
asset management offerings. Emerging Markets NCCF improved from GBP0.5 billion to GBP0.8 billion as a result of strong flows from Latin
America & Asia and the South African Corporate business.
Funds under management
FUM increased by 9% on a constant currency basis, with NCCF of GBP9.1 billion and positive market movements of approximately GBP18 billion.
H1 2012 reported FUM includes affiliates of USAM and the Finnish business of Old Mutual Wealth which were sold in H2 2012.
FUM in Emerging Markets was up 6% to GBP50.7 billion and Old Mutual Wealth up by 9% to GBP75.2 billion. USAM FUM rose 10% to GBP151.3
billion on a comparable basis.
Equity markets finished strongly in H1 2013 despite a very volatile period in May and early June, with the FTSE 100, S&P 500, MSCI World and the
JSE All-Share indices up by 5.4%, 12.6%, 7.1% and 0.8% respectively over the half year.
Impact of foreign exchange
The rand to sterling average exchange rate weakened by 14% during H1 2013, reducing sterling earnings from our South African businesses. The
US dollar to sterling average rate strengthened by 3%, increasing sterling earnings from USAM. The half year rand closing rate was 10% lower than
at 2012 year end and 17% lower than at H1 2012, which reduced closing sterling FUM.
Other economic impacts
South African long-term interest rates moved significantly during the course of H1 2013, with the 10-year government bond yield used as the
Financial Soundness Valuation (FSV) rate decreasing during the first half to a low point of 6.4% and then rising with global macro condition changes
to close at 7.8%, up on the 2012 year end level of 6.9%.
In order to manage the risk of a volatile FSV interest rate and its consequent impact on IFRS profits, Emerging Markets has a programme in place
which largely hedged the risk of interest rate volatility and helped to reduce the negative impact from the further decline in the FSV rate in the first
part of H1 2013. The hedge programme has been continued into H2 2013 but will be reviewed during the year given the change in economic
conditions and the interest rate environment.
Interim dividend
The interim dividend of 2.1 pence, or its equivalent in local currency for those shareholders outside the UK, represents an increase of 20% on that
of the prior year. A separate announcement on the key dividend dates is made with these interim results.
The dividend will be paid on 31 October 2013, one month earlier than in previous years and our current intention is to follow a similar timetable for
the interim dividend in future.
Review of Operations
Emerging Markets
2012 (constant
2013 currency) Change
Highlights
AOP (GBPm) 290 257 13%
NCCF (GBPbn) 0.8 0.5 0.3
FUM (GBPbn)(1) 50.7 48.0 6%
Pre-tax Operating Margin(2) 112bps 106 bps 6bps
(1)Comparative as at December 2012
(2)Pre-tax Operating Margin is calculated as pre-tax AOP annualised divided by average FUM
AOP grew by 13%, benefiting from higher equity market levels, favourable investment variances, lower new business strain and the absence of the
adverse impacts of falling interest rates and tax changes which were seen in the comparative period.
NCCF improved following good sales performances from both Latin America & Asia and the South African Corporate business. Unit trust sales were
strong once again in Latin America. FUM rose due to NCCF and positive exchange rate movements as a result of the depreciation of the rand . At
30 June 2013, 22% of total Emerging Markets FUM originated from outside of South Africa (31 December 2012: 19%). Of the GBP0.8 billion
NCCF, GBP0.45 billion of the flows were from outside South Africa (H1 2012: GBP0.11 billion out of GBP0.5 billion).
Pre-tax operating margin was 112bps.
Old Mutual Wealth
2013 2012 Change
Highlights
AOP (GBPm) 108 95 14%
NCCF (GBPbn) 0.8 0.8 -
FUM (GBPbn)(1) 75.2 69.2 9%
Pre-tax Operating Margin(2) 36% 32% 400bps
(1)Comparative as at December 2012
(2)Pre-tax Operating Margin is calculated as pre-tax AOP divided by Revenue
AOP grew by 14% with revenues rising due to higher asset management revenues being earned following an increase in the funds under
management in the period. Adjusting for Finland, which was sold in H2 2012, AOP grew by 27%.
Net client cash flows were boosted by Q2 Platform sales, higher sales within International and very strong performance in Italy. FUM rose given
strong markets and good NCCF in the period. Pre-tax operating margin reflected the reduced cost base and greater share of FUM being managed
within our own asset management capability.
Nedbank
2012 (constant
2013 currency) Change
AOP (GBPm) 387 357 8%
Net interest income (GBPm) 724 678 7%
Non-interest revenue (GBPm) 670 581 15%
Diluted Headline EPS 58.4p 51.9p 13%
AOP was up 8% to GBP387 million with Nedbank reporting that headline earnings grew 13.3% to GBP275 million (H1 2012: GBP243 million),
driven by good revenue growth and disciplined expense management, countering the higher level of impairments.
Nedbank Group produced a solid set of results for the six months ended 30 June 2013. The results reflect the impact of a tougher-than-anticipated
economic environment, offset by continued internal momentum in building the Nedbank franchise.
Diluted headline earnings per share increased 12.6% to 58.4p (H1 2012: 51.9p) and diluted basic earnings per share increased 11.5% to 58.3p (H1
2012: 52.3p).
Property & Casualty
2012 (constant
2013 currency) Change
AOP (GBPm) 10 27 (63)%
Underwriting Result (GBPm) (8.3) 6.4 (130)%
Gross written premiums (GBPm) 383 324 18%
Underwriting ratio (2.7)% 2.5% (520)bps
AOP fell by 63%, due to underwriting losses of GBP8.3 million. Underwriting losses were incurred in Personal (motor claims), Commercial (large
fire and weather related claims) and iWyze direct. Profit from Credit Guarantee Insurance Corporation (CGIC) was adversely impacted by the
prevailing economic conditions.
Significant change is being implemented by management to improve the underwriting ratio to more acceptable levels. Expense management has
been successful in containing inflationary pressures. Premium growth was largely through new distribution initiatives. The deterioration in the
underwriting ratio reflects the increase in claims costs in the period.
US Asset Management (continuing operations)1
2012 (constant
2013 currency) Change
AOP (GBPm) 54 49 10%
NCCF (GBPbn) 6.9 2.3 4.6
FUM (GBPbn)(2) 151.3 137.4 10%
Pre-tax Operating Margin(3) 33% 33% -
(1)Continuing operations exclude the financial impact of affiliates divested in 2012
(2)Comparative as at December 2012
(3)Pre-tax Operating Margin is calculated as pre-tax AOP before non-controlling interests divided by Total Revenue. Comparative operating margin has been
restated following the adoption of IFRS 10 in respect of Heitman
AOP grew by 10% due to higher average FUM, positive markets and net positive flows.
Net client cash flows were positive for a further quarter across a broad spectrum of investment strategies. Funds under management were boosted
by positive NCCF and rising equity markets despite weaker bond markets in the second quarter.
Operating margin on a continuing basis was consistent with prior year.
AOP analysis
GBPm
H1 2013 H1 2012
Core operations
Emerging Markets 290 292
Old Mutual Wealth 108 95
Nedbank 387 405
Property & Casualty 10 31
USAM 54 42
849 865
Finance costs (46) (75)
Long term investment return on excess assets 25 25
Net interest payable to non-core operations (6) (13)
Corporate costs (21) (25)
Other net expenses - 13
Adjusted operating profit before tax 801 790
Tax on adjusted operating profit (207) (210)
Adjusted operating profit after tax 594 580
Non-controlling interests ordinary shares (137) (135)
Non-controlling preferred securities (9) (30)
Adjusted operating profit after tax attributable to ordinary equity holders
of the parent 448 415
Adjusted weighted average number of shares (millions) 4,835 4,806
Adjusted operating earnings per share (pence) 9.3 8.6
Profits from core operations were similar to those of the prior year in reported currency terms. Both Emerging Markets and Nedbank
profits grew in domestic currency terms, but those from Property & Casualty reduced due to increased underwriting losses. Finance
costs fell due to lower levels of debt. Long term investment return on excess assets was flat reflecting the increase in underlying net
assets but lower assumed rates of return.
Net interest payable to non-core operations reduced by 54% to GBP6 million (H1 2012: GBP13 million), due to lower prevailing rates on
the loan notes to our Bermuda business.
Corporate costs were down 16% to GBP21 million (H1 2012: GBP25 million), due to our continuing efforts to simplify activity and timing
of expenditure.
Total tax expense
The effective tax rate (ETR) on AOP decreased slightly from 27% in H1 2012 to 26% in H1 2013. As over 84% of the H1 2013 AOP tax
charge relates to Emerging Markets and Nedbank, movements in these business units have a correspondingly large impact on the
Group's ETR. The decrease in ETR was largely a result of the abolition of STC in 2012 and the reduction of group debt costs. This was
partially offset by a reduction in low taxed profits due to lower fair value movements in Emerging Markets, a reduction in dividends
received in Nedbank, and fewer non-taxable dividends allocated to the shareholder in Old Mutual Wealth.
Looking forward, and depending on market conditions and profit mix, we expect the ETR on AOP in future periods to range between
25% and 28%.
Income tax attributable to policyholder returns
In accordance with accounting guidance, the Group's IFRS tax charge includes tax on policyholder investment returns rather than being
offset against the related income. The impact is to increase profit before tax by GBP71m in H1 2013 (H1 2012: GBP34 million), with a
corresponding increase to the tax charge.
Free surplus generation
Core continuing operations generated GBP460 million of free surplus (H1 2012: GBP457 million).
Covered business
Covered business contributed GBP253 million (H1 2012: GBP251 million), with lower new business strain and more positive economic
variances largely offset by an increase in negative experience variances.
Non-covered business
Non-covered business generated GBP207 million (H1 2012: GBP206 million). Additional income earned in USAM was offset by lower
income in the Property & Casualty business.
Cash and liquidity
GBPm
Opening cash and liquid assets at holding company at 1 January 2013 472
Operational inflows
Operational receipts 70
Dividends from South African operations 131
Total operational inflows 201
Operational outflows
Interest paid (38)
Group Head Office costs (21)
Other flows (2)
Ordinary cash dividends (238)
Total operational outflows (299)
Net capital flows (18)
Closing cash and liquid assets at holding company at 30 June 2013 356
Operational cash inflows to holding company
Operational flows include payments made by the South African holding company to local shareholders, equivalent to GBP122 million.
In addition, the holding company has received GBP69 million of flows from USAM. Receipts from Old Mutual Wealth are expected in
the second half of the year.
Operational cash outflows and distributions by holding company
Interest paid represents the cash outflows relating to the holding company's debt instruments, and is approximately half of the full year
expected payment.
Corporate costs of GBP21 million were lower than prior year. In addition, the company distributed GBP238 million of cash to
shareholders over the first half of the year, representing the payment of the final 2012 dividend.
