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Old Mutual plc preliminary results for the year ended 31 December 2014 - Part I
Old Mutual
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NEWS RELEASE
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27 February 2015
Old Mutual plc preliminary results for the year ended 31 December 2014
Strong financial performance
- Adjusted operating profit (AOP) of GBP1.6 billion up 16% in constant currency, flat in reported currency
- AOP earnings per share 17.9p up 13% n constant currency, down 3% in reported currency
- Final dividend of 6.25p up 4%, with a total dividend of 8.7p up 7%
- Net client cash flow of GBP4.9 billion
- FUM at GBP319.4 billion up 6% in constant currency, 9% in reported currency
- GBP653 million net free surplus generated
- Group ROE 13.3%, within target range of 12-15%
- The Group has appropriate and resilient levels of capital, liquidity and leverage
Transforming our future prospects in our chosen markets
- Building an African financial services champion, with GBP593 million committed to date:
- Acquisition of UAP gives Old Mutual significant scale and broad product offering in fast-growing East African markets
- Nedbank acquisition of 20% stake in ETI provides banking access across 36 African countries
- 1.8 million new customers in Africa; 15.8 million African customers in total
- Building the leading retail investment business in the UK:
- Quilter Cheviot acquisition completed 25 February 2015: provides high quality discretionary investment management capability
- Gross proceeds of European disposals and OMAM IPO (GBP562 million) redeployed into Quilter Cheviot acquisition (GBP585
million)
- Good progress in vertical integration: over 30% of NCCF into OMGI from Platform; OMGI now managing 12% of Platform FUM
- Successful IPO of OM Asset Management (OMAM) provides the business with the financial flexibility to grow
Focus on strategic and operational delivery and driving returns from our investments
- Old Mutual Emerging Markets strong growth in South Africa, profits up 25%
- Nedbank profits up 14%
- Old Mutual Wealth NCCF GBP3.7 billion, up 61%, with open book NCCF of GBP4.8 billion
- OMAM NCCF GBP5.8 billion
- Focus on integrating acquisitions to drive growth in our markets
Julian Roberts, Group Chief Executive, commented:
"I am delighted with the way the Group has performed in 2014. We are executing our strategy in a sustainable and profitable way. We have
taken significant steps in building an African financial services champion. Old Mutual in South Africa grew profits by 25%, Nedbank grew profits
by 14% and collaboration amongst our South African business continues. In the Rest of Africa, we are seeing steady growth which we expect to
accelerate following the acquisition of UAP and investment in ETI.
"This has been a watershed year in our efforts to build the UK's leading retail investment business. Old Mutual Wealth has substantially
completed its investment in building a modern UK retail investment company with its acquisition of Quilter Cheviot, in addition to Intrinsic earlier
in the year. We are already seeing the benefits of our vertically integrated model and we are ready for the introduction of the liberalised pension
regime on 6th April. OMAM has had an exceptionally good year with profits up 32% and a successful listing on the New York Stock Exchange.
"We have invested significantly and reallocated capital in our key markets to grow profits over the long term while holding appropriate levels of
capital and leverage. Our focus for 2015 is on integrating the acquisitions, delivering the operational improvements and creating value from
these investments."
Old Mutual plc preliminary results for the year ended 31 December 2014
Enquiries
Investor Relations
Patrick Bowes UK +44 20 7002 7440
Dominic Lagan UK +44 20 7002 7190
Sizwe Ndlovu SA +27 11 217 1163
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 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.
- Adjusted operating profit (AOP) reflects the directors' view of the underlying long-term performance of the Group. AOP is a
measure of profitability which adjusts the IFRS profit measures for the specific items detailed in the notes in Part 4 of these
preliminary results and, as such, it is a non-GAAP measure.
For core life assurance and property and casualty businesses, AOP is based on a long-term investment return, including returns
on investments held by life funds in Group equity and debt instruments, and is stated net of income tax attributable to policyholder
returns. For all core businesses, AOP excludes goodwill impairment, the impact of accounting for intangibles acquired in a
business combination and costs related to completed acquisitions, revaluations of put options related to long-term incentive
schemes, profit/(loss) on acquisition/disposal of subsidiaries, associated undertakings and strategic investments, fair value
profits/(losses) on certain Group debt instruments and costs related to the fundamental restructuring of continuing businesses.
AOP includes dividends declared to holders of perpetual preferred callable securities. Old Mutual Bermuda and Nordic are treated
as non-core and discontinued operations in the AOP disclosure. As such they are not included in AOP. Refer to note B1 for further
information on the basis of segmentation.
Adjusted operating earnings per share is calculated on the same basis as AOP. It is stated after tax attributable to AOP and non-
controlling interests. It excludes income attributable to Black Economic Empowerment trusts of listed subsidiaries. The calculation
of the adjusted weighted average number of shares includes own shares held in policyholders' funds and Black Economic
Empowerment trusts.
Cautionary statement
This announcement 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, 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.
Notes to editors
A webcast of the presentation on the preliminary results and Q&A will be broadcast live at 09:00 am GMT (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 50709853#:
UK/International +44 20 3139 4830
US +1 718 873 9077
South Africa +27 21 672 4008
Playback (available for 30 days from 27 February 2015), using pass-code 653969#:
UK/International +44 20 3426 2807
Copies of these results, together with high-resolution images and biographical details of the directors of Old Mutual plc, are available in
electronic format to download from the Company's website at www.oldmutual.com.
The following documents, containing financial data for 2014 and 2013, are also available from the Company's website.
- Presentation slides
- Appendix slides
- Financial Disclosure Supplement
- MCEV Supplementary information
- Economic Capital Statement of Principles
Sterling exchange rates
Appreciation / (depreciation) of
2014 2013 local currency against sterling
Average Rate 17.87 15.10 (18%)
South African Rand
Closing Rate 18.00 17.43 (3%)
Average Rate 1.65 1.57 (5%)
US Dollar
Closing Rate 1.56 1.66 6%
Part 1 – 2014 Annual Review
Part 1 – 2014 Annual Review
Contents
News Release 1
Part 1 – 2014 Annual Review 4
Group Review 5
Overview 5
Business review 8
Dividend policy 10
Board changes 10
Outlook 10
Part 2 – Financial Performance 11
Part 3 – Detailed Business Review 24
Part 4 – Financial Information 49
Group highlights(1) 2013
(constant 2013 (as
2014 currency) change reported) change
Adjusted operating profit (pre-tax, GBPm)(2) 1,605 1,388 16% 1,612 -
Adjusted operating earnings per share (pence) 17.9p 15.9p 13% 18.4p (3%)
Group net margin(3) 47bps 45bps 2bps 48bps (1bps)
Return on equity(4) 13.3% 13.6% (30bps)
Net asset value per share (pence)(5) 140.3p 136.4p 3% 137.7p 2%
Old Mutual Emerging Markets MCEV value (GBPm) 3,108 2,860 9% 2,953 5%
Net client cash flow (GBPbn) 4.9 14.6 (66%) 15.5 (68%)
Group customer numbers (millions) 17.5 16.1 9%
Funds under management (GBPbn) 319.4 301.7 6% 293.8 9%
Total dividend for the year (pence) 8.7p - - 8.1p 7%
(1) The figures in the table are in respect of core continuing operations only, unless otherwise stated
(2) IFRS profit after tax attributable to equity holders of the parent was GBP582 million for the year ended 31 December 2014 (2013: GBP705 million). A full
reconciliation of IFRS profit to AOP can be found In the Financial Performance review
(3) Ratio of AOP before tax to average funds under management in the period. Nedbank calculation also includes average banking assets
(4) RoE is calculated as core continuing operations AOP (post-tax) divided by average ordinary shareholders' equity (i.e. excluding the perpetual preferred
callable securities). It also excludes the equity associated with non-core operations.
(5) Net asset value per share is calculated as ordinary shareholders' equity (i.e. excluding the perpetual preferred callable securities) divided by the actual
shares in issue at the end of the period
Group Review
Overview
A strong financial performance
This has been a good year for Old Mutual with strong underlying financial performance, significant strategic developments and
continued operational delivery. Net client cash flows (NCCF) for the Group, excluding our non-US affiliate, were GBP11.2 billion. Gross
sales of GBP26.3 billion were up 11% in constant currency, with funds under management up 6% to GBP319.4 billion also in constant
currency. Profits grew strongly in the year up 16% in constant currency to GBP1.6 billion, flat in reported currency. Group return on
equity (RoE) at 13.3% was within our target range of 12 – 15%.
Equity markets performed strongly in South Africa and the United States with the JSE-All Share up 18% on average and the Russell
1000 Value up 16% on average in the year. Equity market performance was more muted in the UK, with the average level of the FTSE
100 up 3%. We saw a further weakening of the rand with the average rate declining by 18% against sterling in the period while the
closing year-end rand exchange rate declined only 3%. This has had a negative impact on our sterling reported results.
In mixed macro-economic conditions
Macro-economic conditions in South Africa remained relatively weak with GDP growing by 1.5%, mainly due to labour disputes in the
mining and manufacturing sectors. Power shortages are expected to continue in 2015 with the consequence that GDP is forecasted to
grow moderately by 2.1%. However, a prolonged period of low oil prices could benefit the South African consumer as a significant
proportion of disposable income at the lower end of the socio-economic scale is spent on transport and food costs, both of which should
reduce. Sub-Saharan Africa continued to experience strong growth of 4.8%, with growth predicted to increase marginally in the region to
4.9% in 2015.
In the UK, the economy grew by 2.6% in 2014, the fastest since 2007, and similar levels of growth are expected in 2015. Inflation fell
during the year and unemployment continued to fall. The US experienced GDP growth of 2.4% which is forecast to accelerate to 3.6% in
2015.
Strategic overview
Strategic delivery in our chosen markets
This year has seen further progress in the transformation of Old Mutual. We have reshaped the business and in time this should lead to
a different earnings profile for the Group. We have a simple, focused strategy based on growing in our chosen markets where we have
significant competitive advantage: building an African financial services champion; building the leading retail investment business in the
UK, and growing our multi-boutique asset management business in the US.
The final substantive part of our streamlining, simplification and de-risking programme, embarked on in 2010, was completed with the
minority Initial Public Offering (IPO) of OM Asset Management (OMAM) on the New York Stock Exchange on 9 October 2014. We also
disposed of a number of non-core European businesses in the year: the Skandia businesses in Austria, Germany, Poland and
Liechtenstein, with France and Luxembourg sold on 2 February 2015.
We have invested in the Group via acquisitions and operational improvements to maintain and enhance our performance. Significant
investments include: Quilter Cheviot for up to GBP585 million in February 2015, including GBP42 million in new equity, to provide Old
Mutual Wealth with a high quality discretionary investment management capability, which was financed via the disposals of non-core
European assets and from the proceeds of OMAM's IPO; in Africa, we announced our intention to acquire a majority stake in UAP
Holdings (UAP), an East African insurance business for GBP162 million; we purchased an additional 25% of Old Mutual Finance for
GBP63 million; and Nedbank bought a 20% stake in Ecobank Transnational Incorporated (ETI) for GBP305 million. Operationally, we
are investing in new platform technology in the UK which will transform our customers' experience, boost product capability and lower
our cost base from 2017 onwards.
Our focus now is on integrating the acquisitions, delivering operational improvements and creating value from these investments.
Following the completion of the UAP transaction in 2015, we will have deployed R3.6 billion of the R5 billion we identified to fund
acquisitions. We are investing in Africa for the medium to long term and, while quality insurance assets in Africa have become
increasingly scarce, we have maintained a disciplined approach to acquisitions, only deploying capital in line with our allocation criteria.
Additionally, we ensure that any business we acquire has a strong cultural fit with Old Mutual.
We are building an African financial services champion
At the heart of our strategy to build an African financial services champion is our strong Southern African franchise. We are making
good progress in aligning Old Mutual, Nedbank and Mutual & Federal (M&F) to become the leading financial services group in southern
Africa. We are seeing more cross-selling between our businesses, with, for example, our South African Retail Affluent and Mass
Foundation businesses selling more iWYZE products. We have previously stated that we were targeting pre-tax AOP revenue, cost and
capital synergies of R1 billion by the end of 2017 and we are making good progress having identified more than 50% of the synergies.
We are making a significant investment in our technology in South Africa and the Rest of Africa to improve the experience for customers
and intermediaries, to provide simpler and more efficient back office processes, support growth in the rest of Africa and integrate
platforms across our life, property & casualty and banking businesses. We have addressed areas which we needed improving: for
example, new product launches have contributed to an increase in single premium sales in our Retail Affluent business by 29%; Old
Mutual Investment Group (OMIG) continues to deliver good investment performance in our key equity funds, including Old Mutual
Investors Fund and the Old Mutual Active Quant Fund, and is showing improving performance in our key multi asset class fund, the Old
Mutual Balanced Fund; and at M&F we are continuing to see the benefits of price remediation and claims savings initiatives proving
particular successful.
The regulatory environment in South Africa is expected to undergo significant transformation in the medium term as changes such as
the proposed Retail Distribution Review (RDR), Solvency Asset Management, Pensions Reform, Treating Customers Fairly and Twin
Peaks regulatory reform are implemented. We continue to engage constructively with the various regulatory authorities in this regard.
Our offering in East Africa, where we are looking to buy controlling stakes in financial services businesses with both retail and wholesale
capabilities, was significantly strengthened when we agreed to buy a majority stake of 60.7% in UAP Holdings, subject to various
regulatory approvals. UAP has a strong position in East and Central Africa and a product offering that is highly complementary to our
existing businesses. It is a sizeable business and one that provides a platform for us to expand in the fast growing East African region.
In Kenya, UAP has the third largest Property & Casualty (P&C) market share; the second largest health insurance business; a
substantial property investment portfolio and a fast growing life insurance business, which, when combined with our existing Kenyan life
business, will be the fourth largest in the country. It has well established and diverse distribution networks. In Uganda, it has the second
largest P&C and health insurance businesses, and the third largest life business. It also has small P&C businesses in Rwanda,
Tanzania and South Sudan, and an insurance brokerage in the Democratic Republic of Congo.
We expect the acquisition to complete in the first half of 2015, and following completion we will look to combine our Kenyan businesses
to have one integrated financial services provider. Our focus initially will be on revenue generating initiatives. For example, we see
excellent opportunities to offer P&C products utilising UAP expertise to Faulu's large retail client base, which is broadly similar to our
mass foundation cluster in South Africa. In West Africa our life and P&C businesses have been growing organically and will look to grow
further via partnerships and distribution deals. We have also rolled out new products in Nigeria, leveraging our South African expertise
and tailored to local needs and culture, including a retail risk product and savings product. In Ghana, we launched a funeral policy in
June and a credit life product sold via the Ecobank branches in July. We have also added a further 226 advisers in Ghana, bringing the
total to 327.
Nedbank exercised its right to subscribe for a 20% stake in ETI for a sum of GBP305 million. The transaction strengthens the already
strong strategic alliance between the two banks, which was established in 2008, to provide their respective clients a seamless one bank
experience across 39 countries and comprising more than 2,000 branches. Nedbank has appointed a Director to the Board of ETI and
a programme of collaboration has been put in place to realise synergies and drive cross-border collaboration between the two
organisations.
Building the UK's leading retail investment business
Two years ago, we made the decision to build a modern, capital-light, advice-led vertically integrated business based on our core UK
operation. We wanted leading customer offerings in each layer of the wealth management value chain: advice and distribution; platform
wraps; wealth solutions; and asset management. We took this decision due to the fundamental shift in UK retail financial services.
Over the past several years, a number of factors have combined to cause a shift from traditional life assurance to a new more customer
focused, capital light model. These include structural factors such as the introduction of significant new regulatory frameworks, for
example Solvency II, RDR and, more recently, the liberalisation of the UK pensions regime. The introduction of quantitative easing and
the resulting sustained period of low interest rates has been significant as the long term liability for guarantee products has been harder
to match, leading to these products disappearing and investment risk being pushed back on to customers.
These factors have had several consequences. New regulatory regimes have led to the development of capital efficient products as old
style products are proving too capital intensive. Pricing transparency has caused margin compression, and hence the need for
businesses to participate in more of the value chain. Following the introduction of new rules on the provision of financial advice, the High
Street banks, historically providers of this service have largely taken the decision to exit and therefore financial adviser networks have
become more popular – particularly given the significant changes in retirement provisions. RDR is encouraging financial advisers to
switch from independent to restricted advice, so the need for investment providers to have their own distribution network is becoming
increasingly important. Additionally, financial advisers are focusing on providing financial planning and pensions advice and outsourcing
investment management to discretionary investment managers.
Customer demands have also forced changes on the sector. Products need to be designed to meet specific outcomes that customer's
desire in their retirement – retirements that are becoming increasingly long as longevity increases. Customers now expect their financial
services provider to be digitally accessible necessitating significant investment in IT overhauls.
These changes to the industry provide a compelling opportunity for businesses which have the right customer offering, which we believe
must include advice given changing regulations and the complexity of the current landscape.
In asset management, we have scaled up Old Mutual Global Investors (OMGI) by hiring expertise in certain asset classes, with the
consequence of FUM reaching GBP21.0 billion at the end of 2014, up from GBP12.6 billion when OMGI was created in August 2012.
During the year we added capabilities in Asian Equities, Fixed Income Absolute Return and European Equities. We will continue to add
capabilities selectively. Additionally, our purchase of Quilter Cheviot provides Old Mutual with a leading position in discretionary
investment management with 165 investment managers directly managing customers' money through a bespoke advisory service.
We have introduced a number of wealth solutions that can help our customers in the accumulation phase of their life, as well as in the
decumulation phase. Managed portfolio services (MPS), which allow financial advisers to outsource the investment management
function, are proving particularly popular. For example, WealthSelect, which provides financial advisers with access to the most
comprehensive range of portfolio management solutions in the market, with a free to the client MPS, has attracted around GBP700
million of net new money in 2014.
We already have one of the leading wrap platforms with GBP30.8 billion of FUM and a wide selection of products available. Last year,
we took the decision to transform our platform into one of the most flexible in the market, with added functionality and product offering,
through an outsourcing agreement with IFDS. The transformation will take time, cost and effort but is critical to the success of the
business.
On 1 July 2014 we bought Intrinsic, one of the UK's largest financial adviser networks with over 3,000 advisers and the business is now
integrated in the Old Mutual Wealth model and we are well placed to capitalise on the RDR-driven trend towards restricted advisers and
financial planners. The UK Platform, personal protection products and elements of OMGI's fund range have been added to the
Intrinsic's product panel for its 930 restricted advisers, up from 699 at the end of 2013. Quilter Cheviot also increases our distribution
reach, through financial advisers, professional service firms and direct sales teams.
We believe that the liberalisation of the UK pensions market will result in an increase in the demand for advice as those approaching
retirement explore their options. When the liberalised pension's regime comes into force from 6 April 2015, Old Mutual Wealth will be
able to offer a full suite of flexible options. Through our Collective Retirement Account (CRA) we already offer both capped and flexible
drawdown as well as investment solutions for decumulation, and from April we will offer all CRA customers flexible access to their
pensions savings.
