Wrap Text
Old Mutual plc Preliminary Results for the year ended 31 December 2013 - Part 1
Old Mutual
ISIN CODE: GB00B77J0862
JSE SHARE CODE: OML
NSX SHARE CODE: OLM
ISSURE CODE: OLOML
NEWS RELEASE
Friday, 28 February, 2014
Old Mutual plc preliminary results for the year ended 31 December 2013
Financial performance:
- Adjusted operating profit (AOP) of GBP1.6 billion up 15% in constant currency, flat in reported currency
- Very strong net client cash flow across the Group:GBP15.5 billion, equivalent to 6% of opening FUM
- FUM up 19% to GBP294 billion on a constant currency basis
- GBP811 million free surplus generated
- Group ROE 13.6%, within target range of 12-15%
- (AOP) Earnings per share 18.4p up 21% in constant currency and 5% in reported currency
- Final dividend of 6.0p, up 14%, with a total dividend of 8.1p up 16%
Strategic progress:
- Minority IPO of US Asset Management business in 2014, subject to market conditions
- Intrinsic bolt-on acquisition supports Old Mutual Wealth's integrated wealth management model
- Acquisitions in East and West Africa; integration of new businesses progressing well
- Improved collaboration between Old Mutual, Nedbank and Mutual & Federal
New products and improved distribution driving sales:
- R1.6 billion of XtraMAX sales since launch in May; SA Wealth offering attracted R1 billion of FUM since launch
- OMGI UK Alpha Fund sales of nearly GBP1 billion
- 16% of UK Platform gross sales into OMGI funds
- Agency sales force growth in South Africa Mass Foundation, Kenya, and Latin America
- Customer growth; 590,000 new customers in Rest of Africa; 529,000 in Nedbank Retail; 280,000 in Mass Foundation
Julian Roberts, Group Chief Executive, said:
"I am delighted with the way Old Mutual has performed this year notwithstanding the volatility of the rand, with double digit growth in each of our
main businesses. We have seen positive net client cash flows into all of our businesses totallingGBP15.5 billion which is testament to our
attractive customer propositions.
"We are making excellent progress against our strategic objectives. We are growing in South Africa, with more than 750,000 new Old Mutual
and Nedbank customers. We have taken significant steps in our goal of becoming Africa's financial services champion, with new businesses in
East and West Africa and nearly 600,000 new customers.
"I am excited about the prospects of Old Mutual Wealth which, with the acquisition of Intrinsic and our strengthened asset management
capability, now has the foundations to become the leading retail investment business in the UK. We have announced today that we intend to
proceed with a minority IPO of US Asset Management in 2014, subject to market conditions.
"We have a clear strategy and clear priorities which we are focused on achieving. While the external environment is likely to remain uncertain,
and in particular the impact of the movement of the rand on our reported results, we believe that the long-term structural growth trends in Africa
and strong demand for banking, protection and savings products remain intact and will continue to drive sustainable and profitable growth for
Old Mutual."
Old Mutual plc results for the year ended 31 December 2013
Enquiries
External Communications
Patrick Bowes UK +44 20 7002 7440
Kelly de Kock SA +27 21 509 8709
Dominic Lagan UK +44 20 7002 7190
Media
William Baldwin-Charles +44 20 7002 7133
+44 7834 524 833
Notes to the financial summary on the front page of this announcement
- All figures refer to core continuing operations. Core continuing operations exclude the results of the Nordic business disposed of
during 2012 and the Bermuda business which is classified as non-core.
- Constant currency figures are calculated by translating local currency prior period figures at the prevailing exchange rates for the
period under review.
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, 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, 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.
Nothing in this news release shall constitute an offer to sell or the solicitation of an offer to buy securities.
Notes to editors
A webcast of the presentation on the preliminary results and Q&A will be broadcast live at 9:00 am UK time (11:00 am South African
time) today on the Company's website www.oldmutual.com. Analysts and investors who wish to participate in the call should dial the
following numbers and quote the pass-code 54741170#:
UK/International +44 20 3139 4830
US +1 718 873 9077
South Africa +27 21 672 4008
Playback (available for 30 days from Friday, 28 February 2014), using pass-code 644817#:
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 preliminary results can be found on our website. This contains financial
data for 2013 and 2012.
Sterling exchange rates
Appreciation / (depreciation)
2013 2012 of local currency
Average Rate 15.10 13.01 (16)%
South African Rand
Closing Rate 17.43 13.77 (27)%
Average Rate 1.57 1.58 1%
US Dollar
Closing Rate 1.66 1.62 (2)%
Group Review
Overview
Strong cash flows and profits…
This has been a year of profitable business growth and strategic delivery by Old Mutual. Our strong net client cash flows across all our
businesses demonstrate the strength of our client offering and this has translated into excellent profit growth of 15% toGBP1.6 billion on
a constant currency basis, and flat on a reported basis. Gross sales were up 17% to more thanGBP25 billion, with funds under
management (FUM) up 19% toGBP293.8 billion. Group return on equity (RoE) at 13.6% remained well within the 12 – 15% we have set
as a target.
Equity markets in our largest markets of South Africa, the UK and US performed strongly in the year with the JSE All-Share up around
18%, the FTSE 100 14% higher and Standard & Poor's 500 up 30%. However, the year saw a further weakening of the rand against
sterling, resulting in the Group's business results being affected on a reported currency basis, with the average rand rate declining
during the period by 16% against sterling.
…as confidence returns…
After a challenging few years, we saw confidence and growth begin to return to the UK economy, and the US continuing on its path to
recovery, with a corresponding rise in equity markets. Growth slowed somewhat in South Africa with economic activity affected by
labour disputes in the extractive industries, but the International Monetary Fund (IMF) expects growth to increase this year to 2.8% from
1.90% in 2013. Concern over South Africa's current account and budget deficits combined with an expectation of tapering by the US
Federal Reserve led to the rand depreciating by 27% against sterling and 24% against the US dollar by the year end. The sub-Saharan
markets where we operate saw significant growth again in the year with estimated GDP growth of 6.2% in Nigeria, 7.9% in Ghana and
5.9% in Kenya (IMF).
…and Old Mutual continues its transformation to focus on growth…
For the past five years, our focus has been to simplify our Group and return Old Mutual to a strong position from which to deliver long-
term growth. With this having been substantially achieved, we are focused on growth and in 2013 set out four strategic priorities to
achieve this. We are making good progress in executing these priorities.
We said that we would expand in the fastest growing markets in South Africa and we have built our customer base and increased sales
significantly during the year. Old Mutual has gained 280,000 customers in the Mass Foundation sector and Nedbank has added a
further 529,000 customers in its retail banking unit this year. Old Mutual South Africa gross sales increased 11% to R118 billion,
Nedbank saw an increase in average interest earning assets of 7% to R594.7 billion and non-interest revenue growth was 11.8%.
Our second strategic priority is to become Africa's financial services champion, and we have set aside up to R5 billion to help us
achieve this. Despite the short-term headwinds facing the emerging markets, we are convinced that the structural growth drivers of the
young, growing population allied to a more stable political environment and growing wealth driven by natural resources present a
sizeable opportunity for retail financial services. We now have more than 1.9 million customers in Africa, outside of South Africa, and our
focus is to build scale businesses in West and East Africa, based around regional hubs in Lagos and Nairobi. We bought the Oceanic
life and property and casualty (P&C) businesses in Nigeria, which are now operational and trading under the Old Mutual brand. We
bought Provident Life Assurance in Ghana and the integration of this business into the Old Mutual group is progressing well. In East
Africa, subject to the conclusion of the relevant closing conditions, we bought a majority stake in Faulu, a highly regarded micro-lender
with more than 400,000 customers. The customer profile of Faulu is very similar to that of our South African Mass Foundation business,
and we have started cross-selling credit life to the Faulu customer base and are exploring ways of adapting other parts of our Mass
Foundation product suite for use in Kenya.
We have now committed approximately R700 million in acquiring these businesses, and are actively exploring a number of attractive
options to ensure that we can rapidly build scale in these key markets. Nedbank is expected to complete its acquisition of a 36.4% stake
in the Mozambican bank Banco Unico in Q1 2014 for $24.4 million and has the opportunity to exercise its right to acquire 20% in ETI.
As we build across Africa and as we cement our position in South Africa we will continue to seek ways in which Old Mutual, Nedbank
and Mutual & Federal (M&F) can work more closely together and leverage off their individual strengths and capabilities. This initiative is
already resulting in significant cross-selling opportunities. For example: Nedbank Financial Planners delivered gross flows of R4.3 billion
to the South African Retail Affluent division and Retail Affluent sold R600 million of M&F products. Collaboration is key to our future
growth and we intend to implement incentive plans for the executive management of Old Mutual Emerging Markets (OMEM), Nedbank
and M&F which will reward them for driving revenue, cost and capital synergies between the three businesses. In addition, reflecting the
importance of the insurance and banking businesses to South Africa, at the request of the Regulator, in 2014 we will be activating a new
top Board in the country to oversee risks, capital and strategy for the South African part of the Group.
We explained our plans to grow Old Mutual Wealth and we have set a pre-tax AOP target for the business of GBP300 million in 2015
and we are on track. In the UK, we are aiming to become the leading retail investment business and have put in place building blocks to
achieve this: we have strengthened the talent base in Old Mutual Global Investors (OMGI); have signed an agreement for IFDS to
provide us with one of the most flexible platforms on the market; widened our product proposition including launching WealthSelect; and
have announced that we will acquire one of the UK's largest financial adviser networks, subject to regulatory approval, as a bolt-on
acquisition.
We intend to proceed with an initial public offering of a minority interest in the US Asset Management (USAM) business in 2014, subject
to market conditions. The purpose of the offering is to enhance USAM's financial and operating flexibility to deploy capital to continue to
grow and develop further its multi-boutique asset management business. We expect that this offering will broaden USAM's access to
capital to pursue future growth initiatives across its business, including collaborative investments in affiliate growth and further
penetration of non-US markets through its global distribution platform, as well as strategic partnerships with high quality boutique asset
management firms with complementary investment products.
…while remaining financially strong and cash generative
We have a strong balance sheet with a low level of indebtedness. In 2013, we completed our GBP1.7 billion debt repayment programme
through the purchase of GBP176 million of outstanding debt. The Group, excluding Nedbank, had gross IFRS debt of GBP1.3 billion at
31 December 2013. We continue to generate strong cash returns which give us the ability to continue to invest for growth and remain
strongly capitalised while maintaining a progressive dividend.
Emerging Markets continues its growth trajectory…
The Emerging Markets business as a whole saw good growth in the year, with gross sales up 9% to R165 billion. NCCF improved by
52% to R24.7 billion, with FUM up 16% to R838 billion. Pre-tax AOP on an IFRS basis was up 12% to R8.9 billion.
OMEM's successful performance was underpinned by a focus on understanding and meeting our customers' needs. We introduced new
offerings in our markets, including: the Old Mutual Wealth proposition in South Africa, which was launched in September and in its first
six months of operations reached R1 billion of FUM; XtraMAX in South Africa; a mobile phone operated transactional money account in
Namibia; and a personal pension plan in Kenya. We also boosted the number of agents we have. In Kenya, we now have approximately
600 agents; since acquiring AIVA in Latin America, we have recruited a further 460 agents; in the Mass Foundation business we have
grown our adviser numbers to 4,160 from 3,750 last year. Product innovation and customer service remain critical for the success of our
business and will continue to be a key focus for our staff.
In Old Mutual South Africa, strong sales across the business were largely driven by product innovation. In Retail Affluent, non-covered
sales were up 22% due to strong demand for our Galaxy and unit trust products, and covered sales increased by 9%, with a particularly
strong performance in single premium sales, up 28%, largely into XtraMAX, a structured investment product. The Mass Foundation
segment maintained its growth path with gross sales up 14%, largely due to a larger adviser force, and profits were also up by 14%. We
maintain a tight grip on the quality of the new business we are writing by, for example, by enhancing new business submission
standards and have introduced various retention initiatives.
Gross Corporate sales were up 17% mainly due to excellent growth in single premium business. Old Mutual Investment Group (OMIG)
saw good flows into equity boutiques, however sales as a whole declined 7% against 2012 which was a particularly strong year.
Old Mutual Finance, our 50% joint venture, continues to have a conservative approach to lending and we have maintained collection
rates on our active portfolio of more than 90%. We maintain a tight focus on unsecured credit and have strict underwriting criteria.
In the Rest of Africa, we saw excellent growth in covered sales, up 17%, as we secured large corporate deals in Namibia, growth in
Retail Affluent sales in Kenya and the inclusion of Nigeria for the first time. Non-covered sales decreased by 14%, mainly due to the
exclusion of Kenya broker flows in 2013 and lower institutional sales in Namibia.
In Latin America and Asia, profits were up 80% boosted by favourable exchange rates, a reallocation of central expenses and the first
time inclusion of AIVA profits in 2013.
Overall Emerging Markets non-covered sales for the period were flat at R116 billion reflecting the reclassification of Asia sales from non-
covered to covered and the strong performance of the comparative period.
We have set out a number of clear targets for the Emerging Markets business. We are aiming to grow our customer base to at least 9
million by 2015, maintain our RoE target between 20 – 25%, and have the Rest of Africa profits, including Property & Casualty, reaching
15% of South African profits by 2015. As part of our plan to achieve this, we are exploring a number of options in both East and West
Africa which will allow us to build the scale that we believe we need in these key markets.
…Nedbank produces another year of increased profit…
Nedbank produced another set of excellent results, with headline earnings up 15.9% to R8.7 billion driven by good revenue growth,
impairments increasing at a slower rate than net interest income and disciplined expense management. Non-interest revenue saw
growth of 11.8% to R19.4 billion and net interest income increased by 7.8% to R21.2 billion. The credit loss ratio for the year was
1.06%, up slightly from last year (1.05%) which was expected given the economic climate, more conservative provisioning and a single
large impairment recorded by the business banking division. Nedbank remains well capitalised with the Basel III common-equity Tier 1
ratio at 12.5%.
…while the environment remains challenging for Property & Casualty…
The tough conditions we have seen for P&C insurance continued into the second half of 2013, as the industry in South Africa as a whole
suffered from weather-related losses in the last quarter, drought conditions affected our Agriculture underwriting results in the first half,
and a continued soft market especially in motor. These conditions contributed to a disappointing underwriting loss of R437 million.
Gross written premiums grew by 16.6% in the year, with strong growth of 36.7% in the Corporate & Niche segment due to the new
Treaty Inwards business. In iWYZE, we saw solid growth in gross written premiums of 10.8% and a significant improvement in the
claims ratio.
The new management team has a clear plan to address the challenges that the business faces. We are confident that following the
implementation of the plan we will meet our published targets but acknowledge that it will take time for this to come through in the
business' financial results. By 2016, we expect this business to have a sustainable top 2 position in the South African market; to have
built significant operations in the major markets in the Rest of Africa; to maintain an RoE of 15-20% through the cycle; and with an
underwriting margin of 4-6%.
… Old Mutual Wealth delivers operational growth and strategic transformation…
It was a significant year for Old Mutual Wealth with the changes following the implementation of the long awaited Retail Distribution
Review (RDR), with significant progress made in the strategy to build the leading retail investment business in the UK, and developing
new customer propositions, all alongside a strong operational performance. Profits were up 11% on the prior year to GBP217 million.
The 2012 total included additional exceptional policyholder tax benefits of GBP22 million and GBP13 million of profit from the now sold
Finnish business. Excluding these items, the underlying profit was up by 36%, from GBP160 million.
Gross sales for the year were up 24%, with all core businesses contributing to the uplift. NCCF was up 15% on the prior year as we saw
strong sales on the UK Platform, by Old Mutual Global Investors (OMGI), and through our International business. As a result of the
strong NCCF and an uplift in equity markets, FUM increased by 13% to GBP78.5 billion.
In the UK, the Platform recorded NCCF of GBP2.4 billion, which was a particularly good performance given the challenging start to the
year with the introduction of RDR. Confidence amongst advisers has returned and we have seen good sales across the collective
investment products and ISA products, leading to a strong fourth quarter. FUM on the Platform now stands at GBP27.3 billion, up 21%
on the prior year, and contributing to the increase in profits from GBP2 million last year to GBP13 million in 2013. Importantly, gross new
business sales on the Platform into OMGI funds were 16% at end of 2013. The Platform was awarded the "Best Platform" award at the
Professional Advisers Awards.
Our International cross-border business had NCCF of GBP0.5 billion, up 150% on the prior year, predominantly due to new product
launches and improved sales in South Africa. Sales in Hong Kong and Europe were also much improved and sales in Latin America
have developed well with the acquisition of AIVA, which saw some large single premium business toward the end of the year.