The Group is declaring an interim dividend of 2.1 pence per share, which will result in payments totalling circa GBP102 million on 31
October 2013.
Net capital flows
Gross capital flows were significantly below prior year as a result of the sale of the Nordic business unit for a sum of GBP2.1 billion in
March 2012.
In June 2013, consideration of GBP44 million was received from Emerging Markets in respect of the transfer of the holding company's
ownership share of the Chinese joint venture. These flows were offset by seed capital payments to Old Mutual Wealth and cash
payments to Bermuda of GBP27 million in the first half of the year.
Whilst not included in the net capital flows for H1 2013, the holding company received a further GBP120 million for the transfer of
ownership of the Colombian and Mexican entities to the South African holding company in July 2013 and the Group continues to
progress towards the purchase of the Indian joint venture by Emerging Markets.
Liquidity
At 30 June 2013, the Group had available liquid assets and undrawn committed facilities of GBP1.6 billion (31 December 2012: GBP1.7
billion). At 31 July 2013 this had risen to GBP1.7 billion.
In addition to the cash and available resources referred to above at the holding company level, each of the individual businesses also
maintains liquidity to support their normal trading operations.
Capital and leverage
Debt strategy, profile and maturities
The Group had gross IFRS debt of GBP1,520 million at end of June, and still expects to reduce Group debt by an additional GBP175
million over time.
In the longer term, the Group has further first calls on debt instruments amounting to GBP623 million in 2015 and GBP348 million in
2020. In addition the Group has GBP112 million of senior debt maturing in 2016. The GBP500 million Tier 2 bond issued in June 2011
matures in 2021.
In July 2013, the Group received approval from the Bermuda Monetary Authority for Old Mutual Bermuda to release $450 million of
capital back to the holding company in the form of cancelled inter-company loan notes. This leaves circa $550 million outstanding.
We estimate that approximately $35 million of these remaining loan notes will need to be converted to cash during the next 18 months.
The future level of capital required in Old Mutual Bermuda, on both an economic and a regulatory basis, will be influenced by the extent
and nature of the run-off of its book and the amount of the investment hedge in place. If any cash surplus were to emerge, this would
only be at the end of the 10 year guarantee period.
Financial Groups Directive results
The Group's regulatory capital surplus, calculated under the EU Financial Groups Directive (FGD), at 30 June 2013 was GBP2.1 billion
and this represents a statutory cover of 160%. A 1% fall in the ZAR/GBP exchange rate results in a GBP18 million reduction in surplus.
Given that the capital resources and the capital requirement both fluctuate with changes in exchange rates, the cover ratio remains
broadly unaffected.
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 is different from the locally reported surplus as 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, not all make
a positive contribution to the Group's FGD position. The Group regulatory capital was calculated in line with the PRA's prudential
guidelines.
30-Jun-13 30-Jun-12
Regulatory capital GBPm % GBPm %
Ordinary Equity 5,011 90% 5,024 87%
Other Tier 1 Equity 533 10% 588 10%
Tier 1 Capital 5,544 100% 5,612 97%
Tier 2 1,271 23% 1,885 33%
Deductions from total capital (1,266) (23)% (1,723) (30)%
Total capital resources 5,549 100% 5,774 100%
Total capital requirements 3,477 3,429
Group FGD surplus 2,072 2,345
Business local statutory capital cover
The Group's subsidiary businesses continue to have strong local statutory capital cover.
30-Jun-13 30-Jun-12
Old Mutual Life Assurance Company (South Africa) 3.8x 3.6x
Mutual & Federal(1) 1.7x 1.5x
UK 2.7x 2.9x
Nedbank(2)(3) Common equity Tier 1: 11.8% Common equity Tier 1: 10.6%
Tier 1: 13.0% Tier 1: 12.1%
Total: 14.8% Total: 14.4%
Bermuda(4) 1.6x 1.3x
(1)Local statutory cover is based on interim Solvency Assessment and Management (SAM) framework for non-life insurers, implemented on 1 January 2012
(2)This includes unappropriated profits
(3)2012 Nedbank capital ratios are calculated on a Basel II.5 basis, while 2013 ratios are on a Basel III basis
(4)Based on Bermuda's enhanced solvency capital regulatory regime
Economic capital
We continue to manage our business and monitor solvency internally on an economic capital at risk basis, which expresses solvency at
a 99.93% confidence level. We continue to be comfortably solvent on this basis with a solvency ratio of over 160%.
We intend to make detailed disclosures of our economic capital position in respect of 2013 during the first half of 2014. Early in 2013
we formally withdrew from the internal model application process both in respect of Solvency II in the UK and its South African
equivalent, SAM, as a result of delays in Solvency II implementation and the simplification of the overall Old Mutual Group's structure.
Group and subsidiary ROE
ROE H1 2013 H1 2012
Emerging Markets(1) 24.0% 22.7%
Old Mutual Wealth(2) 15.3% 13.7%
Nedbank (excluding goodwill) 16.1% 15.8%
Property & Casualty(3) 4.1% 12.0%
USAM(3) 15.1% 12.2%
Total Group ROE(4) 13.7% 13.0%
(1)OMSA, ROA and Asia calculated as return on allocated capital; Latin America calculated as return on average equity
(2)IFRS AOP (post tax) divided by average shareholders' equity, excluding goodwill, PVIF and other acquired intangibles
(3)IFRS AOP (post tax and NCI) divided by average shareholders' equity
(4)Core business IFRS AOP (post tax and NCI) divided by average ordinary shareholders' equity; H1 2012 restated following the adoption of the revised IAS
19 'Employee Benefits'
Emerging Markets ROE was at 24.0%, with increased post-tax profits partly offset by an increased allocated capital base, supporting
our growth and expansion plans.
Nedbank ROE (excluding goodwill) improved largely due to an increased return on assets and 13% increase in headline earnings.
Old Mutual Wealth ROE improved to 15.3% due to higher asset management profits and fees given the increase in FUM.
USAM ROE was higher due to improved operating earnings and reduced costs following the 2012 divestitures.
The fall in Property & Casualty ROE was as a result of the underwriting losses incurred.
The movement in Group ROE reflects the growth in profits in the period and the timing of dividend payments on the equity base.
Non-core business unit Bermuda
The IFRS post-tax profit for the period was GBP2 million (H1 2012: GBP48 million profit), driven primarily by the reduction in Universal
Guaranteed Minimum Accumulation Benefits (GMAB) reserves and a realised gain on the fixed income portfolio offset by lower
revenues on the reduced investment portfolio.
At 30 June 2013, 98% of the Universal Guarantee Option (UGO) GMAB contracts by guarantee amount had passed their five-year
anniversary top-up date. The cumulative cash cost of fifth anniversary top-ups paid was GBP344 million ($523 million) with GBP64
million ($98 million) paid in H1 2013. The estimated outstanding cash cost of fifth anniversary top-ups was less than GBP1 million at H1
2013.
We experienced significantly higher than assumed surrender rates for the six months to 30 June 2013. At 30 June 2013, around 79% of
non-Hong Kong UGO policies and around 63% of Hong Kong policies had been surrendered on or after the fifth anniversary date. The
UGO GMAB guarantee reserve at 30 June 2013 was GBP84 million ($128 million) compared to the reserve at H1 2012 of GBP543
million ($851 million). During Q2 2013, the HAV (highest anniversary value risk) was hedged.
Given the reduction in size of the remaining book, the valuation basis in the current period has been simplified from a full MCEV
calculation to an adjusted IFRS basis, which uses the IFRS net asset value.
Further information on Bermuda is included in Part 3 - Detailed Business Review.
Non-controlling interests
Non-controlling interests' share of adjusted operating profit after tax for H1 2013 was GBP146 million (H1 2012: GBP165 million). In
respect of ordinary shares the movement was flat, mainly reflecting non-controlling interests' share of Nedbank's profit, partially offset by
their share of unrealised losses generated on the translation of Nedbank. The reduction on preferred securities was due to the
repayment of Group debt instruments during H2 2012.
Risk management
Risk allocation and Solvency II
Despite withdrawing from the internal model application process, this model will continue to support the setting of our integrated risk and
business strategy and forms the basis of our capital risk appetite and limit-setting framework. It is a useful management tool, allowing
us to better understand the potential impact of strategic decisions and possible future developments (both internally and externally) on
our economic capital position.
We continue to refine and embed our internal model, focusing on our own internal requirements.
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.
The Group's overall risk profile and capital position remains stable despite difficult economic conditions and weakened global recovery.
With this stable position, we have strategically positioned ourselves for growth, mainly through Old Mutual Wealth and expansion in
Africa. In the short-term we expect operational and execution risk to increase, and have accepted these risks and are actively managing
them.
The most significant external risks to earnings relate to the concentration of businesses in South Africa and the translation of earnings
from rand to sterling. The rand is susceptible to changing in-country fundamentals and movements in the global economy, and is also
highly geared towards foreign investment sentiment. During the first half of 2013, rand volatility increased and the rand depreciated
against sterling. Current levels may have some allowance for further short-term volatility priced in, but we continue to monitor and
manage the risk. Scenario testing involving a severe fall in the rand shows that we remain comfortable that the Group has sufficient
capital and liquidity headroom to withstand such events.
The increased pressure on South African consumers due to a tough economic environment poses some risk to all our businesses in
South Africa. Exposure to credit risk has increased slightly, but remains within appetite. The risk is being monitored and managed and
the rise in unsecured lending during H1 2013 has reduced compared to that of H1 2012, reflecting continued controlled growth in
Nedbank and Old Mutual Finance.
In South Africa, the values of certain life insurance liabilities are sensitive to movements in long-term interest rates, which have been
volatile over the first half of 2013. This hedge programme implemented in 2012 has been rolled forward into 2013.
Old Mutual Bermuda risk exposure has reduced significantly, and represents less than 3% of the Group Economic Capital at Risk.
The current regulatory environment is continuously evolving in all markets where we operate. Regulators across the globe continue to
focus on the treatment of customers and both principles and appropriate regulation in this area are evolving. This will result in further
changes to our products and how we disclose them.
The UK has already implemented twin peaks regulations, and we are already seeing increased focus from regulators following the
move. In South Africa twin peaks regulations are expected to be in place by 2014, and there is a move towards Group supervision. We
are evolving our risk management and governance structures and processes to support this. Although we are not a global systemically
important financial institution, we are domestically important in South Africa.
The Board believes 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.