We are pleased with the significant progress that Old Mutual Wealth is making in its transition to a vertically integrated business and we
are seeing evidence that the model is working: more money is flowing into the Platform from our adviser network and more money is
flowing from the Platform into OMGI. We have set a target for the existing Old Mutual Wealth businesses to achieve GBP270 million of
AOP by the end of 2015, not including Quilter Cheviot, and we are confident that we will achieve this.
Continuing to grow and improve OM Asset Management
In 2010, we said that we were exploring a minority IPO of our US asset management business, with the timing determined by our
progress against our goals of growth, improved margins and investment performance, as well as by the conditions of the equity markets.
OMAM has gone through a significant transformation since that period to ensure it met our criteria for listing. We brought in a new
management team to oversee the transformation of the business. We took the decision to focus on long-term, institutionally driven,
active asset management to generate alpha for our clients, and we disposed of those affiliates that were loss-making or did not
generate the returns we expect. We decided to build a global distribution capability and in 2014, this team raised USD5.5 billion in total
assets funded in OMAM affiliates, and non-US based clients now account for 20% of FUM.
On 9 October 2014, we announced the IPO of 22,000,000 OMAM shares at USD14 a share. The underwriters also exercised an
overallotment option on 2,231,375 OMAM shares. As a consequence, Old Mutual plc now owns 94,555,859 shares, or 78.8%, of the
issued share capital of OMAM. The gross proceeds for the Group from the IPO process, including the pre-IPO dividend, totalled
GBP317 million.
The purpose of the IPO was to enhance OMAM's financial and operating flexibility to deploy capital to continue to grow, develop further
its multi-boutique asset management business and provide the Group with enhanced financial flexibility. We will remain a supportive
shareholder in this process.
Business review
The following business commentary refers to the locally reported currency.
Old Mutual Emerging Markets
Old Mutual Emerging Markets had a very strong year with AOP up 23% to R11.0 billion. Gross sales were up 12% to R185 billion,
although NCCF was down 14% to R21.3 billion due to a number of large institutional outflows. FUM was up 8% to R905 billion.
In South Africa, gross sales were up 14% driven primarily by product innovation. In our Retail Affluent business, APE sales were 9% up
on the previous year, as single premium sales saw growth of 29%, bolstered by strong XtraMAX sales. Regular premium sales were
down 6% as the tough economic environment led to lower MAX savings and Greenlight sales. However non covered sales were up 16%
due to higher unit trust sales and strong flows into Wealth. Old Mutual Wealth's growth continued with net inflows of R8.9 billion in the
year.
APE sales in Mass Foundation (MFC) were up 11% on the prior year, with a particularly strong performance in the second half, due to
the very successful launch of the 2-IN-ONE savings product and improved adviser productivity. We launched 2-IN-ONE in August 2014
in response to the specific need of our customers to access a portion of their savings in a way that would not attract surrender charges,
as well as being an affordable alternative to short term loans. Since launch, sales have totalled R630 million. The MFC business has
continued to grow, with 255,000 net new customers added in 2014 and now has more than 2.8 million customers, with an adviser force
of 4,142.
As a result of health care intervention in South Africa, we have seen a significant improvement in the life expectancy of people living
with HIV. While this is an issue that affects the whole of society, we have taken the decision to release some of the reserves we had
previously set aside due to mortality rates, and will be using a proportion of these provisions to increase the level of cover for our
existing MFC customers. Additionally, given the improved mortality experience in South Africa, we will now be able to offer customers
products which are more affordable and provide better value.
Gross sales in Corporate were up 46% to R36.8 billion, with profits up 7% to R1.3 billion. Corporate achieved strong recurring premium
growth in the year up 105%, mainly due to strong Superfund and group assurance sales. Corporate has made excellent progress with
transforming the administration business following the launch of the new Superfund umbrella.
OMIG delivered modest 2% profit growth, mainly due to increased completion fees following several successful deployments in the
Alternatives Boutiques, although offset by lower OMSFIN profits. Low-margin institutional outflows from listed asset management
boutiques led to an outflow R4.6 billion against R5.7 billion of net inflows in the prior year.
OMF grew loans by 20% over the prior year to R9.9 billion. Its collections ratio was 91.2% and together with loan growth led to credit
loss ratios reducing to 12.4% from 14%. Sales through the OMF branch footprint now account for more than a quarter of MFC life APE
sales.
P&C in South Africa continued to show progress in its turnaround with an underwriting margin of 0.9%, against (5.6)% last year, and an
underwriting profit of R81 million compared to an underwriting loss of R469 million following price remediation and improved claims
management. Gross written premium of R10.8 billion, up 2%, reflects the active management of the quality of the book, albeit at a cost
in terms of market share. The claims ratio of 69.5% is significantly better than the prior year of 76.3%. We are exploring direct insurance
opportunities that the recent acquisition in Kenya presents. In this regard we have entered into an agreement with three industry experts
to consider the strategic direction, innovation and centres of excellence that would be necessary to facilitate the successful
implementation of this initiative.
Profits in Rest of Africa were up 5% as we invested in distribution, IT, brand building and improved our governance infrastructure. On a
like-for-like basis, APE sales were up 17% on the previous year as a result of increased adviser numbers in Kenya and the inclusion of
Ghana for the first time. Non-covered sales were up 16% due to strong unit trust flows in Zimbabwe and large sales to the National
Social Security Fund in Kenya.
Asia and Latin America profits grew by 39% due to a strong performance by Colombia, improved results in China, significant growth in
AIVA and favourable exchange rate movements.
Nedbank
Nedbank produced a strong set of results, with headline earnings up 14% to R9.9 billion driven by good net interest income growth and
a lower credit loss ratio, despite strengthening central provisioning and increasing coverage levels. Net interest income (NII) grew by 8%
due to an increase in average interest-earning banking assets. Non-interest revenue (NIR) was up 5%, with an improved second half
performance. Impairments were down 19% and the credit loss ratio continued to improve with all clusters now within or below their
target levels.
The combined clusters have developed competitive client value propositions and strong market positioning as reflected in headline
earnings growth of 19.3% and an increased ROE of 19.7% (2013: 18.7%) against a higher average total capital allocated at R51.4
billion (2013: R45.5 billion).
Nedbank Capital grew headline earnings by 23.3%, with this strong performance driven by good NII growth and improvements in
impairments. Lower NIR growth reflects the high 2013 base in trading income related to renewable-energy transactions. Pre-
provisioning operating profit growth was 12.0%. Headline earnings growth of 15.8% in Nedbank Corporate was underpinned by strong
NII and NIR growth. The increase in NII was supported by commercial mortgage and corporate lending activities and endowment
benefits. The growth in NIR was from core transactional income and private-equity investments. Low levels of impairments continue to
reflect good risk management across the portfolio.
Nedbank Business Banking's strong increase of 17.8% in headline earnings and improving ROE follow the normalisation of impairments
from a large single-client default in 2013 and solid NII growth from increased product volumes and higher endowment earnings. Lower
NIR reflects the impact of maintaining transactional fees at 2013 levels as well as the proactive reduction of transactional banking fees
in alignment with market practices. Pre-provisioning operating profit was up 5.8%.Headline earnings in Nedbank Retail grew 15.7% and
benefited from an improvement in impairments in personal loans and home loans. NIR was influenced by the strategic decision to slow
down personal loans and maintain transactional fees at 2013 levels. Consequently, pre-provisioning operating profit decreased by 4.1%.
Nedbank Wealth's headline earnings growth of 15.8% was off a high 2013 base. This was largely due to record earnings growth in
Wealth Management and continued momentum in Asset Management, partially offset by relatively slower growth from Insurance. The
performance in Insurance resulted from lower levels of sales of traditional insurance products, including homeowner's cover and
personal-loan-related insurance products. The Rest of Africa Division, previously included in the Centre, reported earnings of R357m
(2013: R173m), showing strong growth, including associate income from ETI as estimated by Nedbank on a prudent basis effective from
the fourth quarter, as ETI reports later than Nedbank. The division also reported stronger performance from all five of its regional
subsidiaries.
Old Mutual Wealth
Old Mutual Wealth produced a good performance with profits up 5% to GBP227 million, from GBP217 million in 2013, with strong
performance from OMGI and the UK Platform offset by the reduction in AOP from the divested European businesses and lower profits in
our International business. Excluding the divested European businesses, profits were up 11%. Gross sales were up 11% on the prior
year at GBP16.0 billion, with NCCF of GBP3.7 billion 61% higher than 2013 which, led to an increase in FUM to GBP82.5 billion.
In the UK, NCCF at OMGI of GBP2.5 billion was significantly higher than in the prior year (2013: GBP0.7 billion) with strong
performance across most funds. The Global Equity Absolute Return fund was the top selling fund with net flows of GBP1.4 billion, and
the UK Alpha fund attracted more than GBP0.8 billion of net flows. Our adviser network Intrinsic contributed GBP179 million of NCCF
from July through to December via Cirilium. OMGI's FUM at the end of the year was GBP21.0 billion, up 31%, including GBP2.0 billion
of FUM from Cirilium. Gross flows into OMGI from the UK Platform were GBP1.8 billion in the year (2013: GBP0.8 billion), OMGI now
manages 12% of the FUM on the Platform, up from 8.5% in 2013. OMGI's success was recognised at the 2014 Investment Week Fund
Manager of the Year Awards where it was awarded Global Group of the Year.
The UK Platform saw gross sales of GBP5.1 billion (2013: GBP4.7 billion) although NCCF was lower than the prior year at GBP2.0
billion due to increased re-registrations and one IFA moving GBP153 million to their own discretionary fund management solution. FUM
on the Platform now stands at GBP30.8 billion, up 13% since the start of the year, which, along with flat costs led to an operating profit
of GBP19 million (2013: GBP13 million).
Platform sales through Intrinsic restricted advisers totalled GBP178 million, with GBP68 million of NCCF. Sales are on an upward trend,
with GBP43 million in December against an average of GBP27 million per month in the period since acquisition. This represented 10%
of Platform sales in December, with more than 50% going into the CRA.
International's profits were disappointing at GBP37 million, down 24% on the previous year, due to foreign exchange movements
restricting profits and other one off costs. Gross sales were GBP1.8 billion, 4% lower than the prior year, with sales in the UK and South
Africa higher than in the previous year but with lower sales in all other regions. All regions, except the UK, contributed to positive NCCF
of GBP0.3 billion and FUM of GBP15.6 billion.
The transaction to acquire Quilter Cheviot completed on 25 February 2015 and we can now start progressing with the integration of the
business into Old Mutual Wealth. Quilter Cheviot performed in line with our expectations, with NCCF of GBP1.1 billion leading to FUM of
GBP16.7 billion.
We also completed the rebrand from Skandia to Old Mutual Wealth in September 2014. The initial response to the rebrand has been
highly promising with consumer awareness of Old Mutual Wealth at 30% and at 98% amongst the financial adviser network.
Institutional Asset Management
OMAM
OMAM had a very good year with profits up 32% to USD211 million (2013: USD160 million) due to increases in management fees and some
performance fees. AOP margin increased to 40% before affiliate key employee distributions. NCCF was very strong at USD9.5 billion, with
gross inflows of USD32.0 billion driven by global equities, emerging markets equities, international equities, US dividend focus equities, US
mid cap value equities and real estate assets.
Our Global Distribution initiative performed well, raising USD5.5 billion in total assets funded in OMAM affiliates, as we continue to expand
our non-US client base, which currently account for 20% of FUM.
Non-US affiliate
Underperformance in 2013 and some senior personnel turnover resulted in net outflows during the year of GBP6.3 billion. FUM now
stands at GBP32.3 billion. Investment performance in 2014 has improved meaningfully relative to 2013, with 81% of portfolios beating
their benchmarks on an asset weighted basis compared to 26% in 2013. The longer term track records also remain strong across the
product line for 3 year, 5 year and longer periods. The business has now completed a re-organisation to provide stable management
and investment teams going forward and future succession. It is confident that it now has the right platform, products and performance
going forward, although a risk remains for further outflows due to the delayed impact of the legacy issues on certain client mandates.
Responsible Business
We have committed a strategic priority to be recognised as a leader in responsible business in each of the markets in which we operate
and have appointed Gail Klintworth as Group Customer Director to run this process. We have many excellent examples of our progress
as a responsible business, across the five pillars of being responsible to our customers, communities, employees, the environment and
our investments, built on a strong foundation of ethical values and good governance. We are now seeking to raise our ambition in the
two areas where we believe we can have the most significant impact: financial wellbeing and responsible investing and we will be
working with our partners, including the Cambridge Institute for Sustainability Leadership, to drive impactful action through each of our
business units.
Black economic empowerment
Old Mutual, through OMSA and M&F, announced its Broad-Based Black Economic Empowerment (BBBEE) transaction in 2005. This
was aligned with and implemented in collaboration with Nedbank (see announcement by Nedbank on 23 February 2015). All the
resultant schemes had the objective of creating sustainable value and mutual benefits for the business and a broad base of diverse
partners and beneficiaries, including strategic Black Business Partners (BBPs), clients and community interest groups affiliated with Old
Mutual. The schemes were also expanded to include employees at all levels within Old Mutual.
The OMSA BBBEE (except for staff schemes) transaction unwinds on 1 May 2015, with the various schemes settling any remaining
debt due to Old Mutual under the BBBEE transaction. It is envisaged that the remaining Old Mutual plc shares in the employee schemes
will continue to be used to attract and retain talented Black management into Old Mutual, while the dividends received on the remaining
Old Mutual plc shares in the client and community schemes will continue to be distributed to beneficiaries. The BBPs will take delivery of
the remaining Old Mutual plc shares in their schemes after 1 May 2015. Discussions are ongoing between Old Mutual, Nedbank and the
BBPs on areas for future collaboration.
Further details will be communicated post expiry of the Old Mutual BBBEE transaction.
Dividend
The Board has considered the position in respect of the final dividend for 2014 and is recommending the payment of a final dividend for
2014 of 6.25p per Ordinary Share (or its equivalent in other applicable currencies). Based on this recommendation the full-year Ordinary
dividend would be 8.7p, a 7% increase on the prior year. No scrip dividend alternative will be available in relation to this dividend.
The Board reaffirms its policy of intending 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 AOP earnings in
future. Interim dividends will routinely be set at 30% of the prior year's full ordinary dividend.
Board changes
We were pleased to welcome Ingrid Johnson and Paul Hanratty to the Board as Executive Directors. Ingrid Johnson was appointed
Group Finance Director on 1 July 2014, succeeding Philip Broadley who stepped down from the Board on 31 August 2014. Paul
Hanratty was appointed Chief Operating Officer and joined the Board on 1 July 2014. We are also pleased to announce that on 1 May
2015 Vassi Naidoo will join our Board as a non-executive director as well as the boards of our banking subsidiaries, Nedbank Group
Limited and Nedbank Limited, as their prospective new Chairman. He will succeed Dr Reuel Khoza who has now served nearly nine
years on the Old Mutual Board and will not be seeking re-election at this year's Annual General Meeting.
Outlook
In our main market of South Africa, economic conditions are likely to remain challenging in the short term particularly as the continuing
power shortages are expected to constrain growth. However, a prolonged period of low oil prices will keep inflation down which is
positive for the consumer. Our businesses in South Africa are in good shape and we are confident about their resilience in 2015, despite
these headwinds.
In the UK, we are well positioned to benefit from investment from customers looking to take advantage of the new pension withdrawal
rules that come into effect in April. We expect demand for advice to increase as a consequence of these changes.
In the US, our focus will remain on pursuing growth initiatives, including further penetration of non-US markets and through partnerships
with scale asset management boutiques and building its business following the successful IPO.
We have invested significantly in our chosen markets to grow profits over the long term while maintaining appropriate levels of capital
and leverage. Our focus for 2015 is on integrating the acquisitions, delivering operational improvements and creating value from these
investments.
Part 2 – Financial Performance
Contents
News Release 1
Part 1 – 2014 Annual Review 4
Part 2 – Financial Performance 11
AOP analysis 12
AOP analysis by line of business 12
Tax 12
AOP analysis by business unit 13
Abridged balance sheet review 13
Return on Equity and Return on Allocated Capital 14
Group and local RoE 14
Capital 14
Business unit local statutory capital cover 14
Financial Group Directive solvency results 15
Economic Capital estimates 16
NAV per ordinary share 17
Adjusted Group NAV per ordinary share 17
Emerging Markets MCEV Results and economic impacts 17
Free surplus generation 17
Summarised Group cash flows 17
Debt Levels and maturities 18
Liquidity 18
Financial strength rating 19
Risk management 19
Risks and uncertainties 19
Dividends 20
IFRS results 20
Part 2 – Financial Appendix 21
Supplementary financial information (data tables) 21
Summarised financial information 21
Group return on equity 21
Group debt summary 21
Financial Groups Directive 21
Regulatory capital 21
Financial strength rating 22
Long-term investment rates 23
Group gross flows and FUM 23
Part 3 – Detailed Business Review 24
Part 4 – Financial Information 49
AOP Analysis
Financial results in this part are on a reported basis unless otherwise stated
AOP analysis by line of business (GBPm) 2014 2013 % change
Line of business
Life & Savings 610 645 (5%)
Asset Management(1) 301 264 14%
Banking & Lending(2) 799 806 (1%)
Property & Casualty 35 4 775%
1,745 1,719 2%
Finance costs (78) (92) (15%)
Long-term investment return on excess assets 24 43 (44%)
Net interest payable to non-core operations (5) (11) (55%)
Corporate costs (55) (54) 2%
Other net (expenses)/income (26) 7 (471%)
Adjusted operating profit before tax 1,605 1,612 -
Tax on adjusted operating profit (439) (424) 4%
Adjusted operating profit after tax 1,166 1,188 (2%)
Non-controlling interests – ordinary shares (280) (279) -
Non-controlling interests – preferred securities (18) (19) (5%)
Adjusted operating profit after tax attributable to ordinary equity holders of the parent(3) 868 890 (2%)
Adjusted weighted average number of shares (millions) 4,845 4,836 -
Adjusted operating earnings per share (pence) 17.9 18.4 (3%)
(1) Includes Institutional Asset Management, OMGI, OMEM and Nedbank's asset management businesses
(2) Includes Nedbank, OMSFIN, Faulu in Kenya, CABS in Zimbabwe and from FY 2014 Old Mutual Finance
(3) IFRS profit after tax attributable to equity holders of the parent was GBP582 million for the year ended 31 December 2014 (2013: GBP705 million). A full
reconciliation of IFRS profit to AOP can be found In the Financial Performance review
AOP by line of business
Life & Savings profits were 5% lower following the sale of Austria, Germany and Poland during the year and the impact of the weaker
rand not withstanding a good underlying performance in Old Mutual Emerging Markets (OMEM).
Asset Management earnings increased by 14% with strong dollar profit growth in Old Mutual Asset Management; a strong performance
in the South African Old Mutual Wealth business and exceptional profit growth of 120% in Old Mutual Global Investors (OMGI).