We have strengthened the OMGI asset management capabilities in UK equities and this, combined with continued strong investment
performance, led to NCCF for the year of GBP0.7 billion, up from GBP0.3 billion in 2012. NCCF from UK third parties reached GBP1.3
billion, against GBP0.1 billion in 2012. We saw further Nordic outflows, which were anticipated following the sale of the Nordic business
in 2012, totalling GBP1.0 billion. We expect the final GBP200 million of Nordic outflows in the current year. We continue to look to
broaden our investment styles where appropriate.
In 2012, we outlined our plans for transforming Old Mutual Wealth into the leading retail investment business in Britain and we have
taken a number of significant strides in this respect. It is now operating under one reporting structure and management team and this
year all businesses will be rebranded from Skandia to Old Mutual Wealth.
A key pillar of our strategy was to strengthen our asset management offering. We have brought in a new UK equities team and will look
to strengthen our teams in other asset classes where necessary. We have launched a new proposition to the market – WealthSelect,
which provides financial advisers with the most comprehensive range of portfolio management solutions in the market. During the year
we continued to embed Wealth Interactive, our cross-border international platform, and we signed an outsourcing arrangement with
IFDS which will transform our platform into one of the most flexible in the market, with associated transformation costs of
approximately GBP140 million over the next three years after GBP20 million of costs have already been incurred.
We have announced today that we are purchasing Intrinsic Financial Services Limited ('Intrinsic'), one of the largest adviser networks in
the UK with 3,000 advisers, both restricted and independent. We believe that the provision of advice is of fundamental and growing
importance in the retail financial services market and that restricted advice will become more dominant in time. The purchase of Intrinsic
is a critical part of our strategy of creating a leading wealth management business that combines financial advice, investment solutions
and high quality asset management to deliver first class outcomes for our customers.
…and US Asset Management maintains its momentum
The excellent first six months of 2013 continued into the second half of the year translating into profit and margin growth and sustained
positive NCCF. Profits at $174 million increased by 21% on the prior year's reported result and NCCF at $16.3 billion, represented 7.8%
of the opening FUM, with our Global Distribution team accounting for approximately a quarter of NCCF. Net flows were highly diversified
with six out of our eight affiliates recording positive or flat flows. FUM stands at $257.4 billion, 23% higher than the prior year due to a
combination of the strong net flows and positive market movements.
We are playing our part in the communities where we operate…
We recognise that we have an impact on the societies in which we operate. Secure, transparent and affordable financial products are at
the heart of a strong and thriving society, and that is what we seek to provide to all of our customers. Our products and services are key
to a sustainable economy, and often serving the lower income groups of society.
In our markets we support economic development and society as a whole in a number of ways. In South Africa, we signed an R80
million deal that will fund the development and operations of four low-fee independent schools over the next five years and are set to
reach 4,100 pupils. This deal is the third of its kind for the Schools Investment Fund, a fund established by the Public Investment
Corporation (PIC), the Government Employees Pension Fund (GEPF) and Old Mutual to address the shortage of quality affordable
schools in South Africa. In all our businesses we work through our employees and directly with community partners to support projects
and in 2013 across the Group we spent GBP16.1 million in community investment programmes.
We are committed to monitoring, managing and reducing our environmental impact and as part of this we will be adopting non-financial
targets that support our Responsible Business strategy. These will be communicated in our Responsible Business report to be
published at the beginning of April.
… and ensuring we are always focused on the customer…
We can only be successful with the continued support and trust of our customers. Ensuring that we treat them fairly and provide them
with the products, returns and service levels they expect from an institution to which they entrust their savings is critical. It is why we
spend significant resources making the customer the central focus of our company. We have made significant progress in this regard, in
particular in enhancing our customer insights and improving and expanding our product range.
In the past year we have taken a number of further steps by, for example, improving our proposition: through the launch of Old Mutual
Wealth in South Africa and enhancing our distribution in Kenya via the acquisition of Faulu. We have made our products more
accessible by: expanding Old Mutual Finance's branch footprint to 225 and by launching new world solutions such as Nedbank's app
suite and the I-invest mobile unit trust savings product in Kenya. We have improved the customer feedback capability in each
geography where we are present, and we have seen a steady improvement in our Net Promoter Score, which is a customer loyalty
metric.
… while building a strong, responsible culture within Old Mutual
Embedding the right culture and values in the organisation is similarly important. As part of this process, senior management are
formally assessed to ensure that they demonstrate the company's desired values and a proportion of their remuneration is dependent
on this.
Senior management receive specific feedback via a 360 degree process to understand their strengths and where they need to develop
in terms of these behaviours. Our leadership development programmes help to develop the mindset and skills needed. For employees
at all levels we have training and recognition schemes focused on instilling the behaviours we want to encourage. These form part of
our induction of new employees and we ask every person each year via a culture and values survey to describe the values and
behaviours they see in the way the company operates. We use this feedback to identify actions to continually align the way we do things
with our values.
Our strong cash generation and capital position supports a 16% increase in dividend
The Board has considered the position in respect of the final dividend for 2013 and is recommending the payment of a final dividend for
2013 of 6.0p per Ordinary Share (or its equivalent in other applicable currencies). Based on this recommendation the full-year Ordinary
dividend would be 8.1p, a 16% increase on the prior year. No scrip dividend alternative will be available in relation to this dividend.
Dividend policy
The Board intends to pursue a progressive dividend policy consistent with our strategy, having regard to overall capital requirements,
liquidity and profitability, and targeting a dividend cover in the range of 2.0 to 2.25 times IFRS AOP earnings in future. Interim dividends
will continue to be set at about 30% of the prior year's full ordinary dividend.
Board changes
We were pleased to welcome Dr Nkosana Moyo, Zoe Cruz and Adiba Ighodaro to the Board as independent non-executive directors. Dr
Moyo is the Executive Chairman of the Mandela Institute for Development Studies, and was previously Vice President and Chief
Operating Officer of the African Development Bank and Managing Partner of the African business of Actis Capital. Ms Cruz was
previously Co-President for Institutional Securities and Wealth Management at Morgan Stanley with responsibility for running major
revenue generating businesses there, including overseeing their securities risk management and information technology. She also
founded and ran her own investment management firm, Voras Capital Management. Ms Ighodaro is currently a partner with Actis, an
emerging markets investment firm. Before joining Actis she was Head of West Africa for the Commonwealth Development Corporation.
Dr Moyo is a member of the Company's audit and remuneration committees; Ms Cruz is a member of the risk and remuneration
committees; and Ms Ighodaro is a member of the audit committee.
Bongani Nqwababa resigned as an independent non-executive director of the Company on 6 January 2014.
Philip Broadley, Group Finance Director of Old Mutual since November 2008, has notified the Group of his intention to leave in 2014. Mr
Broadley has played a critical role in the transformation of Old Mutual and leaves a much simpler and more resilient business, focused
on meeting customers' needs and with a clear strategy for growth. We are currently conducting a thorough internal and external search
for Mr Broadley's successor.
South African empowerment
We continue to transform our business in South Africa, with Old Mutual South Africa and Nedbank maintaining their level 2 accreditation
for B-BBEE using the new Financial Sector Code.
Outlook
We have a clear strategy and clear priorities which we are focused on achieving. While the external environment is likely to remain
uncertain, and in particular the impact of the movement of the rand on our reported results, we believe that the long-term structural
growth trends in Africa and strong demand for banking, protection and savings products remain intact and will continue to drive
sustainable and profitable growth for the country.
Group Financial Highlights
GBPm
2012
(constant 2012 (as
Group highlights(1) 2013 currency) Change reported) Change
Adjusted operating profit (IFRS basis, pre-tax) 1,612 1,402 15% 1,612 -
Adjusted operating earnings per share (IFRS basis) 18.4p 15.2p 21% 17.5p 5%
Group net margin(2) 48bps 46bps 2bps 50bps (2)bps
Return on equity(3) 13.6% 13.0% 60bps
Net asset value per share 137.7p 127.6p 8% 145.8p (6)%
Adjusted Group MCEV per share 207.5p 220.5p (6)%
Gross sales 25,364 21,702 17% 23,314 9%
Emerging Markets 10,930 10,072 9% 11,684 (6)%
Old Mutual Wealth(4) 14,434 11,630 24% 11,630 24%
Net client cash flow (GBPbn) 15.5 4.5 5.0
Funds under management (GBPbn) 293.8 246.2 19% 262.2 12%
Total dividend for the year 8.1p 7.0p 1.1p
(1)The figures in the table are in respect of core continuing businesses only
(2)Ratio of AOP before tax to average funds 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). Comparative restated as required following adoption of the revised IAS 19 'Employee Benefits'
(4)From Q2 2012 OMAM(UK) has been reported within Old Mutual Wealth rather than USAM
Movements in foreign exchange rates
The rand to sterling average exchange rate weakened by 16% in 2013, reducing reported sterling earnings from our South African
businesses. The rand closing rate was 27% lower than at 2012 year end, reducing sterling reported IFRS and MCEV net asset values
as well as FUM. The US dollar to sterling average rate strengthened by 1%, increasing reported sterling earnings from USAM.
Adjusted operating profit (AOP) and net free surplus
Pre-tax AOP for 2013 was GBP1,612 million, an increase of 15% on a constant currency basis with growth in fees and improved
operational efficiency. AOP earnings per share were up 21% to 18.4p on a constant currency basis. The weakening in the rand to
sterling average exchange rate of 16% reduced sterling earnings such that the profits on a reported basis remained flat.
Net free surplus of GBP811 million was generated in the period representing 81% of AOP generated by the business units after tax and
non-controlling interests. Of this, GBP544 million of cash was remitted by the operating units.
Group net margin
Constant currency Group net margin increased by 2 basis points from 46 to 48 basis points. The increase was due to higher net
margins in USAM and Nedbank, partially offset by lower net margins in Emerging Markets, Old Mutual Wealth and Property & Casualty.
Return on equity
Core Group RoE was 13.6%, against a comparable 2012 RoE of 13.0% as earnings grew faster than the growth in retained equity.
Net asset value
On a constant currency basis, the net asset value per share has increased by 10.1p to 137.7p (2012: 127.6p). This is mainly due to
profit attributable to the parent of 14.4p offset by dividends paid in the year of 7.35p. On a reported basis, net asset value per share
decreased by 8.1p.
Adjusted Group MCEV per share
The adjusted Group MCEV per share decreased by 13.0p to 207.5p. Adjusted operating MCEV earnings of 17.9p were more than offset
by 24.9p relating to the adverse impact of the rand depreciation as well as a further 2.6p relating to the decline in the sterling market
value of Nedbank.
Gross sales
Gross sales for Emerging Markets grew 9% to GBP10,930 million. Sales growth in our South African retail and Corporate businesses
were particularly strong, with further support from the Rest of Africa. Gross sales in Old Mutual Wealth were GBP14,434 million, led by
UK Platform and OMGI inflows.
Net client cash flow
The Group had strong positive NCCF of GBP15.5 billion (2012: GBP4.5 billion net inflow). USAM saw significant net client cash inflows
of GBP10.4 billion (2012 continuing operations:GBP0.9 billion), reflecting improved 3-year investment performance as well as positive
market trends. Old Mutual Wealth NCCF was GBP2.3 billion (2012:GBP2.0 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 GBP1.1 billion to GBP1.6 billion as a result of strong flows from our Retail Affluent, Mass Foundation and OMIG businesses.
Funds under management
FUM increased by 19% to GBP293.8 billion on a constant currency basis and by 12% on a reported basis, with NCCF of GBP15.5 billion.
Positive market movements accounted for GBP34.3 billion with equity markets finishing strongly in 2013 despite a very volatile period in
the first half of the year. The FTSE 100, S&P 500, MSCI World and the JSE All-Share indices were up by 14.4%, 29.6%, 24.1% and
17.8% respectively over the year.
FUM in Emerging Markets was up 16% to GBP48.1 billion and Old Mutual Wealth was up by 13% to GBP78.5 billion. USAM FUM
increased by 23% to GBP155.3 billion on a comparable basis, excluding affiliates which were sold in 2012.
Other economic impacts
South African long-term interest rates moved significantly during the course of 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 6.2% and then rising with global macro
condition changes to close at 8.1%, 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 2013. The hedge programme was continued in H2 2013 but will be reviewed during 2014 given
developments in economic conditions and the prevailing interest rate environment.
Dividend
The full year dividend of 8.1 pence, or its equivalent in local currency for those shareholders on overseas registers, represents an
increase of 16% on the prior year.
Converting the sterling final dividend at the exchange rate prevailing on 21 February 2014, the dividend to South African shareholders
for the full year 2013 was 48% higher than the 2012 full year dividend in rand terms.
The interim dividend paid on 31 October 2013 was 2.1 pence.
Subject to being approved by shareholders at the Group's Annual General Meeting on 15 May 2014, the final dividend will be paid on 30
May 2014. A separate announcement on the key dividend dates for the 2013 final dividend is made with these preliminary results.
AOP analysis
GBPm
2013 2012(1) % Change
Core operations
Emerging Markets(2) 590 611 (3)%
Nedbank 797 825 (3)%
Property & Casualty(2) 4 37 (89)%
Old Mutual Wealth 217 195 11%
US Asset Management 111 91 22%
1,719 1,759 (2)%
Finance costs (92) (130) (29)%
Long-term investment return on excess assets 43 54 (20)%
Net interest payable to non-core operations (11) (18) (39)%
Corporate costs (54) (54) -
Other net income 7 1 600%
Adjusted operating profit before tax 1,612 1,612 -
Tax on adjusted operating profit (424) (440) (4)%
Adjusted operating profit after tax 1,188 1,172 1%
Non-controlling interests – ordinary shares (279) (281) (1)%
Non-controlling interests – preferred securities (19) (50) (62)%
Adjusted operating profit after tax attributable to ordinary equity holders of the parent 890 841 6%
Adjusted weighted average number of shares (millions) 4,836 4,818 0%
Adjusted operating earnings per share (pence) 18.4 17.5 5%
(1)The comparative period has been restated as required following the adoption of the revised IAS 19 'Employee Benefits' and IFRS 10 'Consolidated
Financial Statements'
(2)100% of iWYZE is now recorded within Property & Casualty rather than Emerging Markets. Comparative information for 2012 has been restated
AOP from the core continuing business units decreased by 2%, with increases in each of Old Mutual Wealth and US Asset
Management offset by lower results in Emerging Markets and Nedbank primarily due to the rand depreciation and Property & Casualty
due to the underwriting losses incurred.
Finance costs reduced from GBP130 million to GBP92 million, reflecting the lower level of debt outstanding following the completion of
our debt repayment programme in 2013 and the one-off costs associated with tendering senior debt in 2012.
The long-term investment return decreased by 20% on the comparative period with the reduction in the LTIR rates from the start of the
year and the effect of the weakening rand exchange rate more than offsetting a higher level of net assets.
Corporate costs were flat on prior year.
The aggregated impact of all these factors meant that adjusted operating profit before tax was GBP1,612 million in both 2013 and 2012
on a reported basis.
The repayment of preference share instruments in the period contributed to the reduction in non-controlling interests from GBP331
million to GBP298 million.
The tax charge was at an effective rate of 26%, slightly lower than 2012 although in line with previous guidance.
After tax and non-controlling interests, IFRS adjusted operating profit increased by 6% on a reported basis.
Further information on the Group's non-core business (Bermuda) is included in Part 3 – Detailed Business Review.
Group and subsidiary RoE
The Group RoE improved to 13.6% in 2013 from 13.0% in 2012 with progress made in all our major operating units. The Property &
Casualty RoE was reduced due to increased underwriting losses and lower investment returns. The Group continues to target RoE in
the range of 12-15%.
Group RoE 2013 2012
Emerging Markets(1)(2) 25.0% 25.0%
Nedbank 15.6% 14.8%
Property & Casualty(2)(4) 0.6% 7.1%
Old Mutual Wealth(3) 15.9% 13.0%
US Asset Management(4) 15.1% 13.4%
Group RoE(5) 13.6% 13.0%
(1)Within Emerging Markets, OMSA, Rest of Africa and Asia calculated as return on allocated capital; Latin America calculated as return on average equity
(2)100% of iWYZE is now recorded within Property & Casualty rather than Emerging Markets. Comparative information for 2012 has been restated
(3)IFRS AOP (post tax) divided by average shareholders' equity, excluding goodwill, PVIF and other acquired intangibles
(4)IFRS AOP (post tax and NCI) divided by average shareholders' equity
(5)Core business IFRS AOP (post tax and NCI) divided by average ordinary shareholders' equity
Long Term Investment Return (LTIR)
The LTIR rates are reviewed annually and reflect the returns expected on the chosen asset classes. The 2013 long-term rates for
Emerging Markets, Mutual & Federal and Old Mutual Wealth were 8.0% (2012: 9.0%), 7.4% (2012: 8.6%) and 1.0% (2012: 1.5-2.0%)
respectively. The 2014 long-term rates for Emerging Markets, Mutual & Federal and Old Mutual Wealth are 8.6%, 7.4% and 1.0%
respectively. The asset allocation in Emerging Markets will continue to be split 75% cash and bonds and 25% equity.
