Wrap Text
Old Mutual plc announcement of new strategy and preliminary results for the year ended 31 December 2015
OLD MUTUAL PLC
ISIN CODE: GB00B77J0862
JSE SHARE CODE: OML
NSX SHARE CODE: OLM
ISSUER CODE: OLOML
NEWS RELEASE
Ref: 178/16
11 March 2016
Old Mutual plc announcement of new strategy and preliminary results for the year
ended 31 December 2015
Strong financial performance
- Pre-tax adjusted operating profit (AOP) of GBP1.7 billion up 11% in constant currency, up 4% in reported currency
- AOP earnings per share 19.3p up 15% in constant currency, 8% in reported currency
- Second interim dividend of 6.25p flat versus prior year, with a total dividend of 8.9p up 2% (up 25% in rand)
- Net client cash flow of GBP6.6 billion, GBP(1.5 billion) including Rogge which is now held for sale
- FUM (excluding Rogge) at GBP303.8 billion up 8% in constant currency, 6% in reported currency
- GBP945 million net free surplus generated (2014: GBP897 million)
- Group RoE 14.2%, well within target range of 12%-15%
- Solvency II surplus of GBP1.6 billion with ratio of 135%, excluding surplus of GBP0.8 billion from Old Mutual Emerging Markets and Nedbank
- IFRS profit after tax distributable to equity holders of the parent of GBP614 million, up 5% in reported currency
New strategy to separate underlying businesses and unlock value
- Four strong businesses with combined pre-tax operating profits of GBP1.8 billion
- Old Mutual Emerging Markets, Old Mutual Wealth, Nedbank and OM Asset Management to be separated
- Managed separation expected to be materially completed by end of 2018
- New capital management policy; intention to reduce Group holding company debt materially; phased reduction of central costs
Bruce Hemphill, Group Chief Executive, commented:
"The strategy we have announced today sets out a bold new course to unlock value currently trapped within the Group structure.
"We have four strong businesses that can reach their full potential by freeing them from the costs and constraints of the Group. As you can see
from our results, these businesses are performing strongly, have excellent competitive positions in sizeable markets and the underlying growth
potential to flourish independently.
"Our new strategy will allow each business to have simpler access to capital markets to fund its growth more easily and be valued more
appropriately, with more straight forward regulatory arrangements. We are announcing today a strategy that will allow us to release the potential
within the Group for the benefit of all its stakeholders for many years to come.
"There is likely to be a range of external influences on future Group reported earnings including slower economic growth, exchange rates and
equity market volatility and how we execute the managed separation. We nevertheless believe that our four strong businesses are well placed to
continue to perform strongly in their domestic markets."
Patrick O'Sullivan, Chairman, commented:
"Old Mutual is an iconic South African institution with a heritage of which it remains justifiably proud. From its roots as the premier financial
services group in South Africa, it has evolved through the listing in London to reach a point today where we have four strong businesses.
"After much careful thought, we have taken the important decision that the best interests of shareholders will be served by enabling these
businesses to chart independent courses over the medium term. We owe a considerable debt to the loyal staff whose efforts have shaped the
evolution of the Group. I am sure that they, customers and shareholders alike will recognise the logic behind our decision and can look forward to
the opportunity to create long term-shareholder value in the next phase of the evolution of Old Mutual."
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 3 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 is treated as a non-
core and discontinued operation in the AOP disclosure. As such it is 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.
- MCEV information is subject to departures from MCEV Principles (Copyright© Stichting CFO Forum Foundation 2008) due to the
use of the government bond yield curve in the majority of Emerging Markets.
Cautionary statement
This announcement contains forward-looking statements relating to certain of Old Mutual plc's plans and its current goals and
expectations relating to its future financial condition, performance and results. By their nature, all forward-looking statements involve risk
and uncertainty because they relate to future events and circumstances that are beyond Old Mutual plc's control, including, among other
things, global, and UK and South African, domestic, economic and business conditions, market-related risks such as fluctuations in
interest rates and exchange rates, policies and actions of regulatory authorities, the impact of competition, inflation, deflation, the timing
and impact of other uncertainties, 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 11:30 am GMT/UK time (1:30 pm 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 84429151#:
UK/International +44 20 3139 4830
US +1 718 873 9077
South Africa +27 21 672 4008
Playback (available for 30 days from 11 March 2016), using pass-code 667344#:
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 2015 and 2014, are also available from the Company's website.