Banking & Lending profits were marginally down with good local currency profit growth in Nedbank's banking and lending profits, up
16%, and increased lending profits in OMEM, as a result of the increased contribution by OMF, following its consolidation from the
beginning of the fourth quarter, and the first time inclusion of Faulu. These operational improvements were offset by the weaker average
rand rate.
Property & Casualty earnings rose strongly driven by a turnaround in underwriting profits in South Africa, which has benefited from
targeted management pricing actions and claims initiatives, particularly in Personal which has seen an exceptional turnaround. Both
Commercial and Corporate & Niche also saw strong underwriting improvements.
Finance costs are down in 2014 following the repayment of GBP176 million of debt in the fourth quarter of 2013.
Long-term investment return (LTIR) on excess assets decreased in 2014 as a result of a lower asset base following acquisition activity
in Emerging Markets, as well as the impact of the weaker rand.
Net interest payable to non-core operations was lower in 2014 as a result of the cancellation of Bermuda loan notes in the second half
of 2013 and 2014, as well as lower prevailing interest rates.
Corporate costs marginally increased with continued efficiency savings largely offsetting ongoing Solvency II preparation costs.
Other net (expenses)/income decreased due to lower fair value gains on seed capital as well as brand-building costs for the Group
through investing in Old Mutual Wealth's positioning in the UK.
Tax
The AOP effective tax rate (ETR) for the Group has increased slightly to 27% (2013: 26%).
Because over 80% of the profits and tax before non-controlling interests arise in emerging markets and Nedbank, movements in the
ETR in these businesses have a large impact on the group ETR. The ETR in Nedbank remained stable but the ETR in our emerging
markets businesses increased due to a reduction in non-taxable and low taxed income and the impact of non-deductible losses in
Africa.
The ETR for our Old Mutual Wealth business is generally lower than those in our emerging markets businesses given the lower
corporate tax rate in the UK and in the International division.
Interest and head office costs incurred in the UK can be offset against profits in Old Mutual Wealth UK.
Looking forward, and depending on market conditions and profit mix, we expect the ETR on AOP in future periods to range between
25% and 28%.
AOP analysis by business unit (GBPm) 2014 2013 % change
Core operations
Old Mutual Emerging Markets(1) 617 594 4%
Nedbank 770 797 (3%)
Old Mutual Wealth 227 217 5%
Institutional Asset Management 131 111 18%
1,745 1,719 2%
Net non-operating expenses (140) (107) 31%
Adjusted operating profit before tax 1,605 1,612 -
(1) Comparative has been restated to include Property & Casualty AOP of GBP4 million
AOP by business unit
Old Mutual Emerging Markets profits rose modestly in sterling terms with good local currency growth in Retail Affluent and Mass
Foundation businesses in South Africa and improved overall underwriting performance.
Nedbank profits fell marginally in sterling terms despite strong growth in net interest income, a substantial improvement in impairments
and moderate growth in non-interest revenue.
Old Mutual Wealth profits rose, with strong growth from the Platform and OMGI and improvement in operating margins. Excluding the
European businesses divested during the period, underlying profits rose 11%.
Institutional Asset Management profits rose strongly as a result of increased performance and management fees earned in the period,
benefiting from rising levels of investment markets.
Net non-operating expenses increased to GBP140 million from GBP107m as a result of lower investment returns off a lower asset base
and lower seed capital gains despite a reduction in finance costs.
Abridged Group balance sheet (GBPm)
2014 2013
Assets
Goodwill and other intangible assets 2,763 2,835
Loans and advances 34,857 33,583
Investment and securities 87,547 88,220
Other assets 17,349 15,693
Total Assets 142,516 140,331
Liabilities
Long-term business policyholder liabilities (insurance reserves) 10,519 12,126
Investment contract liabilities (insurance reserves) 68,841 69,015
Property & Casualty liabilities (insurance reserves) 319 332
Third party interests in consolidated funds 5,986 5,478
Borrowed funds 3,044 2,644
Amounts owed to bank depositors 36,243 34,370
Other liabilities 8,019 7,329
Total equity (including hybrid debt) 9,545 9,037
Total Equity and Liabilities 142,516 140,331
The Group balance sheet at 31 December 2014 included GBP3 billion of goodwill and other intangible assets, largely in Europe and the
US, GBP35 billion of loan and advances, of which GBP34 billion were in Nedbank, and GBP88 billion of investment and securities, of
which GBP30 billion were in Old Mutual Emerging Markets and GBP47 billion in Old Mutual Wealth.
Investment contracts were GBP69 billion, of which GBP60 billion were unit-linked and similar contracts and GBP20 billion of investment
contracts were in Old Mutual Emerging Markets and GBP48 billion were in Old Mutual Wealth. Long-term business policyholder
liabilities of GBP9 billion relate to Old Mutual Emerging Markets.
The Group had GBP3 billion of borrowed funds, of which GBP2 billion relates to Nedbank funding.
Return on Equity
Return on
Group and local RoE 2014 (GBPm) Shareholder shareholder
equity excl. equity excl.
AOP intangibles(1) intangibles(2) Local RoE
Old Mutual Emerging Markets 410 1,654 25.7% 22.8%
Nedbank 301 1,811 17.2% 17.2%
Old Mutual Wealth 179 928 19.5% 16.5%
Institutional Asset Management 96 (8) 49.3% 16.5%
Group Head Office (118) 2,406(1,3) - -
Group RoE 868 6,791 13.3% 13.3%
(1) Shareholders' equity is at 31st December 2014. Business unit figures exclude the Group share of 'Goodwill and other intangible assets' per the
segmental balance sheet; these have been included at the GHO level
(2) Calculated as AOP post-tax and NCI divided by average shareholders' equity excluding 'Goodwill and other intangible assets'
(3) Includes 'Goodwill and other intangible assets' and excludes the perpetual preferred callable securities and non-core operations
(4) Group RoE is calculated using average ordinary shareholders' equity (i.e. excluding perpetual preferred callable securities) and excludes non-core
operations
The Group RoE declined by 0.3% to 13.3%. The average Group equity is flat at GBP6,545 million (2013: GBP6,525 million) as a result
of the net retained profits for the period being greater than the fall in the sterling value of rand based net equity at the closing year end
exchange rates compared to that at the start of the year as well as the Bermuda capital repatriation. Reported currency earnings were
lower principally due to the movement in the average rand /sterling exchange rates in the period. Constant currency earnings grew by
13%.
At an individual business unit level, each business performed well in relation to their expected medium and long-term RoE target
ranges. Old Mutual Emerging Markets, Old Mutual Wealth and Institutional Asset Management improved their RoE's compared with the
prior year as a result of improved earnings and stable capital bases. Nedbank maintained its RoE (excluding goodwill) at 17.2%. Note
that, for the purpose of the calculation, goodwill and other intangibles have been excluded from the individual business returns and are
shown in the holding company as we sought to build scale and competitive advantage in our business through acquisition. As a
consequence the Business unit returns are higher than the Group return.
Capital
The Group's capital position is managed to ensure the subsidiary businesses are appropriately capitalised under local and Group capital
rules, and subsidiary and Group capital is resilient to stress scenarios. The Group has an appropriate level of capital for the current
strategic plans, including 2015 acquisitions of Quilter Cheviot and UAP Holdings and taking into account the evolving regulatory regime.
The Group capital position is supported by debt and hybrid instruments and the level of Group leverage is appropriate and sustainable.
Business Unit regulatory solvency strength
The Group's subsidiary businesses continue to have strong and resilient local capital. This is consistent with the Group's operating
model and capital philosophy to ensure capital resides where the risks lie, including risks for extreme scenarios. The table below
summarises the principal local statutory capital positions.
Capital Capital
Local currency Resources Requirements Surplus 2014 2013
Old Mutual Life Assurance Company South Africa (OMLACSA)(1)
(Rbn) 47.8 15.3 32.5 3.1x 3.2x
Mutual & Federal(2) (Rbn) 2.9 2.1 0.8 1.8x 1.9x
Nedbank(3) (Rbn) 64.4 44.1 20.3 14.6% 15.7%
UK(4) (GBPbn) 0.6 0.2 0.4 2.6x 2.6x
Bermuda(5) (USDbn) 0.4 0.3 0.1 1.3x 1.4x
(1) South Africa Statutory Valuation Methods (SVM) in accordance with FSB requirement
(2) Capital Adequacy Requirement (CAR) in accordance with FSB requirement
(3) Basel III valuation method and including unappropriated profits and showing total Group Capital adequacy ratio
(4) FGD basis (not required to report to the PRA separately)
(5) Enhanced Capital Requirement as set by the Bermuda Monetary Authority
Group regulatory capital - Financial Groups Directive (FGD)
The Group currently measures its Group solvency and regulatory capital in accordance with the EU Financial Groups Directive (FGD).
The FGD methodology and framework differs fundamentally to the new Solvency II regime to which we will transition in 2016.
The Group's regulatory capital surplus, calculated under the FGD, was GBP2.0 billion at 31 December 2014 (31 December 2013:
GBP2.1 billion) representing a statutory cover of 163% (31 December 2013: 168%). The reduction in surplus and coverage ratio is due
to an increase in capital requirements as a result of growth in Nedbank's risk weighted banking assets and the continued growth in the
protection part of the Old Mutual Emerging Markets insurance book. Capital resources remained stable at GBP5.2 billion reflecting the
redeployment of proceeds from business disposals and the IPO of Old Mutual Asset Management to fund acquisitions.
Group regulatory capital (FGD basis) (GBPbn) 2014 2013
Capital resources 5.2 5.2
Capital requirements 3.2 3.1
Surplus 2.0 2.1
Coverage 163% 168%
30% of the Group FGD resources of GBP5.2 billion comprise of qualifying debt instruments (totalling GBP1.5 billion). These provide
additional liquidity as well as optimising the Group's Weighted Average Cost of Capital (WACC) and consists of GBP1.0 billion of debt
instruments issued at the Group holding company and GBP0.2 billion at the Group's South African subsidiary Old Mutual Life Assurance
Company (South Africa) Limited (OMLAC(SA)) and GBP0.3 billion at Nedbank.
Regulatory Capital has been assessed in the context of various stress scenarios. This analysis indicates that a 1% fall in the ZAR/GBP
exchange rate would result in a GBP11 million reduction in the surplus (2013: GBP13 million reduction), and if the ZAR/GBP weakened
to R25, the surplus would reduce to GBP1.7 billion. The cover ratio is resilient to movements in exchange rates in a stress scenario
because both the capital resources and the capital requirement fluctuate with changes in those same exchange rates.
Since the 2014 year end, the Group has completed the acquisition of Quilter Cheviot and announced the proposed acquisition of a
majority stake in UAP. These two transactions will reduce Group FGD by GBP0.7 billion and reduce the statutory cover ratio by
approximately 20 percentage points.
Future Regulatory Capital assessment- Solvency II and Solvency Assessment and Management (SAM)
We are actively engaged with the Group's regulators in the application process on the future Solvency II capital regime. In line with our
regulators' timetable, we will submit our relevant applications in Q2 2015 and anticipate receiving a response in the second half of 2015
to facilitate implementation of Solvency II in January 2016.
Irrespective of the outcome of Solvency II, the capital strength relative to the risks of our underlying business will remain unchanged.
However, the Solvency II regime will introduce a different lens through which we look at Group capital. The full Solvency II outcome is
not yet clear and will depend on the assumptions and aggregation models used in Solvency II calculations. The Solvency II regime will
use a more conservative 1 in 200 stress scenario in determining capital requirements and apply a more rules based determination of
fungibility and transferability. By comparison, the FGD regime is not a risk based regime and assumes full fungibility and transferability
of capital across geographies. Given the inherent conservatism of Solvency II compared to the FGD regime, it is likely that Solvency II
will result in the reporting of lower levels of surplus regulatory capital and lower coverage ratios when compared with the FGD regime.
The adoption of the standard formula approach may also increase conservatism. Old Mutual intends to apply the standard formula
approach for the purposes of Solvency II because it is more relevant. The standard formula model will be applied in determining
regulatory capital requirements for SAM (in South Africa). Furthermore, as Old Mutual Wealth in the UK moves toward being a modern
vertically integrated retail investment business, the internal model approach is less relevant.
Only when the Solvency II rules are fully determined will the Group fully understand the extent to which SAM and Solvency II will align
and whether South Africa will be deemed to be a Solvency II-equivalent regime. The formal PRA application process will also provide
clarity in a number of other areas including the approach to aggregating subsidiaries in the Group calculations, contract boundaries,
cross border diversification benefits and the equivalence of non-EU regulatory regimes (other than South Africa).
During 2015, we will report to our regulators under the interim arrangements and we are preparing for the full Pillar 3 reporting under
Solvency II and SAM, which is required from 2016 onwards when the new regimes become effective. Preparing for reporting under the
new regulations will require significant effort and investment in reporting processes for our businesses.
Economic Capital
Old Mutual's Economic Capital (EC) framework presents management's view of the Group's capital with underpinning assumptions that
the full future value of insurance profits emerges over time and that full diversification can be recognised between businesses. The
Group monitors EC through regular reporting, including risk assessments and consideration of the impacts of extreme stress scenarios
for each business.
Although current FGD rules do not apply restrictions on fungibility and transferability, we expect that this may change under solvency II.
As we finalise assumptions and methodologies underpinning the Group's Solvency II calculation, we will consider these in relation to our
EC framework and consider whether any refinements are required as a consequence.
At 31 December 2014, the Group Economic Capital surplus was GBP5.2 billion, and Economic Capital cover ratio was 226% (31
December 2013, GBP4.8 billion 216%). As well as the strong outcome for the Group, the results demonstrate the capital strength of
each individual business unit. This is consistent with the Group's operating model and capital philosophy and aligned with local statutory
capital.
The Group economic capital coverage ratio has strengthened compared to the position at 31 December 2013, due to the impact on EC
surplus of an increase in available financial resources from retained profits earned in the period net of dividends paid and corporate
activity completed during 2014.
The Group's Economic Capital positions at 31 December 2014 are shown in the table below.
Economic Capital (GBPbn) Old Other
Mutual Old Business Sum of
Emerging Mutual Units and Group Group Group
Markets Nedbank(3) Wealth adjustments(4) businesses 2014(5) 2013
Available Financial Resources(1) 3.9 2.0 2.1 1.2 9.2 9.2 9.0
Economic Capital at Risk(2) 1.6 1.3 0.9 1.6 5.4 4.0 4.2
Economic Capital Surplus 2.3 0.7 1.2 (0.4) 3.8 5.2 4.8
Economic Capital cover ratio(6) 239% 154% 234% n/a 171% 226% 216%
(1) The Available Financial Resources ('AFR') is the value of assets held in excess of economic liabilities
(2) Economic capital at risk ('ECaR') requirement is the reduction in post-tax economic available financial resources over a one-year forward-looking time
horizon that should only be exceeded once in 200 years (99.5% confidence level that the event will not occur). The confidence level used for Nedbank is
99.93% reflecting Nedbank's more prudent approach to the Basel 99.9% requirements
(3) Nedbank results are those calculated and disclosed as part of the Internal Capital Adequacy Assessment Process (ICAAP) but reflect the proportion of
plc's ownership and exclude the 10% stressed-tested capital buffer
(4) Other Business units and adjustments reflect additions for Institutional Asset Management, OM Bermuda, group specific risks (including currency
translation risk on non-GBP surplus), and adjustments for intra-group transactions
(5) The final Group position allows for assumed diversification between diverse business units. The business unit positions allow for diversification between
entities within the business unit
(6) Economic Capital cover ratio calculated using unrounded ECAR and AFR figures
Since the 2014 year end, the Group has completed the acquisition of Quilter Cheviot and announced a proposed acquisition of UAP.
The impact of these two transactions will be to reduce Group EC surplus by GBP0.7 billion to GBP4.5 billion and coverage to 209%.
Sensitivity of Economic Capital to key market movements at 31 December 2014
The economic capital positions are resilient to changes in various economic factors. The table below presents the sensitivity of the
economic surplus and cover ratio under certain standard financial stresses, which are defined by reasonably possible individual
movements in key market parameters while keeping all other parameters constant with the effects impacting both the available financial
resources and economic capital at risk requirement.
Economic Capital position at 31 December 2014 Group EC Surplus Group EC coverage
Base Economic Capital Position 5.2 226%
Equity markets fall by 10% 5.0 225%
Equity markets fall by 25% 4.8 225%
Interest rates fall by 100 basis points 5.2 227%
Interest rates rise by 100 basis points 5.1 223%
Credit spreads increase by 100 basis points* 5.1 225%
ZAR:GBP exchange rate depreciates by 10%
(R20:GBP1) 4.9 230%
ZAR:GBP exchange rate depreciates by 30%
(R23:GBP1) 4.6 235%
* A 100bps increase in credit spreads is generally assumed 1 notch down grade on BBB to BB- ratings and 2 notches downgrade on lower graded
investments
Net Asset Value per ordinary share
The net asset value per ordinary share has increased by 2.6p to 140.3p (2013: 137.7p). This is mainly due to profit attributable to
ordinary shareholders of the parent of 11.4p offset by dividends paid in the year of 8.0p. On a constant currency basis, the net asset
value per share has increased by 3.9p. The higher growth in constant currency is due to the 2014 closing rand rate being 3% lower
than 2013.
Adjusted Group NAV per ordinary share
The adjusted Group NAV per ordinary share is calculated using an MCEV valuation basis for Emerging Markets covered business and
the UK Heritage business in Old Mutual Wealth as well as the market value of listed subsidiaries. Other businesses and residual assets
are included at IFRS NAV.
The adjusted Group NAV was GBP10.9 billion, up from GBP10.1 billion in 2013. The improvement over 2014 mainly reflects growth in
underlying business contributions, the improvement in the Nedbank share price and the valuation uplift as a result of the IPO of the Old
Mutual Asset Management business. The adjusted Group NAV per ordinary share was 221.9p at 31 December 2014 (31 December
2013: 206.1p).
Emerging Markets MCEV results and economic impacts
MCEV increased from R51.5 billion at 31 December 2013 to R55.9 billion at 31 December 2014. This is mainly due to the contribution
from new business and investment performance, partially offset by capital transfers. Significantly positive mortality variances were
largely offset by adverse persistency variances, development costs, and the impact of increasing policyholder cover levels on Mass
Foundation Cluster risk products (reflecting the strong beneficial effect of better mortality experience with policyholders). Return on
embedded value reduced to 9.9% in 2014 mainly due to lower experience variances and other operating variances, partially offset by a
higher contribution from expected returns and positive operating assumption changes.
Economic variances were positive due to favourable investment performance in South Africa, although this was dampened by poor
market performance in Zimbabwe.
Free surplus generation
Our businesses have generated a net free surplus of GBP653 million in 2014 (2013: GBP811 million), reflecting a conversion rate of
66% of AOP post-tax and NCI (2013: 81%). This reduction is largely explained by discretionary organic investment (excluding new
business strain) in the Old Mutual Wealth and Old Mutual Emerging Market businesses of GBP97 million and GBP23 million
respectively as these businesses execute their growth strategies, the impact of the weaker rand on the Old Mutual Emerging Markets
surplus, and the move to a remittance basis in determining OMAM surplus generation following the IPO. From this free surplus
generated, a total of GBP464 million was remitted by the operating units to the Group holding company during 2014.