Free surplus generation
Our businesses have continued to be efficient at converting profit into free surplus, with an 81% conversion rate (2012: 81%) and a total
free surplus of GBP811 million generated in the period (2012:GBP814 million).
Cash and liquidity
GBPm
Opening cash and liquid assets at holding company at 1 January 2013 472
Operational inflows
Operational receipts from Northern hemisphere businesses 210
Operational receipts from emerging market businesses 334
Total operational inflows 544
Operational outflows
Interest paid (78)
Debt repayment (176)
Group Head Office costs (34)
Inter-company interest and other operational flows 38
Ordinary cash dividends (335)
Total operational outflows (585)
Net capital flows 114
Closing cash and liquid assets at holding company at 31 December 2013 545
Operational cash inflows to holding company
The remittances to the holding company on a cash-paid basis were GBP544 million in 2013, which is 54% of AOP before central
expenses. Operational flows from emerging markets totalled GBP334 million, of which GBP172 million related to rand payments made
by the South African holding company to local shareholders through dividend access trust arrangements. In addition, Old Mutual plc
has received GBP105 million of flows from each of USAM and Old Mutual Wealth.
Rand receipts routinely cover the full Group dividend for a given year.
Operational cash outflows and distributions by holding company
Interest paid represents the cash cost of servicing the holding company's debt instruments and totalled GBP78 million for 2013 (GBP142
million in 2012). The reduction on the prior year was due to the non-recurrence of costs associated with tendering senior debt in 2012 as
well as the completion of the Group's debt repayment plan during 2013. Holding company debt amounting to GBP176 million was repaid
through an open market tender in 2013.
In addition, the Group distributed GBP335 million of cash to shareholders through dividend payments in the period, which included
the GBP172 million paid in South Africa.
The cash component of Group head office costs of GBP34 million were net of a number of one-off inflows, including the settlement of a
number of outstanding intra-group balances.
Net capital flows
Old Mutual plc has received GBP44 million and GBP120 million in respect of the transfer to Old Mutual South Africa of its ownership of
shares in the Chinese joint venture and in the Colombian and Mexican businesses respectively.
In May 2013, the Group provided GBP27 million of funding to OM Bermuda in support of hedging the Highest Anniversary Value (HAV)
risk on the remaining liabilities. A further GBP23 million of outflows related to the investment of seed capital.
Liquidity
At 31 December 2013, the Group had available liquid assets and undrawn committed facilities of GBP1.3 billion (31 December
2012: GBP1.7 billion). The reduction in headroom is the result of debt repaid during the period, combined with a reduction in the Group's
committed Revolving Credit Facility (RCF) from GBP1,200 million to GBP800 million. The unutilised portion of this facility forms part of
the holding company's overall liquidity headroom and, in addition to this facility and the cash at Old Mutual plc, each of the individual
businesses also maintains liquidity to support its normal trading operations.
At 31 December 2013, the Group had $466 million of inter-company loan notes outstanding to Old Mutual Bermuda following the
Bermuda Monetary Authority's agreement during the year to the cancellation of a total of $550 million of loan notes held at 31 December
2012. Additional cash funding for the business may be required; for example, to provide for margin collateral due to the dynamic
hedging activity, depending on market movements and changes in hedging strategy.
Capital and leverage
Debt strategy, profile and maturities
The Group excluding Nedbank had gross debt on an IFRS basis of GBP1,342 million at 31 December 2013 (2012:GBP1,569 million). In
November 2013 we reduced Group debt by a further GBP176 million via an open market tender, to complete our stated debt reduction
target of GBP1.7 billion. Following the tender, there are no plans to repay further Group debt in the immediate future.
The Group has first calls on debt instruments amounting to €374 million (GBP311 million) in November 2015 and GBP273 million in
March 2020. In addition, the Group has GBP112 million of senior debt maturing in October 2016. The GBP500 million bond issued in
June 2011 matures in June 2021. Included in subordinated Group debt at the year end is a R3 billion debt instrument with a first call in
October 2015, issued by Old Mutual Life Assurance Company (South Africa).
Business local statutory capital cover
The Group's subsidiary businesses continue to have strong local statutory capital cover.
31-Dec-13 31-Dec-12
Old Mutual Life Assurance Company (South Africa) 3.3x 4.0x
Mutual & Federal(1) 1.8x 1.8x
UK 2.7x 2.3x
Nedbank(2) Common equity Tier 1: 12.5% Common equity Tier 1: 11.6%
Tier 1: 13.6% Tier 1: 13.1%
Total: 15.7% Total: 15.1%
Bermuda(3) 1.4x 1.6x
(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 and is calculated on a Basel III basis
(3)Based on Bermuda's insurance (Prudential Standards) Class E Capital Rules
Financial Groups Directive results
The Group's regulatory capital surplus, calculated under the EU Financial Groups Directive (FGD), was GBP2.1 billion at 31 December
2013 and represents a statutory coverage ratio of 169%. Increases in financial resources attributable to retained earnings in the year
were reduced by the repayment of debt and net increases in the capital requirements of the Group's businesses, with the result that the
absolute surplus was stable when compared to 2012.
This is a level with which we are comfortable given our earnings, our cash flow profile, the natural currency hedges of our capital
resources and requirements and risk assessment. A 1% fall in the ZAR/GBP exchange rate would result in a GBP10 million reduction in
the surplus (2012:GBP16 million reduction in the surplus). Given that the capital resources and the capital requirement both fluctuate
with changes in exchange rates, the cover ratio remains broadly unaffected by such a change in currency rates.
Economic capital
We continue to manage our business and monitor capital coverage internally on an economic capital at risk (ECaR) basis. We are
comfortably capitalised on this basis with a coverage ratio of over 160%. We intend to make disclosures of our economic capital
position in respect of 2013 during the first half of 2014.
Old Mutual calculates its economic coverage ratio on an internal basis. ECaR is calculated using a bottom-up risk based approach
applied to product lines within operating entities. Old Mutual has chosen to calculate ECaR using a one-year probability of default of
0.5% going forward, which is consistent with Solvency II principles and general industry practice. These calculations incorporate
exposures to Old Mutual's life insurance, property and casualty, banking and asset management businesses across regions. As such,
diversification is allowed for between different risks within entities and across sectors and territories.
Market Consistent Embedded Value (MCEV)
The adjusted Group MCEV per share decreased by 13.0p (6%) to 207.5p from December 2012, with 4,897 million shares in issue
(December 2012: 4,893 million shares). This decline was due to adjusted operating MCEV earnings of 17.9p being more than offset by
negative non-operating earnings and other movements of 30.9p, largely comprised of the translation effect of foreign exchange
movements and the payment of dividends.
During the period Old Mutual owned on average 54.4% of Nedbank. At 31 December 2013, the market value of Nedbank included in our
adjusted Group MCEV was GBP3.1 billion.
Within the adjusted operating MCEV earnings per share of 17.9p, non-covered business operating earnings increased by 1.5p to 7.9p,
and now represents 44% of the total (2012: 42%).
The 1.5p increase in non-covered business operating earnings per share was largely due to lower finance costs following the debt
reduction programme and the reduction in outstanding loan notes held by Old Mutual Bermuda. Nedbank's higher earnings contribution
in rand was largely offset by the impact of exchange rates.
Covered business operating MCEV earnings per share increased by 1.0p to 10.0p as a result of an increase in Old Mutual Wealth
covered earnings by 2.3p due to the non-recurrence of 2012 run-off costs for Austria and Germany and the higher value of new
business as a result of lower acquisition costs. The earnings from Old Mutual Bermuda reduced by 1.4p mainly due to reduced gains
from persistency experience and assumption changes after the significant run-off of the business in the period.
At December 2013, 62% of the adjusted Group MCEV, pre-debt and net other business, was in emerging market countries (2012: 64%),
with 25% in European businesses (2012: 22%) and 13% in the US (2012: 15%).
Net asset value
The reported net asset value per share has decreased by 8.1p to 137.7p (2012: 145.8p). This is mainly due to the impact of the
depreciation of the rand of 18.2p and dividends paid in the year of 7.35p, partially offset by profit attributable to the parent of 14.4p.
Risk Management
Risks and uncertainties
A number of potential risks and uncertainties could have a material impact on the Group's 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 the
rest of Africa. In the short-term we expect operational and execution risk to increase. We have accepted these risks in order to reduce
longer-term strategic risk and are actively managing these risks.
Investment in risk management and governance over the past few years has positioned the Group well to comply with the new
regulatory requirements under Solvency II and the equivalent developments in South Africa, and Basel III. We are confident that we are
sufficiently capitalised on an economic capital basis to comply with the new requirements as currently proposed, although these are not
yet finalised.
South Africa currently has substantial current account and budget deficits and historically low interest rates. The most significant
external risks to earnings relate to the concentration of businesses in South Africa and the exposure to South African economic
conditions and the impact thereof on our South African customer base, as well as the value of the Group's earnings and assets when
translated from rand to sterling. Our scenario testing involving a severe fall in the rand shows that the Group has sufficient capital and
liquidity headroom to withstand such an event.
The increased pressure on South African consumers due to lower disposable income poses some risk to all our businesses in South
Africa. Exposure to credit risk has increased slightly, but remains within appetite. Whilst the majority of lending activities are secured,
Nedbank's unsecured lending book reduced over 2013. Within Old Mutual Finance we experienced controlled growth off a low base,
applying stringent affordability requirements and strict credit criteria.
In South Africa, the values of certain life insurance liabilities are sensitive to movements in long-term interest rates, which have been
volatile over 2013. In response to this, the exposure to changes in the interest rate was hedged in 2013 and has been continued into
2014, subject to ongoing review in line with changes in economic conditions and the interest rate environment.
Old Mutual Bermuda risk exposure has reduced significantly, and represents less than 2% of the Group ECaR.
The current regulatory environment is continuously changing in all markets where we operate. Regulators across the globe continue to
focus on the treatment of customers and both principles and best practice in this area are evolving. Our commitment to operating
responsibly, with a strong focus on customer culture and values, positions us well to respond to this.
In South Africa, there is a move towards Group supervision and our risk management and governance structures and processes have
been evolving for some time in anticipation of these developments. Although we are not a global systemically important financial
institution, we are considered domestically important in South Africa by the regulators.
The Board believes that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly,
the Board continues to adopt the going concern basis for preparing accounts.
Tax
Total tax expense
The effective tax rate (ETR) on AOP decreased slightly from 27% in 2012 to 26% in 2013. As 84% of the 2013 AOP tax charge relates
to Emerging Markets and Nedbank, movements in the ETRs of 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 South African secondary tax on companies (STC) during
2012 and an increased proportion of low taxed income in Africa, as well as the impact of the reduction of the UK tax rate on deferred tax
liabilities.
Looking forward, and subject to 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, tax on policyholder investment returns is included in the Group's IFRS tax charge rather than
being offset against the related income. The impact is to increase Group IFRS profit before tax by GBP174 million in 2013 (2012:GBP75
million), with a corresponding increase to the tax charge. Of this GBP174 million, GBP112 million was attributable to Old Mutual Wealth
(2012:GBP26 million), with the remaining GBP62 million relating to South Africa and Rest of Africa (2012:GBP49 million).
FINANCIAL APPENDIX
Supplementary financial information (data tables)
Summarised financial information
2013 2012 % Change
IFRS results
Basic earnings per share(1) 15.0p 24.9p (40)%
IFRS profit after tax attributable to equity holders of the parent (GBPm)(1)(2) 705 1,172 (40)%
MCEV results(3)
Adjusted Group MCEV (GBPbn) 10.2 10.8 (6)%
Adjusted Group MCEV per share 207.5p 220.5p (6)%
Adjusted operating Group MCEV earnings (post-tax and non-controlling interests)
(GBPm) 867 776 12%
Adjusted operating Group MCEV earnings per share 17.9p 15.4p 16%
Return on Group MCEV 9.4% 8.0%
(1)Basic earnings per share and IFRS profit after tax in 2012 included 12.3p and GBP564 million, respectively, relating to 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)MCEV in 2012 includes profit from discontinued operations of GBP564 million following the sale of Nordic
Group return on equity(1) GBPm
2013 2012
AOP excluding accrued hybrid dividends – core operations(2) 890 841
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(2) 6,529 6,566
Average shareholders' equity – core operations 6,525 6,460
Return on average equity(2) 13.6% 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) in core businesses
(2)Following the adoption of revised IAS 19 'Employee Benefits', the comparative ROE, AOP and average shareholders' equity has been restated for 2012 to
be lower by GBP1 million and GBP19 million respectively
Group debt summary
2013 2012
Senior gearing (net of holding company cash) (4.0%) (3.0%)
Total gearing (net of holding company cash) 6.5% 8.5%
Book value of debt - MCEV basis (GBPm) 1,420 1,607
Book value of debt - IFRS basis (GBPm) 1,342 1,569
Total interest cover(1) 14.4 times 8.8 times
Hard interest cover(1) 4.2 times 1.9 times
(1)Total interest cover and hard interest cover ratios exclude non-core and discontinued operations
Adjusted Group MCEV per share
p
Adjusted Group MCEV per ordinary share at 31 December 2012(1)(2) 220.5
Covered business 10.0
Non-covered business 7.9
Adjusted Group operating MCEV earnings per ordinary share(1) 17.9
Economic variances and other earnings 6.3
Foreign exchange and other movements (24.9)
Dividends paid to ordinary and preferred shareholders (7.9)
Nedbank market value and foreign exchange movement (2.6)
BEE and ESOP adjustments (1.0)
Mark to market of debt (0.8)
Non-operating MCEV earnings and other movements (30.9)
Adjusted Group MCEV per ordinary share at 31 December 2013(1) 207.5
(1)The 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 year end 2012 Adjusted Group MCEV per share has been restated as required following the adoption of the revised IAS 19 'Employee Benefits' and
IFRS 10 'Consolidated Financial Statements'. The impact of these changes was to increase Adjusted Group MCEV per share by 0.2p
Financial Groups Directive
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. Both the capital resources and the capital requirements
fluctuate with changes in exchange rates.
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.
Regulatory capital 31-Dec-2013(1) 31-Dec-2012(2)
GBPbn % GBPbn %
Ordinary Equity 4.8 92% 5.2 91%
Other Tier 1 Equity 0.4 8% 0.6 11%
Tier 1 Capital 5.2 100% 5.8 102%
Tier 2 1.1 21% 1.3 23%
Deductions from total capital (1.1) (21)% (1.4) (25)%
Total capital resources 5.2 100% 5.7 100%
Total capital requirements 3.1 3.6
Group FGD surplus 2.1 2.1
Coverage ratio 169% 159%
(1)Based on the preliminary position
(2)As submitted to the Prudential Regulatory Authority (PRA)
Statutory Results
Reconciliation of Group AOP and IFRS profits
GBPm
2013 2012(1)
Adjusted operating profit 1,612 1,612
Adjusting items (286) (467)
Non-core operations 32 165
Profit before tax (net of policyholder tax) 1,358 1,310
Income tax attributable to policyholder returns 174 75
Profit before tax 1,532 1,385
Total tax expense (552) (471)
Profit from continuing operations after tax 980 914
Profit from discontinued operations after tax 3 564
Profit after tax for the financial year 983 1,478
Other comprehensive income(2)(3) (1,136) (807)
Total comprehensive income(3) (153) 671
Attributable to
Equity holders of the parent(3) (96) 503
Non-controlling interests
Ordinary shares(3) (76) 118
Preferred securities 19 50
Total non-controlling interests(3) (57) 168
Total comprehensive income(3) (153) 671
(1)The comparative period has been restated as required following the adoption of the revised IAS 19 'Employee Benefits' and IFRS 10 'Consolidated
Financial Statements'
(2)Other comprehensive income includes GBP(1,257) million in currency translation differences on translating foreign operations (2012:GBP(641) million)
(3)All share-based payments reserve movements are reflected directly in equity and no longer classified as other comprehensive income. Comparatives have
been restated
Operational Results
The detailed Business Review is included in Part 3.