FINANCIAL APPENDIX
Supplementary financial information (data tables)
GBPm
Summarised financial information (as reported) H1 2013 H1 2012 % change
IFRS results
Basic earnings per share(1) 8.9p 19.2p (54)%
IFRS profit after tax attributable to equity holders of the parent(2) 414 930 (55)%
MCEV results(3)
Adjusted Group MCEV (GBPbn)(4) 10.3 10.8 (5)%
Adjusted Group MCEV per share(4) 209.7p 220.5p (5)%
Adjusted operating Group MCEV earnings (post-tax and non-controlling interests) 379 417 (9)%
Adjusted operating Group MCEV earnings per share 7.8p 8.0p (3)%
Return on Group MCEV 8.4% 9.0%
(1)Basic earnings per share in 2012 included 12.5p in respect of profit from discontinued operations following the sale of Nordic
(2)The comparative period has been restated as required following the adoption of the revised IAS 19 'Employee Benefits'
(3)Includes Nordic
(4)Comparatives as at 31 December 2012
GBPm
Group return on equity (as reported)(1) H1 2013 H1 2012
AOP including accrued hybrid dividends core operations(2) 448 415
Opening shareholders' equity excluding hybrid capital core operations(2) 6,566 5,835
Half-year shareholders' equity excluding hybrid capital core operations(2) 6,480 6,980
Closing shareholders' equity excluding hybrid capital core operations - -
Average shareholders' equity core operations 6,523 6,408
Return on average equity(2) 13.7% 13.0%
(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)
(2)The comparative shareholders' equity figures have been restated as required following the adoption of the revised IAS 19 'Employee Benefits'
GBPm
Group debt summary H1 2013 H1 2012
Senior gearing (net of holding company cash) (2.0)% (7.5)%
Total gearing (net of holding company cash) 9.7% 8.1%
Book value of debt - MCEV basis 1,569 2,459
Book value of debt - IFRS basis 1,520 2,400
Total interest cover(1) 14.4 times 7.5 times
Hard interest cover(1) 3.6 times 1.7 times
(1)Total interest cover and hard interest cover ratios exclude Nordic profits in the prior period
Summary MCEV results
Adjusted Group MCEV per share
The adjusted Group MCEV per share decreased by 5% or 10.8p to 209.7p over the six months to 30 June 2013, with 4,896 million
shares in issue (December 2012: 4,893 million shares). The adjusted operating MCEV earnings of 7.8p were offset by non-operating
losses and other movements of 18.6p.
The non-operating losses and other movements are primarily due to the 6.6% decrease in the Nedbank market value since December
2012, foreign exchange losses and higher dividends paid in the period.
p
Adjusted Group MCEV per ordinary share at 31 December 2012(12) 220.5
Covered business 3.8
Non-covered business 4.0
Adjusted operating Group MCEV earnings per ordinary share(1) 7.8
Economic variances and other earnings 3.4
Foreign exchange and other movements (7.3)
Dividends paid to ordinary and preferred shareholders (5.4)
Nedbank market value adjustment (8.2)
BEE and ESOP adjustments (0.7)
Mark to market of debt (0.2)
Nordic divestment costs (0.2)
Non-operating MCEV earnings and other movements (18.6)
Adjusted Group MCEV per ordinary share at 30 June 2013(1) 209.7
(1)The weighted average number of shares used to calculate adjusted Group MCEV per share and adjusted operating Group MCEV earnings per share
does not include preference shares
(2)The December 2012 Adjusted Group MCEV per share has been restated to reflect the changes in accounting policies
Adjusted operating Group MCEV earnings from Emerging Markets benefited from strong VNB. Negative experience variances reflecting
tax, business development costs and poorer persistency were only partially offset by good mortality experience. In Old Mutual Wealth,
improved sales across International regions and increased new business margins were offset by additional development expenditure.
Statutory results
Reconciliation of Group AOP and IFRS profits
GBPm
H1 2013 H1 2012(1)
Adjusted operating profit 801 790
Adjusting items (69) (149)
Non-core operations (including Bermuda) 2 53
Profit before tax (net of policyholder tax) 734 694
Income tax attributable to policyholder returns 71 34
Profit before tax 805 728
Total tax expense (250) (241)
Profit from continuing operations after tax 555 487
Profit from discontinued operations after tax (8) 595
Profit after tax for the financial year 547 1,082
Other comprehensive income (356) (418)
Total comprehensive income 191 664
Attributable to
Equity holders of the parent 192 543
Non-controlling interests
Ordinary shares (10) 91
Preferred securities 9 30
Total non-controlling interests (1) 121
Total comprehensive income 191 664
(1)The comparative period has been restated for the impact of changes in accounting policies
Emerging Markets
Rm
H1 2013 H1 2012 % Change
AOP (IFRS basis, pre-tax) 4,115 3,661 12%
NCCF (Rbn) 11.1 7.9 41%
FUM (Rbn)(1) 764.8 724.6 6%
GBPm
H1 2013 H1 2012 % Change
AOP (IFRS basis, pre-tax) 290 292 (1)%
NCCF (GBPbn) 0.8 0.6 33%
FUM (GBPbn)(1) 50.7 52.6 (4)%
(1)Comparative information for FUM is presented as at 31 December 2012
Overview and operating environment
Emerging Markets has performed well despite the South African economic slowdown in the first half of the year, with continued good
sales performance across most lines of business and important steps taken in increasing the size of the operational footprint outside
South Africa.
In South Africa, Corporate secured a R2.7 billion CPI-linked annuity sale in May 2013, the largest it has yet written. The XtraMAX single
premium savings proposition from Retail Affluent was launched in May 2013 with encouraging early sales volumes.
Whilst we see some signs of consumer strain and increased debt burden in South Africa, impacts on persistency are being carefully
managed through enhanced new business submission standards and retention initiatives.
Business developments
A series of acquisitions were announced in the first half of 2013 which are expanding our footprint in Africa:
- Nigeria - we completed the acquisition of Oceanic Life insurance company from Ecobank in February 2013, and the company
is now trading as Old Mutual. We have rolled out our credit life and group life products and will be implementing our
governance, risk and control systems as part of the integration programme.
- Kenya - we have entered into a partnership with Faulu Kenya through the acquisition of a controlling stake in their business
which provides a broad range of financial services products. This transaction is subject to regulatory approval and other
conditions precedent and is expected to be completed before the end of 2013. Faulu has a wide distribution network across
Kenya with over 100 outlets and more than 400,000 customers. It serves a similar customer base to our Mass Foundation
business in South Africa.
- Ghana - we have purchased the fifth largest insurance company in Ghana, Provident Life Assurance, subject to regulatory
approval.
We expanded our wealth offering for Retail Affluent in South Africa which included the acquisition of Fairheads, an independent fiduciary
service provider. As part of our strategy to enhance our digital offering for our customers, we acquired 22seven, an online personal
financial management service, in January 2013.
In Latin America, the purchase of AIVA was concluded in January 2013 and we have started working with AIVA to build our broker
channel in Mexico.
In China, our joint venture has diversified its bank channel presence, growing from 1,000 approved outlets at the beginning of the year
to 1,485 at the end of June 2013, which supported strong sales growth in H1 2013.
New products launched in India include Group savings plans (Gratuity Plan and Leave encashment plan).
IFRS AOP results
AOP increased by 12% from R3,661 million to R4,115 million, with strong growth in profits for Mass Foundation (up 50% to R783
million) and Latin America & Asia (up 115% to R170 million).
South African AOP benefited from the positive impact of higher equity market levels, favourable investment variances mainly from Retail
Affluent annuity portfolios and lower new business strain as a result of a more profitable mix of new business written. The marked
adverse impact of interest rate and tax changes on our 2012 South African retail business profits did not re-occur. Interest rate
exposures were largely hedged in 2013 resulting in a neutral overall valuation interest rate impact on profits from the South African retail
businesses for the period. Corporate profits declined by 5% mainly due to higher new business strain from inflation-linked annuity deals.
OMIGSA's profit performance was down 4% as a result of the release of incentive accruals in H1 2012, lower associate income and
restructuring costs incurred in the properties business in the current period, partly offset by higher OMSFIN mark-to-market gains and
higher performance and base fees.
AOP from Latin America & Asia increased by 115% as a result of the rand depreciation and a reallocation of expenses to central
overheads.
The growth in Rest of Africa operating profits was mainly due to favourable exchange rate impacts and 2012 indigenisation costs in
Zimbabwe not being repeated in 2013, although there were increased provisions for non-performing CABS loans in Zimbabwe and
increased spend relating to the African expansion strategy.
Net client cash flow
NCCF improved by R3.2 billion to R11.1 billion, mainly driven by annuity deals secured by Corporate and improved flows in Latin
America & Asia as a result of new asset management mandates in Colombia, good sales in retail investment products in Mexico and
higher bank channel sales of Universal Life in China. Reduced NCCF in OMIGSA was primarily due to two significant inflows in the
Dibanisa boutique in H1 2012 which were not repeated in the current year.
Of the R11.1 billion NCCF, R6.4 billion of the flows were from Rest of Africa and Latin America & Asia (H1 2012: R3.0 billion out of R7.9
billion).
Funds under management
FUM increased by 6% from December 2012 to R765 billion, mainly due to the increased NCCF and exchange rate impacts. Equity
markets ended the half year marginally up in South Africa (JSE All-Share Index up 0.8% since December 2012), although they
continued to be volatile. At 30 June 2013, 22% of total Emerging Markets FUM originated from outside of South Africa with this
contribution growing from 19% at 31 December 2012.
Gross sales
Gross sales grew 17% to R76 billion, with our savings sales mix continuing to highlight the growing shift in South Africa from traditional
life products to investment products including unit trusts. For the first half of the year, 29% of gross sales came from outside South
Africa (H1 2012: 23%).
Non-covered sales
Non-covered sales increased by 7% from R48.2 billion to R51.6 billion, with growth of 36% in unit trust sales and a 18% decline in other
non-covered sales. Excluding the impact of the reclassification of the Asia sales from non-covered to covered in 2013, the increase in
non-covered sales was 9%. The strong increase in unit trust sales was largely due to the winning of asset management mandates in
Colombia and higher sales of retail investment products in Mexico. In South Africa, strong sales were delivered by Retail Affluent. Rest
of Africa benefited from higher sales in Zimbabwe, Kenya and Namibia.
Other non-covered sales decreased mainly due to the significant Dibanisa sales in the comparative period. This was partially offset by
higher flows into the Futuregrowth and Alternatives boutiques.
Covered sales
Life APE sales increased by 29% from R3,178 million to R4,093 million. Excluding the reclassification of Asia sales, APE sales
increased by 18%, driven by strong growth in Mass Foundation (up 17%), Corporate (up 56%) and Rest of Africa (up 23%).
South African single premium sales increased by 53%, mainly due to large annuity deals in Corporate. Retail Affluent sales are 8%
above H1 2012 primarily due to improved sales of Max savings (bolstered by strong sales of the new XtraMAX product) and Living
Annuities. Fixed Bond sales were lower as a result of continued conservative interest rates offered, although sales improved following a
general increase in bond yields and a rate enhancement in May 2013.