Group cash flows (GBPm) 2014 2013
Opening cash and liquid assets at holding company at 1 January 2014 545 472
Operational flows
Operational receipts from Northern hemisphere businesses 154 210
Operational receipts from emerging market businesses 310 334
Corporate costs and other operational flows (30) 7
Total operational flows 434 551
Capital servicing
Interest paid (32) (32)
Preference Dividends (32) (46)
Ordinary cash dividends (411) (335)
Total servicing of capital (475) (413)
Capital movements
Net debt (repayment) / issue in the period - (176)
Net Business unit funding 51 (50)
Issue of ordinary shares (5) (3)
Total capital movements 46 (229)
Corporate activity
Net corporate activity 453 164
Total Corporate Activity 453 164
Closing cash and liquid assets at holding company at 31 December 2014 1,003 545
Operational flows
Operational receipts from businesses generating hard currency earnings decreased to GBP154 million (2013: GBP210 million). This
reflects the investment made in the Wealth business to support their transformation as well as lower remittance from OMAM. Following
its listing in October 2014 the Group now receives a dividend based on 25% of Economic Net Income (ENI) and an annual payment in
respect of the Group's deferred tax asset whereas previously OMAM remitted all available cash.
Servicing of capital
Dividend payments to shareholders of GBP411 million were made, of which GBP227 million was paid to shareholders in Southern
Africa.
GBP291m represented the final dividend for 2013 and GBP120 million was the interim dividend for 2014.
Capital movements
Group capital movements in 2014 were GBP46 million compared to GBP229 million during the prior year. 2013 included the repayment
of debt of GBP176 million in the second half of the year.
Corporate activity
Cash flows from net corporate activity includes the cash received from the sale of OMAM shares in the IPO and proceeds on the
disposal of our European businesses partially offset by cash required to fund acquisitions.
Old Mutual Emerging Markets and Nedbank corporate activity was funded directly by the businesses.
Debt levels and maturities
The Group's balance sheet remains strong.
The Group, excluding banking related debt, had borrowed funds and other debt treated as equity under IFRS, of GBP1,540 million at 31
December 2014 (31 Dec 2013: GBP1,342 million).
Banking related gross debt was GBP2,030m as at 31 December 2014 (31 December 2013: GBP1,828m).
Borrowed funds (GBPm) Old Mutual Institutional Sum of
Emerging Old Mutual Asset Group
Markets Wealth Management Nedbank Group businesses
Floating rate notes - - - 563 - 563
Fixed rate notes - - - 576 112 688
Term loan and other loans 125 - - - - 125
Revolving credit facilities 72 - 114 - - 186
Mortgage-backed securities - - - 52 - 52
Subordinated debt securities(1) 223 - - 642 565 1,430
Borrowed funds 420 - 114 1,833 677 3,044
Other instruments treated as equity:
EUR374 million perpetual preferred callable
securities at 5.00% - - - - 253 253
GBP273 million perpetual preferred
callable securities at 6.40% - - - - 273 273
Book value of other instruments - - - - 526 526
(1) OMLAC(SA) is included in Old Mutual Emerging Markets
The Group has first calls on capital instruments of R3,000 million (GBP167 million) Tier 2 debt, issued by OMLAC(SA) exercisable in
October 2015, and at the holding company level, EUR374 million (GBP290 million) Tier 2 debt, exercisable in November 2015 and GBP273
million Tier 1 debt exercisable in March 2020. Additionally the Group has GBP112 million of senior debt maturing in October 2016 and
GBP500 million of Tier 2 debt maturing in June 2021.
OMLAC(SA) raised an additional R300 million (GBP17 million) in fixed rate bonds and R700 million (GBP39 million) in floating rate Tier
2 bonds in November 2014 in the South African bond market. Both instruments have first calls in November 2019. OMLAC(SA) is
continuing with this programme and intends issuing further debt in March 2015.
Nedbank has GBP415 million of maturities on its capital and funding during 2015.
OM Asset Management plc drew down USD177 million (GBP114 million) in October 2014 under its USD350 million (GBP225 million)
syndicated Revolving Credit Facility to fund the pre-IPO dividend to the Group holding company.
Liquidity
At 31 December 2014, the Group holding company had available liquid assets of GBP1 billion (31 December 2013: GBP0.5 billion)
invested in cash and near cash instruments, including; money market funds, UK government securities and a highly liquid corporate
bond portfolio. The Group holding company also has access to an undrawn committed facility of GBP0.8 billion (31 December 2013:
GBP0.8 billion). Since the year end, liquid assets of GBP566 million have been used in the settlement of the completion process
associated with the Quilter Cheviot acquisition.
In addition to cash and available resources held at the holding company level, which are considered adequate to support the Group
under both normal and stressed conditions, each individual business also maintains liquidity and credit facilities sufficient to support its
normal trading operations and to withstand stress events.
Financial strength rating
In June 2014 Fitch affirmed its long-term foreign currency rating on SA Sovereign debt as BBB, but revised the outlook from stable to
negative. In the subsequent review of Old Mutual plc and its life subsidiaries, Fitch affirmed the ratings of Old Mutual plc, OMLAC(SA)
and Old Mutual Wealth Life Assurance Limited and kept all the ratings on stable outlook.
In November 2014 Moody's downgraded its rating on SA Sovereign debt from Baa1 to Baa2 and changed the outlook from negative to
stable. In the subsequent review of Old Mutual plc and its subsidiaries, Moody's downgraded the senior debt rating for Old Mutual plc
from Baa2 to Baa3 and downgraded the Insurer Financial Strength Rating of OMLAC(SA) from A3 to Baa1; both ratings were moved
from negative outlook to stable. The rating for Old Mutual Wealth Life Assurance Limited was affirmed at A2, while the outlook was
moved from stable to negative.
In July 2014, Fitch published a rating of Mutual & Federal, assigning a National IFSR of AAA(zaf) with stable outlook. This rating
reflected Fitch's view that Mutual & Federal is a core part of the Group and benefits from the financial strength of OMLAC(SA).
Risk Management
Principal 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.
Our principal risks have been determined by assessing the possible effects on our reputation, our stakeholders, our earnings, capital
and liquidity, and the future sustainability of our business. These risks are closely monitored by local management and independent
subsidiary boards and overseen by Group management and reported to the Board on a regular basis.
As a result of the pace and scale of the changes the Group underwent in 2014, strategic execution risk has become our key principal
risk. As in previous years, economic conditions in South Africa, the changing location of credit risk across the Group, market risk and the
level of currency translation risk remain principal risks to Old Mutual. The risk of changing customer needs and regulatory change
remains important for Old Mutual and its peers.
Group risk profile
Across the Group, when measuring risks to capital and to earnings, most risk exposures have increased in line with business growth.
Within Emerging Markets, credit risk has grown due to the increased stake in Old Mutual Finance and the acquisition of Faulu: we have
reassessed risk appetite accordingly. Credit risk has a greater proportional impact on earnings at risk than it does on capital at risk.
We recognise that there is a short-term increase in operational risk in the next few years while we execute and integrate the various
strategic change initiatives and material acquisitions in new business sectors and locations. We have accepted this increase to reduce
our longer-term strategic risk. We continue to monitor and manage it closely through Group and BU oversight together with strong
governance, focus on the control environment and prompt escalation of issues.
Business risk and market risk remain our two most material risks. While they have remained relatively stable over the year, they are
influenced by the economies in the key regions where we operate and the impact on the consumer in those countries, notably South
Africa, where we currently have our largest retail earnings base. As well as monitoring economic factors to understand our earnings and
capital resilience to severe macro-economic events, we have maintained a strong focus on customers, considering how we can help
them in tougher times and monitoring for early indicators of financial distress.
Liability risk diversifies well against our other risks and we continue to seek to increase the proportion of this risk where appropriate.
Our liability risk exposure remains small outside the South African businesses.
In line with our peers, there is significant regulatory change impacting the financial services sector in the territories we operate. The
regulatory capital uncertainties in relation to Solvency II and SAM are highlighted in the capital section. There is also substantial change
in the conduct agenda in terms of the way business is sold or the nature of the products designed to achieve required customers'
outcomes. Our focus on responsible business, core values and culture gives us confidence to embrace these changes, and we continue
to monitor the position carefully.
The Twin Peaks system of regulating the financial sector in South Africa is expected to come into force in due course. A second draft of
the Financial Sector Regulation Bill, which seeks to lay the legislative basis for Twin Peaks regulation, was released for comment in
December 2014. We are actively preparing to meet the proposed regulatory requirements.
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 risks and uncertainties
The Group is subject to income taxes in numerous jurisdictions and the calculation of the Group's tax charge and worldwide provisions
for income tax necessarily involves a degree of estimation and judgement. At any given time the Group typically has a number of open
tax returns with various tax authorities and engages in active dialogue to resolve this. Provisions relating to these open items are
recognised based on the Group's estimate of the most likely outcome, after taking into account external advice where appropriate.
Where the final tax outcome of these matters is different from the amounts that were initially recorded such differences will impact profit
and loss, current and deferred income tax assets and liabilities in the period such determination is made.
Dividends
The full year dividend of 8.7 pence, or its equivalent in local currency for those shareholders on overseas registers, represents an
increase of 7% on the prior year.
For indicative purposes only, converting the sterling final dividend at the exchange rate on 31 December 2014, the dividend to South
African shareholders for the full year 2014 would be 13% higher than the 2013 full year dividend in rand terms.
The interim dividend paid on 31 October 2014 was 2.45 pence.
Subject to being approved by shareholders at the Annual General Meeting of Old Mutual plc on 14 May 2015, the final dividend will be
paid on 29 May 2015. A separate announcement on the key dividend dates for the 2014 final dividend is made with these preliminary
results.
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 AOP earnings. And we will continue to set our
interim dividend at 30% of the prior year total.
IFRS Results
The Group IFRS profit after tax attributable to equity holders of the parent was GBP582 million for 2014 and GBP705 million for 2013.
Old Institutional Discontinued
IFRS to AOP Reconciliation Emerging Mutual Asset and non-core
year end December 2014 Markets Nedbank Wealth Management Other operations Total
Profit/(loss) after tax attributable to
equity holders of the parent 395 315 (37) 77 (119)(2) (49)(3) 582
Total adjusting items(1) 45 2 230 40 (16) - 301
Tax on adjusting items (20) (1) (14) (18) 17 - (36)
Non-controlling interest in adjusting
items (10) (15) - (3) - - (28)
Discontinued and non-core operations - - - - - 49 49
AOP after tax and non-controlling
interest 410 301 179 96 (118) - 868
Old Institutional Discontinued
IFRS to AOP Reconciliation Emerging Mutual Asset and non-core
year end December 2013 Markets Nedbank Wealth Management Other operations Total
Profit/(loss) after tax attributable to
equity holders of the parent 339 327 38 54 (88)(2) 35(3) 705
Total adjusting items(1) 87 - 159 42 (2) - 286
Tax on adjusting items 1 4 (20) (12) (19) - (46)
Non-controlling interest in adjusting
items (4) (16) - - - - (20)
Discontinued and non-core operations - - - - - (35) (35)
AOP after tax and non-controlling
interest 423 315 177 84 (109) - 890
(1) Full details of the adjustment applied in determining AOP, is set out in note C1 to the Preliminary Financial Statements, which can be found in Part 4 of this
document.
(2) Other: Loss of GBP119 million in 2014, principally relates to centre costs and finance costs (2013: GBP88 million)
(3) Discontinued and non-core operations comprises: Loss of GBP49 million in 2014 principally comprises the results of OM Bermuda and costs associated with
the separation of the Nordic and US Life businesses (2013: GBP35 million)
FINANCIAL APPENDIX
Supplementary financial information (data tables)
Summarised financial information 2014 2013 % change
IFRS results
Basic earnings per share (pence) 12.4p 15.0p (17%)
IFRS profit after tax attributable to equity holders of the parent (GBPm) 582 705 (17%)
Net asset value (GBPbn) 9,545 9,037 6%
Net asset value per share (pence)(1) 140.3p 137.7p 2%
(1) Net asset value per share is calculated as ordinary shareholders' equity (i.e. excluding the perpetual preferred callable securities) divided by the actual
shares in issue at the end of the period
Group return on equity (GBPm)(1) 2014 2013 % change
AOP excluding accrued hybrid dividends 868 890 (2%)
Opening shareholders' equity excluding hybrid capital 6,529 6,566 (1%)
Half-year shareholders' equity excluding hybrid capital 6,315 6,480 (3%)
Closing shareholders' equity excluding hybrid capital 6,791 6,529 4%
Average shareholders' equity 6,545 6,525 -
Return on average equity 13.3% 13.6% (30bps)
(1) RoE is calculated as AOP (post-tax) divided by average ordinary shareholders' equity (i.e. excluding the perpetual preferred callable securities).
It excludes non-core operations
Group debt summary 2014 2013
Senior gearing (gross of holding company cash) - IFRS basis 2.1% 1.1%
Total gearing (gross of holding company cash) - IFRS basis 13.3% 12.5%
Book value of debt - IFRS basis (GBPm)(2) 1,540 1,342
Total interest cover(1) 16.8 times 14.4 times
Hard interest cover(1) 5.0 times 4.2 times
(1) Total interest cover and hard interest cover ratios exclude non-core operations
(2) Excludes banking related debt of GBP2,030 million (2014) and GBP1,828 million (2013)
Financial Group Directive
Regulatory capital 2014(1) 2013(2)
GBPbn % GBPbn %
Ordinary equity 4.6 92% 4.8 92%
Other Tier 1 equity 0.4 8% 0.4 8%
Tier 1 Capital 5.0 100% 5.2 100%
Tier 2 Capital 1.2 23% 1.2 23%
Deductions from total capital (1.0) (23%) (1.2) (23%)
Total capital resources 5.2 100% 5.2 100%
Total capital resource requirements 3.2 3.1
Group FGD surplus 2.0 2.1
Coverage ratio 163% 168%
(1) Based on the preliminary estimates. Formal filing due to the Prudential Regulatory Authority (PRA) by 30 April 2015
(2) As submitted to the PRA on 30 April 2014
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 Group's FGD regulatory capital is calculated in line with the PRA's prudential guidelines.
Financial strength rating Moody's Fitch
Republic of South Africa
Sovereign rating Baa2 BBB (neg)
Old Mutual plc
Senior debt rating Baa3 BBB-
LT2 debt rating Ba1 BB
UT2 debt rating Ba1 BB
T1 debt rating Ba2 BB
Short-term debt rating P3 F3
OMLAC(SA)
National insurance financial strength Not rated AAA
National long-term senior debt rating Not rated AAA
National long-term subordinated debt rating Not rated AA
Global insurance financial strength Baa1
Old Mutual Wealth Life Assurance Company
Insurance financial strength A2 (neg) A-
Nedbank
Long-term foreign currency rating Baa2 BBB (neg)
Mutual & Federal
National insurance financial strength Not rated AAA
Ratings outlook are stable unless stated; neg = negative outlook
Long-term investment return rates (%)
2014 2013
Emerging Markets 7.4-8.0 7.4-8.0
Old Mutual Wealth 1.0 1.0
The LTIR rates are reviewed annually and reflect the returns expected on the chosen asset classes. There will be no change to the
2015 rates. The asset allocation in Emerging Markets will continue to be split 75% cash and bonds, and 25% equity.
Group gross flows and funds under management (GBPbn)
Net flows
Market and as % of
FUM Gross Gross other FUM opening
1-Jan-14 inflows outflows Net flows movements 31-Dec-14 FUM
Emerging Markets 48.3 10.4 (9.2) 1.2 0.8 50.3 2%
Nedbank 11.7 12.7 (12.2) 0.5 0.4 12.6 4%
Old Mutual Wealth 78.5 16.0 (12.3) 3.7 0.3 82.5 5%
Invest and Grow markets 63.9 17.0 (12.2) 4.8 4.7 73.4 8%
Manage for Value markets 22.0 2.1 (2.5) (0.4) (4.5) 17.1 (2%)
Eliminations (7.4) (3.1) 2.4 (0.7) 0.1 (8.0) 9%
Institutional Asset Management 155.3 21.4 (21.9) (0.5) 19.2 174.0 -
OM Asset Management 120.0 19.4 (13.6) 5.8 15.9 141.7 5%
Non-US based affiliate 35.3 2.0 (8.3) (6.3) 3.3 32.3 (18%)
Core operations 293.8 60.5 (55.6) 4.9 20.7 319.4 2%
Net flows
Market and as % of
FUM Gross Gross other FUM opening
1-Jan-13 inflows outflows Net flows movements 31-Dec-13 FUM
Emerging Markets 52.8 10.9 (9.3) 1.6 (6.1) 48.3 3%
Nedbank 11.8 12.3 (11.1) 1.2 (1.3) 11.7 10%
Old Mutual Wealth 69.2 14.4 (12.1) 2.3 7.0 78.5 3%
Invest and Grow markets 55.0 15.0 (11.5) 3.5 5.4 63.9 6%
Manage for Value markets 20.2 2.0 (2.6) (0.6) 2.4 22.0 (3%)
Eliminations (6.0) (2.6) 2.0 (0.6) (0.8) (7.4) 10%
Institutional Asset Management 128.4 25.5 (15.1) 10.4 16.5 155.3 8%
OM Asset Management 97.5 18.8 (12.3) 6.5 16.0 120.0 7%
Non-US based affiliate 30.9 6.7 (2.8) 3.9 0.5 35.3 13%
Core operations 262.2 63.1 (47.6) 15.5 16.1 293.8 6%
Part 3 – Detailed Business Review
Contents
News Release 1
Part 1 – 2014 Annual Review 4
Part 2 – Financial Performance 11
Part 3 – Detailed Business Review 24
Emerging Markets 25
Emerging Markets data tables (Rand) 29
Nedbank 33
Nedbank data tables (Rand) 37
Old Mutual Wealth 39
Old Mutual Wealth data tables (Sterling) 42
Institutional Asset Management 44
Non-core business – Bermuda 46
Part 4 – Financial Information 49
Old Mutual Emerging Markets
Highlights 2014 2013 % change
AOP (pre-tax, Rm)(1) 11,033 8,969 23%
Covered sales (APE) 9,706 8,442 15%
NCCF (Rbn) 21.3 24.7 (14%)
FUM (Rbn)(2) 904.9 840.8 8%
Pre-tax operating margin(3) 126bps 114bps 12bps
IFRS profit after tax attributable to equity holders of the parent (GBPm) 395 339 17%
(1) From 1 January 2014, all Property & Casualty business has been reported as part of Old Mutual Emerging Markets. Comparatives have been restated
(2) Comparative information for FUM has been restated to include Property & Casualty FUM of R2.9 billion
(3) Pre-tax operating margin is calculated as pre-tax AOP divided by average FUM and has been restated to include Property & Casualty
Operating environment
Emerging market economies experienced slower economic growth in 2014 than in 2013 with lower commodity prices and weaker
exchange rates.