Emerging Markets
2012 (constant
2013 currency) Change
AOP (GBPm)(1) 590 527 12%
NCCF (GBPbn) 1.6 1.1 0.5
FUM (GBPbn) 48.1 41.6 16%
Pre-tax FUM Operating Margin(2) 114 bps 118 bps (4) bps
(1)100% of iWYZE is now recorded within Property & Casualty rather than Emerging Markets. Comparative information for 2012 has been restated
(2)Pre-tax FUM Operating Margin is calculated as pre-tax AOP divided by average FUM
Nedbank
2012 (constant
2013 currency) Change
AOP (GBPm)(1) 797 711 12%
Net interest income (GBPm) 1,405 1,303 8%
Non-interest revenue (GBPm) 1,282 1,147 12%
Diluted Headline EPS 121.1p 105.3p 15%
(1)The comparative period has been restated as required following the adoption of the revised IAS 19 'Employee Benefits'
Property & Casualty
2012 (constant
2013 currency) Change
AOP (GBPm)(1) 4 31 (88)%
Underwriting Result (GBPm) (29) (9) (222)%
Gross written premiums (GBPm) 749 643 17%
Underwriting Ratio (4.9)% (1.7)% (320)bps
(1)100% of iWYZE is now recorded within Property & Casualty rather than Emerging Markets. Comparative information for 2012 has been restated
Old Mutual Wealth
2012 (constant
2013 currency) Change
AOP (GBPm) 217 195 11%
NCCF (GBPbn)(1) 2.3 2.0 0.3
FUM (GBPbn) 78.5 69.2 13%
Pre-tax Revenue Operating Margin(2) 36% 33% 300 bps
(1)From Q2 2012 OMAM UK has been reported within Old Mutual Wealth (OM Global Investors) rather than USAM. The comparatives for 2012 have not been
restated
(2)Pre-tax Operating Margin is calculated as pre-tax AOP divided by Net Revenue
US Asset Management (continuing operations)(1)
2012 (constant
2013 currency) Change
AOP (GBPm) 111 96 15%
NCCF (GBPbn) 10.4 0.9 9.5
FUM (GBPbn) 155.3 125.9 23%
Pre-tax Revenue Operating Margin(2)(3) 33% 32% 100 bps
(1)Continuing operations exclude the financial impact of affiliates divested in 2012, although includes the results of Echo Point which was discontinued in Q4
2013
(2)The comparative period has been restated as required following the adoption of the revised IFRS 10 'Consolidated Financial Statements'
(3)Pre-tax Revenue Operating Margin is calculated as pre-tax AOP before non-controlling interests divided by Total Revenue. Comparative revenue operating
margin has been restated following the adoption of IFRS 10 in respect of Heitman
Emerging Markets
Solid operational delivery and strategic progress in Africa through a challenging economic environment
Rm
Highlights 2013 2012 % Change
AOP (IFRS basis, pre-tax)(1) 8,911 7,955 12%
NCCF (Rbn) 24.7 16.2 52%
FUM (Rbn) 837.9 724.6 16%
Return on equity(1) 25% 25%
Gross sales 164,995 152,041 9%
Covered sales (APE)(2)(3) 8,442 6,808 24%
Covered sales (PVNBP)(3)(4) 51,470 43,345 19%
Non-covered sales(3)(5) 116,441 116,275 0%
Value of new business (VNB)(3)(4) 2,043 1,762 16%
APE margin(4) 27% 27%
PVNBP margin(4) 4.0% 4.1%
Operating MCEV earnings (covered business, post-tax) 4,965 4,269 16%
MCEV (covered business) 51,473 45,395 13%
Return on Embedded Value 11.0% 10.7%
(1)100% of iWYZE is now recorded within Property & Casualty rather than Emerging Markets. Comparative information for 2012 has been restated
(2)From 1 January 2013, Rest of Africa life APE sales are reported net of minority interest whereas previously these were reported gross of minority interest.
Comparatives have not been restated
(3)From 1 January 2013, sales by the India and China businesses have been disclosed as life APE sales rather than non-covered sales. Comparatives have
not been restated. No VNB or PVNBP is calculated in respect of these sales
(4)From 1 January 2013, VNB, PVNBP and the respective margins include all countries in Rest of Africa (previously only Namibia). Comparatives have not
been restated
(5)From 1 January 2013, client broker account flows in Kenya are no longer classified as non-covered sales. Comparatives, which have not been restated,
included R819 million of such flows
Operating environment
Although global activity strengthened during the second half of 2013, economic activity in South Africa was volatile throughout the year
with labour disputes disrupting a number of industries. Consumer income growth has been lower than in previous years, but corporate
profitability has generally remained strong.
The JSE All Share Index ended the year 18% higher, as world markets rallied strongly on signs of an economic recovery in the US.
Bonds performed poorly as long-term yields, as measured by the 10-year government bond yield, increased from 6.9% to 8.1% in 2013.
The total return on the JSE All Bond Index was approximately 2% for 2013.
South African budget and current account deficits have grown in the year, with interest rate levels still historically low. The South African
rand depreciated approximately 27% against the sterling and 24% against the US dollar in 2013.
Old Mutual Life Assurance Company South Africa (OMLACSA) remains one of South Africa's highest-rated institutions from a financial
strength perspective. In January 2014, Fitch upgraded OMLACSA's long-term rating to AAA(zaf) and affirmed its national insurer
financial strength rating at AAA(zaf) with stable outlook.
The growth rate in Africa has been in excess of 5% and, while natural resources have historically led the way, the developing middle
class across the continent is increasingly recognised as the next big driver of growth. At a country level, Kenya grew by 5.9%,
Zimbabwe by 3.2%, Namibia by 4.4% and Nigeria by 6.2% (IMF). Equity markets in all these countries ended 2013 at higher levels, with
Nigeria increasing by 47% and Zimbabwe increasing by 33% for the year.
China's growth rate stabilised at around 8%, whilst in Latin America, growth was mixed across the region.
Business developments
African expansion
We have continued to expand our operations in Africa through both acquisitions and organic growth by increasing the size of our sales
forces and product development efforts. As previously indicated, we have allocated up to R5 billion for potential investment in the
African expansion programme. In 2013, we committed or funded an acquisition spend of approximately R700 million, comprised of the
following acquisitions:
- Oceanic Life business in Nigeria;
- Oceanic General Insurance business in Nigeria;
- Provident Life Assurance, the fifth largest life company in Ghana; and
- Faulu Kenya DTM LTD, a microfinance company, subject to the conclusion of the relevant closing conditions.
Our businesses in Nigeria are in place to offer a comprehensive customer value proposition for a one-stop insurance solution that
provides customers with a suite of life and savings and property and casualty insurance product offerings.
Faulu, which serves a similar customer base to our Mass Foundation business in South Africa, provides access to around 400,000
customers in Kenya and has an excellent distribution network with more than 100 "bricks and mortar" distribution outlets, as well as a
distribution agreement with the Kenyan Post Office. We aim 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 600 agents
in Kenya.
Distribution and product development
Several innovative product launches and new service offerings in 2013 have enhanced our customer value proposition:
- Old Mutual Wealth was launched to South African customers in September and the first phase of adviser training has been
successfully completed with more than 1,500 advisers trained and accredited;
- In Retail Affluent in South Africa, we launched a structured investment product called XtraMAX in May;
- We acquired an online digital capability, 22seven; which provides financial planning tools to South African customers;
- In Namibia, the Old Mutual Card was launched – a transactional money account operated from customers' mobile phones;
- In Kenya, we launched a personal pension plan aimed at providing Kenyans of all income levels with access to affordable
retirement savings, as well as an occupational umbrella pension scheme for small to medium-sized enterprises; and
- In Mexico, 'Contigo Seguro para Padres' (parental life insurance) was launched in October.
In Latin America, we concluded the purchase of AIVA in January 2013 and we continue to work with AIVA to build our broker channel in
Mexico. As part of this successful integration, we have recruited more than 460 agents in the new broker channel with sales being in line
with our expectations.
Supporting economic transformation in South Africa
We believe that we have an obligation to support the communities in which we operate and we continue to invest significantly in projects
that will make a real, visible difference to the lives of these communities.
We launched the Old Mutual Education Fund (R350 million over the next seven years) to support improvements in learning for children
across different age groups.
We also signed an R80 million deal that will fund the development and operations of four low-fee independent schools over the next five
years which are set to reach 4,100 learners. This deal is the third of its kind for the Schools Investment Fund, a fund established by the
Public Investment Corporation (PIC), the Government Employees Pension Fund (GEPF) and Old Mutual to address the shortage of
quality affordable schools in South Africa.
The Masisizane Fund has approved loans of more than R76 million in 2013 with 47% in the agricultural sector and 26% in franchising. A
total of 1,746 job opportunities have been facilitated in 2013 through these investments.
Old Mutual South Africa maintained its level 2 accreditation for B-BBEE using the new Financial Sector Code.
IFRS AOP results
Pre-tax AOP increased by 15% (12% including LTIR to R8.9 billion) benefiting from the positive impact of higher equity market levels on
asset-based fees.
Retail Affluent and Mass Foundation profits grew by 11% and 14% respectively, helped by the non-recurrence of adverse tax and yield
curve changes in 2012. Further progress was made in 2013 to implement solutions that would protect South African IFRS AOP from the
impact of yield curve movements, such as an extension of our hedging programme. As a consequence, yield curve movements did not
have a material impact on South African IFRS AOP in 2013. This hedging programme has been continued into 2014, subject to ongoing
review in line with changes in economic conditions.
Corporate profits rose by 9% partly due to higher mortality profits on group assurance and the success of an ongoing cost reduction
programme.
Rest of Africa showed a marginal 2% decline (10% increase including LTIR) due to an increase in central costs incurred to support
growth initiatives and expansion activities, partially offset by the favourable impact of strong equity market returns in Zimbabwe.
Asia and Latin America profits grew 80%, largely due to favourable exchange rates, the reallocation between profits and OMEM central
expenses, and the first time inclusion of profits from AIVA.
Within the Old Mutual Investment Group (OMIG), Old Mutual Specialised Finance (OMSFIN) profits grew strongly from successful
investment results, while profits in the rest of OMIG declined mainly as a result of incentive accruals released in 2012 and lower
associate income.
Central expenses decreased by 10% due to lower IT costs and more conservative management of expenses.
Net client cash flow
NCCF improved from R16.2 billion to R24.7 billion, mainly due to strong sales in the South African retail businesses, higher bank
channel sales in China and improved net inflows in OMIG, particularly due to the non-recurrence of the significant PIC withdrawal that
took place in 2012.
Net flows in Latin America decreased substantially due to a large withdrawal by a public communications company in 2013 and a large
inflow from a government pension deal in 2012.
Funds under management
FUM increased by 16% to R838 billion mainly due to the increased NCCF and strong equity market performance, with the investment
returns of the international assets enhanced by the depreciation of the rand. At 31 December 2013, 21% of total start manager FUM
originated from our emerging market businesses outside of South Africa, up from 19% at 31 December 2012.
The new Wealth proposition in South Africa accumulated FUM of over R1.0 billion within six months of its launch in September 2013.
Gross sales
Gross sales increased by 9% to R165 billion. In South Africa, strong growth was achieved in the Retail Affluent and Corporate
businesses, which grew by 21% and 17% respectively, mainly due to excellent growth in single premiums. Momentum continued in
Mass Foundation which recorded growth of 14%. Asian sales doubled, benefiting from our joint venture in China expanding its bank
channel presence from 1,000 approved outlets at the beginning of the year to 1,397 at the end of December 2013. At an aggregate level
the modest 9% growth is largely due to the comparative period being boosted by large institutional sales in Latin America and lower
OMIG sales given the exceptional new business won in 2012.
Non-covered sales
Non-covered sales were flat at R116 billion reflecting the reclassification of Asia sales in 2013 from non-covered to life assurance sales
and a particularly strong comparative period that was boosted by a number of large one-off deals in OMIG and Latin America.
In South Africa, Retail Affluent sales grew by 22% due to strong Galaxy and OMUT sales, reflecting the continuing shift from traditional
life products to investment products including unit trusts, as well as higher acsis institutional sales. OMIG had strong flows into the
equity boutiques in 2013, although sales reduced by 7% due to large mandates and flows secured by non-equity boutiques such as
Dibanisa and Futuregrowth in 2012, as well as delays from draw-downs in the Alternative investment portfolio in 2013.
Sales in Rest of Africa reduced by 14% following the exclusion of client broker account flows in Kenya, as well as lower institutional
sales in Namibia.
In Latin America, unit trust and mutual fund sales decreased by 8% despite being appointed the fund manager of three mutual funds in
Colombia and winning two large corporate deals in 2013. This was mainly due to the comparative period including three large one-off
mandates. There were also higher sales of the Global Trust products in Mexico.
Covered sales (APE)
Life APE sales increased by 24% to R8.4 billion boosted by the reclassification of Asia sales which were reported as non-covered sales
in 2012.
In South Africa, Retail Affluent single premium sales were 28% up on 2012, mainly due to strong Max saving sales following the launch
of the new XtraMAX product in May 2013 and improved fixed bond sales. Corporate single premium sales increased by 23% mainly due
to large inflation-linked and with-profit annuity deals. Both these businesses experienced weaker regular premium sales with Greenlight
sales continuing to be affected by a highly competitive market and Corporate sales having benefited from significant deals in 2012.
Growth in Mass Foundation sales of 13% was primarily due to a larger sales force with tied agent sales, particularly in the branches,
being stronger than broker and call centre sales.
A 17% increase in Rest of Africa sales followed large corporate deals secured in Namibia, higher Retail Affluent sales in Kenya as a
result of additional advisers, higher reported sales in Zimbabwe due to exchange rate movements and the first time inclusion of R29
million of sales following the acquisition of Oceanic Life in Nigeria. Sales for 2013 are reported net of minority interests with no
restatement of comparatives. On a like-for-like basis, gross of minority interests, the growth rate was significantly higher at 31%.
Within Asia & Latin America, Mexico experienced strong life APE sales growth, albeit off a low base, mainly from the launch of the
Multitrust product as well as the Retail Mass business gaining momentum. 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 (OMF)
The decline in the credit approval rate to 31% reflects OMF's continued conservative approach to lending, following evidence of
elevated client debt levels. Credit losses rose slightly from 13.3% in 2012 to 14.0% in 2013. OMF's collection rates on the active
portfolio remained above 90% and our strengthened credit scoring, implemented in 2012, has resulted in improved credit performance
on the later vintages. Credit life sales to OMF customers increased from R186 million to R211 million, reflecting the moderate 14%
increase in loans advanced in the year. OMF's contribution to Mass Foundation sales has grown, with in-house advisor sales of
traditional insurance products from OMF branches now over 14% of Mass Foundation sales on an APE basis (21% including credit life).
Value of new business (VNB) and margins
VNB improved by 16% to R2.0 billion with the APE margin remaining stable at 27%. Retail Affluent and Mass Foundation growth of 16%
and 14% respectively was largely due to volume growth and a favourable change in the economic basis. Corporate VNB decreased by
21% mainly due to a greater proportion of lower margin inflation-linked annuities being sold in 2013. Rest of Africa VNB increased by
130% due to strong growth in Namibia following large Absolute Secure Growth portfolio sales and the contribution of R37 million from
other African countries reporting VNB for the first time. VNB in Latin America was negative (compared to positive VNB in the
comparative period) following a change in expense allocation methodology which resulted in a larger allocation to acquisition rather than
maintenance expenses.
Embedded value
Operating MCEV earnings (post-tax) increased by 16% to R5.0 billion. The main contributors to this growth were improved VNB and
positive experience variances and other operating variances, both of which were negative in 2012. This was partly offset by negative
operating assumption changes compared with positive assumption changes in 2012.
Good mortality experience was partly offset by worse persistency experience, where Mass Foundation was adversely affected by a less
favourable mix of stop order and debit order business, as well as general economic strain in the market affecting affordability.
Operating assumption changes consist mainly of the negative impact of persistency assumption changes in Mass Foundation, which
were partly offset by positive maintenance expense assumption changes.
Return on Embedded Value (RoEV) improved from 10.7% to 11.0%.
Total MCEV earnings (post-tax) increased by 11% on prior year, benefiting from continued good investment returns in addition to higher
operating earnings.
Outlook
Macro-economic prospects in South Africa are subdued, with the economy adjusting to the depreciating rand and due to labour
demands and political uncertainty especially in the run up to the national elections in May 2014. Nevertheless, real GDP growth in 2014
is expected to improve to 2.8% according to the IMF, from the 2013 level of around 1.9%.
South African household incomes are expected to come under further pressure in the year ahead, particularly in the lower income
market. However, affluent customers are expected to be more resilient.
We continue to expect good sales performance from our Retail businesses with double digit sales growth in our Mass Foundation
business despite increased financial pressure on our customers from rising inflation as well as low employment levels. The quality of
new business and impacts on persistency are being carefully managed through enhanced new business submission standards and
retention initiatives.