South African regular premium sales increased by 5% with continued momentum in Mass Foundation delivering growth of 17% primarily
as a result of a larger sales force. OMF Credit Life sales are broadly in line with H1 2012 given marginal new loan growth. Protection
products accounted for 54% of Mass Foundation sales in the period. Retail Affluent sales are flat with Greenlight continuing to be
negatively affected by highly competitive pricing in the broker market and saving sales reflecting the industry shift from traditional life to
investment products. Corporate risk sales are well below the comparative period when they were boosted by two large deals. Umbrella
savings sales improved in 2013.
Rest of Africa sales benefited from a good performance and large deal in Namibia, favourable currency movements and good corporate
deals in Zimbabwe, as well as the first time inclusion of sales from Nigeria following the completion of the acquisition of Oceanic Life in
February 2013.
Sales in Latin America & Asia increased significantly with growth in Mexico of 39%, albeit off a low base, due to favourable exchange
rate movements and strong sales of the new single premium investment product.
Asian sales were reclassified for the first time in H1 2013. As a result of strong single premium sales in China, we are now ranked fifth in
the JV league tables in terms of total premiums.
Old Mutual Finance
2013 loans advanced reflect our continued conservative approach to lending, following evidence of elevated client debt levels.
Impairments rose marginally from 15.0% in H1 2012 to 15.2% in H1 2013. Collections improved and our strengthened credit scoring
introduced in May 2012 has resulted in improved credit performance.
Value of new business and margins
Value of new business (VNB) improved strongly by 49% to R982 million with a strong increase in the APE margin from 22% to 28%.
The improvement in margin is mainly attributable to higher sales volumes (in particular from the growth in sales in Mass Foundation)
and the favourable changes in operating and economic assumptions at December 2012, partly offset by a less profitable product mix in
Corporate.
Embedded value
Operating MCEV earnings (post-tax) increased by 11% to R2,011 million. The main contributor to the improved earnings was higher
VNB. Other operating variances relating to management actions, corrections and methodology changes in 2013 were less negative
compared to 2012.
In the period, operating experience variances were negative as a result of tax, business development costs incurred, particularly in
Africa, and negative persistency experience mainly due to one large termination and the transfer of a large customised annuity scheme
in Corporate, as well as slightly lower retention in Mass Foundation.
Return on Embedded Value (RoEV) declined from 10.1% to 9.1% mainly due to operating experience variances being negative in the
period and lower expected returns, partly offset by higher VNB.
Total MCEV growth from December 2012 to June 2013 of 7% to R48.9 billion benefited from good investment variances.
Outlook
Prospects for the broad economic outlook for Africa remain largely positive, although there is a risk of weaker growth particularly in
South Africa if global conditions and the socio-political environment deteriorate.
Long-term growth expectations for the mass market in South Africa remain attractive due to demographic shifts, and we will continue to
focus on our core customer base in that market.
We are in the process of identifying further suitable targets for acquisition or partnership which will further support our growth in Rest of
Africa.
The integration of Old Mutual and M&F in the Rest of Africa has been agreed and is being implemented. This will be the first step in the
closer integration of the whole of Property & Casualty into the Emerging Markets business.
Emerging Markets data tables (Rand)
Adjusted operating profit
Rm
H1 2013 H1 2012 % change
Retail Affluent 1,528 1,349 13%
Mass Foundation(1) 783 522 50%
Corporate 563 591 (5)%
Rest of Africa 248 226 10%
Latin America & Asia(2) 170 79 115%
LTIR 783 784 0%
Life and Savings 4,075 3,551 15%
OMIGSA 477 498 (4)%
Central expenses and administration (437) (388) (13)%
Total Emerging Markets 4,115 3,661 12%
(1)All Property & Casualty activities are now reported as a separate segment, therefore iWyze results are excluded from Mass Foundation. Comparatives have
been restated
(2)Latin America & Asia comparatives previously included costs related to central expenses and administration. Comparatives have not been restated
Gross sales and funds under management(1)
Rbn
Market and
other
1-Jan-13 Gross sales(2) Redemptions Net flows movements 30-Jun-13
Retail Affluent 121.2 26.6 (25.2) 1.4 9.7 132.3
Mass Foundation 0.0 3.7 (1.7) 2.0 (2.0) 0.0
Corporate 1.3 10.0 (10.2) (0.2) 0.2 1.3
OMIGSA 463.3 13.8 (12.3) 1.5 4.2 469.0
Total South Africa 585.8 54.1 (49.4) 4.7 12.1 602.6
Rest of Africa 38.3 5.5 (4.1) 1.4 7.5 47.2
Latin America & Asia 100.5 16.6 (11.6) 5.0 9.5 115.0
Total Emerging Markets 724.6 76.2 (65.1) 11.1 29.1 764.8
(1)FUM shown on an end manager basis
(2)Gross sales are cash inflows for the period and thus include prior period recurring premium flows
Gross sales(1)
Rm
H1 2013 H1 2012 % change
Retail Affluent 26,615 22,456 19%
Mass Foundation 3,696 3,230 14%
Corporate 9,990 6,309 58%
OMIGSA 13,790 18,392 (25)%
Total South Africa 54,091 50,387 7%
Rest of Africa 5,460 4,757 15%
Latin America & Asia 16,635 10,079 65%
Total Emerging Markets 76,186 65,223 17%
(1)Gross sales are cash inflows for the period and thus include prior period recurring premium flows.
Non-covered sales
Rm
Unit trust / mutual fund sales Other non-covered sales Total non-covered sales
H1 H1 H1 H1 H1 H1
2013 2012 % 2013 2012 % 2013 2012 %
South Africa 14,709 11,675 26% 19,958 23,285 (14)% 34,667 34,960 (1)%
Rest of Africa(1) 2,438 2,082 17% 875 1,355 (35)% 3,313 3,437 (4)%
Latin America & Asia(2) 13,653 8,937 53% 0 880 (100)% 13,653 9,817 39%
Total Emerging Markets 30,800 22,694 36% 20,833 25,520 (18)% 51,633 48,214 7%
(1)Exclusion of R1.1 billion reclassification of client broker account flows in Kenya (execution mandate only) in the current year. Comparatives have not been
restated
(2)From Q1 2013, sales by the India and China businesses have been disclosed as covered rather than non-covered business. Comparatives have not been
restated
Covered sales (APE)
Rm
Single premium APE Regular premium APE Total APE
H1 H1 H1 H1 H1 H1
By Cluster:
2013 2012 % 2013 2012 % 2013 2012 %
South Africa
Retail Affluent 520 483 8% 722 725 0% 1,242 1,208 3%
Mass Foundation 1 1 0% 1,358 1,165 17% 1,359 1,166 17%
Corporate 527 203 160% 150 232 (35%) 677 435 56%
Total South Africa 1,048 687 53% 2,230 2,122 5% 3,278 2,809 17%
Rest of Africa 90 65 38% 278 235 18% 368 300 23%
Latin America & Asia(1) 213 11 1 836% 234 58 303% 447 69 548%
Total Emerging Markets 1,351 763 77% 2,742 2,415 14% 4,093 3,178 29%
Rm
Single premium APE Regular premium APE Total APE
H1 H1 H1 H1 H1 H1
By product:
2013 2012 % 2013 2012 % 2013 2012 %
Emerging Markets
Savings 846 583 45% 1,397 1,118 25% 2,243 1,701 32%
Protection(2) 2 13 (85%) 1,345 1,297 4% 1,347 1,310 3%
Annuity 503 167 201% - - N/A 503 167 201%
Total Emerging Markets 1,351 763 77% 2,742 2,415 14% 4,093 3,178 29%
(1)Latin America & Asia represents Mexico, India and China. From Q1 2013, sales by the India and China businesses have been disclosed as covered rather
than non-covered business. Comparatives have not been restated
(2)OMF Credit life sales are included within protection sales (R102 million H1 2013 and R100 million in H1 2012)
Old Mutual Finance
Rm
H1 2013 H1 2012 % change
Lending book (gross) 7,340 6,331 16%
Sales: loans advanced 3,056 2,974 3%
NPAT/average lending book(1) 2.6% 3.3% (70)bps
Loan approval rate 33.6% 32.6% 100bps
Impairments: average lending book 15.2% 15.0% 20bps
Return on equity 25.8% 31.9% (610)bps
Branches 213 181 18%
Staff 1,948 1,612 21%
(1)Net profit after tax (NPAT)/average lending book is stated after capital charges
Old Mutual Wealth
GBPm
H1 2013 H1 2012(2) % Change
AOP (IFRS basis, pre-tax) 108 95 14%
NCCF (GBPbn) 0.8 0.8 -
FUM (GBPbn)(1) 75.2 69.2 9%
(1)Comparative information for FUM is presented as at 31 December 2012
(2)Finland was sold during H2 2012. This accounted for AOP of GBP10m, NCCF of GBP21m and FUM of GBP1.1bn for H1 2012. Comparatives have not
been restated
Overview and operating environment
The business has performed well with important progress made against the targets set out in 2012. As part of the strategy to become a
modern, integrated wealth and asset management business, we have taken steps to extend our asset management capabilities and
develop new products and implement the necessary changes relating to RDR in the UK. We believe that we have maintained a
leadership position in the UK platform market. Our investment performance in the UK has been excellent as our proposition has gained
traction, with flows improving markedly and an increased proportion of new flows generating asset management revenues. In our cross-
border markets, the management actions taken in 2012 to enhance distribution relationships and develop products have continued to
lead to improved sales.
Business developments
In 2012 we highlighted the key areas of focus for the business over the next three years. During the first half of the year we have made
good progress:
- Build out our asset management business: the actions taken to reposition the business following the merger of Skandia
Investment Group and Old Mutual Asset Managers (UK) continues to improve performance and the business is now running
at an operating margin of 17% (December 2012: 5%). The Old Mutual Global Investors (OMGI) brand was successfully
launched in the first half of the year and sales have developed well with independent reports highlighting OMGI as one of the
top asset management firms in terms of sales in Q1 2013. The proportion of inflows onto our UK platform to be managed by
OMGI has increased as the Old Mutual Wealth and OMGI teams work closely together. OMGI was the best performing fund
manager on our UK Platform in Q2 when measured by net client cash flow. In Q1, we announced the hiring of Richard Buxton
and his team to further strengthen our UK equities capability and we are already seeing good flows of new business as a
consequence.
- Widen our proposition: on our savings products, we have already transferred approximately GBP900 million in AUM into our
Select fund range, which is likely to attract further assets when our marketing campaign is launched in the first quarter of
2014. We re-entered the protection market towards the end of 2012 with our revitalised Skandia Protect product. In May
2013, we launched a critical illness offering, with our product being regarded as one of the best in the market due to the extent
of the risk events covered by the policy.