- Presentation slides
- Appendix slides
- Financial Disclosure Supplement
- MCEV Supplementary information
- Solvency II and Economic Capital position
Sterling exchange rates
Appreciation / (depreciation) of
2015 2014 local currency against sterling
Average Rate 19.52 17.87 (9%)
South African Rand Closing Rate 22.82 18.00 (27%)
US Dollar Average Rate 1.53 1.65 7%
Closing Rate 1.47 1.56 6%
Group Review
2014
Group highlights(1) (constant 2014 (as
2015 currency) change reported) change
Adjusted operating profit (pre-tax, GBPm) 1,663 1,496 11% 1,605 4%
Adjusted operating earnings per share (pence) 19.3p 16.8p 15% 17.9p 8%
IFRS profit after tax distributable to equity holders of the parent (GBPm)(2) 614 523 17% 582 5%
Return on equity(3) 14.2% 13.3% 90bps
Adjusted net asset value per share (pence)(4) 178.9p 191.3p (6%) 221.9p (19%)
Gross sales (GBPbn) 31.8 25.5 25% 26.3 21%
Net client cash flow (GBPbn) (1.5) 5.2 (129%) 4.9 (131%)
Net client cash flow (excluding Rogge) (GBPbn) 6.6 11.5 (43%) 11.2 (41%)
Group customers (millions) 18.9 17.5 8%
Funds under management (GBPbn) 327.9 314.3 4% 319.4 3%
Funds under management (excluding Rogge) (GBPbn) 303.8 282.0 8% 287.1 6%
Total dividend for the year (pence) 8.9p 8.7p 2%
(1) The figures in the table are in respect of core continuing operations only, unless otherwise stated
(2) A full reconciliation of IFRS profit to AOP is shown in Part 2 of this announcement
(3) Group ROE is calculated as AOP (post-tax and NCI) divided by average ordinary shareholders' equity (i.e. excluding the perpetual
preferred callable securities). It excludes non-core operations
(4) The adjusted Group NAV per ordinary share uses 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 other assets
are included at IFRS NAV
Overview
A strong underlying financial performance
This has been a strong underlying financial performance by Old Mutual, with continued operational delivery and further investment for
growth in our business units. Net client cash flow (NCCF) for the Group, excluding Rogge, which we agreed to sell to Allianz Global
Investors on 8 February 2016, was GBP6.6 billion. Gross sales grew by 21% to GBP31.8 billion, with funds under management at GBP303.8 billion
(excluding Rogge), up 6% from the previous year. AOP in constant currency grew 11% to GBP1.7 billion or 4% in reported currency.
All of our business units performed well in 2015. Old Mutual Emerging Markets (OMEM) delivered a strong performance with AOP up 9%
to R12.0 billion. Nedbank's headline earnings were up 9.6% to R10.8 billion. Old Mutual Wealth had a very good year with AOP of GBP307
million, achieving the AOP GBP270 million target we set in 2012 (excluding Quilter Cheviot profits). OM Asset Management produced a solid
performance against backdrop of volatile markets in the second half of the year with profits up 9% to $229 million, including an exceptional
performance fee of $19 million. Following a long period of operational improvements, the performance of the underlying businesses, allied
to stronger balance sheets, mean they are now ready for the next stage of their development.
Strategic Review
New strategy to separate underlying businesses and unlock value
Following the appointment of Bruce Hemphill as Group Chief Executive, we initiated a strategic review of the Group.
The review has reached the following conclusions:
- The Group has undergone substantial change in recent years, completing a successful programme of simplifying the business,
focusing on customers and core competencies, operational improvement and reducing risk through lowering of debt, and
investment in governance and controls. We set our capital management policy to support this agenda.
- The four underlying businesses — Old Mutual Emerging Markets (OMEM), Nedbank, Old Mutual Wealth (OMW) and OM Asset
Management (OMAM) – have benefited from significant investment and each has strong growth prospects in sizeable markets,
with excellent competitive positions, strong balance sheets and rigorous governance. There are, however, limited tangible
synergies between the businesses.