In South Africa, the macro-economic environment continued to face challenges including protracted industrial action, rising inflation and
lower GDP growth (GDP expected to end at 1.4% compared to original target of 2.7%), which all contributed to the sovereign rating
downgrade by Standard & Poors. Towards the latter part of the year consumers benefitted from lower oil prices and lower inflation
levels. The rand remained volatile and closed the year 3% lower against the sterling and 10% down against the US dollar. The JSE All
Share Index rose 8% and the Shareholder Weighted Index was up 11.9% during the year benefitting from higher foreign inflows.
Outside South Africa, economic performance was mixed. Nigeria overtook South Africa as the largest economy on the continent,
however political unrest, especially in the North Eastern part of Nigeria, increased. Ghana experienced inflationary challenges and a
weakening currency although this has stabilised during the latter part of 2014.
Kenya delivered strong GDP growth of 5.5% for the year. The stronger US dollar positively impacted Zimbabwe and inflation levels
remain stable, however Zimbabwean equity markets were down 19.5% in the year following the elections and ongoing weak economic
conditions (in contrast to the prior year which was up 39%). Latin American growth was impacted by weaker currency markets against
the US dollar and falling oil prices and China GDP growth slowed to 7.3% year-on-year while India's economy increased to 7.5% year-
on-year in the last quarter of 2014.
Business developments
Africa 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. Gross sales in our East and West African businesses continue to show strong growth and now
account for 15% of total Rest of Africa sales, contributing an additional 2% from 2013.
In South Africa we invested R1.1bn to increase our holding in Old Mutual Finance (OMF) to 75% in September 2014. OMF provides an
effective sales platform for the Mass Foundation Cluster (MFC) as well as providing in branch service for our existing customers. We
continue to expand our distribution footprint in the Mass Foundation market. Our average adviser force increased by 6% and we have
expanded the number of OMF branches by 15% from the prior year to 259 branches. Sales made through OMF branches now account
for 26% of the total MFC life sales demonstrating the effectiveness of this distribution model.
We continue to build bancassurance relationships not only with Ecobank in Ghana and Nigeria, but also through the introduction of
other banking partners. In Ghana we have enhanced our retail distribution capability with the recruitment of additional 226 advisers,
bringing our total adviser force to 327.
In East Africa, we have agreed to acquire a 60.7% stake in UAP Holdings (UAP), subject to various regulatory approvals. UAP has a
strong position in East and Central Africa and a product offering that is highly complementary to our existing businesses.
The transaction for the acquisition of Faulu Kenya was completed in April 2014 and the business has been fully integrated into Old
Mutual Kenya.
In our combined Rest of Africa businesses, customer numbers have reached 3 million by adding 1.1 million new customers mainly in
Nigeria as a result of the winning of a large public sector scheme contract and the inclusion of Kenya Faulu bank customers.
Product and business development
In 2014 Old Mutual Emerging Markets (OMEM) made good progress in the execution of a number of key business and product strategies.
In South Africa, Retail Affluent enhanced its Greenlight offering by adding a new range of severe illness benefits and enhanced
competitiveness for disability income. The Wealth proposition in SA has been expanded with the launch of integrated private client stock
broking (PCS) which has delivered NCCF of R2.2 billion since inception and fiduciary capabilities in April 2014 to further complement
the holistic wealth management model. The new Wealth platform (excluding PCS) has attracted R8.9 billion NCCF in the year. The
Wealth platform is also a key support for the Old Mutual International business, gross sales of R5 billion up 56% on prior year were
generated, with NCCF of R2.3 billion up 48% relative to prior year.
Retail mass market customers in South Africa responded positively to the launch of the innovative 2-in-ONE savings product. We have
also launched a new best in market funeral product range that offers cheaper cover and enhanced value added benefits. Both of these
were launched in the second half of the year.
Corporate made good progress with transforming the administration business following the announcement in 2013 that it would cease
offering an administration-only service to single employer retirement funds. A new Superfund umbrella as well as a low discretionary
with profit annuity product called Old Mutual Performance Pension was launched resulting in better and more efficient customer
administration.
We successfully launched Pensions Plus (with-profit annuity) and the Old Mutual Savings Plan (retail savings product) in Zimbabwe.
We expanded our retail mass product offering in Nigeria with the launch of risk (Family Plan) and savings products.
We launched a new savings product in Mexico to help expand our retail affluent distribution through our AIVA partnership.
iWYZE launched a Buildings No-claim Reward product which refunds customers their building insurance premiums after six claim free year.
Our digital distribution network has been expanded to include innovative mobile applications - MyPortfolio on the OM mobile application
in SA and Namibia and a mobile banking app was launched for CABS in Zimbabwe, the first of its kind in the country. In Swaziland we
launched a mobile insurance offering called Likhandlela, an insurance driven loyalty incentive. Old Mutual Namibia launched OMCARD,
a Visa approved transactional card. An app to support the Old Mutual Kenya Ask Questions brand campaign and locate Old Mutual
Kenya branches was released. In China we offer online accidental cover insurance products covering travel by air, road and rail.
iWYZE launched a claims notification app that allows customers to initiate claims through the app.
Supporting economic transformation in SA
We believe we have a responsibility to support the communities in which we operate and we continue to invest significantly in
infrastructure and local projects that will achieve sustainable change in the lives of our stakeholders in these communities. Volunteerism
is core to our culture with well over 1,000 staff volunteering for various community projects.
Old Mutual and Nedbank jointly pledged USD1 million towards the African Union – Private sector Ebola fund.
In 2014 the Old Mutual Education Flagship Project made an impact on teaching and learning in 134 schools to the benefit of 4,100
educators and 105,000 learners. Linked to the National Development Plan, significant investment has been channeled into education
through Old Mutual Foundation, Old Mutual Education Trust, bursaries, and learnership and internship programs. The Education Trust
has produced 195 graduates in various disciplines (40 in 2014).
Since inception, Masisizane Fund has disbursed R152 million to small and medium enterprises (SME) with an additional R36 million
disbursed for wholesale funding through micro finance institutions (MFI's). The number of direct jobs facilitated to date is 7,426 (1,556 in
2014) and a cumulative 46,000 indirect jobs have been facilitated through partnerships with MFI's.
We are committed to support responsible business initiatives and our Housing Fund, Schools Fund, IDEAS Renewables Energy Fund
and the Agri Fund have collectively invested over R1.1 billion in 2014.
Old Mutual South Africa has achieved Level 2 BBBEE status for the fourth consecutive year.
Our current BEE deal with our Black Business Partners expires in May 2015. Old Mutual Emerging Markets and Nedbank (together
'OMEM and Nedbank consortium'), Brimstone Investment Corporation Limited ('Brimstone'), Women's Investment Portfolio Holdings
Limited ('WIPHOLD') and Izingwe Financial Investments (Proprietary) Limited('Izingwe') have initiated discussions on the nature of their
future relationships, including on-going commercial relationships and potential co-investment in BEE operating businesses.
We have committed in principle, to making a financial contribution and commitment of resources to regional empowerment and
development objectives through the undertaking of the following initiatives:
- The development of entrepreneurs and job creation in partnership with Brimstone, initially funded by an endowment of R100
million, of which a third would be contributed by Brimstone and the balance by the Nedbank & OMEM consortium.
- The large-scale commercialisation of small-scale agriculture which seeks to address rural unemployment, income generation
and food security sustainability in partnership with WIPHOLD, initially funded by an endowment of R100 million of which a
third would be contributed by WIPHOLD and the balance by the Nedbank & OMEM consortium.
- The development of township economies, including the economies of mining communities in partnership with Izingwe, initially
funded by an endowment of R66million contributed by Izingwe and Nedbank and a further R33million contributed by OMEM
towards affordable housing developments.
These initiatives are aligned to the National Development Plan and are aimed at positive sustainable outcomes to be shared by a broad
base of communities.
AOP results: Strong growth in SA and Latin America
Pre-tax AOP increased by 28% (23% including LTIR to R11.0 billion) benefitting from impact of higher asset based fees, life
underwriting profits (including favourable mortality experience), the consolidation of OMF and the turnaround from an underwriting loss
to profit at Mutual & Federal (M&F).
In South Africa, Retail Affluent profits grew by 16% supported by higher asset based fees, improved mortality and disability experience.
MFC profit growth of 36% benefitted from improved mortality experience and was bolstered further by the increased contribution by
OMF following its consolidation from 1 September and stronger sales in the second half of the year. As a result of increased usage of
anti-retroviral drugs in South Africa, we have seen a significant improvement in the life expectancy of people living with HIV. We have
therefore been able to reduce our MFC funeral cover reserves and will be using a proportion of these releases to increase the level of
cover for our existing Mass Foundation customers. Additionally, given the improved mortality experience in South Africa, we will now be
able to offer customers new products which are more affordable and provide better value. .
Corporate profits rose by 7% as underwriting profits and asset-based fees improved and new business strain reduced.
OMIG delivered a modest 2% growth in profit mainly due to increased completion fees following several successful investment
deployments in the Alternatives Boutiques, offset by lower Old Mutual Specialised Finance (OMSFIN) profits given high once-off credit
event profits in 2013 and listed asset management profits were down due to 2013 performance profits not being repeated.
Rest of Africa profits increased by 11% before central costs and LTIR following the inclusion of Faulu, increased asset management
profit in Namibia, improved CABS profit in Zimbabwe and a favourable exchange rate. These impacts were partially offset by increased
investment in distribution and central governance costs which reduced overall growth to 5% (after LTIR and central costs).
Asia and Latin America profits grew 39% due to higher profits from Colombia, improved results in China and significant growth in the
AIVA contribution.
The underwriting result in Property & Casualty (South Africa) improved achieving a profit of R79 million (2013: R469 million loss). The
underwriting result has improved as a result of targeted management actions with regards to price and claims initiatives, particularly in
the Personal Lines segment which has seen a markedly improved performance. Both the Commercial and Corporate & Niche segments
have also seen strong underwriting improvements. After a difficult start to the year, Credit Guarantee Insurance Company (CGIC) has
ended the year profitably. The management team has made good progress in the execution of key initiatives and remain focused on the
delivery of a sustainable turnaround.
NCCF: Strong net cash flows impacted by large asset management outflows
NCCF declined by R3.4 billion to R21.3 billion mainly due to relatively low-margin institutional client outflows in a number of OMIG listed
asset management boutiques. Corporate was successful in securing large single premium flows and delivered a net positive NCCF of
R8.6 billion.
Asia and Latin America NCCF remained stable compared to the prior year.
Funds under management: Over R900 billion funds under management
FUM increased by 8% to R905 billion driven by positive cash flows, strong market performance and investment returns of the
international assets enhanced by a stronger US dollar.
Gross sales: Good growth in SA and in Rest of Africa
Gross sales increased by 12% to R185 billion. In South Africa, Retail Affluent, Mass Foundation and Corporate business grew sales
10%, 12% and 46% respectively reflecting good sales performance. OMIG sales declined by 4% mainly due to several large mandates
secured in 2013. New Markets (Asia and Latin America) grew sales by 6% underpinned by improved productivity and the weaker rand.
Life APE sales: Strong growth in corporate regular premiums
Life APE sales increased by 15% to R9.7 billion underpinned by strong recurring premium sales growth in Corporate and Retail Affluent
single premium sales growth.
Retail Affluent delivered single premium sales growth of 29% supported by the continued success of the XtraMax product. Recurring
premium sales declined by 6% with economic pressure on the middle income customers resulting in lower volumes from the broker
distribution channel.
Mass Foundation sales grew 11% as the 2-in-ONE savings product and new funeral range product gained traction in the second half of
the year.
Recurring premium sales in South Africa increased by 14% with Corporate sales up 105% due to strong Superfund savings and group
assurance sales.
On a like-for–like basis Rest of Africa sales (excluding renewals) are 17% higher than the comparable prior year following increased
adviser headcount in Kenya and the inclusion of Ghana for the first time in 2014.
Latin American sales increased by 49% with improved productivity in the retail channel supported by increased sales through the AIVA
on-shore channel. Sales in Asia are ahead of prior year mainly due to higher sales in non-bank channels in China, improved adviser
productivity in India and favourable exchange rate movements.
Non-covered sales: Strong growth in SA Corporate and Retail Affluent
Non-covered sales rose by 15% supported by strong Corporate and Retail Affluent flows. Retail Affluent non-covered sales grew by
16% due to strong unit trust sales and our new wealth platform continued to attract strong flows. Corporate secured significant
Superfund customised flows in the fourth quarter.
Rest of Africa sales grew 16% with strong unit trust flows in Zimbabwe and large corporate flows in Kenya.
Latin America sales rose 6% mainly benefiting from a favourable exchange rate.
Banking: Responsible growth in loan book and improved credit loss experience
OMF grew loan sales by 7% over the prior year to R6.7 billion whilst it also increased its collections ratio to 91.2% and reduced credit
losses to 12.4% from 14.0%.
In Rest of Africa, CABS credit loss ratio ended in line with prior year despite economic pressure in Zimbabwe with tighter credit controls
and a focus on secured loans. The results of Faulu are included from the second quarter with their credit loss ratio remaining stable a 0.9%.
Value of new business (VNB) and margins: Decline mainly due to mix of new business sales
VNB decreased by 5% to R1.9 billion with PVNBP margin down slightly at 3.4% mainly due to larger volumes of lower margin savings
business and higher new business strain.
Embedded value
Operating MCEV earnings (post-tax) increased by 3% to R5.1 billion, largely due to improved mortality experience and assumption
changes across Mass Foundation and Retail Affluent which was offset by lower VNB, persistency assumption changes and higher
development costs.
Return on Embedded Value (RoEV) decreased from 11.0% to 9.9% mainly due to a significant decrease in operating experience
variances (including negative tax experience) and a lower contribution from new business, partly offset by more favourable operating
assumption changes.
Total MCEV (covered business) increased by 9% on prior year due to higher operating earnings and debt raised in capital markets,
partly offset by lower positive investment returns than in the prior year.
Outlook
Emerging markets continue to operate in a challenging economic and socio-political environment. The energy constraints and likely
electricity tariff increases in South Africa remain a concern and are likely to dampen growth prospects in 2015. However, lower oil prices
are expected to result in a sharp decline in inflation and therefore higher disposable income for our consumers, particularly those in the
retail mass segment. GDP in South Africa is expected to rise 2.1% in 2015.
In Sub-Saharan Africa, growth is expected to remain at similar levels as 2014. However, the growth outlook has deteriorated in Nigeria
as lower oil revenue could slow down the economy and force the government to cut expenditure. General elections have been
scheduled for March 2015. In Ghana, real GDP growth will be strong over the coming years, fluctuating between 6% and 8%.
Forthcoming IMF support will underpin investor confidence and rising oil and gas output will provide a significant boost to the economy.
Growth prospects for Colombia and Mexico remain fairly positive, but downside risks to the 2015 outlook persist if low oil prices are
prolonged - the slump could reduce the attractiveness of opportunities for energy investment and oil revenues.
The Chinese government is expected to continue its economic reform this year, which implies weaker but more balanced economic
growth. Lower oil prices and a stronger than expected global economy could be a catalyst for growth.
We are on track to meet our objective of 10 million customers in the Rest of Africa by 2020 and we continue to aim for an overall RoE
target of between 20% to 25%.
Emerging Markets data tables (Rand)
Adjusted operating profit by cluster (pre-tax, Rm) 2014 2013 % change
Retail Affluent 3,519 3,028 16%
Mass Foundation 2,629 1,937 36%
Corporate 1,310 1,224 7%
OMIG 1,027 1,003 2%
Property & Casualty(1, 3) 79 (469) 117%
LTIR(1) 1,714 1,657 3%
Central expenses and administration (865) (828) (4%)
South Africa 9,413 7,552 25%
Rest of Africa(1) 834 749 11%
LTIR 484 422 15%
Central expenses and administration (244) (146) (67%)
Rest of Africa 1,074 1,025 5%
Asia & Latin America 546 392 39%
Total Emerging Markets 11,033 8,969 23%
Adjusted operating profit by product (pre-tax, Rm) 2014 2013 % change
Life & Savings 7,423 6,681 11%
Asset Management 1,916 1,447 32%
Banking & Lending(2) 1,070 783 37%
Property & Casualty(3) 624 58 976%
Total Emerging Markets 11,033 8,969 23%
(1) Property & Casualty AOP including LTIR of R472 million, has been allocated according to geographic location. Comparatives have been restated
(2) Comprises Faulu in Kenya, Central African Building Society in Zimbabwe and Old Mutual Finance in South Africa
(3) Comparatives have been restated to include Property & Casualty AOP
Gross sales and funds under management (Rbn)(1)
Net flows
Market and as % of
FUM Gross Gross other FUM opening
1-Jan-14 sales(2) outflows Net flows movements(3) 31-Dec-14 FUM
Retail Affluent(4) 99.8 57.8 (53.0) 4.8 19.2 123.8 5%
Mass Foundation(5) - 8.7 (4.0) 4.7 (4.7) - -
Corporate(4) 51.9 36.8 (28.2) 8.6 10.5 71.0 17%
OMIG(5) 506.9 31.1 (35.7) (4.6) 16.3 518.6 (1%)
Property & Casualty(6) 2.9 - - - (0.4) 2.5 -
Total South Africa 661.5 134.4 (120.9) 13.5 40.9 715.9 2%
Rest of Africa(6) 53.9 13.7 (11.8) 1.9 6.4 62.2 4%
Asia & Latin America 125.4 36.8 (30.9) 5.9 (4.5) 126.8 5%
Total Emerging Markets(7) 840.8 185.0 (163.7) 21.3 42.8 904.9 3%
Net flows
Market and as % of
FUM Gross(2) Gross other FUM opening
1-Jan-13 sales outflows Net flows movements(3) 31-Dec-13 FUM
Retail Affluent(4) 76.6 52.5 (45.6) 6.9 16.3 99.8 9%
Mass Foundation(5) - 7.8 (3.5) 4.3 (4.3) - -
Corporate(4) 45.9 25.2 (27.2) (2.0) 8.0 51.9 (4%)
OMIG(5) 463.3 32.5 (26.8) 5.7 37.9 506.9 1%
Property & Casualty(6) 2.8 - - - 0.1 2.9 -
Total South Africa 588.6 118.0 (103.1) 14.9 58.0 661.5 3%
Rest of Africa 38.4 12.2 (8.5) 3.7 11.8 53.9 10%
Asia & Latin America 100.4 34.8 (28.7) 6.1 18.9 125.4 6%
Total Emerging Markets(7) 727.4 165.0 (140.3) 24.7 88.7 840.8 3%
(1) FUM shown on an end manager basis
(2) Gross sales are cash inflows for the period and thus include prior period recurring premium flows
(3) Includes the foreign exchange impact of translating FUM managed outside of South Africa
(4) From 1 January 2014, Acsis and Symmetry institutional businesses are reported within Corporate, whereas previously these had been reported in the
Retail Affluent cluster. Comparatives have been restated (FY 2013: R7.4 billion Gross sales, R1.1 billion NCCF and R50.4 billion FUM)
(5) Mass Foundation gross sales are recorded by segment but all FUM is managed by OMIG
(6) From 1 January 2014, Property & Casualty FUM has been allocated by geographic location (R0.7 billion reclassification of P&C Africa FUM included in
'Market and other movements'). Comparatives have not been restated.