- Improve efficiency: our new organisational structure was implemented at the end of 2012 as we moved to become one
integrated wealth business. This restructuring is now complete and well embedded.
- Manage our heritage books for value: our Manage for Value portfolio is tracking well against our targets following the
actions taken to restructure these operations. Persistency experience on our closed books in Germany, Austria, Switzerland
and the UK is in line with our expectations, while profitability levels have improved in our open books (France, Italy and
Poland) as our efficiency programme takes effect.
IFRS AOP results
Old Mutual Wealth AOP increased by 14% to GBP108 million (H1 2012: GBP95 million) as a result of increased average FUM in the
period. The comparable period included GBP10 million of profits from the Finnish business, which was sold in H2 2012. Excluding
Finland, AOP grew by 27%. Overall operating margin increased from 32% to 36%, mainly as a result of efficiencies following last year's
restructuring. The operating margin was also improved by the greater share of FUM being managed within our own asset management
capability.
UK Platform profits increased as a result of operational leverage from the higher FUM.
Underlying International cross-border profit growth excluding Finland was 19% as profits benefited from operational leverage, cost
efficiency and from the improved sales performance as a consequence of the new product innovation and distribution developments
made last year.
OMGI fees and profits grew as a result of merger synergies, higher FUM levels and the migration of assets into our Select fund range.
The Old Mutual Wealth Europe open book profits grew strongly on higher FUM in Italy and a significantly reduced expense base in
France.
Net client cash flow (NCCF)
NCCF of GBP0.8 billion was flat on prior period (H1 2012: GBP0.8 billion) with improved sales in the UK Platform, International cross-
border and Italian businesses being offset by GBP0.8 billion of post-Nordic sale net outflows in OMGI.
UK Platform NCCF was GBP1.3 billion (H1 2012: GBP1.2 billion), following a strong second quarter after challenging market conditions
in the early part of the year due to the practicalities of implementation of the RDR regulations.
International cross-border NCCF of GBP254 million was significantly up on the prior period (H1 2012: GBP61 million) reflecting
improved sales across most regions, especially South Africa and Hong Kong, as the actions taken in 2012 continued to result in
improved business performance.
OMGI continued to produce strong underlying NCCF from UK third party sales, reflecting the reorganisation and recent hires within the
UK equities teams as well as increased sales through our retail platform in the UK. Net outflows from the lower margin Nordic business
following the divestment of Nordic in 2012 were GBP0.8 billion for the year to date, and we expect the final GBP0.5 billion to GBP0.7
billion to flow out in the next 12 months.
Significantly improved sales in Italy and France saw NCCF for the European open books increase to GBP364 million (H1 2012: GBP133
million).
Gross outflows on the closed UK Heritage book were broadly flat on H1 2012, and persistency levels remain in line with our
expectations.
Funds under management
FUM increased 9% to GBP75.2 billion, with positive NCCF and higher equity markets contributing to the increase. UK assets excluding
OMGI were GBP40.6 billion (31 December 2012: GBP36.7 billion) with UK Platform assets at GBP25.0 billion, 11% higher than the 31
December 2012 level.
Investment performance in OMGI remains strong with 49% of OMGI on and off-shore Open Ended Investment Company (OEIC) funds
in the 1st quartile over three years, and 69% of total funds above the median.
Gross sales
Gross sales increased to GBP6,741 million, 26% higher than the prior period (H1 2012: GBP5,356 million), with strong performance in
the UK and International businesses as well as in Italy.
UK Platform sales increased by 4% to GBP2,277 million (H1 2012: GBP2,192 million). Following the challenging start to the year,
momentum has developed in the latter months, with Q2 sales exceeding Q1 by 40%. The improved performance reflects increasing
traction of the Old Mutual Wealth offering in the market.
International cross-border gross sales of GBP931 million were 20% up on prior period (H1 2012: GBP775 million), due to Hong Kong
sales continuing to benefit from the success of our Portfolio Bond, good sales through AIVA in Latin America and improved sales and
distribution effectiveness in South Africa.
OMGI sales were strong from both the Wealth platform and from third party sources, at GBP3,510 million. These were supported by
brand marketing activities, key desk hires in the UK equity team, strong fund performance and a more effective UK distribution structure.
Within the Heritage business, sales of GBP371 million (H1 2012: GBP463 million) reflect its closure to new business.
In the open Manage for Value portfolios we experienced good sales in Italy (up 55% to GBP625 million) and in France (up 23% to
GBP142 million). In Italy, there were increased sales through both new and established distribution relationships, while France
continues to benefit from favourable changes to tax legislation and the confidence that has returned to the market in H1 2013.
Around GBP900 million of FUM from our UK business was transferred to OMGI as the underlying fund manager. Further transfers are
expected in the second half of 2013.
Life and Embedded value summary
Gross single premium covered business sales on the UK Platform recovered in Q2 2013, with the highest level of sales since Q1 2011.
Platform sales accounted for GBP115 million of the GBP318 million total Old Mutual Wealth sales on an APE basis.
In the International market, sales increased by 18% to GBP99 million on an APE basis.
Sales in open Manage for Value portfolios increased by 30% to GBP79 million, reflecting the good performance in Italy and France.
Value of new business grew substantially from the recovery in higher margin international sales. Experience variances were GBP(22)
million and represent development spend in accordance with our change in methodology in 2012. As a consequence, Return on
Embedded Value (RoEV) decreased to 3.4%.
The growth in MCEV during the period of 6% was largely due to the value of new business written and economic and foreign exchange
variances.
Outlook
Positive equity market conditions and wide-ranging developments in our offering position the business well for the future and for
achieving our 2015 targets. We expect that our actions will result in further operating improvements over the coming months.
The cost base for OMGI in the second half of the year will reflect the increase in new team hires to further grow the business which will
have the consequence of reducing profit run-rate and operating margin in the short-term.
We continue to explore opportunities to invest in high quality teams where investment strategies complement the Old Mutual Wealth
offering.
Old Mutual Wealth data tables (Sterling)
Adjusted operating profit
GBPm
H1 2013 H1 2012 % Change
Invest & Grow markets
UK Platform 2 (1) 300%
UK Other(1) 3 4 (25)%
International(2) 31 36 (14)%
Old Mutual Global Investors(3) 8 3 167%
Total Invest & Grow 44 42 5%
Manage for Value markets
Old Mutual Wealth Europe - open book(4) 11 1 n/a
Heritage business(5) 53 52 2%
Total Manage for Value 64 53 21%
AOP (IFRS basis, pre-tax) 108 95 14%
(1)Includes Protection, Series 6 pensions, and UK Institutional business
(2)Comparative includes Finland, which was sold in H2 2012 and contributed GBP10 million of AOP in H1 2012
(3)OMAM (UK) profits were recorded in USAM up until its transfer to OMGI in Q2 2012
(4)Includes business written in France, Italy and Poland
(5)Includes UK Heritage and Old Mutual Wealth Europe closed book (Germany, Austria, Switzerland and Liechtenstein)
Gross sales and funds under management
GBPbn
Market and
other
1-Jan-13 Gross sales Redemptions Net flows movements 30-Jun-13
Invest & Grow markets
UK Platform 22.6 2.3 (1.0) 1.3 1.1 25.0
UK Other(1) 4.7 0.4 (0.4) - 0.5 5.2
International 13.9 0.9 (0.6) 0.3 0.5 14.7
Old Mutual Global Investors 13.8 3.5 (3.3) 0.2 0.8 14.8
Total Invest & Grow 55.0 7.1 (5.3) 1.8 2.9 59.7
Manage for Value markets
Old Mutual Wealth Europe - open book(2) 5.9 0.8 (0.4) 0.4 0.1 6.4
Heritage business(3) 14.3 0.4 (1.1) (0.7) 2.0 15.6
Total Manage for Value 20.2 1.2 (1.5) (0.3) 2.1 22.0
Elimination of intra-Group assets(4) (6.0) (1.6) 0.9 (0.7) 0.2 (6.5)
Total Old Mutual Wealth 69.2 6.7 (5.9) 0.8 5.2 75.2
(1)Includes Protection, Series 6 pensions, and UK Institutional business
(2)Includes business written in France, Italy and Poland
(3)Includes UK Heritage and Old Mutual Wealth Europe closed book (Germany, Austria, Switzerland and Liechtenstein)
(4)Assets and flows managed by OMGI on behalf of other Old Mutual Wealth businesses
Gross sales
GBPm
H1 2013 H1 2012 % Change
Invest & Grow markets
UK Platform 2,277 2,192 4%
UK Other(1) 436 454 (4)%
International 931 775 20%
Old Mutual Global Investors(2) 3,510 1,808 94%
Total Invest & Grow 7,154 5,229 37%
Manage for Value markets
Old Mutual Wealth Europe - open book(3) 805 555 45%
Heritage business(4) 371 463 (20)%
Total Manage for Value 1,176 1,018 16%
Elimination of intra-Group assets(5) (1,589) (891) 78%
Total Old Mutual Wealth 6,741 5,356 26%
(1)Includes Protection, Series 6 pensions, and UK Institutional business
(2)OMAM(UK) sales were recorded in USAM until its transfer to OMGI in Q2 2012
(3)Includes business written in France, Italy and Poland
(4)Includes UK Heritage and Old Mutual Wealth Europe closed book (Germany, Austria, Switzerland and Liechtenstein)
(5)Assets and flows managed by OMGI on behalf of other Old Mutual Wealth businesses
Non-covered sales
GBPm
H1
H1 2013 2012 % Change
Invest & Grow markets
UK Platform 1,237 1,138 9%
UK Other(1) 315 322 (2)%
Old Mutual Global Investors(2) 3,510 1,808 94%
Total Invest & Grow 5,062 3,268 55%
Manage for Value markets
Old Mutual Wealth Europe open book(3) 26 13 100%
Heritage business(4) 4 6 (34)%
Total Manage for Value 30 19 58%
Elimination of intra-Group assets(5) (1,589) (891) 78%
Total Old Mutual Wealth 3,503 2,396 46%
(1)Includes Protection, Series 6 pensions, and UK Institutional business
(2)OMAM(UK) sales were recorded in USAM until its transfer to OMGI in Q2 2012
(3)Includes business written in France, Italy and Poland
(4)Includes UK Heritage and Old Mutual Wealth Europe closed book (Germany, Austria, Switzerland and Liechtenstein)
(5)Assets and flows managed by OMGI on behalf of other Old Mutual Wealth businesses
Covered sales
GBPm
Gross single premium APE regular premium Total APE
H1 2013 H1 2012 % H1 2013 H1 2012 % H1 2013 H1 2012 %
Invest & Grow markets
UK Platform 985 1,007 (2)% 17 18 (6)% 115 118 (3)%
UK Other(1) 34 64 (47)% 12 12 - 15 19 (21)%
International(2) 832 621 34% 15 22 (32)% 99 84 18%
Total Invest & Grow 1,851 1,692 9% 44 52 (15)% 229 221 4%
Manage for Value markets
Old Mutual Wealth Europe open book(3) 730 489 49% 6 12 (50)% 79 61 30%
Heritage business(4) 21 62 (66)% 8 19 (58)% 10 25 (60)%
Total Manage for Value 751 551 36% 14 31 (55)% 89 86 3%
Total Old Mutual Wealth 2,602 2,243 16% 58 83 (30)% 318 307 4%
(1)Includes Protection, Series 6 pensions, and UK Institutional business
(2)Comparative includes Finland, which was sold in H2 2012
(3)Includes business written in France, Italy and Poland
(4)Includes UK Heritage and Old Mutual Wealth Europe closed book (Germany, Austria, Switzerland and Liechtenstein)
Nedbank
Rm
Highlights H1 2013 H1 2012 % change
AOP (IFRS basis, pre-tax) 5,489 5,073 8%
Headline earnings(1) 3,914 3,454 13%
Net interest income(1) 10,309 9,642 7%
Non-interest revenue(1) 9,535 8,265 15%
Net interest margin(1) 3.58% 3.54%
Credit loss ratio(1) 1.31% 1.11%
Cost to income ratio(1) 54.2% 55.6%
Return on Equity(1) 14.6% 14.2%
Return on Equity (excluding goodwill)(1) 16.1% 15.8%
Common equity Tier 1 ratio(2) 11.8% 11.6%
(1)As reported by Nedbank in its report to shareholders for six months ended 30 June 2013 and 30 June 2012
(2)Comparative is at 31 December 2012 and calculated by Nedbank on a Basel III basis
The full text of Nedbank's results for the year ended 30 June 2013, released on 6 August 2013, can be accessed on our website
http://www.oldmutual.com/ir/pressReleases/index.jsp. The following is an edited extract:
Nedbank Group generated economic profit (EP) of R749 million, up 28.7% (H1 2012: R582 million). The return on average ordinary
shareholders' equity (ROE) excluding goodwill increased to 16.1% (H1 2012: 15.8%) and ROE to 14.6% (H1 2012: 14.2%), benefiting
from an increased return on assets (ROA) ratio of 1.15% (H1 2012: 1.07%).