We are embedding and strengthening the Treating Customers Fairly (TCF) principles in our businesses and we will work with the
industry and regulators to achieve clarity on application, particularly with regard to legacy products.
Prospects in the other emerging market economies in which we operate remain largely positive, particularly in the rest of Africa as a
result of a developing middle class. This, as well as the low levels of insurance penetration in most African countries, means that we
expect good growth levels to persist. However, there is some risk arising from more difficult global conditions such as weak commodity
prices and lower capital flows to emerging markets.
We continue to explore suitable targets for acquisition or partnership that will further support our growth in Rest of Africa.
We have set very clear targets for our businesses. These include growing customers to more than 9 million by 2015, maintaining overall
RoE in the range of 20-25%, and growing profits in Rest of Africa (including property & casualty results) to 15% of South Africa's profits
by 2015.
Emerging Markets data tables (Rand)
Adjusted operating profit (pre-tax)
Rm
2013 2012 % Change
Retail Affluent 3,028 2,725 11%
Mass Foundation(1) 1,937 1,702 14%
Corporate 1,224 1,127 9%
South Africa LTIR 1,211 1,317 (8)%
South Africa Life and Savings 7,400 6,871 8%
Rest of Africa(2) 548 561 (2)%
Rest of Africa LTIR(2) 396 296 34%
Rest of Africa 944 857 10%
Asia & Latin America(3) 392 218 80%
Life and Savings 8,736 7,946 10%
OMIG 1,003 933 8%
Central expenses(3) (828) (924) 10%
Total Emerging Markets 8,911 7,955 12%
(1)100% of iWYZE is now recorded within Property & Casualty rather than Emerging Markets. Comparatives have been restated
(2)In 2013, Namibia's holding company returns were reclassified from Rest of Africa profits to LTIR. Comparatives have not been restated
(3)Asia & Latin America profit in the comparative period is net of overhead costs which are now classified as OMEM central expenses
Gross sales and funds under management(1)
Rbn
Market &
FUM other FUM
1-Jan-13 Gross sales(2) Redemptions Net flows movements(4) 31-Dec-13
Retail Affluent 121.2 59.9 (51.9) 8.0 21.1 150.3
Mass Foundation(3) - 7.8 (3.5) 4.3 (4.3) -
Corporate 1.3 17.8 (20.9) (3.1) 3.2 1.4
OMIG(3) 463.3 32.5 (26.8) 5.7 37.9 506.9
Total South Africa 585.8 118.0 (103.1) 14.9 57.9 658.6
Rest of Africa 38.4 12.2 (8.5) 3.7 11.8 53.9
Asia & Latin America 100.4 34.8 (28.7) 6.1 18.9 125.4
Total Emerging Markets 724.6 165.0 (140.3) 24.7 88.6 837.9
Rbn
Market &
FUM other FUM
1-Jan-12 Gross sales(2) Redemptions Net flows movements(4) 31-Dec-12
Retail Affluent 99.7 49.7 (44.3) 5.4 16.1 121.2
Mass Foundation(3) - 6.8 (3.0) 3.8 (3.8) -
Corporate 1.2 15.1 (18.2) (3.1) 3.2 1.3
OMIG(3) 430.3 34.8 (44.0) (9.2) 42.2 463.3
Total South Africa 531.2 106.4 (109.5) (3.1) 57.7 585.8
Rest of Africa 28.6 10.8 (7.3) 3.5 6.3 38.4
Asia & Latin America 66.5 34.8 (19.0) 15.8 18.1 100.4
Total Emerging Markets 626.3 152.0 (135.8) 16.2 82.1 724.6
(1)FUM shown on an end manager basis. The Financial Disclosure Supplement shows additional disclosure of FUM on a start manager basis
(2)Gross sales are cash inflows for the period and thus include prior period recurring premium flows
(3)Mass Foundation gross sales are recorded by segment but all FUM is managed by OMIG
(4)Includes the foreign exchange impact of translating FUM managed outside of South Africa
Gross sales(1)
Rm
2013 2012 % Change
Retail Affluent 59,900 49,677 21%
Mass Foundation 7,779 6,796 14%
Corporate 17,794 15,152 17%
OMIG 32,496 34,820 (7)%
Total South Africa 117,969 106,445 11%
Rest of Africa 12,223 10,804 13%
Asia & Latin America 34,803 34,792 0%
Total Emerging Markets 164,995 152,041 9%
(1)Gross sales are cash inflows for the period and thus include prior period recurring premium flows
Covered sales (APE)
Rm
Single premium APE Regular premium APE Total APE
% % %
By cluster:
2013 2012 Change 2013 2012 Change 2013 2012 Change
Retail Affluent 1,226 956 28% 1,485 1,529 (3)% 2,711 2,485 9%
Mass Foundation(1) 2 2 0% 2,769 2,441 13% 2,771 2,443 13%
Corporate 803 652 23% 424 486 (13)% 1,227 1,138 8%
Total South Africa 2,031 1,610 26% 4,678 4,456 5% 6,709 6,066 11%
Rest of Africa(2) 192 133 44% 526 480 10% 718 613 17%
Asia & Latin America(3) 366 24 1,425% 649 105 518% 1,015 129 687%
Total Emerging Markets 2,589 1,767 47% 5,853 5,041 16% 8,442 6,808 24%
Rm
Single premium APE Regular premium APE Total APE
% % %
By product:
2013 2012 Change 2013 2012 Change 2013 2012 Change
Savings 1,948 1,218 60% 2,974 2,422 23% 4,922 3,640 35%
Protection(1) - - - 2,879 2,619 10% 2,879 2,619 10%
Annuity 641 549 17% - - - 641 549 17%
Total Emerging Markets 2,589 1,767 47% 5,853 5,041 16% 8,442 6,808 24%
(1)OMF credit life sales are included within Mass Foundation protection sales (R211 million in 2013 and R186 million in 2012)
(2)From 1 January 2013, Rest of Africa life APE sales are reported net of minority interest whereas previously it was reported gross of minority interest.
Comparatives have not been restated
(3)Asia & Latin America represents Mexico, India and China. From 1 January 2013, the Group's share of sales by the India and China businesses has been
disclosed as covered rather than non-covered business. Comparatives have not been restated
Non-covered sales
Rm
Unit trust / mutual fund sales Other non-covered sales Total non-covered sales
% % %
2013 2012 Change 2013 2012 Change 2013 2012 Change
South Africa 30,357 26,422 15% 48,963 46,851 5% 79,320 73,273 8%
Rest of Africa(1) 5,423 5,457 (1)% 2,135 3,286 (35)% 7,558 8,743 (14)%
Asia & Latin America(2) 29,563 32,161 (8)% - 2,098 (100)% 29,563 34,259 (14)%
Total Emerging Markets 65,343 64,040 2% 51,098 52,235 (2)% 116,441 116,275 0%
(1)From 1 January 2013, client broker account flows in Kenya are no longer classified as non-covered sales. Comparatives, which have not been restated
included R819 million of such flows
(2)From 1 January 2013, the Group's share of sales by the India and China businesses has been disclosed as covered rather than non-covered business.
Comparatives have not been restated
Old Mutual Finance
Rm
2013 2012 % Change
Lending book (gross) 8,258 6,431 28%
Sales: loans advanced 6,250 5,482 14%
NPAT/average lending book(1) 3.9% 3.8%
Loan approval rate 31.0% 34.2%
Credit losses: average lending book 14.0% 13.3%
Return on equity 32.1% 35.3%
Branches 225 201 12%
Staff 2,055 1,821 13%
(1)Net profit after tax (NPAT)/average lending book is stated after capital charges
Nedbank
Solid performance off strong foundations in a more difficult environment
Rm
Highlights 2013 2012 % Change
AOP (IFRS basis, pre-tax) 12,026 10,738 12%
Headline earnings(1) 8,670 7,483 16%
Net interest income(1) 21,220 19,680 8%
Non-interest revenue(1) 19,361 17,324 12%
Net interest margin(1) 3.57% 3.53%
Credit loss ratio(1) 1.06% 1.05%
Cost to income ratio(1) 55.2% 55.6%
Return on equity(1) 15.6% 14.8%
Return on equity (excluding goodwill)(1) 17.2% 16.4%
Common equity Tier 1 ratio(2) 12.5% 11.6%
(1)As reported by Nedbank in its results for the year ended 31 December 2013 and 31 December 2012
(2)Calculated by Nedbank on a Basel III basis
The full text of Nedbank's results for the year ended 31 December 2013, released on 24 February 2014, can be accessed on our
website http://www.oldmutual.com/ir/pressReleases/index.jsp. The following is an edited extract:
Banking and economic environment
Globally, economic conditions improved during 2013, led by better prospects in key developed economies. In contrast, growth in
emerging-market economies generally slowed during the year. The improved US environment has resulted in a tapering off of
quantitative easing, and significant liquidity outflows from emerging markets and lower commodity prices led to currency depreciation in
many emerging markets, in particular those with current and fiscal account deficits.
Locally, the economic environment remained challenging, with growth in gross domestic product (GDP) slowing to 1.9% in 2013 and the
current account and fiscal deficits continuing to widen. The downgrading of SA's sovereign credit rating by three of the major credit
rating agencies in late 2012 and early 2013, now placing SA two notches above investment grade and the US commencement of the
tapering off of quantitative easing contributed to the rand's 24% depreciation against the US dollar in 2013.
Growth in household credit demand fell to levels last seen during the global financial crisis as a result of lower overall wages due to
strike action, persistently high unemployment rates and increases in administered prices, which, together with elevated levels of
indebtedness, eroded consumer confidence.
Declining business confidence kept private sector investment at low levels. The demand for corporate credit generally fared better than
household credit demand, as a modest increase in government fixed-capital investment on energy, transport and other infrastructure
sectors provided some underpin.
Review of results
Nedbank performed well over the year ended 31 December 2013 ('the period'). The results reflect the tougher-than-anticipated
economic environment offset by delivery on our strategic focus areas and continued internal momentum in building and growing the
Nedbank franchise.
Headline earnings increased 15.9% to R8,670 million (2012: R7,483 million), driven by good revenue growth, impairments increasing at
a slower rate than net interest income and disciplined expense management.
Diluted headline earnings per share (HEPS) increased 15.0% to 1,829 cents (2012: 1,590 cents) and diluted earnings per share
increased 15.1% to 1,822 cents (2012: 1,583 cents).
We have continued to create value for our shareholders by increasing net asset value per share by 12.1% to 13,143 cents (2012:
11,721 cents) and dividends per share by 19.0% to 895 cents per share (2012: 752 cents per share).
Nedbank generated economic profit (EP) of R2,114 million, up 39.0% (2012: R1,521 million). The return on average ordinary
shareholders' equity (ROE), excluding goodwill, increased to 17.2% (2012: 16.4%) and the ROE increased to 15.6% (2012: 14.8%),
benefiting from an increased return on assets (RoA) of 1.23% (2012: 1.13%).
Nedbank is well capitalised, with the Basel III common-equity tier 1 ratio at 12.5% – at the top end of our internal target range (2012:
Basel III pro forma ratio 11.6%). Funding and liquidity levels remained sound, with the surplus liquidity buffer at R28.0 billion (2012:
R24.4 billion), and the final-quarter average long-term funding ratio was maintained at 26.2%.
Cluster performance
Nedbank benefited from the diversified earnings streams from our clusters. Stronger earnings growth rates were achieved by Nedbank's
wholesale clusters, while earnings growth in Nedbank Retail and Nedbank Business Banking was impacted by higher impairments and
continued investment for growth.
Nedbank Capital produced an outstanding set of results. Growth in earnings came from good drawdowns in the investment banking
pipeline and improvements in impairments to within the cluster's through-the-cycle target range.
Nedbank Corporate's strong earnings and ROE growth was achieved through excellent performance by Property Finance as a result of
strong advances growth coupled with fair-value gains. Corporate Banking contributed to this achievement through continued growth in
transactional income and increased liability revenues. This performance was underpinned by stable impairments and good expense
management.
Nedbank Business Banking delivered headline earnings and an ROE similar to those in 2012, notwithstanding the single-client specific-
impairments charge in June 2013. The full-year credit loss ratio (CLR) at 0.65% is within the target range due to the quality of client
advances and proactive risk management practices. The strong growth in non-interest revenue (NIR) and asset payouts, mainly to
existing clients, is reflective of good underlying business momentum, despite the protracted challenges facing the small-and-medium-
enterprise sector in SA.
Nedbank Retail generated headline earnings of R2.5 billion, which included absorbing a pre-tax charge of R323 million in additional
impairments as downside-risk protection for deteriorating levels of consumer credit health, fuelled by the high, industry-wide unsecured
lending growth rates in preceding years and resultant industry tightening of credit availability. The embedding of sound risk management
practices and early comprehensive risk-mitigating actions resulted in the CLR of 2.16%, which is within the Retail CLR target range.
Overall defaulted loans continued to decline, while coverage strengthened further.
The excellent momentum in sustainably repositioning the Retail Cluster, strategically and financially, was maintained in a very
challenging macro-economic and competitive environment. Investment in distribution and distinctive client value propositions is yielding
significant client gains, with increases in related transactional, deposit and lending volumes contributing to good NIR growth – still ahead
of expense growth. The proactive measures to de-risk personal loans by slowing advances growth and offering lower priced credit life
products with increased benefits have lowered NIR growth by one percentage point.
Nedbank Wealth achieved record headline earnings in 2013. The results were mainly attributable to strong growth in the areas of asset
management, financial planning and stockbroking, as well as a significant year-on-year reduction in impairments.
Headline earnings at the centre represent, inter alia, an increase in earnings in the Rest of Africa Division, a reversal of R88m of
insurance provisions following court rulings in our favour in the first half of the year, a small fair-value profit on hedging activities and net
interest income (NII) earned on higher levels of surplus equity held at the centre. These were offset by an R60m portfolio provision
raised in the second half of the year in view of various economic and regulatory uncertainties.
Detailed segmental information is available on Nedbank's website at www.nedbankgroup.co.za under the 'Financial information' section.
Financial performance
Net interest income
Net interest income grew 7.8% to R21,220 million (2012: R19,680 million), with average interest-earning banking assets growth of 6.8%
(2012 growth: 7.5%).
The net interest margin (NIM) increased to 3.57% (2012: 3.53%), led by liability margin gains from a lower cost of marginal wholesale
funding, deposit mix benefits and slightly lower levels of average long-term debt, partially offset by a decrease in asset margins.
Notwithstanding improved risk-adjusted pricing of new advances, the asset margin was impacted by mix changes from the planned
slowdown in growth of personal loans.
Impairments charge on loans and advances
Impairments increased 7.0% to R5,565 million (2012: R5,199 million). The CLR was similar to that of 2012 at 1.06% (2012: 1.05%),
having improved from 1.31% at June 2013.
Sound asset quality and proactive risk management resulted in lower levels of inflows into defaulted advances, which declined 9.4% to
R17,455 million (2012: R19,273 million), and amounted to 2.95% of gross advances (2012: 3.58%).
All clusters reported CLR within their respective through-the-cycle target ranges. The total CLR remained above Nedbank's target range
due to the higher weighting of retail impairments. Nedbank Retail's CLR of 2.16% is up on the 2012 ratio of 2.01% due to the additional
aforementioned R323m impairment charges. The six-month write off period for personal loans, methodology changes and steps taken in
prior periods to reduce risk led to personal loan defaulted advances peaking in May 2013 and the CLR improving since June 2013.
The coverage ratio for total and specific impairments increased to 65.6% (2012: 56.4%) and 42.8% (2012: 38.6%) respectively. Portfolio
coverage on the performing book continued to strengthen to 0.70% (2012: 0.66%).
Our collections processes are robust and generated post-write off recoveries of R888 million (2012: R866 million), reflecting the
prudency of cash accounting recoveries on the written-off book. This includes recoveries in Personal Loans of R276 million (2012: R243
million).
Non-interest revenue
NIR increased by 11.8% to R19,361 million (2012: R17,324 million), due to the following:
- Commission and fee income increased strongly by 11.8% to R14,023 million (2012: R12, 538 million) from good transactional
volume increases across Nedbank and improved cross-sell
- Insurance income growth of 13.7% to R1,927 million (2012: R1,695 million) remained robust, with good sales in motor vehicle
insurance and an improvement in the claims environment partly offset by the volume-related slowdown in credit life income
- Trading income held up well, increasing 4.1% to R2,564 million (2012: R2,464 million) off the high 2012 base
- Private-equity income of R225 million (2012: R391 million) was recorded following unrealised losses in Nedbank Capital and
the higher realisations in 2012
- Sundry income increased to R526 million (2012: R394 million) mostly owing to the reversal of insurance provisions following
court rulings in our favour in June 2013
- Fair-value gains of R40 million (2012: R265 million loss) were recognised mainly as a result of basis risk on centrally hedged
banking book positions and accounting mismatches in the hedged fixed-rate advances portfolios
Our strategy to grow NIR has resulted in an NIR increase of 13.0% (excluding fair-value adjustments) on a compound basis since 2009,
with an increase in the NIR-to-expenses ratio from 78.8% in 2009 to 86.4% (2012: 84.4%) to exceed our medium-to-long-term target of
> 85% for the first time over a full year since the introduction of this metric.