(7) Opening FUM at 1 January 2014 restated to include Property & Casualty FUM of R2.9 billion ( 1 January 2013: R2.8 billion)
Covered sales - APE (Rm)
Single premium APE Regular premium APE Total APE
By cluster: 2014 2013 % change 2014 2013 % change 2014 2013 % change
Retail Affluent(1) 1,370 1,066 29% 1,403 1,485 (6%) 2,773 2,551 9%
Mass Foundation(2) 3 2 50% 3,080 2,769 11% 3,083 2,771 11%
Corporate(1) 1,004 963 4% 871 424 105% 1,875 1,387 35%
Total South Africa 2,377 2,031 17% 5,354 4,678 14% 7,731 6,709 15%
Rest of Africa(3) 145 192 (24%) 628 526 19% 773 718 8%
Asia & Latin America(4) 377 366 3% 825 649 27% 1,202 1,015 18%
Total Emerging Markets 2,899 2,589 12% 6,807 5,853 16% 9,706 8,442 15%
Single premium APE Regular premium APE Total APE
By product: 2014 2013 % change 2014 2013 % change 2014 2013 % change
Savings 2,552 1,948 31% 3,568 2,974 20% 6,120 4,922 24%
Protection(2) - - - 3,239 2,879 13% 3,239 2,879 13%
Annuity 347 641 (46%) - - - 347 641 (46%)
Total Emerging Markets 2,899 2,589 12% 6,807 5,853 16% 9,706 8,442 15%
(1) From H1 2014, Symmetry institutional business is reported within Corporate, whereas previously these had been reported in the Retail Affluent cluster.
Comparatives have been restated (FY 2013: R160 million single premium APE)
(2) OMF credit life sales are included within Mass Foundation protection sales (R263 million in FY 2014 and R211 million in FY 2013)
(3) For FY 2013, Rest of Africa life APE sales are reported net of minority interest whereas previously these were reported gross of minority interest with the
full impact for FY 2013 being booked in Q4 2013. From 1 January 2014 Rest of Africa excludes renewal sales (FY 2013: R55 million). Comparatives have
not been restated. Rest of Africa life APE sales restated for FY 2013 (excluding renewals) would have been R663 million
(4) Asia & Latin America represents Mexico and a proportional share of India and China.
Non-covered sales
Unit trust sales Other non-covered sales Total non-covered sales
2014 2013 % change 2014 2013 % change 2014 2013 % change
South Africa(1)(2) 35,033 30,357 15% 59,416 48,963 21% 94,449 79,320 19%
Africa (ex. SA) 5,801 5,423 7% 2,955 2,135 38% 8,756 7,558 16%
Asia & Latin America(3, 4) 31,249 29,563 6% - - - 31,249 29,563 6%
Total Emerging Markets 72,083 65,343 10% 62,371 51,098 22% 134,454 116,441 15%
(1) Within South African Retail Affluent, Old Mutual Investment Services recognises Linked Investment Service Provider (LISP) sales on which it earns fees
irrespective of where the underlying funds are managed. Where these funds are managed by Old Mutual Unit Trusts (OMUT), OMUT also recognises a
sale. These intra-segment sales for FY 2014 amount to R15,365 million (FY 2013: R10,550 million)
(2) Old Mutual International life sales amounting to R5 billion are 56% above prior year and are not included in the OMEM non-life sales as these sales are
reported in Old Mutual Wealth (UK)
(3) AIVA sales amounting to R2.8 billion are 23% below prior year and are not included in the OMEM non-life sales as these sales are reported in Old
Mutual Wealth (UK)
(4) Represents Colombia and Mexico
Value of new business 2014 2013 % change
Retail Affluent(1) 426 429 (1%)
Mass Foundation 1,035 1,129 (8%)
Corporate(1) 241 188 28%
Total South Africa 1,702 1,746 (3%)
Africa (ex. SA)(2) 246 320 (23%)
Asia & Latin America(1, 2) (10) (23) (57%)
Total Emerging Markets 1,938 2,043 (5%)
(1) From 1 January 2014, Symmetry institutional business is recorded within Corporate, previously this were recorded within Retail Affluent. Comparatives
have been restated (FY 2013: R13 million)
(2) No VNB is calculated in respect of Life APE sales in India and China. Latin America is Mexico only
Old Mutual Finance 2014 2013 % change
Gross lending book (Rm) 9,928 8,258 20%
Sales: loans advanced (Rm) 6,706 6,250 7%
NPAT/average lending book(1) 5.4% 3.9% 150bps
Loan approval rate 37.0% 31.0% 600bps
Credit loss ratio (credit losses: average lending book)(2) 12.4% 14.0% (160bps)
Return on equity 41.8% 32.1% 970bps
Branches 259 225 15%
Staff 2,463 2,055 20%
(1) Net profit after tax (NPAT)/average lending book is stated after capital charges
(2) The current year benefits from the prior year impact of an impairment methodology change. On a comparable basis FY 2014 would be 12.9%, an
improvement of 60bps (FY 2013: 13.5%). The calculation of the credit loss ratio reflected in the table above is consistent with those of the direct peer group
Property & Casualty (Rm)(1) 2014 2013 % change
Gross written premiums 12,189 11,315 8%
South Africa 10,774 10,527 2%
Rest of Africa 1,415 788 80%
Net earned premiums 9,457 8,856 7%
South Africa 8,607 8,365 3%
Rest of Africa 850 491 73%
Underwriting result 138 (437) (132%)
South Africa 81 (469) (117%)
Rest of Africa 57 32 78%
Underwriting margin (%) 1.4% (4.9%)
South Africa 0.9% (5.6%)
Rest of Africa 6.7% 6.5%
Claims ratio (%)(2) 68.7% 75.6%
Combined ratio (%) 98.6% 104.9%
International solvency ratio (%) 51.5% 54.1%
(1) The results of Nigeria and Zimbabwe are included for the first time in H1 2014
(2) Includes claims admin costs transferred from management expenses
Nedbank
Highlights (Rm) 2014 2013 % change
AOP (pre-tax) 13,757 12,026 14%
Headline earnings 9,880 8,670 14%
Net interest income 22,961 21,220 8%
Non-interest revenue 20,312 19,361 5%
Net interest margin 3.52% 3.57%
Credit loss ratio 0.79% 1.06%
Cost to income ratio 56.5% 55.2%
Return on Equity 15.8% 15.6%
Return on Equity (excluding goodwill) 17.2% 17.2%
Common equity Tier 1 ratio 11.6% 12.5%
IFRS profit after tax attributable to equity holders of the parent (GBPm) 315 327 (4%)
The full text of Nedbank's results for the year ended 31 December 2014, released on 23 February 2015, can be accessed on our
website http://www.oldmutual.com/media/news/viewNews.jsp?newsId=25893. The following is an edited extract:
Banking and economic environment
The operating environment in 2014 remained challenging for consumers, with global markets reflecting a mixed performance, and the
local economy remained under pressure from strike action and electricity supply constraints. SA's gross domestic product (GDP) is
forecast to grow at 1.4% for 2014, but in the absence of strike action, economic growth would have been 1% higher according to the
South African Reserve Bank (SARB).
Weak economic conditions, the twin deficits and SA's resultant dependency on foreign capital inflows translated into rand depreciation
and heightened inflationary pressures in the early part of the year, prompting an increase of 75 basis points in interest rates. These
domestic factors contributed to Standard & Poor's reaffirming SA's sovereign risk rating at BBB negative with the outlook remaining
stable (placing SA one notch above investment grade), Fitch Ratings revising its outlook on its BBB rating to negative and Moody's
downgrading SA's debt rating to Baa2 with a stable outlook.
The SA banking industry was also tested by the collapse of African Bank Limited ('Abil'), the country's largest unsecured lender. The
combined strength of the system ensured that Abil's resolution was successfully managed and that the bank was placed under
curatorship with no significant consequences for the rest of the SA financial system.
Overall the credit environment remained muted, with wholesale credit demand continuing to outpace retail demand as poor employment
prospects, high levels of indebtedness, increased interest rates and weak confidence levels weighed against consumers. Wholesale
credit demand was supported by renewable-energy projects, corporate action and increased deal-flow from the rest of Africa. Wholesale
activity is expected to moderate as corporates remain hesitant to make long-term investments and increase production capacity given
the weak economic outlook.
Review of results
Nedbank produced strong headline earnings growth of 14.0% to R9,880 million (2013: R8,670 million) for the year ended 31 December
2014. Growth was driven by an increase in net interest income (NII), improvements in impairments and growth in non-interest revenue
(NIR), particularly in the second half. Headline earnings included associate income from our shareholding in Ecobank Transnational
Incorporated (ETI) effective for the last quarter of the year.
Diluted headline earnings per share (DHEPS) increased 13.0% to 2,066 cents (2013: 1,829 cents) and diluted earnings per share
increased 12.5% to 2,049 cents (2013: 1,822 cents). Excluding associate income from ETI and the related funding costs, Nedbank's
organic DHEPS increased 12.3%.
Economic profit (EP) of R2,112 million (2013: R2,114 million) was achieved against a higher cost of equity of 13.5% (2013: 13.0%).
Return on average ordinary shareholders' equity (ROE) increased to 15.8% (2013: 15.6%) and ROE excluding goodwill was 17.2%
(2013: 17.2%), supported by a higher return on assets (ROA) of 1.27% (2013: 1.23%).
Nedbank's balance sheet is well positioned. Our Basel III common-equity tier 1 (CET1) ratio of 11.6% (2013: 12.5%) after acquiring
approximately 20% of ETI is above the mid-point of our Basel III 2019 internal target range. Funding and liquidity levels remained
sound, with statutory liquid assets and cash reserves increasing 18.5% to R82.6 billion (2013: R69.7 billion). Nedbank met the 60%
minimum liquidity coverage ratio (LCR) requirement on 1 January 2015. The LCR will be increased 10% annually to reach 100% on
1 January 2019.
Net asset value per share continued to increase, growing 9.5% to 14,395 cents (2013: 13,143 cents).
Cluster performance
Our business clusters have developed competitive client value propositions and strong market positioning as reflected in headline
earnings growth of 19.3% and an increased ROE of 19.7% (2013: 18.7%) against a higher average total capital allocated at
R51.4 billion (2013: R45.5 billion).
Nedbank Capital grew headline earnings 23.3%, with this strong performance driven by good NII growth and improvements in
impairments. Lower NIR growth reflects the high 2013 base in trading income related to renewable-energy transactions. Pre-
provisioning operating profit growth was 12.0%.
Headline earnings growth of 15.8% in Nedbank Corporate was underpinned by strong NII and NIR growth. The increase in NII was
supported by commercial mortgage and corporate lending activities and endowment benefits. The growth in NIR was from core
transactional income and private-equity investments. Low levels of impairments continue to reflect good risk management across the
portfolio.
Nedbank Business Banking's strong increase of 17.8% in headline earnings and improving ROE follow the normalisation of impairments
from a large single-client default in 2013 and solid NII growth from increased product volumes and higher endowment earnings. Lower
NIR reflects the impact of maintaining transactional fees at 2013 levels as well as the proactive reduction of transactional banking fees
in alignment with market practices. Pre-provisioning operating profit was up 5.8%.
Headline earnings in Nedbank Retail grew 15.7% and benefited from an improvement in impairments in personal loans and home loans.
NIR was influenced by the strategic decision to slow down personal loans and maintain transactional fees at 2013 levels. Consequently,
pre-provisioning operating profit decreased by 4.1%.
Nedbank Wealth's headline earnings growth of 15.8% was off a high 2013 base. This was largely due to record earnings growth in
Wealth Management and continued momentum in Asset Management, partially offset by relatively slower growth from Insurance. The
performance in Insurance resulted from lower levels of sales of traditional insurance products, including homeowner's cover and
personal-loan-related insurance products.
The Rest of Africa Division, previously included in the Centre, reported earnings of R357 million (2013: R173 million), showing strong
growth, including associate income from ETI as estimated by Nedbank on a prudent basis effective from the fourth quarter, as ETI
reports later than Nedbank. The division also reported stronger performance from all five of our regional subsidiaries.
Headline earnings at the Centre includes net endowment on surplus capital and fair-value gains in the hedged portfolios, offset by
additional portfolio impairment provisions for ongoing economic uncertainties, with the central portfolio provision increased by R150
million to R350 million.
Detailed segmental information is available in the results booklet and on Nedbank's website at nedbankgroup.co.za under the 'Financial
information' section.
Financial performance
Net interest income (NII)
NII grew 8.2% to R22,961 million (2013: R21,220 million), benefiting from 9.7% growth in average interest-earning banking assets.
The net interest margin (NIM) narrowed to 3.52% (2013: 3.57%). The endowment income benefit from higher interest rates was offset
by asset and liability margin compression. Asset margins were impacted by the change in asset mix as lower-yielding wholesale
advances grew faster than higher-yielding retail advances, including the reduction in our personal-loans book, and by holding higher
levels of lower-yielding high-quality liquid assets for Basel III LCR requirements. Liability margin compression arose from higher levels of
competition for Basel III-friendly deposits.
Impairments
Impairments decreased 19.0% to R4,506 million (2013: R5,565 million) and the credit loss ratio (CLR) declined to 0.79% (2013: 1.06%),
despite increased coverage levels and the strengthening of central provisions to R350 million (2013: R200 million) in line with Nedbank's
view of a protracted weak economic environment.
CLRs decreased across all clusters as a result of ongoing improvements in asset quality, prudent credit granting and strong collections.
Higher levels of post write-off recoveries of R941 million (2013: R888 million) were recorded, including personal-loan recoveries of R343
million (2013: R276 million).
Total Nedbank defaulted advances decreased by 11.2% to R15,846 million (2013: R17,848 million), driven by continued improvements
in the residential-mortgage and personal-loans books. Total defaulted advances now constitutes 2.5% of the book (2013: 3.0%).
Coverage ratios for total and specific impairments strengthened to 70.0% (2013: 64.2%) and 43.1% (2013: 42.3%) respectively.
Portfolio coverage improved to 0.70% (2013: 0.68%).
Non-interest revenue (NIR)
During the year a number of strategic actions were implemented to position Nedbank for growth into the future. These actions included
the slowdown in growth of personal loans, reducing the pricing of our credit life product (but with increased benefits), maintaining
transactional fees at 2013 levels, and implementing selected fee reductions in Retail Relationship Banking and Business Banking.
As a result NIR increased by 4.9% to R20,312 million (2013: R19,361 million), with strong growth of 10.2% in the second half of the year.
The underlying drivers of NIR growth included:
- Commission and fee income increasing 3.9% to R14,570 million (2013: R14,023 million), driven by good transactional-
banking volume growth and ongoing client acquisition, notwithstanding the effect of no fee increases and fee reductions
amounting to R355 million.
- Insurance income growing 3.1% to R1,986 million (2013: R1,927 million), which was achieved mainly in the second half of the
year, through a better claims experience and continued momentum in non-traditional insurance, offset by retail volumes.
- Trading income growing 3.3% to R2,648 million (2013: R2,564 million) off a high 2013 base.
- Private-equity income increasing 88.0% to R423 million (2013: R225 million) following higher profits realised on listed
investments of R434 million (2013: R192 million).
- Fair-value gains of R35 million (2013: R40 million), which were recognised primarily as a result of basis risk on centrally
hedged banking book positions and accounting mismatches in the hedged fixed-rate advances portfolios.
Expenses
Expense growth of 9.4% to R24,534 million (2013: R22,419 million) is reflective of continued investment in Nedbank's franchises.
The main contributors were:
- staff-related costs increasing 9.6%, comprising growth in remuneration of 8.8% and an increase in variable incentives;
- computer processing costs growing 13.9% to R3,097 million, including amortisation costs of R654 million, up 12.0%.
- fees and insurance costs increasing 10.7% in line with higher volumes of revenue-generating activities such as cash handling,
card issuing and acquiring, and client acquisition costs in Nedbank Wealth.
Associate income
Associate income increased to R161 million (2013: R27 million), largely driven by the estimated income from our shareholding of
approximately 20% in ETI, effective from 1 October 2014. Nedbank's results includes our own conservative estimate of ETI's earnings,
as the publication dates of ETI results are not aligned to Nedbank.
Statement of financial position
Capital
Nedbank remains well capitalised, with all capital adequacy ratios well above the Basel III minimum regulatory capital requirements and
within our Basel III internal target ranges.
Our CET1 ratio of 11.6% (2013: 12.5%) is above the mid-point of our Basel III 2019 internal target range. The decrease in the ratio
since June 2014 is largely as a result of the expected 0.9% capital impact from our investments in ETI and Banco Único.
The tier 1 and total capital ratios reflect the progressive grandfathering of old-style instruments in accordance with Basel III transitional
arrangements. Because of this only 80% of Nedbank's preference shares and hybrid debt qualified as tier 1 capital in 2014. In addition,
NED 8, a R1.7 billion old-style tier 2 subordinated-debt instrument, was called in February 2014 and replaced with R2.5 billion of new-
style Basel III-complaint tier 2 instruments.
Further details on risk and capital management will be available in the 'Risk and Balance Sheet Management review' section of
Nedbank's analyst booklet and the Pillar 3 Report to be published on the website at nedbankgroup.co.za in March 2015.
Funding and liquidity
Nedbank's balance sheet remains well funded, with deposits increasing 8.4% to R653.5 billion (2013: R603.0 billion) and the loan-to-
deposit ratio strengthening to 93.8% (2013: 96.1%).
Our strategy of growing retail and commercial deposits and maintaining a conservative term funding profile continues to be reflected in
Nedbank's average long-term funding ratio for the fourth quarter of 25.4% (average fourth quarter 2013: 26.2%), which has tended to be
above the industry average.
Nedbank maintained a sound liquidity position, with contingent liquidity well in excess of prudential liquidity requirements. The statutory
liquid assets and cash reserves, combined with the surplus liquid-asset portfolio of R37.0 billion (2013: R28.0 billion), increased 18.5%
to R82.6 billion (2013: R69.7 billion).
Liquidity coverage ratio
SARB adopted the Basel Committee's LCR phase-in arrangements where, from 1 January 2015, SA banks must meet the minimum
regulatory requirement of 60%, which increases by 10% annually to reach 100% on 1 January 2019.
Nedbank has met the minimum LCR requirement of 60%, and implemented an appropriately conservative buffer. We are well positioned
to meet the ongoing LCR requirements throughout the transitional period.
Loans and advances
Loans and advances grew 5.8% to R613.0 billion (2013: R579.4 billion). Excluding low-yielding trading advances, banking advances
growth was 8.1%, underpinned by gross new payouts of R166.8 billion (2013: R158.9 billion).
Banking advances growth was primarily driven by strong growth from Nedbank Capital and Nedbank Corporate, which together
contribute 47.5% of total banking advances and 49.7% of the year-on-year growth.