Nedbank Group is well capitalised, with the Basel III common equity tier 1 ratio at 11.8% (December 2012: Basel III pro-forma ratio
11.6%). Funding and liquidity levels remained sound with the surplus liquidity buffer at R25.0 billion (December 2012: R24.4 billion),
while the average long-term funding ratio increased to 28.0% (December 2012: 26.0%).
The net asset value per share continued to increase, growing 7.9% (annualised) to 12,180 cents from 11,721 cents in December 2012.
Financial performance
Net interest income
Net interest income grew 6.9% to R10,309 million (H1 2012: R9,642 million), supported by growth in average interest-earning banking
assets of 6.1%.
The net interest margin (NIM) of 3.58% increased from the comparative period (H1 2012: 3.54%) and the prior year (December 2012:
3.53%). Margin gains were underpinned by advances and deposit mix changes, risk-adjusted pricing of new advances and back-book
advances runoff.
Impairments
Impairments increased to R3,325 million (H1: R2,702 million) and the credit loss ratio (CLR) to 1.31% (H1 2012: 1.11%).
The CLR is comprised of a specific charge of 1.24% and a portfolio charge of 0.07% (H1 2012: specific: 1.00% and portfolio: 0.11%).
(%)
CLR analysis H1 2013 FY 2012 H1 2012
Specific impairments 1.24 0.91 1.00
Portfolio impairments 0.07 0.14 0.11
Total CLR 1.31 1.05 1.11
Total group defaulted advances decreased year -on -year to R20,176 million (H1 2012: R21,838 million) from continuing improvements
in the residential and commercial mortgage books. Defaulted advances were up 9.4% (annualised) on the 2012 year-end (December
2012: R19,273 million) from increases in personal loans and in the wholesale businesses.
Part 3 Detailed Business Review
The coverage ratio for total and specific impairments increased to 58.8% (H1 2012: 52.9%) and 40.9% (H1 2012: 39.0%) respectively.
Portfolio coverage on the performing book continued to strengthen to 0.7% (H1 2012: 0.6%).
Our collections processes generated post write-off recoveries of R412 million (H1 2012: R428 million), reflecting the prudent approach
of cash accounting the recoveries on the written-off book. This includes personal-loan recoveries of R130 million (H1 2012: R114
million).
Non-interest revenue
Non-interest revenue (NIR) increased by 15.4% to R9,535 million (H1 2012: R8,265 million), due to the following:
- Commission and fee income of R6,771 million was up 14.2% (H1 2012: R5,928 million), driven by strong client gains, improved
cross-sell, good volumes and higher levels of client activity;
- Insurance income of R950 million increased 15.4% (H1 2012: R823 million), benefiting from growth in personal loan volumes offset
by the base effect of the benign short-term claims experienced in H1 2012;
- Trading income increased to a robust R1,272 million (H1 2012: R1,252 million) from a high 2012 base as a result of continuing
strong performance within the fixed-income, commodities, credit and currencies and forex environments;
- Private equity generated income of R63 million (H1 2012: R139 million); and
- Fair-value gains of R94 million (H1 2012: R125 million loss) were recognised mainly as a result of basis risk on centrally hedged
banking book positions and accounting mismatches in hedged fixed-rate advances portfolios as market yields increased. This
positive fair value gain follows a period of cumulative fair-value losses of R583 million since 2010. NIR, excluding fair-value gains,
was up 12.5%.
The strong uplift from NIR resulted in the NIR-to-expense ratio increasing to 88.7% (H1 2012: 83.0%) and for the first time Nedbank
achieved its medium- to long-term target of more than 85%. The strength of the Nedbank franchise is reflected in the sustained growth
in NIR, increasing 15.4% (15.7% excluding fair value adjustments) on a compound basis since June 2009.
Expenses
Disciplined cost management resulted in expenses growing at 8.0% to R10,750 million (H1 2012: R9,957 million, restated by R18
million to reflect the adoption of IAS 19 Employee Benefits (2011)).
Growth in expenses was primarily driven by:
- Staff-related costs increasing 8.6%, comprising remuneration cost growth of 8.0% following inflation-related annual increases
averaging 6.5% and 0.7% growth in predominantly frontline headcount; and
- Marketing and computer processing cost growing 15.6% and 7.4% respectively, consistent with the group's focus on revenue-
generating business activities and building the franchise.
Taxation
The base effect of capital gains tax and secondary tax on companies in June 2012, combined with lower levels of dividend income,
resulted in an effective tax rate of 25.9% (H1 2012: 27.9%).
Statement of financial position
Capital
Strong balance sheet management resulted in all capital adequacy ratios remaining well above the Basel III minimum regulatory capital
requirements and well within the group's new Basel III internal target ranges.
(%)
30-Jun-13 31-Dec-12 30-Jun-12 Internal target
ratio ratio ratio range
(Basel III) (Basel III) (Basel II.5) (Basel III)
Common equity Tier 1 ratio 11.8 11.6 10.6 10.5 to 12.5
Tier 1 ratio 13.0 13.1 12.1 11.5 to 13.0
Total capital ratio 14.8 15.1 14.4 14.0 to 15.0
The group's capital ratios are expected to be maintained at these strong levels in 2013 through projected earnings growth and the
portfolio tilt strategy, offset by risk-weighted asset growth.
A total of R1.8 billion of new-style, fully loss-absorbent, Basel III-compliant, Tier 2 subordinated-debt capital was successfully issued
during July 2013 to replace the R1.8 billion, Basel II Tier 2 capital that matures in September 2013.
Further detail on risk and capital management will be available in the Risk and balance sheet management review section of the group's
analyst booklet and the Pillar 3 Report to be published on the website at www.nedbankgroup.co.za in September 2013.
Funding and liquidity
Nedbank Group remains well-funded, with a strong liquidity position that is underpinned by a well-diversified and lengthened funding
profile, a surplus liquid asset buffer of R25.0 billion in anticipation of the Basel III liquidity coverage ratio (LCR), a strong loan-to-deposit
ratio and low reliance on interbank and foreign currency funding. The average long-term funding ratio for the second-quarter of 28.0%
(December 2012: 26.0%) was supported by the growth in the Retail Savings Bond to R7.7 billion.
Loans and advances
Loans and advances grew 11.5% (annualised) to R557.4 billion (December 2012: R527.2 billion), underpinned by gross new-advances
payouts increasing 20.3% to R83 billion (H1 2012: R69 billion). Retail banking advances grew by a modest 2.5% (annualised), reflecting
the difficult consumer environment, selective origination in higher-risk asset categories in line with our portfolio tilt strategy, roll-off of the
home loans back-book and early repayments.
Deposits
Deposits grew 10.2% (annualised) to R578.8 billion (December 2012: R550.9 billion) and the loan-to-deposit ratio increased slightly to
96.3% (H1 2012: 95.7%).
The growth in call and term deposits of 13.8%, fixed deposits of 13.6% and cash management deposits of 2.8% demonstrates the
strong focus on portfolio tilt and attracting retail and corporate funding through competitive and innovative liability products.
Current and savings accounts increased by 2.3% and 27.5% respectively, with good contributions from Retail, Business Banking and
Wealth. Continuing improvements in the funding profile ensured that Nedbank continued to hold a higher proportion of household
deposits relative to the size of its current retail transactional banking franchise.
Economic outlook
Globally, economic growth is expected to be slightly firmer in the remainder of 2013. However, downside risk remains high, particularly
in some key emerging markets, including China, where concerns of a credit crisis and economic slowdown have moderated growth
momentum.
South Africa's GDP is forecast to grow by 2.0% in 2013 and 3.2% in 2014. The weakening rand will provide limited benefit to export
growth in light of the low productivity, soft commodity prices and infrastructural constraints, but will add to inflationary pressures. Overall,
given the outlook of lower growth, interest rates are anticipated to remain unchanged until possibly the second half of 2014.
Household credit demand, including residential mortgages, is likely to remain muted, albeit with pockets of growth in areas such as
instalment sales and leasing finance. Growth in unsecured loans will continue to slowdown as consumer stress increases and lending
risk appetite diminishes.
Infrastructure spending by the public sector is anticipated to increase, but corporate credit demand is expected to remain subdued, with
increasing competition for fewer deals.
Prospects
Financial performance for the full year as set out below is currently anticipated to remain broadly in line with the guidance
communicated in Nedbank's 2012 annual results, with the exception of the CLR which is now expected to be below the 1.31% in H1
2013, but above 1.00%:
- Advances to grow at mid to upper single digits.