Expenses
Disciplined cost management, combined with ongoing investment in the franchise, resulted in operating expenses growing 9.2% to
R22,362 million (2012: R20,485 million).
Growth in expenses was primarily driven by:
- a staff-related cost increase of 10.5%, comprising salary and wage cost growth of 8.3% following average inflation-related
annual increases of 6.5% and 1.4% growth in average headcount, and a variable-compensation increase in line with
Nedbank's financial performance, with the short-term incentive (STI) up 15.9% and long-term incentive (LTI) up 23.4%;
- investment in distribution channels of R151 million;
- marketing costs growth of 13.3% as we invest in building our franchise and transactional banking client base; and
- a computer processing increase of 10.5% in line with increases in business volume growth
Taxation
The base effect of capital gains tax and secondary tax on companies in 2012, together with lower levels of dividend income, resulted in
a lower effective tax rate of 25.2% (2012: 26.8%).
Statement of financial position
Capital
Strong balance sheet management and organic earnings growth during the period caused all capital adequacy ratios to remain well
above the Basel III minimum regulatory capital requirements and at or above the top of Nedbank's Basel III internal target ranges.
During the year a total of R3.0 billion of new-style, fully loss-absorbent, Basel III-compliant, tier 2 subordinated debt was successfully
issued to replace the R2.1 billion of Basel II tier 2 capital that matured in September 2013.
Further detail on risk and capital management will be available in the Risk and balance sheet management review section of Nedbank's
results booklet and the Pillar 3 Report to be published on their website at www.nedbankgroup.co.za on 31 March 2014.
Funding and liquidity
Nedbank's surplus liquid asset buffer increased to R28.0 billion (2012: R24.4 billion), reflecting a strong liquidity position. Nedbank has
low levels of reliance on interbank and foreign currency funding, and continues successfully to diversify and lengthen its funding profile.
The last quarter average long-term funding ratio was maintained at 26.2%, supported by the successful conclusion of a R2.0 billion five-
year commercial-mortgage securitisation in March 2013 as well as R5.8 billion in senior unsecured debt issued during the year,
replacing R3.4 billion that matured in March and April 2013. Nedbank has been compliant with the Basel III Liquidity Coverage Ratio on
a pro forma basis since 31 December 2012.
Loans and advances
Loans and advances increased 9.9% to R579.4 billion (2012: R527.2 billion), with good wholesale banking advances growth of 16.1%.
Gross new advances payouts increased 10.1% to R158.9 billion (2012: R144.3 billion).
Banking advances growth in Nedbank Capital remained robust, following steady drawdown of the deal pipeline throughout the year,
including the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP), of which Nedbank supported over
a third of the allocated renewable-energy capacity in the first and second phases. Growth in the trading advances book came largely
from foreign-currency placements and deposits placed under reverse repurchase agreements related to surplus liquidity and the
hedging of Nedbank's liquid asset portfolio.
The increase in Nedbank Corporate's advances is comprised of 5.3% growth in corporate banking and 11.0% growth in property
finance. Nedbank's market-leading commercial property franchise earned the accolade of being voted the best property finance bank in
SA in the PWC SA banking survey 2013.
Nedbank Business Banking recorded advances growth of 4.4% as the small-to-medium-sized enterprises sector continued to
experience economic pressure throughout 2013.
Retail banking advances continued to grow modestly at 2.5%. Advances growth was led by an increase of 14.2% and 13.8% for card
and vehicle finance respectively, while personal loan and home loan advances declined 9.4% and 2.1% respectively in line with the
selective origination strategy in both advances categories ahead of expected interest rate increases.
At a total level personal loan advances now represent 3.6% and home loan advances 23.0% of total advances.
Growth in advances at the centre was led by increased business activity in the Rest of Africa, consistent with Nedbank's focus on
deepening its Pan-African banking client relationships and expanding its presence in the rest of Africa.
Deposits
Deposits grew 9.5% to R603.0 billion (2012: R550.9 billion) and a sound loan-to-deposit ratio of 96.1% (2012: 95.7%) was maintained.
The portfolio tilt strategy to drive deposit growth is reflected in good contributions seen from all the clusters. Current accounts increased
5.1% (2012: 7.9%) and savings accounts grew by a strong 30.3% (2012: 9.3%), as saving deposits held in Nedbank Wealth were
boosted by rand depreciation. Call and term deposit balances were 9.7% (2012: 9.9%) higher due to increased funding from the
commercial and asset management sectors. The strategy also focused on increasing fixed deposits, which resulted in 16.3% (2012:
8.2%) growth in fixed deposits while negotiable certificates of deposit were up 13.7% (2012: negative 21.4%).
Economic outlook
The economic outlook for developed economies is expected to be more positive in 2014, with accelerated momentum in the US and UK,
and the Eurozone beginning to show signs of fragile growth. These improved prospects, together with the effects of a tapering off of
quantitative easing, will lead to global volatility and pose downside risk to many emerging markets. A further concern is China's
economic slowdown, given its importance as a trade partner for SA.
Nedbank currently anticipates GDP growth of 2.6% for SA in 2014. This is higher than the expected 1.8% growth in 2013, but remains
below growth rates required to reduce unemployment levels meaningfully. The key drivers are likely to be better export performance and
an increase in gross fixed-capital formation. Downside risk to growth has increased as interest rates have started on an upward
trajectory, with a 50 basis point increase in January 2014 and further potential increases later in the year.
Growth in household credit demand is unlikely to improve in 2014 while employment conditions remain poor, real income constrained
and consumer debt levels high. Growth across most retail advances categories will continue to be muted and consumer credit risks are
likely to increase. The rate and extent of further interest rate increases will impact the ability of consumers to service their debt.
Corporate credit demand is expected to remain above retail credit demand, but will continue to be subdued as corporates delay
committing to new projects in an environment of infrastructure constraints and low levels of confidence.
Prospects
In the context of a volatile and uncertain economic outlook forecast risk is high. Against this background the financial performance for
2014 is currently anticipated as follows:
- Advances to grow at mid to upper single digits
- NIM to remain at levels similar to those of 2013
- The CLR to be within the new CLR range of 80 to120 basis points, improving slightly on 2013
- NIR (excluding fair-value adjustments) to grow at mid to upper single digits, incorporating the 0% transactional fee increase in
2014
- Expenses to increase at upper single digits
In the light of the volatile economic conditions Nedbank is currently expecting organic diluted HEPS growth in 2014 to be greater than
the growth in nominal GDP. As usual, this will be updated at our interim results presentation.
With regards to Nedbank's medium-to-long-term targets, the CLR target range was amended from 0.60% to 1.00% to 0.80% to 1.20%
to reflect Nedbank Retail's more prudent provisioning methodologies and asset mix changes. The efficiency ratio target was amended
from <50.0% to a range of 50.0% to 53.0% to reflect the structurally lower interest rate pattern and Nedbank's strategy of investing for
growing the franchise.
Nedbank data tables (Rand)
Cluster performance Headline earnings (Rm) RoE (%)
2013 2012(1) % Change 2013 2012(1)
Nedbank Capital 1,726 1,431 20.6% 29.4% 25.4%
Nedbank Corporate 2,245 1,817 23.6% 26.4% 22.5%
Nedbank Business Banking 929 944 (1.6)% 19.4% 21.5%
Nedbank Retail 2,539 2,552 (0.5)% 11.6% 12.1%
Nedbank Wealth 900 718 25.3% 36.2% 29.7%
Business clusters 8,339 7,462 11.8% 19.1% 17.9%
Centre including Rest of Africa 331 21
Total (including goodwill)(1) 8,670 7,483 15.9% 15.6% 14.8%
(1)2012 restated by R27 million to reflect the adoption of IAS 19 'Employee Benefits'
Detailed segmental information is available in the results booklet and on Nedbank's website at www.nedbankgroup.co.za under the
'Financial information' section
Credit loss ratio analysis (%)
FY 2013 H1 2013 FY 2012
Specific impairments 0.95 1.24 0.91
Portfolio impairments 0.11 0.07 0.14
Total credit loss ratio 1.06 1.31 1.05
Credit loss ratio (%)
% banking Through-the-cycle
advances 2013 2012 target ranges
Nedbank Capital 11.5% 0.51 1.06 0.10 – 0.55
Nedbank Corporate 32.1% 0.23 0.24 0.20 – 0.35
Nedbank Business Banking 12.0% 0.65 0.34 0.55 – 0.75
Nedbank Retail 38.2% 2.16 2.01 1.50 – 2.20
Nedbank Wealth 4.0% 0.28 0.61 0.20 – 0.40
Total 1.06 1.05 0.60 – 1.00
Capital (%)
31-Dec-13 31-Dec-12 ratio Internal target range Regulatory minimum
ratio (Basel III) (Basel III) (Basel III) (Basel III)(1)
Common equity Tier 1 ratio 12.5 11.6 10.5-12.5 4.5%
Tier 1 ratio 13.6 13.1 11.5-13.0 6.0%
Total capital ratio 15.7 15.1 14.0-15.0 9.5%
(1)The Basel III regulatory minima are being phased in between 2013 and 2019, and exclude Pillar 2B add-ons
Loans and advances by cluster
Rm
31-Dec-13 31-Dec-12 % Change
Nedbank Capital 109,549 82,494 32.8%
Banking activity 72,066 52,732 36.7%
Trading activity 37,483 29,762 25.9%
Nedbank Corporate 175,274 162,730 7.7%
Nedbank Business Banking 62,785 60,115 4.4%
Nedbank Retail 195,435 190,647 2.5%
Nedbank Wealth 22,082 19,864 11.2%
Centre including Rest of Africa 14,247 11,316 25.9%
Total 579,372 527,166 9.9%
Nedbank group targets
Metric 2013 performance Medium-to-long-term targets 2014 outlook(1)
RoE (excluding goodwill) 17.2% 5% above cost of ordinary Below target
shareholders' equity
Growth in diluted headline earnings per 15.0% > or = consumer price index + GDP growth > or = consumer price index
share + 5% + GDP growth
Credit loss ratio 1.06% Between 0.8% and 1.2% of average Meet target, improving
banking advances slightly
NIR-to-expense ratio 86.4% > 85% At target
Efficiency ratio 55.2% 50.0% to 53.0% At target
Tier 1 capital adequacy ratio (Basel III) 12.5% 10.5% to 12.5% At or above the top end
of target
Economic capital Internal Capital Adequacy Assessment Process (ICAAP): A debt rating (including 10% capital
buffer)
Dividend cover 2.11 times 1.75 to 2.25 times 1.75 to 2.25 times
(1)Shareholders are advised that these forecasts are based on organic earnings and Nedbank's latest macro-economic outlook and have not been reviewed
or reported on by Nedbank's independent auditors.
Property & Casualty
Tough operating conditions whilst business changes are being implemented
Rm
Highlights 2013 2012(1) % Change
Underwriting margin (4.9)% (1.7)%
Underwriting result (437) (132) (231)%
Long-term investment return (LTIR) 472 608 (22)%
Income from associate (Zimbabwe) 40 19 111%
AOP (IFRS basis, pre-tax) 58 475 (88)%
Gross written premiums 11,315 9,706 17%
Net earned premiums 8,856 7,573 17%
Claims ratio 75.5% 72.4%
Combined ratio 104.9% 101.7%
International solvency ratio 54.1% 64.0%
Return on equity 0.6% 7.1%
(1)Comparatives have been restated to reflect 100% of the iWYZE results
Overview and operating environment
A disappointing underwriting loss of R437 million can largely be attributed to severe weather-related losses in the fourth quarter, drought
conditions leading to poor Agriculture results in the first half and a continuing soft market in the South African property and casualty
sector. The underwriting loss deteriorated from the prior year with the margin worsening by 3.2% to a loss of 4.9%. Flood and hail
damage caused an increase in both claims frequency and severity. The South African property and casualty industry has seen
combined ratios deteriorate significantly during 2013.
Gross written premium grew 17% year on year, reflecting strong growth of 36.7% in the Corporate & Niche segment (including CGIC)
which delivered gross written premiums of R3,527 million (2012: R2,581 million). Much of the growth in premiums was due to inwards
reinsurance business, which primarily consist of open market and strategic attritional losses treaty business. Credit Guarantee (CGIC)
grew 10.8% to R860 million. The Personal segment grew 5.9% to R3,065 million and Commercial by 12.1% to R3,935 million with
Agriculture contributing R145 million and the Rest of Africa by 9.3% to R788 million. The Personal lines quote to acceptance conversion
rate fell, reflecting the implementation of tougher underwriting criteria.
iWYZE, our joint venture with the Old Mutual Mass Foundation business, achieved solid growth in gross written premium of 10.8%, and
a significant improvement in the claims ratio. Reflecting the early stage in the life cycle of the business, the underwriting margin on
iWYZE is (42.1)%, an improvement compared to the previous year (54.6)%. In 2014, premium in iWYZE is expected to grow through
substantial collaboration with Old Mutual. The retention rate will be improved through a combination of accurate customer segmentation,
careful analysis of renewal lapse rates and appropriate renewal moderation, and through the introduction of product innovations aimed
at improving longevity. We will also work on diversifying the types of risks underwritten in the iWYZE book.
The company remains well capitalised with a 54.1% international solvency ratio (net assets: net premiums).
Business development
Management have clear action plans to address challenges over the current business planning period. The focus will be on:
- Remediating rates and improving risk selection in Personal lines
- We will continue introducing price increases across the Personal book, with the impact expected at renewal
- We will incorporate improved risk selection on new business
- Our pricing initiatives will be supported by a greater degree of automation in the underwriting process, which will allow for
tighter control and more effective validation
- Improving claims efficiency and effectiveness while combating claims fraud
- We will implement a new claims operating model which will improve efficiencies in Personal lines by adopting a
segmented approach to claims handling
- We will focus on improved procurement of claims-related expenditure to reduce the average claims cost
- Reducing operating expenses
- We will keep the annual increase in payroll costs in line with inflation
- We will reduce IT costs following our migration off a mainframe based system
- Improving the operating model
- We will be reviewing our current operating model in key segments and will be introducing improvements aimed at
customer satisfaction and operational efficiency
- Improving broker distribution capabilities
- We will provide a single point of contact for each broker with a focus on key account management
- We will improve broker experience by creating continuous feedback loops to business
- Creating a high performance culture
- We will align performance scorecards to the strategy and business plan by providing clear and concise messaging on
targets and introducing robust performance measurement
The new organisational structure, consisting of Personal, Commercial, Corporate & Niche and the Rest of Africa has been bedded down
over the last quarter where executive appointments have been completed for our underwriting segments in South Africa. We expect
improved results as operational efficiencies and strategic objectives begin to gain traction.
Underwriting and IFRS AOP results
The deterioration of the underwriting result was materially affected by weather-related claims specifically in the fourth quarter with R176
million of net losses from flooding in Western Cape and hail storms in and around Johannesburg. By segment, Corporate & Niche and
Commercial lines suffered the most significant reduction in the underwriting result by R157 million and R156 million respectively. The
decrease in the underwriting result led to an 88% reduction in AOP and a reduction in RoE from 7.1% to 0.6%.
The deterioration in the overall claims ratio to 75.5% (2012: 72.4%) was primarily due to higher claims severity in both the Personal and
Commercial motor classes. However, with re-pricing and other remedial actions taking place we are starting to see positive trends.
There was a higher incidence of fire claims in the Corporate & Niche segment, which experienced a claims ratio of 73.4% and drought-
related Agriculture claims.
CGIC generated strong premium growth of 10.8%. However, challenging economic conditions have adversely affected its claims and
expense ratios, resulting in a lower underwriting result compared to the previous year.
Overall, the expense ratio improved by 1% due to a combination of the premium growth and a continued focus on expense
management.
The net commission ratio was 16.6% for 2013 with a 1.1% increase year on year due to changes in business mix and the
commencement of binder fee regulations, whereby intermediaries provide claims handling and policy administration services.
Rest of Africa
In the Rest of Africa, the claims ratio deteriorated to 62.9% (2012: 54.2%) mainly due to three large corporate claims in Namibia of
R20.5 million and two large commercial claims in Botswana of R6.3 million which together contributed 5.5% to the claims ratio. An
increase in the Incurred But Not Reported (IBNR) provision added a further 0.8%. A 7.3% increase in the Personal lines claims ratio in
Namibia from 74.6% to 81.9% was due to premium rate reductions in an attempt to grow the book. Remediation plans have already
been implemented and we will continue to monitor their progress.