- The evolving regulatory environment in Europe and South Africa is adding a degree of additional cost, complexity and constraints.
- The current Group structure also inhibits the efficient funding of future growth plans for the individual businesses, restricting them
from realising their full potential.
- These factors prevent shareholders from benefiting from the full value of the underlying businesses.
Decisions following the Strategic Review
As a result, we have decided that the long-term interests of the Group's shareholders and other stakeholders will be best served by Old
Mutual separating the four businesses – OMEM, Nedbank, OMW and OMAM – from each other.
The managed separation of the Group will be effected in a manner that maximises value to shareholders over time. Nedbank and OMAM
are already publicly traded and the managed separation may involve equity market activity for other subsidiaries as well.
Going forward, Old Mutual plc's primary role will be to implement the separation of the businesses. This will include:
- Working with the business units in delivering enhanced performance relative to their peer groups
- Stewardship of the managed separation process, balancing value, cost, time and risk
- Managing Group debt obligations, central cost reductions and distributions to shareholders
- Fulfilling Old Mutual plc's ongoing regulatory obligations.
Following completion of the managed separation and at an appropriate point in the future, the Group, in its current structure, will no longer
exist.
Continuing relationship with Nedbank
Old Mutual and Nedbank recognise that their commercial relationship continues to be a source of value underpinning successful
collaboration activities in both South Africa and the Rest of Africa. It is therefore intended that the strategic relationship between Nedbank
and OMEM will continue following the managed separation. Old Mutual and Nedbank remain committed to achieving the previously
announced 2017 pre-tax synergies target of R1 billion. However, it is agreed that a majority shareholding in Nedbank is not necessary to
achieve either party's strategic objectives.
In time, Old Mutual envisages reducing its interest in Nedbank to an appropriate strategic minority position to underpin the future
commercial relationship. The exact mechanism to achieve any reduction in Old Mutual's shareholding has yet to be finally determined.
Old Mutual currently envisages reducing its shareholding in Nedbank primarily by way of a distribution of Nedbank shares to the
shareholders of Old Mutual in an orderly manner and at an appropriate time in the context of the managed separation and does not intend
to sell any part of its shareholding in Nedbank to a new strategic investor. It is currently intended that, apart from the strategic minority
shareholding in Nedbank to be held by Old Mutual, the remainder of the Nedbank shareholder base will be widely held by the time the
managed separation has been completed.
The boards of directors and management teams of Old Mutual and Nedbank are working closely together to determine the most effective
method and appropriate timing to effect the managed separation, in a way that safeguards the stability and integrity of both Nedbank and
the South African financial services sector, including determining the level of the strategic minority shareholding that Old Mutual will hold
in Nedbank on an ongoing basis post the managed separation.
Capital management policy
In the recent past, the Board pursued a progressive dividend policy, consistent with our strategy, having regard to the overall capital
requirements, liquidity and profitability and targeted a dividend cover in the range of 2.0 to 2.25 times AOP earnings. The policy set our
interim dividend at 30% of the prior year total.
In light of the conclusions of the strategic review, we will be adopting a capital management policy which provides appropriate flexibility for
the period of the managed separation, the costs of the process as well as providing for the significant investment required in each of the
business units.
Accordingly, for the forthcoming period of managed separation, the Board intends to pursue a dividend policy reflecting the operational
cash generation, investment and liquidity needs of the Group as well as the capital requirements of the underlying businesses. We will
target a dividend cover equivalent to 2.5 to 3.5 times Group AOP earnings for each reporting period, with the first interim dividend based
on a cover of 3.0 times Group AOP earnings for that interim period.
During the period of the managed separation, we also intend to reduce the Group holding company's current debt materially, mainly
through asset disposals over time. Subsequently and to the extent that excess capital is generated, the Board will consider further returns
of capital to shareholders.
Intended outcomes of new strategy
The Group's new strategy will seek to unlock and create significant long-term value for shareholders through:
- The phased reduction of plc central costs. In 2015, these costs, gross of recharges, amounted to approximately GBP80m
- Each business delivering enhanced performance relative to its peers and allowing the market to value it appropriately
- Ensuring that each business accounts directly to its shareholders for its level of returns and cash generation from the capital
employed
- All of the businesses having capital structures and dividend policies appropriate for their own strategies. This will allow these
businesses to access their natural shareholder base.