- NIM to remain at levels similar to 2012.
- The CLR to improve from the June 2013 level, but remain above the top end of the group's through-the-cycle target range of 60 to
100 bps.
- NIR (excluding fair-value adjustments) to grow at low double digits and allow the group to meet the medium-to-long-term NIR-to-
expenses target of more than 85%.
- Expenses to increase by mid to upper single digits.
Nedbank data tables (Rand)
Cluster Performance
Headline earnings (Rm) ROE
H1 2013 H1 2012 % change H1 2013 H1 2012
Nedbank Capital 801 685 16.9% 28.4% 24.1%
Nedbank Corporate(1) 1,069 864 23.7% 25.9% 22.2%
Nedbank Business Banking 349 433 (19.4) % 15.2% 20.5%
Nedbank Retail 1,054 1,194 (11.7) % 10.0% 11.8%
Nedbank Wealth 421 357 17.8% 35.9% 29.3%
Operating units 3,694 3,533 4.6% 17.6% 17.5%
Centre including Rest of Africa(1) 220 (79) >100.0%
Total (including goodwill) 3,914 3,454 13.3% 14.6% 14.2%
(1)June 2012 restated by R13m to reflect the adoption of IAS 19 Employee Benefits (2011)
Detailed segmental information is available in the results booklet and on Nedbank's website at www.nedbankgroup.co.za under the
'Financial information' section.
% banking Through-the-
advances cycle target
Credit loss ratio H1 2013 H1 2012 FY 2012 ranges
Nedbank Capital 11.3% 0.77 1.41 1.06 0.10 - 0.55
Nedbank Corporate(1) 32.1% 0.30 0.30 0.24 0.20 - 0.35
Nedbank Business Banking 11.9% 1.02 0.41 0.34 0.55 - 0.75
Nedbank Retail 38.2% 2.56 2.00 2.01 1.50 - 2.20
Nedbank Wealth 3.8% 0.24 0.46 0.61 0.20 - 0.40
Total 1.31 1.11 1.05 0.60 - 1.00
(1)The Rest of Africa Division was previously reported in Nedbank Corporate and is now reported at the centre
Loans and advances by cluster at year-end are as follows:
Rm
% change
30-Jun-13 31-Dec-12 (annualised)
Banking activity 59,897 52,732 27.4%
Trading activity 37,264 29,762 50.8%
Nedbank Capital 97,161 82,494 35.9%
Nedbank Corporate 169,066 162,730 7.9%
Nedbank Business Banking 62,627 60,115 8.4%
Nedbank Retail 193,027 190,647 2.5%
Nedbank Wealth 22,138 19,864 23.1%
Centre including Rest of Africa 13,330 11.316 35.6%
Total 557,349 527,166 11.5%
Property & Casualty
Rm
Highlights H1 2013 H1 2012(1) % Change
Underwriting margin (2.7)% 2.5%
Underwriting result (118) 91 (230)%
Long-term investment return (LTIR) 237 300 (21)%
Non-operational cost (8) (5)
Income from associate (Zimbabwe) 23 0
AOP (IFRS basis, pre-tax) 135 386 (65)%
Gross written premiums 5,442 4,607 18%
Net earned premiums 4,359 3,710 17%
Claims ratio 73.9% 67.2%
Combined ratio 102.7% 97.5%
International Solvency ratio 56.3% 65.3%
Return on equity 4.1% 12.0%
(1)Comparatives have been restated to reflect 100% of the iWyze result
Overview and operating environment
The underwriting loss of R118 million reflects the continuing unfavourable underwriting experience for our business. Claims inflation
has led to underwriting losses in our personal lines business in particular and this has been exacerbated by a weakening rand on the
motor book claim costs. Selective pricing action on poorly performing lines of business is in progress and will continue in the 2013
renewal season and beyond. Expense control remains an important continuing focus.
All of the Group's Property and Casualty activities are now reported as a single segment, including 100% of the iWyze result and all the
activities in Africa.
During the period we have restructured the business along customer lines to enable closer cooperation with other Group companies.
iWyze, our direct insurance joint venture with the Old Mutual Mass Foundation distribution team, has delivered strong premium growth
at a lower combined ratio compared to the prior period. At the end of June 2013, there were over 46,000 active policies. The claims
loss ratio at end June 2013 was 93.9% (June 2012: 101.5%). Service levels are expected to become more efficient. The business
remains well capitalised with a 56% international solvency ratio (the ratio of net assets to net premiums) and we continue to explore
mechanisms to structure our balance sheet efficiently.
Business developments
The new organisational structure consists of three business segments; Personal, Commercial & Africa and Corporate & Niche. The new
structure will enable us to create greater operational focus and accountability within the business. New management for the Commercial
& Africa and Corporate & Niche segments has been appointed, whilst the appointment for the Personal segment is imminent.
We are currently awaiting regulatory approval from the South African Financial Services Board and the Securities & Exchange
Commission in Nigeria for our acquisition of Oceanic's Nigerian general insurance business from Ecobank.
Underwriting and IFRS AOP results
The underwriting margin of (2.7)% (2012: 2.5%) reflected increased claims frequency and severity, with some exceptional losses as a
result of weather and fire damage. Operating expenses continued to be actively managed. AOP was 65% down due to a decrease in
the underwriting result and a decrease in the LTIR rate due to the lower prescribed rate applied in 2013. ROE decreased from 12.0% to
4.1% reflecting the reduction in underwriting profit.
Gross written premiums (GWP) grew 18% to R5,442 million (2012: R4,607 million). The major contributors to the increase in GWP
were our recently formed Inwards Reinsurance business, Commercial schemes and Underwriting Management Agencies (UMAs), and
Personal lines across all channels. The mix of business written was 28% from Personal, 34% from Commercial, 7% from Africa, 24%
from Corporate & Niche and 7% from CGIC.
The product offerings from Personal and Commercial & Africa consist of a comprehensive set of general insurance lines, predominantly
motor and property cover, whilst the Corporate & Niche segment offers general Corporate cover, as well as engineering, marine and
other specialist lines.
The claims ratio in H1 2013 increased to 73.9% (2012: 67.2%). Claims were elevated in property and in motor across both Personal and
Commercial lines, as well as severe drought conditions which affected the Agriculture business.
The expense ratio improved from 14.8% to 12.5%, as we continued to derive benefits from our continuing restructuring initiatives.
Expenses reduced by 1% which was well below inflation.
The Credit Guarantee operation generated good premium growth; however the challenging economic conditions have had a negative
impact on its claims ratio, resulting in a lower underwriting result compared with the prior period.
Our businesses in Namibia and Botswana achieved strong premium growth, but suffered from an increased claims ratio. Our investment
in Zimbabwe generated a strong performance during the period.
Outlook
The combination of a significant number of catastrophe claims in late 2012 and the continued high incidence of large claims in early
2013 provides the market conditions for a likely hardening of rates in the 2013/14 underwriting year. Additional market capacity has
however been evident in selected lines. Improved management information will allow us to further implement selective strengthening of
our underwriting discipline. We will continue to focus on profitable business with premium growth more likely to come from increased
contributions from alternative channels. We will improve underwriting performance through continued cost containment and a more
efficient supply chain management strategy to reduce average claims costs.
Increased connectivity with other Group companies will further allow for operational improvements and taking advantage of
opportunities in the Rest of Africa. We will continue to grow the affinity channels in iWyze, which will help to create scale.
A number of initiatives are currently under way to improve the operational efficiency within the business.
Our continuing focus on improving service levels and developing new products will support our customer retention and growth
objectives. Product development will centre around designing products for niche markets and refining our existing products for new
customer segments.
US Asset Management
$m
H1 2012 H1 2012
Highlights(1) H1 2013 Continuing % Change Reported % Change
AOP (IFRS basis, pre-tax) 84 76 11% 66 27%
Operating margin, before non-controlling interests(2) 33% 33% 25%
Operating margin, after non-controlling interests(2) 29% 29% 23%
Net client cash flow ($bn) 10.6 3.6 194% 2.3 361%
Funds under management ($bn)(3) 229.8 208.6 10% 208.6 10%
(1)Continuing operations exclude the financial impact of affiliates divested in 2012
(2)Comparative operating margin has been restated following the adoption of IFRS 10 in respect of Heitman
(3)Comparative information for FUM is presented as at 31 December 2012
Overview
Despite volatile markets in the second quarter, business performance was strong, largely due to positive markets and client cash flows
in the first half of 2013, combined with the impact of reduced costs resulting from the divestiture activity undertaken in the second half of
2012. IFRS AOP of $84 million was up 27% on the H1 2012 reported result.
Continued strong long-term investment performance and improved distribution resulted in net client cash inflows increasing to $10.6
billion (H1 2012: $2.3 billion inflow on a reported basis).
Business developments
In April 2013, Old Mutual Asset Management Trust Company was closed and USAM outsourced its continuing corporate trustee
activities to more efficiently support our affiliates' private fund and collective vehicle offerings in the future.
IFRS AOP results and operating margin
IFRS AOP on a continuing basis was up 11% to $84 million (H1 2012: $76 million) due to higher average FUM, benefiting from positive
markets and net client cash inflows.
Management fees from continuing operations for the period of $278 million were 14% up (H1 2012: $243 million), and performance and
transaction fees were up $5 million to $8 million (H1 2012 and H1 2013 performance and transaction fees exclude Heitman).
AOP operating margin from continuing operations remained relatively consistent with the prior year at 33% before non-controlling
interests and 29% after non-controlling interests.
On a reported basis, operating margin before non-controlling interests improved 800 basis points over the first half of 2012, driven by
increases in performance fees and the divestiture activity undertaken. Reported operating margin after non-controlling interests rose
600 basis points. Going forward, USAM will target an operating margin of at least 30% before non-controlling interests.
Investment performance for continuing operations
Over the one-, three- and five-year periods ended 30 June 2013, 54%, 95% and 76% of assets outperformed benchmarks, compared to
65%, 65% and 74% at 31 March 2013 and 62%, 66% and 76% at 31 December 2012. The improvement in three year performance
from 31 March 2013 is driven by one value equity product outperforming its respective benchmark.
Investment performance over the one-, three- and five-year periods continues to be key to generating future positive cash flows.