Outlook
In the latter part of the year, whilst there has been some tentative impact from remedial action taken in our Personal lines division as the
policy count begins to stabilise, the continued depreciation of the rand has led to increased motor related claims costs on imported
parts.
Despite challenging market conditions experienced in 2013, we expect competitors to also increase premiums in response to the rising
claims cost pressures. We anticipate a hardening of the market in 2014. Our primary focus is on restoring the profitability of the
business in 2014 rather than on premium growth. In our Personal segment, greater collaboration within the Old Mutual Group will be the
driving force behind future growth prospects as well as the expansion into the Rest of Africa.
In the longer term, the management team is focused on delivering the plan to improve return on equity to 15-20% by 2016 through the
management of claims costs, capital management and underwriting margin.
Whilst we are confident that our management actions will have a positive impact in achieving our stated targets, we acknowledge that
an increase in the frequency and severity of weather-related claims increases our earnings volatility, given the current business risk
profile.
Old Mutual Wealth
Strong operational delivery through a changing regulatory environment
GBPm
Highlights 2013 2012 % Change
AOP (IFRS basis, pre-tax) 217 195 11%
NCCF (GBPbn)(1) 2.3 2.0 15%
FUM (GBPbn) 78.5 69.2 13%
Return on equity 16% 13%
Gross sales(1) 14,434 11,630 24%
Life assurance sales (APE) 606 610 (1)%
PVNBP 5,556 5,334 4%
Non-covered sales(1)(2) 8,207 5,612 46%
Value of new business 76 62 23%
APE margin 13% 10%
PVNBP margin 1.4% 1.2%
(1)From Q2 2012 OMAM UK has been reported within Old Mutual Wealth (OM Global Investors) rather than USAM. The comparatives for 2012 have not been
restated in respect of flows recognised within USAM in Q1 2012
(2)Includes unit trust, mutual fund, ISAs and other sales
Operating environment
Investment markets improved markedly in 2013 and the level of flows to the industry reflected this with the move into equity and growth
asset allocations, as we had anticipated. Significant regulatory change in the UK, our major market, arose from the Retail Distribution
Review (RDR) for which we were well prepared. Following the implementation of RDR, we have experienced increased demand for
packaged investment solutions from financial advisers who increasingly seek to outsource either elements of, or their entire investment
processes.
During 2013, we developed WealthSelect which is a researched range of some of the best investment strategies in the market, available
through Old Mutual Global Investors (OMGI) funds. Financial advisers will either be able to use the range to build portfolios themselves
or they can use our own managed portfolio service and outsource the management of the portfolios to our Multi-Asset team. The launch
in Q1 2014 will provide us with one of the most comprehensive investment propositions in the market, giving advisers a range of options
to meet differing client needs. We already offer investment solutions for clients focused on controlling risk, called Spectrum, and for
income, known as Generation.
In our international markets, we offer a market-leading range of portfolio bonds which enable clients to invest via our Ireland or Isle of
Man offshore jurisdictions. Depending on where clients are domiciled this provides them with tax efficiency, portability and/or
investment security, whilst maintaining investment choice and flexibility due to the open structure of the products.
Business developments
We have made significant progress in our strategy of developing into an integrated wealth management business. There have been six
key steps:
- Creating one business
- Building out the asset management business
- Widening our proposition: WealthSelect and other product launches
- Transforming our platforms: Wealth Interactive and UK administration
- Building out distribution: Asia and AIVA
- Managing for value: European and UK Heritage businesses
IFRS AOP results
Old Mutual Wealth AOP increased by 11% to GBP217 million (2012: GBP195 million) as a result of tight management of expenses and
increased fees earned on higher average FUM in the period. Profit grew by 19% after excluding GBP13 million of profits from Finland,
which was sold in H2 2012. In 2012, there were exceptional policyholder tax contributions of GBP22 million in part due the move to a
new life tax regime. Underlying profits before tax have therefore grown from GBP160 million to GBP217 million.
While overall profits continue to grow, the quality of these earnings is also improving. The open book activities undertaken by the UK
Platform, asset management, International cross-border and European open businesses contributed GBP99 million of profit in 2013
compared to GBP68 million in 2012. Operating margin for Old Mutual Wealth improved to 36% from 33% in 2012. The reduced cost
base in the business generated positive operating leverage as revenues rose on higher funds under management.
UK Platform profits improved to GBP13 million from GBP2 million in the prior period reflecting higher FUM and increased inflows over
2013, and positive operating leverage as the business maintained a stable cost base.
International cross-border profits, after removing the impact of Finland on the 2012 comparative were 11% down on prior year to GBP49
million. The reduction in profit reflects the increased investment in the second half of the year in the development and roll-out of the
Wealth Interactive platform. Total spend was approximately GBP13 million.
OMGI profits improved to GBP15 million from GBP2 million in the prior period reflecting the higher FUM levels in the business, improved
performance-related fees earned during the year and the continued migration of assets from the UK Heritage business to asset offerings
at OMGI which earn a higher margin. The Europe open business has also returned strong results in 2013 following improved sales in
Italy and the significantly reduced expense base in France. In France we recorded an operating profit for the business for the first time,
while in Italy we exceeded our target return on equity for the local business of 12%.
The Heritage business continues to generate good results with profits of GBP112 million for 2013 (2012:GBP126 million), with the prior
year comparative including the GBP22 million exceptional policyholder tax contribution. The Heritage portfolios contributed 52% of the
Old Mutual Wealth profit in 2013, down from 65% in 2012, while overall profit levels have continued to grow.
Net client cash flow
NCCF of GBP2.3 billion increased by 15% on prior year (2012:GBP2.0 billion) as a result of continuing strong sales in the second half of
the year on the UK Platform, OMGI, and International cross-border businesses.
A strong fourth quarter contributed to the UK Platform delivering NCCF of GBP2.4 billion, up 9% on prior year (2012:GBP2.2 billion).
Following a challenging start to the year with the implementation of the RDR changes, confidence amongst advisers returned and good
sales were seen for the remainder of the year, particularly across the collective investments and ISA products.
In International, NCCF of GBP0.5 billion was 150% higher than prior year (2012:GBP0.2 billion) with increased sales momentum.
NCCF from UK third party distribution channels in OMGI reached GBP1.3 billion, continuing to reflect the positive impact of the recent
appointments within the UK Equities team. New business sales through the UK Platform into OMGI funds are 16% for the full year
2013.
Gross outflows from the lower margin Nordic business totalled GBP1.2 billion following the divestment of the business in 2012, although
this was partially offset by the continued internalisation of funds from the UK Heritage business of approximately GBP1.0 billion (gross)
in 2013. The core OMGI NCCF excluding this internalisation of funds and the Nordic outflows more than doubled to GBP0.9 billion
from GBP0.4 billion in 2012.
Within Europe, both Italy and France have improved NCCF compared with prior year. In Italy NCCF of GBP395 million was 18% higher
than prior year (2012:GBP336 million) as a result of a number of new distribution agreements implemented throughout 2013. This has
also resulted in reduced sales concentration risk locally. In France, following significant restructuring, work with key relationships
throughout 2013 has seen NCCF improve 3% compared with 2012.
Within the European Heritage business, Germany, Austria and Switzerland have seen NCCF reduce, as expected, following their
closure to new business in 2012. NCCF has reduced to GBP74 million for 2013 compared to GBP151 million in the prior year. Effective
retention strategies continue to ensure that the persistency of this business remains ahead of our expectations.
In the UK, net outflows of legacy assets have declined marginally in 2013. Market growth in these investments overall has resulted in
funds under management closing at higher levels than those at the start of the year despite a net outflow position during the year.
Funds under management
FUM has increased to GBP78.5 billion, up 13% on the start of 2013 (December 2012:GBP69.2 billion) with the continued improvement in
the equity markets and positive NCCF.
The UK Platform assets were GBP27.3 billion, up 21% on prior year (December 2012:GBP22.6 billion). OMGI investment performance
remained strong with 44% of Open Ended Investment Company (OEIC) funds in the first quartile over a three year period and a total of
66% of funds above the median. This has contributed to FUM increasing 16% to GBP16.0 billion (December 2012:GBP13.8 billion).
Gross sales
We generated gross sales of GBP14.4 billion, an increase of 24% on the prior period (2012:GBP11.6 billion) with strong sales on the UK
platform, OMGI and International cross-border businesses.
UK Platform sales increased by 14% to GBP4.7 billion (2012:GBP4.1 billion). Following the challenging start to the year in the UK
market, sales momentum built through the year reflecting the improved market conditions. The second half of 2013 saw a 7% increase
compared with the first half of the year due to higher sales of collective investments and ISAs.
UK sales from other lines of business were 15% lower than prior year, as 2012 sales had benefited from a GBP182 million premium
received from an institutional provider. The year ended strongly with sales in the last quarter 50% higher than those in the third quarter.
International cross-border sales of GBP1,921 million were up 14% on the prior period (2012:GBP1,681 million), benefiting from improved
sales in South Africa, which were enhanced further by the launch of the IP+ product in the second half of 2013. Elsewhere, product
launches at the end of 2012 were initially slow to gain traction but in 2013 have significantly exceeded prior year sales. In Europe we
have seen strong sales of Qualifying Recognised Overseas Pension Schemes (QROPS), while Hong Kong has benefited from improved
Portfolio Bond sales. Sales in Latin America have developed well following the AIVA acquisition, and have been supported by the
addition of the Life Investment Portfolio product which was launched in H2 2013. We expect this level of sales performance to continue
into 2014. Latin America sales benefited from some large single premium business towards the end of the year.
OMGI sales were strong through both UK third party channels and the UK Platform. Sales of GBP7,572 million were up 68% on prior
year (2012:GBP4,506 million). Improved sales were seen across the Alternatives and Equities asset classes, with the latter benefiting
from new appointments during the year, the improvement in the markets, consumer confidence and a shift from fixed income back into
equities. A significant uplift in the fourth quarter was achieved, with inflows of 22% of all UK Platform sales into OMGI. This is following
OMGI's improved offering, continued strong investment performance and the sales teams gaining traction in the market after several
months of work with brokers' investment committees.
Within the European open businesses, we have seen continued strong sales in Italy, up 10% on the comparative period to GBP949
million, as a result of increased sales through both established and new distributors. Sales in France remained broadly in line with 2012
as the work with established distributors during a period of significant change has led to us retaining our market share.
Life and embedded value summary
Gross single premium covered business sales on the UK Platform increased by 2% against prior year. Platform sales accounted
for GBP232 million of the GBP606 million total Old Mutual Wealth sales on an APE basis.
In the International market, sales increased by 11% to GBP201 million on an APE basis.
Sales in Europe open portfolios increased by 2% to GBP127 million, with good performance in Italy partially offset by weaker activity
levels in Poland and France.
The value of new business of GBP76 million was GBP14 million higher than prior year. Although APE remained largely unchanged, the
decline in acquisition expenses had a positive impact on the value of new business. Overall APE margin has increased from 10% in
2012 to 13% in 2013.
Outlook
We have made significant progress in transforming our business in 2013 and 2014 will see further change. In the UK, we will launch the
WealthSelect fund management suite, conclude the terms of our administrative outsourcing agreement and broaden our distribution
capabilities. The objective is to increase our speed to market for our proposition and to service customers in the way that they find most
convenient. We expect the sales momentum to continue into 2014 as we introduce further protection and retirement enhancements.
With Wealth Interactive implemented in International, we intend to increase our penetration in the markets we operate delivering flexible
and user friendly products on an efficient platform.
We continue the planning for our outsourcing contract to boost product capability and lower our cost base from 2017 onwards. We
expect an additional cash cost of approximately GBP140 million of the outsourcing agreement to be spent in the period of 2014-2016,
which will be reported as exceptional IFRS costs and so excluded from adjusted operating profit.
The acquisition of the distribution business Intrinsic Financial Services, will allow us to diversify our distribution by becoming a
"complementary" advice channel, and will better position us to offer our own solutions. Given the substantial changes occurring in the
industry, this move will solidify and maintain our presence in the advisory channel in the UK. It will also allow us to compete with other
product providers who are acquiring their own distributors.
A revitalised Asia strategy will be launched at the end of Q1 2014 with the exclusive sales agreement with a leading institutional broker
signed in December. We expect further collaboration with AIVA in Latin America, with the Life Investment Portfolio building a strong
pipeline at the end of 2013 for 2014.
In OMGI, we expect continued strong growth of the UK Equity and Alternatives desks as well as through the Spectrum fund range. We
remain focused on the launch of our multi-asset offerings including our Foundation fund in addition to developing our investment
proposition in Asia.
At the same time as the WealthSelect launch in Q1 2014, there will be the final transfer of the heritage assets from the UK to OMGI of
around GBP400 million. A final GBP200 million in Nordic outflows is expected in 2014.
We announced in November that we had agreed to sell our Polish business, as part of our commitment to simplify our operations and
focus on a select number of core growth markets. The transaction is subject to regulatory approvals and other customary conditions and
we expect to complete the sale in the next six months.
Given our current business profile and our ability to improve margin through increasing sales of our funds through our platforms, we
remain confident of achieving our financial targets for Old Mutual Wealth and developing it into a fully-fledged wealth management
business.