Nedbank Retail's slower advances growth reflects the 16.3% decrease in personal loans, which largely offset stronger growth in Card
and MFC (vehicle finance) of 17.1% and 12.1% respectively.
Advances growth decreasing in the Rest of Africa Division resulted from growth in the regional subsidiaries of 17.2% more than offset by
the repayment of the ETI loan of USUSD285 million.
Total assets administered by Nedbank has surpassed the R1.0 trillion level for the first time, having increased 8.7% for the year
(2013: R939.9 billion). Assets under management increased 11.4% to R212.0 billion (2013: R190.3 billion) following good market
performance.
Value created through broad-based black economic empowerment
Nedbank's South African broad-based black economic empowerment ('BBBEE') transaction introduced in 2005 included over 500 000
direct and indirect beneficiaries. The BBBEE transaction was aligned and implemented in collaboration with Old Mutual Group's BBBEE
transaction. The BBBEE transaction facilitated broad-based black ownership equating to 11.5% of the then value of Nedbank's SA
businesses. The objective was to create sustainable value for a broad base of diverse beneficiaries, including strategic black business
partners, employees, non-executive directors, clients and community interest groups affiliated with the company.
The group's strong financial performance over the ensuing nine-year period has benefitted its BBBEE stakeholders by an estimated
R8.2bn, based on current market prices. Valuing this benefit at the time that shares became unrestricted, during the lifetime of the
BBBEE schemes, the aggregate value created for the BBBEE stakeholders would be R5.5bn.
Further information on the specific repurchase and issue relating to the BBBEE transaction is available on the Nedbank's website at
nedbankgroup.co.za.
Economic outlook
The SA economy is forecast to improve modestly off a low base, although growth will be constrained by disruptions to power supply and
weaker growth anticipated in key export markets, particularly in the Eurozone and China.
Growth in GDP is currently forecast at 2.5% for 2015 as the economy recovers from the effects of strike action and exports are boosted
by a weaker rand. Risk to this appears to be on the downside. The sharp drop in global fuel prices has improved the inflation outlook,
and interest rates are expected to remain unchanged at current levels until late in the year. The softer interest rate outlook and lower
borrowing costs should support consumer credit demand and limit credit defaults in 2015, notwithstanding the weak job market and still
high consumer debt levels.
Retail banking conditions are therefore likely to improve modestly, but growth in wholesale banking may moderate from current levels as
fixed-investment plans and credit demand will be limited by the severity and extent of infrastructure constraints, rising production costs,
soft global demand and low international commodity prices.
Prospects
Our guidance on financial performance for the full 2015 year is as follows:
- Advances to grow at mid-single digits.
- NIM to be below the 2014 level of 3.52%.
- CLR to be at the lower end of the through-the-cycle target range of 80 to 120 basis points.
- NIR (excluding fair-value adjustments) to grow above mid-single digits.
- Expenses to increase above mid-single digits.
Although forecast risk remains high, for the year ahead we once again expect organic growth in DHEPS to be above nominal GDP growth
Nedbank data tables (Rand)
Cluster performance Economic Profit (Rm) Headline earnings (Rm) RoE (%)
2014 2013 % change 2014 2013 % change 2014 2013
Nedbank Capital 1,198 963 24% 2,128 1,726 23% 30.9% 29.4%
Nedbank Corporate 1,167 1,138 3% 2,599 2,245 16% 24.5% 26.4%
Nedbank Business Banking 358 308 16% 1,094 929 18% 20.1% 19.4%
Nedbank Retail (48) (308) (84%) 2,937 2,539 16% 13.3% 11.6%
Nedbank Wealth 660 577 14% 1,042 900 16% 36.8% 36.2%
Rest of Africa (122) (87) 40% 357 173 106% 10.1% 8.7%
Business clusters 3,213 2,591 24% 10,157 8,512 19% 19.7% 18.7%
Centre (1,101) (477) 131% (277) 158 (275%)
Total 2,112 2,114 - 9,880 8,670 14% 15.8% 15.6%
Credit loss ratio analysis (%) 2014 2013
Specific impairments 0.72% 0.97%
Portfolio impairments 0.07% 0.09%
Total credit loss ratio 0.79% 1.06%
Credit loss ratio by cluster (%) % banking Through-the-cycle
advances 2014 2013 target ranges
Nedbank Capital 12.8% 0.14% 0.51% 0.10% - 0.55%
Nedbank Corporate 33.1% 0.21% 0.23% 0.20% - 0.35%
Nedbank Business Banking 11.4% 0.42% 0.65% 0.55% - 0.75%
Nedbank Retail 36.0% 1.70% 2.16% 1.90% - 2.60%
Nedbank Wealth 4.2% 0.17% 0.28% 0.20% - 0.40%
Rest of Africa 2.6% 0.23% 0.37%
Total credit loss ratio 0.79% 1.06% 0.80% - 1.20%
Capital (Basel III) 2014 2013 Internal target range Regulatory minimum(1)
Common equity Tier 1 ratio 11.6% 12.5% 10.5% - 12.5% 5.5%
Tier 1 ratio 12.5% 13.6% 11.5% - 13.0% 7.0%
Total capital ratio 14.6% 15.7% 14.0% - 15.0% 10.0%
(Ratios calculated include unappropriated profits)
(1) The Basel III regulatory requirements (excluding unappropriated profits) are being phased in between 2013 and 2019 and exclude the Pillar 2b add-on.
Loans and advances by cluster (Rm) 2014 2013 % change
Banking activity 78,596 72,066 9%
Trading activity 27,005 37,483 (28%)
Nedbank Capital 105,601 109,549 (4%)
Nedbank Corporate 199,557 175,274 14%
Nedbank Business Banking 65,819 62,785 5%
Nedbank Retail 203,063 195,435 4%
Nedbank Wealth 24,819 22,082 12%
Rest of Africa 14,073 14,700 (4%)
Centre 89 (453) (120%)
Total 613,021 579,372 6%
Metric 2014 performance Medium-to-long-term targets 2015 full-year outlook
5% above cost of ordinary shareholders'
RoE (excluding goodwill) 17.2% equity Below target
Growth in diluted headline earnings per > - consumer price index + GDP growth + > consumer price index +
share 13.0% 5% GDP growth
Growth in organic diluted headline
earnings per share 12.3%
Credit loss ratio 0.79% Between 0.8% and 1.2% of average At lower end of target
banking advances range
NIR-to-expense ratio 82.8% > 85% Below target
Efficiency ratio(1) 56.5% 50.0% to 53.0%(2) Above target
Common equity tier 1 capital adequacy
ratio (Basel III) 11.6% 10.5% to 12.5% Within target range
Economic capital Internal Capital Adequacy Assessment Process (ICAAP): A debt rating (including 10% capital buffer)
Dividend cover 2.07 times 1.75 to 2.25 times 1.75 to 2.25 times
(1) Includes associate income in line with industry accounting practices
(2) Target will be reviewed for the impact of inclusion of associate income
Shareholders are advised that these forecasts are based on organic earnings and our latest macro-economic outlook and have not been
reviewed or reported on by Nedbank's independent auditors.
Highlights 2014 2013 % change
AOP (pre-tax, GBPm) 227 217 5%
Gross sales (GBPm) 15,992 14,434 11%
NCCF (GBPbn) 3.7 2.3 61%
FUM (GBPbn) 82.5 78.5 5%
Pre-tax operating margin(1) 36% 36% 0%
IFRS profit/(loss) after tax attributable to equity holders of the parent (GBPm) (37) 38 (197%)
(1) Pre-tax revenue operating margin is calculated as pre-tax AOP divided by net revenue
Excluding divested businesses 2014 2013 % change
AOP (pre-tax, GBPm) 199 180 11%
NCCF (GBPbn) 3.6 2.2 64%
FUM (GBPbn) 82.5 73.9 12%
Operating environment
Investment markets in the UK and Europe have been volatile during 2014 and uncertainty remains around the global economic
recovery. We have seen increased popularity of risk-adjusted absolute return asset classes as investors look for alternative investment
options to attain positive returns. Equity asset classes remain more attractive than bond markets in an ongoing low interest rate
environment. Within the equity asset classes, we have experienced strong flows as well as strong returns from our non-UK funds.
The regulatory environment in the UK continues to favour our business model and we are well positioned to take advantage of the new
pension changes that were outlined in the 2014 Budget, effective from April 2015. The increased flexibility and changes in the charging
basis of the UK platform market have resulted in higher levels of registration and re-registration of non-insurance wrapped business for
both the industry and our own business.
In our International business and European operations fund values and revenues in sterling terms were reduced by the strength of
sterling against the US dollar in the first half and against the euro over the year.
Business developments
2014 has been a pivotal year during which we have made significant progress in transforming our business and in becoming a vertically-
integrated wealth and asset management business. We also successfully rebranded from Skandia to Old Mutual Wealth. Our integrated
customer proposition encompasses advice, asset management, and platform and protection products.
We completed the acquisition of discretionary investment manager Quilter Cheviot for a consideration of up to GBP585 million on
25 February 2015, which gives us all the components we need to become a fully vertically-integrated wealth management business.
Quilter Cheviot performed in line with expectations. Funds under management at the end of 2014 were at GBP16.7 billion, 10% higher
than prior year. NCCF was GBP1.1 billion (2013: GBP1.1 billion). In line with our 12%-15% RoE target, Quilter Cheviot will enhance
the long-term return profile of the Group, arising from the core profitability of the business together with the expense, revenue and other
synergies.
Following the acquisition of Intrinsic in July 2014, the business is now integrated into Old Mutual Wealth and we are well placed to
capitalise on the RDR-driven trend towards restricted adviser and financial planners. Our UK Platform, personal protection products and
elements of the OMGI fund range have been added to Intrinsic's product panel for its 930 restricted advisers (2013: 699). Intrinsic's
total adviser count was 3,050 at 2014 year end.
In December 2014, we also acquired the remaining 50% stake in Intrinsic Cirilium Investment Company Limited (ICICL) from Henderson
Global Investors. Full ownership of ICICL provides a customer proposition that integrates advice, asset management, platform and
wealth solutions and is an excellent addition to the products we manage on behalf of our customers.
During the year, we made significant progress in simplifying our operations to focus on a select number of core growth markets and we
reduced our operational and regulatory risk exposure in the process. We completed the sale of Skandia Poland to Vienna Insurance
Group, the sale of Skandia Liechtenstein to Aspecta Assurance International AG and the sale of the German and Austrian businesses to
Heidelberger Leben Group for an aggregated consideration of EUR290 million (GBP230 million). The sale of our businesses in France and
Luxembourg to APICIL completed on 2 February 2015.
Within OMGI, the addition of new teams and fund managers covering European and Asian equities, and Fixed Income Absolute Return
has further broadened our product range and asset management capability. We are also developing our stewardship capability as part
of our Responsible Investment practice. OMGI is now available on all major distribution platforms in the UK and its success over the
past year was recognised at the 2014 Investment Week Fund Manager of the Year Awards, where it was awarded Global Group of the
Year.
WealthSelect was launched successfully in the UK. The majority of WealthSelect customers are investing in our Managed Portfolio
Service (MPS) offering and 74% are choosing an active investment portfolio. We continue to review the funds available to enhance the
proposition and offer financial advisers and customers access to the very best fund managers at a highly competitive price.
In H2 2014 we launched our Silk Life Plan product in our Asian markets focussing on high net worth customers. The on-boarding
process takes time given the complexity of the target customer base, but we see a strong pipeline of business to complete during the
first half of 2015.
In the UK we are continuing to progress our IT transformation via our outsourcing contract with IFDS, which is expected to boost product
capability and lower our cost base from 2017 onwards. During 2014, the project spend was GBP59 million (2013: GBP20 million). The
project is now in the build phase and we expect the spend in 2015 to be higher than 2014.
AOP results
Old Mutual Wealth AOP increased by 5% to GBP227 million (2013: GBP217 million) through strong growth in our asset management
and UK Platform businesses offset by the reduction in AOP following the divestments of some of our European businesses. On a like-
for-like basis, AOP increased by 11%. Profits from our invest & grow business, increased by 18% to GBP98 million over the year.
Profits excluding the divested businesses over the second half of 2014 were similar to those of the first half.
OMGI delivered GBP33 million (including GBP2 million from Cirilium) of profit in 2014, more than double the prior period (2013: GBP15
million) with the operating margin improving from 15% to 25% as FUM rose. We have seen strong net inflows into our higher margin
Alternatives and Equities desks with some outflows from lower margin sub-advised funds and from the Global Strategic Bond Fund.
UK Platform had strong profit growth to GBP19 million (2013: GBP13 million) reflecting higher FUM over 2014.
Profits from our International business reduced by 24% to GBP37 million (2013: GBP49 million) with exchange movements reducing
fund-based income, whilst the cost base is largely in sterling. The cost of implementing 'Wealth Interactive' combined with the cost of
recapturing our financial reinsurance and other one-off costs has also reduced profit compared with 2013. These costs are not expected
to recur in future years.
Europe Open book increased profits to GBP26 million, 18% higher than prior period (2013: GBP22 million), on the back of strong net
flows in Italy.
Excluding our divested European business from both periods, our Heritage business maintained its profitability in line with prior year
(2013: GBP78 million) despite the reduction in FUM as the book runs off.
Overall, the combined operating margin for Old Mutual Wealth remained stable over the year at 36% (2013: 36%).
Net client cash flow (NCCF)
NCCF of GBP3.7 billion in 2014 was 61% higher than prior period (2013: GBP2.3 billion) with strong sales in OMGI, UK Platform and
Italy. Our open book businesses produced NCCF of GBP4.8 billion in 2014, 37% higher than 2013.
OMGI NCCF of GBP2.5 billion was significantly higher than prior year (2013: GBP0.7 billion) with a strong performance across most
funds. The Global Equity Absolute Return fund was the top selling fund this year with GBP1.4 billion of net flows, demonstrating its
popularity with investors as equity markets remain volatile. The UK Alpha fund was the next most popular investment choice in 2014
with net flows of over GBP0.8 billion. Cirilium generated net flows of GBP179 million in H2 2014 reflecting our 50% stake between 1 July
2014 and 30 November 2014 and our 100% stake in December 2014 (total net inflows in H2 2014 were GBP302 million). Over GBP0.8
billion of NCCF in 2014 into Old Mutual Global Investors was via our UK Platform (2013: GBP0.3 billion). WealthSelect NCCF has been
encouraging, delivering above expectations with GBP0.7 billion NCCF since its launch in February 2014.
UK Platform delivered NCCF of GBP2.0 billion, 17% lower than prior year (2013: GBP2.4 billion). Sales are 9% higher than prior year at
GBP5.1 billion but we have experienced increased outflows during 2014 as a consequence of increased re-registration activity in the
market.
International NCCF of GBP0.3 billion was 40% lower than prior year (2013: GBP0.5 billion). NCCF in all regions, except the UK
remained positive, despite challenging regulatory environments.
Within our Europe Open business, NCCF of GBP0.7 billion was 40% above prior year (2013: GBP0.5 billion) following an exceptional
second half in Italy. Sales in Italy were 33% higher than prior year as we continue to expand our network of strategic distribution
partners.
NCCF in our Heritage businesses had a net outflow of GBP1.1 billion, flat on prior year, reflecting the continued success of the retention
strategies in place throughout the business. Excluding the divested business, Heritage NCCF was 15% better than prior year as
surrender rates reduced to 10% (2013: 12%), following our continued strategic focus on asset retention.
The inter-company elimination of NCCF, which measures how much of OMGI's flows are sourced through other Old Mutual Wealth
businesses, is GBP0.7 billion, up from GBP0.6 billion in 2013 and demonstrates our growing vertical integration.
Funds under management (FUM)
Funds under management rose by 5% to GBP82.5 billion at the end of 2014 due to good fund performance and strong NCCF, despite
volatile market conditions. Excluding divested operations FUM grew by 12%. UK Platform assets were GBP30.8 billion, up 13% since
the start of the year (December 2013: GBP27.3 billion). OMGI FUM, including Cirilium, was GBP21.0 billion, up 31% on the start of the
year (December 2013: GBP16.0 billion). OMGI FUM now represents 25% of total Old Mutual Wealth FUM. Investment performance
remains good, with 70% of OMGI core funds in the first quartile over a three year period and a total of 84% of funds above the median.
Gross sales
Gross sales increased by 11% compared to the prior period to GBP16.0 billion (2013: GBP14.4 billion) with strong performances by
OMGI and the UK Platform.
OMGI gross sales of GBP9.2 billion were 22% higher than prior year (2013: GBP7.6 billion), reflecting strong sales performance through
UK and international third parties and improving sales penetration from UK Platform. We saw strong flows into our Alternative
investment desk with sales over three times higher than last year and in particular our Global Equity Absolute Return fund has
generated sales of GBP1.7 billion over 2014. Sales in the UK equity asset classes were significantly higher than prior year driven by
strong sales of GBP1.1 billion into our UK Alpha fund. Our multi-asset Spectrum fund range delivered GBP0.6 billion of sales in the year
and sales into WealthSelect were GBP0.8 billion in 2014.
UK Platform sales of GBP5.1 billion were 9% above prior year (2013: GBP4.7 billion). ISA sales were particularly impressive, benefiting
from the increased ISA allowances and were 21% up on prior year. Our personal pension sales were 14% higher than prior year and
are well-positioned to benefit from the Budget changes coming into effect in 2015. New sales and transfers through the UK Platform into
OMGI were GBP1.8 billion (2013: GBP0.8 billion). Protection sales of enhanced critical illness products measured on an APE basis
improved by 11%.
International cross-border sales of GBP1.8 billion were 4% lower than prior year (2013: GBP1.9 billion). Sales in the UK and South
Africa were higher than prior year. The Far East saw lower sales, but improved during the second half of 2014 as sales recovered
following improvement in regional equity markets and strengthening investor confidence at the midpoint of the year.
Within our Europe Open business, sales in Italy of GBP1.2 billion were 33% ahead of prior year (2013: GBP0.9 billion). In France, sales
of GBP0.3 billion were 5% above prior year.
Heritage top-ups on existing business, excluding the divested European businesses, were down 10% from prior year to GBP0.3 billion,
as closed books of business ran off and new flows moved to our core offerings.
Outlook
We have made significant progress in transforming our business in 2014. Given stable markets, we continue to target GBP270 million
of pre-tax AOP for 2015 before earnings from Quilter Cheviot.
Following our acquisition of Quilter Cheviot we will enhance our range of tailored investment services for the growing high net worth
customer segment and offer further opportunities for our existing customer base.
We have already seen good growth in 2014 following the addition of our UK Platform products to the Intrinsic restricted advice panel
and we anticipate this will continue into 2015. We expect sales of our protection products through Intrinsic to gain traction and further
grow our business. We launched our Practice Buy-Out initiative in early 2015 which will encourage retention, as well as grow our
adviser network. Opportunities to further scale our model will be assessed as they arise.
Within OMGI, the recent addition of new teams and fund managers reflects our continued desire to broaden our product range. We
expect continued development of our asset management capabilities, in particular through a focus on our offshore distribution strategy
and the inclusion of Cirilium.