Implementation of the new strategy will remove the conglomerate discount. The enhancement of these businesses will have positive
benefits for their staff, customers, and other stakeholders as well as for the economies and capital markets of the countries in which they
operate. Following the managed separation, the lead regulator for each business unit will then be the same as the local regulator.
Management Arrangements
Two factors will be critical to the successful managed separation:
- Executive talent to lead the process; and
- Appropriate incentives to execute the new strategy.
We are pleased to announce executive changes to align our talent to our new strategy.
Paul Hanratty has agreed to continue to play an important role in the managed separation. As previously announced, Paul will step down
as COO and Executive Director on 12 March 2016. He will then focus on establishing a structure for the managed separation processes
until the end of May and be an adviser to Bruce until September 2016, when he formally leaves the Group. Thereafter, Paul will become
an independent consultant who will work with Old Mutual as an external adviser. Paul's knowledge and wisdom will be invaluable as we
work through a very complex set of decisions. As a result of this change, Ralph Mupita, Chief Executive of Old Mutual Emerging Markets,
will now report directly to Bruce Hemphill.
In addition, Rex Tomlinson will join our Group Executive Committee as Group Chief of Staff and will report to Bruce. Rex will drive the
changes required to operationalise our strategy by working with our business units and other stakeholders. Rex brings a wealth of
business experience in a variety of sectors, including five years as Deputy CEO of Liberty Holdings in South Africa and the last five years
as a consultant and Board member.
We have made excellent progress on the Customer, Brand, Digital and Responsible Business agenda over the past few years under the
leadership of Gail Klintworth and her team, with functional best practice introduced. These functions will now be driven from within each
business unit. Gail will steer the handover of these functions and the Positive Futures Plan, and thereafter she will leave the Group to
pursue other opportunities.
Our executive team has worked effectively together to formulate the strategy announced today and will leverage each other's skills and
those of the wider Old Mutual Group in accomplishing it. We will continue to add to and align our executive team to the task ahead and will
make further announcements shortly.
In order to incentivise this team we are also revising our incentive plans to align to the new strategy. We will consult with shareholders
over the coming weeks to discuss the changes required in preparation for a shareholder vote later in the year on a new Directors'
Remuneration Policy.
Next steps
The separation process will involve significant ongoing regulatory and stakeholder engagement. The Group has a range of options
available to it and the feasibility, sequencing and timing of each element will be affected by a mixture of market, regulatory and other
factors. We intend to update shareholders later in 2016 on the strategies of the underlying businesses and give greater clarity on our
preferred route for the managed separation. We expect that the managed separation will be materially completed by the end of 2018 and
will update the market periodically on our progress.
Business review
A varied and challenging macro-economic backdrop
Equity markets in our three largest markets of South Africa, the UK and the US were volatile, performing strongly in the first half before
reversing their gains in the second half. The FTSE 100 finished the year down 5%, the JSE All Share Index up 2% and the S&P 500 down
1%. The rand continued its recent downward trend and fell to record lows in December as low commodity prices and the normalisation of
interest rates in the US saw emerging markets' currencies come under pressure, further exacerbated by the changes in Finance Minister.
The closing year-end rand exchange rate declined 27% against sterling, with the average rate declining 9%. This has had a negative
impact on our sterling reported results.
The macro-economic environment in South Africa remained weak with GDP growing by 1.3%, due to the impact of falling commodity
prices, energy constraints and low business confidence. GDP growth for South Africa for 2016 is currently estimated at 0.7% by the IMF
and there is the possibility that South African sovereign debt could be downgraded to non-investment grade status this year which would
likely lead to further rand weakness and rising inflation and interest rates. Growth in sub-Saharan Africa is estimated to have slowed
slightly during the year to 3.5% (IMF) although it is forecast to increase to 4.0% this year. In the UK, the economy grew by 2.2% in 2015,
while in the US growth was 2.5%.