Old Mutual Wealth data tables (Sterling)
Adjusted operating profit
GBPm
2013 2012 % Change
Invest & Grow markets
UK Platform 13 2 550%
UK Other(1) 6 1 500%
International(2) 49 68 (28%)
Old Mutual Global Investors(3) 15 2 650%
Total Invest & Grow 83 73 14%
Manage for Value markets
Europe – open book(4) 22 (4) 650%
Heritage business(5) 112 126 (11%)
Total Manage for Value 134 122 10%
Total Old Mutual Wealth 217 195 11%
(1)Includes Protection, Series 6 pensions, and UK Institutional business
(2)Comparative includes Finland, which was sold in H2 2012 and contributed GBP13 million of AOP in 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 Europe Heritage book (Germany, Austria, Switzerland and Liechtenstein)
Gross sales and funds under management
GBPbn
Market and
Gross other
1-Jan-13 sales Redemptions Net flows movements 31-Dec-13
Invest & Grow markets
UK Platform(1) 22.6 4.7 (2.3) 2.4 2.3 27.3
UK Other(2) 4.7 0.8 (0.9) (0.1) 1.0 5.6
International 13.9 1.9 (1.4) 0.5 0.6 15.0
Old Mutual Global Investors(3)(4) 13.8 7.6 (6.9) 0.7 1.5 16.0
Total Invest & Grow 55.0 15.0 (11.5) 3.5 5.4 63.9
Manage for Value markets
Europe - open book(5) 5.9 1.3 (0.8) 0.5 0.2 6.6
Heritage business(6) 14.3 0.7 (1.8) (1.1) 2.2 15.4
Total Manage for Value 20.2 2.0 (2.6) (0.6) 2.4 22.0
Elimination of intra-Group assets(4)(7) (6.0) (2.6) 2.0 (0.6) (0.8) (7.4)
Total Old Mutual Wealth 69.2 14.4 (12.1) 2.3 7.0 78.5
GBPbn
Market and
other
1-Jan-12 Gross sales Redemptions Net flows movements 31-Dec-12
Invest & Grow markets
UK Platform(1) 18.8 4.1 (1.9) 2.2 1.6 22.6
UK Other(2) 3.7 1.0 (0.9) 0.1 0.9 4.7
International 14.3 1.7 (1.5) 0.2 (0.6) 13.9
Old Mutual Global Investors(3)(4)(8) 12.1 4.8 (4.5) 0.3 1.4 13.8
Total Invest & Grow 48.9 11.6 (8.8) 2.8 3.3 55.0
Manage for Value markets
Europe - open book(5) 5.2 1.2 (0.8) 0.4 0.3 5.9
Heritage business(6) 14.9 0.9 (2.0) (1.1) 0.5 14.3
Total Manage for Value 20.1 2.1 (2.8) (0.7) 0.8 20.2
Elimination of intra-Group assets(4)(7) (6.4) (1.8) 1.7 (0.1) 0.5 (6.0)
Total Old Mutual Wealth 62.6 11.9 (9.9) 2.0 4.6 69.2
(1)UK Platform FUM excludes intra-group assets from our International business of GBP1.5 billion in 2013 (2012:GBP1.4 billion)
(2)Includes Protection, Series 6 pensions and UK Institutional business
(3)OMGI redemptions include Nordic sale-related net outflow of GBP1.0 billion in 2013 (2012:GBP0.1 billion)
(4)OMGI and intra-Group eliminations include net inflows from the Heritage business of GBP0.9 billion (2012: nil)
(5)Includes business written in France, Italy and Poland
(6)Includes UK Heritage and Europe Heritage (Germany, Austria, Switzerland and Liechtenstein)
(7)Assets and flows managed by OMGI on behalf of other Old Mutual Wealth businesses
(8)OMGI 2012 opening FUM includes OMAM(UK) FUM of GBP4.0 billion. OMGI 2012 gross sales and redemptions include Q1 2012 flows in respect of
OMAM(UK)
Gross sales
GBPm
2013 2012 % Change
Invest & Grow markets
UK Platform 4,718 4,140 14%
UK Other(1) 823 968 (15%)
International 1,921 1,681 14%
Old Mutual Global Investors 7,572 4,506 68%
Total Invest & Grow 15,034 11,295 33%
Manage for Value markets
Europe – open book(2) 1,278 1,185 8%
Heritage business(3) 765 886 (14%)
Total Manage for Value 2,043 2,071 (1%)
Elimination of intra-Group assets(4) (2,643) (1,736) (52%)
Total Old Mutual Wealth 14,434 11,630 24%
(1)Includes Protection, Series 6 pensions and UK Institutional business
(2)Includes business written in France, Italy and Poland
(3)Includes UK Heritage and Europe Heritage (Germany, Austria, Switzerland and Liechtenstein)
(4)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
% % %
2013 2012 Change 2013 2012 Change 2013 2012 Change
Invest & Grow markets
UK Platform 2,012 1,973 2% 32 32 - 232 229 1%
UK Other(1) 52 97 (46)% 18 21 (14)% 23 31 (26)%
International(2) 1,725 1,413 22% 28 40 (30)% 201 181 11%
Total Invest & Grow 3,789 3,483 9% 78 93 (16)% 456 441 3%
Manage for Value markets
Europe - open book(3) 1,133 1,053 8% 14 19 (26)% 127 124 2%
Heritage business(4) 35 96 (64)% 19 35 (46)% 23 45 (49)%
Total Manage for Value 1,168 1,149 2% 33 54 (39)% 150 169 (11)%
Total Old Mutual Wealth 4,957 4,632 7% 111 147 (24)% 606 610 (1)%
(1)Includes Protection and Series 6 pensions
(2)Comparative includes Finland, which was sold in H2 2012
(3)Includes business written in France, Italy and Poland
(4)Includes UK Heritage and Europe Heritage (Germany, Austria, Switzerland and Liechtenstein)
Non-covered sales
GBPm
2013 2012 % Change
Invest & Grow markets
UK Platform 2,590 2,067 25%
UK Other(1) 636 736 (14)%
Old Mutual Global Investors(2) 7,572 4,506 68%
Total Invest & Grow 10,798 7,309 48%
Manage for Value markets
Europe - open book(3) 45 30 50%
Heritage business(4) 7 9 (22)%
Total Manage for Value 52 39 33%
Elimination of intra-Group assets(5) (2,643) (1,736) 52%
Total Old Mutual Wealth 8,207 5,612 46%
(1)Includes UK Institutional business
(2)From Q2 2012 OMAM (UK) has been reported within Old Mutual Wealth (OMGI) rather than USAM. The comparatives for 2012 have not been restated in
respect of sales recognised within USAM in Q1 2012
(3)Includes business written in France, Italy and Poland
(4)Includes UK Heritage and Europe Heritage (Germany, Austria, Switzerland and Liechtenstein)
(5)Assets and flows managed by OMGI on behalf of other Old Mutual Wealth businesses
US Asset Management
Strong net client cash flows of $16.3 billion and AOP up by 21%, as business momentum continues
$m
2012 2012
Highlights(1) 2013 Continuing Change Reported Change
AOP (IFRS basis, pre-tax) 174 151 15% 144 21%
Operating margin, before non-controlling interests(2) 33% 32% 28%
Operating margin, after non-controlling interests(2) 29% 28% 24%
Net client cash flows ($bn) 16.3 1.4 14.9 (0.4) 16.7
Funds under management ($bn) 257.4 208.6 23% 208.6 23%
(1)Continuing operations exclude affiliates disposed of during 2012 and OMAM(UK), which was transferred to Old Mutual Wealth in Q2 2012. Includes Echo
Point which was discontinued in Q4 2013
(2)Comparative operating margin has been restated following the adoption of IFRS 10 in respect of Heitman
Overview
Business momentum continued in 2013 for USAM, including AOP and operating margin growth, sustained positive net client cash flows,
and strong long-term investment performance. IFRS AOP of $174 million increased by 21% on the reported 2012 result. Net client
cash inflows were $16.3 billion, representing 7.8% of beginning FUM (2012: $0.4 billion net outflow on a reported basis), which coupled
with positive market conditions led to 23% growth in FUM for the year.
IFRS AOP results and operating margin
Operating results
USAM delivered a strong level of AOP in 2013 while supporting key growth initiatives including further build-out of our global distribution
capabilities.
IFRS AOP increased by 21% on a reported basis (2012: $144 million) and 15% on a continuing basis (2012: $151 million) largely due to
increases in management fees resulting from higher average FUM than the comparative period. Reported results also benefited from
the divestiture activity undertaken during 2012.
Revenues of $609 million for the period were 14% higher than 2012 continuing operations ($536 million), driven by higher average
FUM.
AOP margin before non-controlling interests increased by 5% to 33% from reported results in the prior year (1% increase on a
continuing basis), reflecting the 2012 divestitures and operating leverage as revenue has increased. On a post non-controlling interests
basis, reported operating margin increased 5% to 29%, and has continued to progress towards the upper end of our targeted 25%-30%
range.
Investment performance for continuing operations
Over the one-, three- and five-year periods ended 31 December 2013, 48%, 90% and 88% of assets outperformed benchmarks,
compared to 39%, 62% and 81% at 30 September 2013 and 62%, 66% and 76% at 31 December 2012. The improvement in three-year
performance from 30 September 2013 was driven by one value equity product outperforming its respective benchmark, while the
improvement in one-year performance relates largely to select global equity products.
USAM also evaluates investment performance weighted by the revenue generated by its products. As of 31 December 2013, assets
representing 66%, 91% and 84% of revenue outperformed benchmarks over the one-, three- and five-year periods (31 December 2012:
67%, 71% and 68%).
Continued strong long-term investment performance and improved distribution capabilities remain key to generating future positive cash
flows.
Funds under management and net client cash flows
$bn
Disposed of or
transferred
Continuing operations affiliates Reported
2013 2012(1) 2012 2012
Opening FUM 208.6 183.3 48.2 231.5
Gross inflows 39.9 28.7 3.4 32.1
Gross outflows (22.6) (25.3) (5.2) (30.5)
Total client driven net flows 17.3 3.4 (1.8) 1.6
Hard asset disposals (1.0) (2.0) - (2.0)
Net client cash flows 16.3 1.4 (1.8) (0.4)
Disposals (1.6) - (42.0) (42.0)
Transferred to Old Mutual Wealth - - (6.6) (6.6)
Market and other 34.1 23.9 2.2 26.1
Closing FUM 257.4 208.6 - 208.6
(1)Continuing operations exclude affiliates disposed of during 2012 and OMAM(UK), which was transferred to Old Mutual Wealth in Q2 2012. Includes Echo
Point which was discontinued in Q4 2013
Operating results
FUM increased by 23% to $257.4 billion (31 December 2012: $208.6 billion) with $34.1 billion of market appreciation (contributing
16.3% growth) and $16.3 billion of net client cash inflows (contributing 7.8% growth). During Q4 2013, the decision was made to close
Echo Point Investment Management, reducing FUM by $1.6 billion.
FUM consists primarily of long-term investment products diversified across equities (60.2%), fixed income (26.8%) and alternative
investments (13.0%).
Net client cash inflows were $16.3 billion for the period (2012 reported results: $0.4 billion net outflow, 2012 continuing operations: $1.4
billion net inflow), representing 7.8% of opening FUM. Net inflows were highly diversified, with six out of the eight affiliates reporting
positive or flat flows.
Net client cash inflows during the period are expected to result in a $46.9 million positive impact to annualised revenue, relating to
higher fee equity products ($24.3 million), alternatives ($13.0 million), and fixed income products ($9.6 million).
Gross inflows totalled $39.9 billion (2012 reported results: $32.1 billion, 2012 continuing operations: $28.7 billion), with flows in global
fixed income, international equities, dividend focus equities and emerging markets equities. Gross inflows of $13.1 billion were from
new client accounts. Gross inflows of $15.5 billion came from non-US clients during the period.
Gross outflows totalled $23.6 billion (2012 reported results: $32.5 billion, 2012 continuing operations: $27.3 billion), concentrated in US
value equities, along with international equities and global fixed income. Gross outflows of $1.0 billion relate to investment-driven hard
asset disposals by Heitman, USAM's real estate manager.
USAM's Global Distribution initiative raised $4.5 billion in total assets funded in 2013; NCCF sourced by Global Distribution represented
23% of the total NCCF for the year. 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 52% of year-end FUM (31 December 2012:
52%).
Business developments
During Q4 2013, USAM announced plans to close its international equity investment affiliate, Echo Point Investment Management LLC,
a process which will be completed during Q1 2014.
USAM's UK-based global fixed income manager, Rogge Global Partners, announced the appointment of David Jacob, effective from 13
January 2014, as successor to the firm's founder and chief executive officer, Olaf Rogge. Mr. Rogge will continue as chairman and co-
chief investment officer.
Outlook
Assuming favourable market conditions, USAM expects strong business performance and financial growth to continue in 2014, including
sustained positive net client cash flows and an operating margin of greater than 30%, pre non-controlling interests. On an ongoing
basis, USAM continues to target average annual net client cash inflows of 3-5% of opening FUM.
Global equity market trends whilst volatile suggest that investor preferences may shift from fixed income to equity products in 2014. The
impact on USAM of such a shift depends on the specific nature of this shift, although generally equity fees are higher than fixed income
fees.
USAM's Global Distribution team experienced a strong and successful start to its non-US initiatives in 2013 with several significant
fundings of mandates won with their assistance. USAM remains focused on investing in affiliate growth initiatives and further penetration
of non-US markets through its Global Distribution initiative.
We will also continue to explore selective inorganic growth opportunities which are additive to the portfolio and fill critical product or
asset class gaps within our business.
Non-core business – Bermuda
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 inter-company loans from Bermuda.
Overview and operating environment
Bermuda has continued to implement its run-off strategy of risk reduction while managing for value. Favourable experience continued
with contracts containing the Universal Guarantee Option (UGO) Guaranteed Minimum Accumulation Benefit (GMAB) experiencing
higher than assumed surrender rates during the 5-year top-up period that ended in August 2013. The total cash cost of the top-ups
made to contracts reaching their 5-year anniversary dates between 5 January 2012 and 29 August 2013 was $525 million, significantly
lower than the 31 December 2011 projection of $689 million, mainly as a result of favourable equity market movements during the
period.
In December 2013, the Bermuda Monetary Authority (BMA) agreed to the release of $100 million of capital through the cancellation of
inter-company loan notes. This was in addition to the $450 million of capital release approved in July 2013. The release of capital
reflects the reduction in size of the remaining liabilities, risk management strategy and de-risking actions taken.
Surrender development
In aggregate, there was $1,210 million of surrenders in 2013 (2012: $1,929 million). At 31 December 2013 around 81% of the non-Hong
Kong UGO GMAB policies and around 67% of the Hong Kong policies originally written (by guarantee amount) had surrendered on or
after their 5-year anniversary date.
The development of the Bermuda policyholder account values is shown below:
$m
Period 31-Dec-13 31-Dec-12 % Change
Account Value: GMAB 1,031 1,856 (44)%
Account Value: Non-GMAB 407 679 (40)%
Total Account Value 1,438 2,535 (43)%
Business developments
A 5-year hedge was purchased in Q2 2013 for the 10-year risk associated with the highest anniversary value (HAV) feature of the Hong
Kong policies which could potentially arise in 2017-18. The structured "look back" options (HAV Options) provide protection against
markets rising above the 120% guarantee and then subsequently falling. This is designed to reduce future volatility of earnings and
capital requirements emanating from the HAV.
The risks below the 120% guarantee continue to be managed by the dynamic hedge programme at a 50% hedge ratio as at 31
December 2013 for the residual non-US dollar currency exposures and equity market risk.
Key Metrics and Outcomes
IFRS results
The IFRS post-tax profit for the period was $51 million (2012: $254 million profit), due to net realised gains on the bond portfolio and the
favourable guarantee performance, net of hedging. The decrease on prior year profit was mainly due to reduced fee revenue in 2013
given the run-off of the book, reduced investment income following the liquidation of the investment portfolio, losses booked on the HAV
Options and lower favourable lapse experience and assumption changes.
Total insurance liabilities
Of year-end insurance liabilities totalling $1,522 million (2012: $2,764 million):
- $1,234 million (2012: $2,119 million) was held in separate accounts relating to variable annuity investments, of which $1,031
million was related to GMAB policies (2012: $1,856 million)
- $84 million (2012: $229 million) related to the variable annuity guarantee reserve on the GMAB policies
- $204 million (2012: $416 million) related to other policyholder liabilities. These included deferred and fixed indexed annuity
business as well as variable annuity fixed credited interest investments
The majority of the variable annuity guarantee reserve relates to contracts with UGO GMABs. The 2013 year-end UGO GMAB reserve
was $79 million, a decrease of $140 million over the year, due mainly to the realisation of the remaining 5-year top-ups, improved
overall equity market levels, rising US interest rates performance and the high level of UGO GMAB surrenders experienced.
Reserve development
The UGO GMAB reserve relates to the full remaining period of the relevant policies, including 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 over 2012-13:
$m
Estimated
Guarantee reserves Actual cumulative remaining top-up Total estimated
Calculation Date for UGO GMAB top-ups paid(1)(2) payment(1)(2) cash cost(1)(2)
31-Dec-11 1,035 - 689 689
31-Dec-12 219 425 105 530
31-Dec-13 79 525 - -
(1)To meet UGO GMAB fifth anniversary payments
(2)Estimated cash cost before gains on hedge options
Highest Anniversary Value
On an account value basis at 31 December 2013, 86% of the UGO GMAB book had a HAV feature, providing policyholders with a 10-
year guarantee value based on their highest policy value at any anniversary date. As at 31 December 2013, 9% of the total UGO GMAB
book had a 10-year guarantee above 120%.
Treasury management of Bermuda assets
The Bermuda business assets backing the liabilities include:
$m
31-Dec-13 31-Dec-12 % Change
Cash and other liquid assets 71 268 (74)%
Treasury portfolio 62 62 -
Fixed income general account portfolio 5 195 (97)%
Collateral for hedge assets & FV of equity options 32 52 (38)%
Inter-company loan notes 466 1,032 (55)%
Investment in affiliated subsidiary (Group seed investments) 260 260 -
Separate account assets 1,234 2,119 (42)%
Other assets 27 58 (53)%
Total Assets 2,157 4,046 (47)%
The fixed income portfolio has been substantially sold except for a residual amount of less liquid holdings. The balance is $5 million as
at 31 December 2013 (31 December 2012: $195 million). The sales of investments were undertaken during Q2 2013 to realise gains at
prevailing favourable market conditions. The cash realised has been utilised to meet surrender activity and withdrawals.
The inter-company loan notes are structured in tranches allowing capital and treasury management flexibility, when cash is required
from this source. Additional cash funding may also be required to provide for margin collateral due to the dynamic hedging activity
depending on market movements and changes in hedging strategy.
Collateral posted for the hedge assets will adjust as the liabilities develop and could be released back to the business as the business
evolves.
Capital and surplus
Statutory capital and surplus decreased to $604 million at 31 December 2013 (31 December 2012: $1,105 million), reflecting the
cumulative capital release of $550 million approved by the BMA during the year, and after the $51 million profit. Capital allocated to the
business on a local level includes the inter-company loan notes from the business to the Group.
The future level of capital required on both an economic and a regulatory basis will be influenced by the nature and extent of the run-off
of the book of business in Bermuda and the amount of the investment hedge in place. We expect to continue to review the regulatory
capital requirement regularly with the BMA in 2014.
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, hedging and de-risking initiatives for the remaining book, including the 10-year 120% guarantee and HAV policies
still in force. The remaining UGO GMAB reserves will change in response to movements in exchange rates, interest rates, equity
markets, surrender activity and the effluxion of time. The overall remaining guarantee cost is subject to the performance and extent of
the hedging activity.
Going forward, it is expected that fee income will broadly match operating expenses, whilst the prospects for significantly higher than
assumed lapses of remaining policies have in all likelihood reduced, given the surrenders that have already occurred.
Sponsor
Merrill Lynch South Africa (Pty) Ltd
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