WealthSelect is demonstrating popularity and performance as an investment solution and we anticipate that momentum will continue
into 2015.
In the UK Platform we have removed our pension drawdown fee and minimum platform charge to ensure we are competitive and well-
positioned to attract new investment from customers looking to take advantage of the new pension withdrawal rules that come into effect
in April 2015.
With Wealth Interactive now implemented in our International business, we are able to deliver flexible and user-friendly products on an
efficient platform, whilst adapting to the challenging regulatory environments in which we operate. We expect our Silk Life Plan to boost
sales volumes within our Asian markets. We launched the Wealth Management Plan on 1 January 2015 in Hong Kong, to comply with
the new regulation in the region. We obtained an offshore insurance exemption in Florida in 2014 which we expect to generate sales in
Florida to non-resident nationals (typically Latin American clients).
Our earnings profile will continue to shift to our new modern source of profits and away from our heritage businesses. We believe we
have the right business model to drive substantial growth earnings and value.
Old Mutual Wealth data tables
Adjusted operating profit (GBPm) 2014 2013 % change
Invest & Grow markets
UK Platform 19 13 46%
UK Other(1) 9 6 50%
International 37 49 (24%)
Old Mutual Global Investors(2) 33 15 120%
Total Invest & Grow 98 83 18%
Manage for Value markets
Europe – open book(3) 26 22 18%
Heritage business(4) 103 112 (8%)
Total Manage for Value 129 134 (4%)
Total Old Mutual Wealth 227 217 5%
(1) Includes Protection, Series 6 pensions, UK Institutional business and Intrinsic profits
(2) Old Mutual Global Investors includes GBP2 million Cirilium profit in 2014
(3) Includes business written in France, Italy and Poland
(4) Includes UK Heritage and Europe Heritage book (Germany, Austria, Switzerland and Liechtenstein)
Gross sales and funds under management (GBPbn)
Net flows
Market and as % of
FUM Gross Gross other FUM opening
1-Jan-14 sales outflows Net flows movements 31-Dec-14 FUM
Invest & Grow markets
UK Platform(1) 27.3 5.1 (3.1) 2.0 1.5 30.8 7%
UK Other(2) 5.6 0.8 (0.8) - 0.4 6.0 -
International 15.0 1.9 (1.6) 0.3 0.3 15.6 2%
Old Mutual Global Investors(3)(4)(5) 16.0 9.2 (6.7) 2.5 2.5 21.0 16%
Total Invest & Grow 63.9 17.0 (12.2) 4.8 4.7 73.4 8%
Manage for Value markets
Europe - open book(6) 6.6 1.5 (0.8) 0.7 (0.6) 6.7 11%
Heritage business(7) 15.4 0.6 (1.7) (1.1) (3.9) 10.4 (7%)
Total Manage for Value(8) 22.0 2.1 (2.5) (0.4) (4.5) 17.1 (2%)
Elimination of intra-Group assets(4)(9) (7.4) (3.1) 2.4 (0.7) 0.1 (8.0) 9%
Total Old Mutual Wealth 78.5 16.0 (12.3) 3.7 0.3 82.5 5%
Net flows
Market and as % of
FUM Gross Gross other FUM opening
1-Jan-13 sales outflows Net flows movements 31-Dec-13 FUM
Invest & Grow markets
UK Platform(1) 22.6 4.7 (2.3) 2.4 2.3 27.3 11%
UK Other(2) 4.7 0.8 (0.9) (0.1) 1.0 5.6 (2%)
International 13.9 1.9 (1.4) 0.5 0.6 15.0 4%
Old Mutual Global Investors(3)(4)(5) 13.8 7.6 (6.9) 0.7 1.5 16.0 5%
Total Invest & Grow 55.0 15.0 (11.5) 3.5 5.4 63.9 6%
Manage for Value markets
Europe - open book(6) 5.9 1.3 (0.8) 0.5 0.2 6.6 8%
Heritage business(7) 14.3 0.7 (1.8) (1.1) 2.2 15.4 (8%)
Total Manage for Value 20.2 2.0 (2.6) (0.6) 2.4 22.0 (3%)
Elimination of intra-Group assets(4)(9) (6.0) (2.6) 2.0 (0.6) (0.8) (7.4) 10%
Total Old Mutual Wealth 69.2 14.4 (12.1) 2.3 7.0 78.5 3%
(1) UK Platform FUM excludes intra-Group assets from our International business of GBP1.5 billion in 2014 (2013: GBP1.5 billion)
(2) Includes Protection, Series 6 pensions and UK Institutional business
(3) OMGI includes net flows of GBP0.2 billion and FUM of GBP2.0 billion from the Cirilium fund in 2014. OMGI flows also include Nordic sale-related net
outflows of GBP0.2 billion in 2014 (2013: GBP1.0 billion)
(4) OMGI and intra-Group eliminations include gross inflows from Heritage business of GBP0.5 billion in 2014 (2013: GBP1.2 billion)
(5) OMGI FUM includes GBP0.1 billion of shareholder assets in 2014 (2013: GBP0.1 billion)
(6) Includes business written in France, Italy and Poland
(7) Includes UK Heritage and Europe closed book (Germany, Austria, Switzerland and Liechtenstein)
(8) FUM in 2014 has been reduced by the disposal of the Polish, Austrian and German businesses
(9) Assets and flows managed by OMGI on behalf of other Old Mutual Wealth businesses
Institutional Asset Management
Institutional Asset Management consists of OM Asset Management plc (OMAM), listed on the New York Stock Exchange, and a
Non-US affiliate. Further information is included in the Financial Disclosure Supplement.
Highlights: Old Mutual Asset Management(1) 2014 2013 % change
AOP (pre-tax, USDm) 211 160 32%
Operating margin, before affiliate key employee distributions 40% 35%
Operating margin, after affiliate key employee distributions 33% 30%
Net client cash flows (USDbn) 9.5 10.1 (6%)
Funds under management (USDbn) 221 199 11%
IFRS profit after tax attributable to equity holders of the parent (GBPm) 77 54 43%
(1) 2013 comparatives include Echo Point which was discontinued in Q4 2013
Overview
OMAM generated strong 2014 results in volatile equity markets, including increased profits and FUM growth. U.S. equity markets
performed better than other markets.
Continued low interest rates have supported further growth in asset allocation towards alternatives and equity income for active parts of
institutional portfolios.
The full text of OMAM's 2014 earnings announcement, released at 8.00EST on 27 February 2015, can be accessed via the OMAM
corporate website – http://ir.omam.com/investor-relations/news/
Business developments
On 8 October 2014, the Group announced the pricing of its minority initial public offering ("IPO") of 22,000,000 ordinary shares of OM
Asset Management plc (OMAM), the holding company for the Group's U.S. based institutional asset management business. Shares
began trading on the New York Stock Exchange on 9 October 2014, under ticker symbol "OMAM". An additional 2,231,375 ordinary
shares were sold under the underwriters' greenshoe option. The offering closed on 15 October 2014. As a result, the Group continues
to own approximately 78.8% of OMAM.
In October 2014, OMAM completed a USD60 million purchase of additional ownership interests in an Affiliate.
AOP results and operating margin(1)
OMAM continued to deliver strong profits in 2014. AOP increased by 32% to USD211 million (2013: USD160 million) largely due to increases
in management fees and performance fees. Revenues of USD635 million for the period were 19% higher than 2013 (USD534 million),
resulting primarily from growth in average FUM for the year of 18% and higher performance fees than the comparative period.
Performance fees in the period of USD34 million were up 90% over 2013 (USD18 million). Approximately one-third of performance fees were
driven by exceptional performance in a high-water mark based alternative strategy, with the remainder diversified across a range of
products and Affiliates.
AOP margin before affiliate key employee distributions increased by 5% to 40% as a result of higher management fees and
performance fees driving margin increases at the Affiliates and scale benefits at the holding company. On a post affiliate key employee
distributions basis, reported operating margin increased 3% to 33%.
Investment performance
OMAM's aggregate investment performance is reported as weighted by the revenue generated by its products. As of 31 December
2014, assets representing 63%, 66%, and 78% of revenue outperformed benchmarks over the one-, three- and five-year periods (31
December 2013: 71%, 91%, and 82%, 30 September 2014: 66%, 70%, and 81%,). On an asset-weighted basis, over the one-, three-
and five-year periods ended 31 December 2014, 48%, 52% and 64% of assets outperformed benchmarks, compared to 57%, 91% and
85% at 31 December 2013 and 53%, 57%, and 68% at 30 September 2014.
The decline in performance from 31 December 2013 is primarily driven by certain relatively low fee value equity strategies
underperforming their respective benchmarks.
Continued strong investment performance and enhanced distribution capabilities remain key to generating future positive cash flows.
We are pleased with our progress in enhancing distribution capacity through our Global Distribution platform.
Funds under management and net client cash flows
Funds under management and net client cash flows (USDbn)(1) 2014 2013
Opening FUM 198.8 158.4
Gross inflows 32.0 29.4
Gross outflows (20.8) (18.3)
Total client driven net flows 11.2 11.1
Hard asset disposals (1.7) (1.0)
Net client cash flows 9.5 10.1
Disposals (0.4) (1.6)
Market and other 12.9 31.9
Closing FUM 220.8 198.8
(1) 2013 Reported results include Echo Point which was discontinued in Q4 2013
OMAM's FUM grew 11% to USD220.8 billion (31 December 2013: USD198.8 billion) due to USD12.9 billion of market appreciation (contributing
6.5% growth) and USD9.5 billion of positive net client cash flows (contributing 4.8% growth). Positive net client cash flows were particularly
strong in the fourth quarter (USD3.8 billion), contributing a USD20.0 million positive impact to annualised revenue.
OMAM's FUM consists of long-term investment products diversified across U.S. equities (39.6%), global & non-U.S. equities (38.0%),
fixed income (6.9%) and alternative, real estate & timber investments (15.5%).
Gross inflows totaled USD32.0 billion (2013: USD29.4 billion), with flows driven by global equities, emerging markets equities, international
equities, U.S. dividend focus equities, U.S. mid cap value equities, and real estate assets. Gross inflows of USD13.1 billion were from new
client accounts.
Gross outflows totaled USD22.5 billion (2013: USD19.3 billion), driven by U.S. large cap value and international equities. Gross outflows of
USD1.7 billion relate to investment-driven hard asset disposals by Heitman, OMAM's real estate manager.
The OMAM Global Distribution initiative raised USD5.5 billion in total assets funded in OMAM affiliates in 2014 as we continued to work
with our Affiliates to expand their non-U.S. client base in key markets and jurisdictions around the world. Non-U.S. clients currently
account for approximately 20% of FUM (31 December 2013: 19%).
Outlook
Our business remains focused on pursuing growth initiatives, including developing capabilities in multi-asset class, LDI and global/non-
U.S. equities and further penetration of non-US markets through our Global Distribution initiative, as well as growth opportunities
through partnerships with at-scale asset management boutiques with strong investment and executive talent and a vision to enhance
and expand their business.
OMAM announced its inaugural quarterly dividend of USD0.08 per share based on a 25% pay out on 2014 Economic Net Income (ENI) of
USD1.26 per share.
Non-US affiliate
Underperformance in 2013 and some senior personnel turnover resulted in net outflows during the year of GBP6.3 billion. FUM now
stands at GBP32.3 billion. Investment performance in 2014 has improved meaningfully relative to 2013, with 80% of portfolios beating
their benchmarks on an asset weighted basis compared to 26% in 2013. The longer term track records also remain strong across the
product line for 3 year, 5 year and longer periods. The business has now completed a re-organisation to provide stable management
and investment teams going forward and future succession. It is confident that it now has the right platform, products and performance
going forward, although a risk remains for further outflows due to the delayed impact of the legacy issues on certain client mandates.
NON-CORE BUSINESS – BERMUDA
Business Strategy and development
Bermuda has maintained its strategic focus on risk reduction while managing for value. Investment returns, policyholder surrenders and
the success of hedging strategies have contributed to a significant reduction in capital requirements and approval from the Bermuda
regulator to release USD218 million of capital in 2014 (following a release of USD550 million in 2013). Hedging strategies are focused on
managing the risk associated with policies with Guaranteed Minimum Accumulation Benefits (GMABs), primarily Universal Guarantee
Options (UGOs).
Policyholder surrender experience
There was a decrease in surrender experience in 2014 compared to 2013. This was expected, and reflected the resumption of more
normal levels of surrenders following the completion of policyholder top-ups in relation to UGOs that reached their fifth year anniversary.
Fifth year anniversaries commenced in 2012 and ended in the first half of 2013. The value of surrenders in 2014 was USD316 million
(2013: USD1,210 million). Analysis below illustrates how the UGO policy surrender experience around the fifth anniversary period
significantly reduced the size of the UGO book and related risk exposure:
2014 2013 2012 2011
OM Bermuda policy count
Policies with UGO 8,668 9,940 17,207 27,820
Other policies 2,024 2,895 4,768 7,008
Total 10,692 12,835 21,975 34,828
Decrease (versus prior year) (17%) (42%) (37%) (14%)
Bermuda Guarantees
All policies with UGOs provide policyholders with a Capital Return Guarantee of 120% of their original investment value at the 10 year
anniversary date. In addition, there is a Highest Anniversary Value (HAV) feature whereby certain policyholders are guaranteed the
highest policy value at any preceding anniversary date. The UGO features, including the HAV features, mature on the 10 year
anniversaries of these policies in 2017 and 2018. Other policies under administration have less onerous guarantees which do not give
rise to significant volatility and risk.
120% Capital Return Guarantee
On an account value basis, at 31 December 2014, 78% of the policies with UGOs had a value below the 120% Capital Return
Guarantee (31 December 2013: 91%). In May 2014, the business implemented a dynamic tail hedging strategy in respect of the UGO
policies with the 120% Capital Return Guarantee. This approach replaced the previous 50% dynamic hedging strategy in protecting the
company from significant market losses by hedging the risk of equity and foreign exchange exposures.
The dynamic tail hedging strategy systematically adjusts the hedge coverage in response to market movements by progressively
increasing (or decreasing) hedge coverage as markets fall (or rise) compared with the constant coverage ratio that the 50% dynamic
hedging strategy previously employed.
Tail hedging provides improved protection against equity and foreign exchange exposures and eases the liquidity strains required to
support a hedging program under normal market conditions. Economic capital requirements are comparable under the two approaches.
An increased volatility of earnings may be experienced under the dynamic tail hedging approach.
Dynamic tail hedging coverage was 16% of exposures as at 31 December 2014, at which time the median account value to invested
premium ratio was in the region of 106%. The tail hedging approach would increase coverage toward 100% if policy values fell below
72% of invested premiums.
Highest Anniversary Value feature
On an account value basis, at 31 December 2014, 85% of UGO policies have the HAV feature (31 December 2013: 86%).
In order to hedge the equity and currency risks associated with the HAV, structured "look-back" options (HAV Options) were acquired in
Q2 2013 for the 10-year risk associated with the HAV feature of the Hong Kong policies. The HAV Options protect against markets
rising above the 120% guarantee and subsequently falling. It was not considered economical to purchase a hedge for the non-Hong
Kong UGO GMAB HAV exposure as this exposure represented less than 10% of the UGO GMAB book. The HAV Options are
performing as expected with an HAV coverage ratio of 102% on the whole book as at 31 December 2014.
Hedging strategies are under constant review and the approach to manage the 120% Capital Return Guarantees may be expected to
evolve as the 10 year anniversary period approaches in 2017 and 2018.
Abridged statement of IFRS financial position
The statement of financial position illustrates the excess assets backing the liabilities of the Bermuda business.
USDm 2014 2013 % change
Assets
Cash and hedge collateral 58 103 (44%)
Treasuries - 62 (100%)
Group Seed investments 260 260 -
Inter-company loan notes 297 466 (36%)
Other assets 15 32 (53%)
Total Assets(1) 630 923 (32%)
Liabilities
GMAB reserves 82 84 (2%)
Other liabilities 149 222 (33%)
Total Liabilities(1) 231 306 (25%)
Total Equity 399 617 (35%)
(1) Total assets and liabilities excludes separate account assets and liabilities of USD975 million (2013: USD1,234 million)
Funding requirements can be met by drawing down the inter-company loan notes which are structured in tranches, allowing capital and
treasury management flexibility. Cash funding is typically required to fund operating costs, "Other policies" surrenders, and hedging
activity.
The Treasury portfolio was liquidated in December 2014 to fund the capital repatriation of USD58 million approved by the Bermuda
regulator.
At 31 December 2014, liabilities relating to the 120% Capital Guarantee and HAV of USD78 million (2013: USD79 million) are included in the
GMAB reserves with USD66 million (2013: USD66 million) attributable to the 120% Capital Guarantees and USD12 million (2013: USD13 million)
attributable to the HAV guarantees. Other liabilities primarily relate to less onerous products with market related guarantees.
Capital position and outlook
The table illustrates the reduced capital and capital requirements of the business:
OM Bermuda statutory capital surplus (USDm) 2014 2013
Capital 387 604
Capital requirements 295 418
Surplus 92 186
Cover (times requirements) 1.3 1.4
Statutory capital of USD387 million compares to IFRS equity of USD399 million, adjusted for certain inadmissible assets. Statutory capital
reduced to USD387 million as at 31 December 2014 (31 December 2013: USD604 million) following Bermuda Monetary Authority (BMA)
approval to the release of USD218 million of capital in H2 2014. Of the amount released, USD58 million was in the form of cash and USD160
million by the cancellation of inter-company loan notes. At 31 December 2014 the BMA statutory capital requirement was USD295 million
(2013: USD418 million).
The reduction in statutory capital cover to 1.3 times at 31 December 2014 (31 December 2013:1.4 times) reflects the release of capital
and reduction in capital requirements as the risk profile of the business has improved.
The 2014 release of capital followed similar BMA approval in 2013 for the release of a total USD550 million of capital. The reduced level of
capital and capital requirements is consistent with the reducing size of the remaining liabilities and the effectiveness of the de-risking
actions undertaken.
In view of the slower run off of the book after the fifth year policy anniversaries completed in 2013 and lower overall business levels, we
do not anticipate further sizeable capital releases in the run-up to the 10 year policy anniversaries in 2017 and 2018, when further
guarantee top-ups are required. The Company's economic capital is calculated to withstand a 1-in-200 stress event.
IFRS results of Old Mutual Bermuda
Old Mutual Bermuda was closed to new business in March 2009, subsequently it has been reported as a non-core business and as
such its results continue to be excluded from the Group's IFRS AOP. However, interest paid by OM plc in relation to the inter-company
loan from Bermuda is charged in determining the Group's AOP.
IFRS post-tax profit for the period was USD1 million (2013: USD51 million profit). The higher profit for 2013 was mainly due to a favourable
guarantee performance, attributable to improved interest rates, reduced equity volatility, and favourable surrender experience, and non-
recurring substantial net realized gains on the liquidation of the bond portfolio.
Sponsor
Merrill Lynch South Africa (Pty) Ltd
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