Funds under management and net client cash flows
$bn
Disposed of or
Continuing operations transferred affiliates Total
H1 2013 H1 2012 H1 2013 H1 2012 H1 2013 H1 2012
Opening FUM 208.6 183.3 - 48.2 208.6 231.5
Gross inflows 22.5 14.5 - 2.5 22.5 17.0
Gross outflows (11.3) (10.3) - (3.8) (11.3) (14.1)
Total client driven net flows 11.2 4.2 - (1.3) 11.2 2.9
Hard asset disposals(1) (0.6) (0.6) - - (0.6) (0.6)
Net client cash flow 10.6 3.6 - (1.3) 10.6 2.3
Disposals - - - (30.8) - (30.8)
Transferred to Old Mutual Wealth - - - (6.2) - (6.2)
Market and other 10.6 9.8 - 1.4 10.6 11.2
Closing FUM 229.8 196.7 - 11.3 229.8 208.0
(1)Hard asset disposals constitute forestry, property and similar assets, which were sold and proceeds passed to client beneficiaries
FUM increased 10% to $229.8 billion (31 December 2012: $208.6 billion) driven by $10.6 billion of market appreciation and $10.6 billion
of net client cash inflows.
FUM consists primarily of long-term investment products diversified across equities ($134.3 billion, 58.4%), fixed income ($63.9 billion,
27.8%) and alternative investments ($31.6 billion, 13.8%).
Net client cash inflows totalled $10.6 billion for the period (H1 2012 continuing operations: $3.6 billion net inflow, H1 2012 reported
results: $2.3 billion net inflow), representing 5.1% of beginning AUM. Net inflows were highly diversified, with six out of nine affiliates
reporting positive or flat flows.
Net client cash inflows during the period are expected to result in a $24.9 million positive impact to annualised revenue.
Gross inflows totalled $22.5 billion (H1 2012 continuing operations: $14.5 billion, H1 2012 reported results: $17.0 billion), largely through
sales in global fixed income, international equities, dividend focus equities, emerging markets, and domestic real estate products. $8.8
billion of gross inflows came from new client accounts.
Gross outflows totalled $11.9 billion (H1 2012 continuing operations: $10.9 billion, H1 2012 reported results: $14.7 billion), concentrated
in US value equities, along with international equities. Gross outflows of $0.6 billion relate to investment driven hard asset disposals by
Heitman, USAM's real estate manager.
Non-US clients currently account for 36% of FUM (31 December 2012: 35%). International equity, emerging markets, global equity,
global fixed income and currency products account for 51% of the FUM (31 December 2012: 52%).
Outlook
USAM's focus continues to be on generating growth in the portfolio, primarily through organic growth of its affiliates, collaborative growth
generated through new product and channel initiatives and seed capital, and complementary global distribution. We will also consider
selective non-organic growth opportunities which are additive to the portfolio and increase shareholder value.
Following the completion of the affiliate portfolio repositioning and assuming continued strong markets, we expect continuing positive
net client cash flows for the remainder of 2013 and achievement of an operating margin of greater than 30%, before non-controlling
interests.
We are committed to increasing penetration in markets outside of the US and building complementary institutional distribution
capabilities globally.
Non-core business Bermuda
Overview and operating environment
Bermuda remains a non-core business. Its results are excluded from the Group's IFRS AOP, except for the interest expense charged to
AOP relating to the internal loans from Bermuda to Group Head Office.
Bermuda has continued to implement its run-off strategy of risk reduction while managing for value. Contracts containing the Universal
Guarantee Option (UGO) Guaranteed Minimum Accumulation Benefit (GMAB) experienced higher than assumed surrender rates during
the period. At 30 June 2013, 98% of contracts by value had passed their fifth anniversary date. The total cash cost of the top-ups made
to contracts reaching their anniversary by 30 June 2013 was $523 million, significantly lower than the 31 December 2011 projection of
$689 million, mainly as a result of favourable equity market movements. The option-based hedging programme, implemented in March
2012 to protect against the risk of further market declines over the 5-year top-up period, has operated as intended.
In July 2013, the Bermuda Monetary Authority (BMA) agreed to the cancellation of $450 million of inter-company loan notes, reflecting
the reduction in size of the remaining liabilities, risk management strategy and de-risking actions taken.
Business developments
Market conditions and the profile of the Hong Kong policies of the UGO GMAB book have provided the opportunity to reduce risk in this
book by implementing a structured derivative to offset the Highest Anniversary Value (HAV) exposure.
Key Metrics and Outcomes
IFRS results
The IFRS post-tax profit for the period was $3 million (H1 2012: $76 million profit), with the decrease due to reduced revenue in 2013
attributable to the run-off of the book and on the cost associated with the HAV Options, only partially offset by realised gains on the
bond portfolio, the release of reserves and the positive performance of the dynamic hedge. Prior year profit included realised gains on
the Put Options.
Total insurance liabilities
Of half-year insurance liabilities totaling $1,809 million (H1 2012: $4,138 million):
- $1,379 million (H1 2012: $2,761 million) were held in a separate account relating to variable annuity investments, of which $1,164
million related to GMAB policies (H1 2012: $2,495 million).
- $138 million (H1 2012: $871 million) related to the variable annuity guarantee reserve on the GMAB policies. Within this, the 2013
half-year UGO GMAB reserve was $128 million (H1 2012: $851 million). The decrease was mainly due to improved overall equity
market performance and a high level of UGO GMAB surrenders during the half year.
- $292 million (H1 2012: $506 million) related to other policyholder liabilities. These included deferred and fixed indexed annuity
business as well as variable annuity fixed credited interest investments.
Reserve development
The UGO GMAB reserve relates to the full remaining period of the relevant policies, including the five-year anniversary value of 105% of
total premiums on contracts yet to reach that anniversary; the 10-year 120% top-up of total premiums; and any contracts with a HAV
feature.
The table below shows the level of guarantee reserves and, in respect of the UGO GMAB fifth-anniversary guarantees, the cumulative
top-ups paid and the estimated top-up payments remaining based on equity market levels on the calculation date:
$m
Calculation Guarantee reserves Actual cumulative Estimated remaining Total estimated
date for UGO GMAB top-ups paid(1)(2) top-up payment(1)(2) cash cost(1)(2)
30-Jun-11 620 - 346 346
30-Jun-12 851 101 559 660
30-Jun-13 128 523 1 524
(1)To meet UGO GMAB fifth anniversary payments
(2)Estimated cash cost before gains on hedge options
Surrender development
The development of the Bermuda policyholder account values is shown below:
$m
Period 30-Jun-13 31-Dec-12 % Change
Account Value: GMAB 1,164 1,856 (37)%
Account Value: Non-GMAB 507 679 (25)%
Total Account Value 1,671 2,535 (34)%
There were $895 million of surrenders across the full Bermuda book (H1 2012: $648 million), amounting to 35% of the total 31
December 2012 account value. The increase in 2013 is primarily attributable to the higher surrender rates experienced throughout the
fifth year anniversary top-up period for the UGO GMAB policies, and the concentration of the UGO GMAB anniversary dates for the
Hong Kong policies being higher in H1 2013 than in H1 2012.
A total of 5,914 UGO GMAB contracts were surrendered (H1 2012: 2,039 contracts), amounting to approximately 35% of total UGO
GMAB in-force contracts at 31 December 2012. 27,250 UGO GMAB contracts had reached their fifth anniversary as at 30 June 2013, of
which 16,236 surrendered after top-up, with 267 policies still to reach their 5-year anniversary date (the last anniversary date for the
non-Hong Kong book is 29 August 2013, with the last Hong Kong policy topped up on 4 June 2013).
Our reserving assumed that surrender rates for contracts that have just received a five-year anniversary top-up would be around 78%
for the non-Hong Kong book and 58% for the Hong Kong book. Actual experience has been slightly higher for the business on an
overall basis, with around 79% surrenders by guarantee amount for the non-Hong Kong book and 63% for the Hong Kong book as at 30
June 2013. Past the 5-year anniversary, lapse assumptions revert to a much lower long-term expectation of 5% per annum for the
Hong Kong UGO and 13% per annum for the non-Hong Kong UGO book.
Highest Anniversary Value
On an account value basis, at 30 June 2013, circa 90% of the UGO GMAB book on a policy count and guarantee amount basis had a
HAV feature, which gives customers a 10-year guarantee value based on the highest policy value at any anniversary date. As at 30
June 2013, circa 5% (account value $70 million) of the total UGO GMAB book had a 10-year guarantee above 120%.
The Hong Kong policies constitute over 90% of the remaining UGO GMAB book on a HAV spread liability basis. It was not considered
economical to purchase a hedge for the non-Hong Kong UGO GMAB HAV exposure at this juncture. A further 5-year hedge was
purchased in Q2 2013 for the 10-year risk associated with the HAV feature of the Hong Kong policies which could potentially arise in
2017-2018.
This hedge (HAV Options) will provide protection against markets rising above the 120% guarantee and subsequently falling, and thus
are expected to reduce future volatility of earnings and capital requirements emanating from the HAV.
The risks below the 120% guarantee are currently still being managed by the dynamic hedge programme at a 45% hedge ratio at 30
June 2013.
Risk management and investment portfolio update
The fixed income portfolio has been liquidated except for a residual amount of less liquid holdings. The balance is $8 million at 30 June
2013 (31 December 2012: $195 million). This liquidation was undertaken during Q2 2013 to realise gains at prevailing favourable
market conditions. The cash realised will be used to meet future fixed surrender activity and withdrawals.
Treasury management of Bermuda assets
The Bermuda business assets backing the liabilities include:
$m
30-Jun-13 31-Dec-12 % change
Cash and other liquid assets 200 268 (25)%
Treasury Portfolio 63 62 2%
Fixed Income general account portfolio 8 195 (96)%
Collateral for hedge assets & FV of equity options 32 52 (38)%
Inter-company loan notes 1,009 1,032 (2)%
Investment in affiliated subsidiary (Group seed investments) 260 260 -
Separate Account assets 1,379 2,119 (35)%
Other assets 36 58 (38)%
Total Assets 2,987 4,046 (26)%
The realised gain on the fixed income portfolio was $13 million (H1 2012: $9 million) and the net unrealised position was a gain of $1
million (H1 2012: $29 million).
Collateral posted for the hedge assets will adjust as the liabilities develop and could be released as the business evolves. The inter-
company loan notes are structured in tranches allowing capital and treasury management flexibility, if and when cash is required from
this source. This is likely to occur as the investment portfolio is liquidated to fund surrenders and operating costs.
Capital and surplus
Statutory capital increased slightly to $1,108 million at 30 June 2013 (31 December 2012: $1,105 million), reflecting the marginal
profitability for the first half of the year. Capital allocated to the business on a local level takes into account the inter-company loan notes
from the business to the Group.
In light of the reduction in size of the remaining liabilities, risk management strategy and de-risking actions taken, the BMA has
approved a $450 million statutory capital reduction via the cancellation of inter-company loan notes. The capital and liquidity needs of
the business will be kept under review as the run-off continues.
Strategy and outlook
Old Mutual Bermuda will continue to implement its run-off strategy of reducing risk while managing for value, with liability management,
fund management and de-risking initiatives designed to accelerate the run-off during the remainder of 2013.
Sponsor:
Merrill Lynch South Africa (Pty) Ltd
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