We have made good progress against our 2015 targets
We targeted an RoE of between 12% and 15% for the Group and we delivered an RoE of 14.2% for 2015. For OMW, we set a number of
targets: an AOP of the equivalent of GBP270m (excluding Quilter Cheviot); an operating margin of 40%; and RoE of 12-15%. In 2015 we
achieved all these targets: OMW's AOP was GBP273 million (excluding Quilter Cheviot), our combined operating margin was 40% and our
RoE was 16.7%. For the Rest of Africa, we set a target of pre-tax AOP representing 15% of Old Mutual South Africa (OMSA) and nine
million customers across OMEM by 2015. Rest of Africa profit represented 13.1% of OMSA's profits, just below the target as a result of
the timing of our African acquisitions and the strong rise in OMSA profits, and had 10.7 million customers across OMEM at the year end.
Old Mutual Emerging Markets
OMEM is a diversified financial services provider, which offers life insurance, property and casualty, asset management, and banking and
lending, predominantly in sub-Saharan Africa. It is very well positioned to take advantage of the increasing demand for retail and
corporate financial services in Africa fuelled by a growing demographic dividend across the continent. OMEM also has a presence in Asia
and Latin America. It continues to defend its leading market position in the established markets of South Africa, Namibia and Zimbabwe,
which together produce 95% of total OMEM profits. Profits have grown at a CAGR of 12.5% over the last three years, with a local credit
rating of AAA and an RoE of 23%. OMEM continues to build its customer base and expand its offering through product innovations and
expanding distribution channels and in 2015 reached 10.7 million customers, up from 9.4 million in 2014, with 4.0 million of these
customers in sub-Saharan Africa, excluding South Africa.
The portfolio outcome of OMEM's businesses is the delivery of high top-line growth, strong cash generation and good returns for
shareholders off a strong South African capital base.
In South Africa, our largest market, we have leading market share positions in life insurance, property and casualty insurance, asset
management and credit solutions. In the retail market, we service clients across the spectrum, from those entering the formal economy
and buying financial services products for the first time up to high net-worth individuals. We do this through our Mass Foundation,
Personal Finance and Wealth segments with these retail businesses making more than 50% of OMEM profits. We also provide a range of
products to business clients through our Corporate segment. We are the leading life insurer in terms of total life Annual Premium
Equivalent (APE) sales and the second-largest property and casualty business (in terms of total gross premiums) through Mutual &
Federal. Old Mutual Investment Group (OMIG) is our leading African-based asset manager that offers a comprehensive range of listed
and unlisted investment capabilities.
In the Rest of Africa, growing demand for financial services is underpinned by long-term, structural factors. We have market leading
businesses in the Southern African Development Community (SADC) region where we offer a range of retail and corporate financial
services products. Our SADC countries, namely Zimbabwe, Swaziland, Botswana, Malawi and Namibia contribute 13% of total OMEM
profits.
In East Africa, we completed the acquisition of a 60.7% stake in UAP in June 2015, which provides OMEM with an excellent platform to
grow in East Africa to become the leading financial services provider in the region. The integration of UAP into the rest of Old Mutual
Kenya is progressing well and we will look to list the combined entity on the Nairobi Stock Exchange in due course. We have made good
progress in merging life and asset management businesses in the region and have started to use our South African property and casualty
capability to improve our underwriting and claims management processes. The acquisition has extended our presence in Kenya to include
Uganda, Tanzania, Rwanda, South Sudan and Democratic Republic of Congo.
In West Africa, we have small but fast-growing businesses in Nigeria and Ghana, alongside a bancassurance relationship with Ecobank
Transnational Incorporated ("Ecobank") in the region.
In Latin America, we provide leading life insurance, investments and asset management solutions to retail and corporate customers in
Colombia and Mexico, supported by AIVA, our Uruguayan-based third party agency channel. In Asia, where we have joint ventures in
India and China, we provide leading life insurance and investments to retail customers, leveraging product and distribution capabilities
from South Africa. In aggregate, our Latin American and Asian businesses contribute 4% of OMEM profits.
Operational Review for 2015
OMEM delivered strong performance in 2015 with AOP up 9% to R12.0 billion, with higher asset-based fees, better underwriting profits,
the consolidation of Old Mutual Finance (OMF) (our specialised branch-based personal loans, transactional banking and credit life
business), and the M&F turnaround partly offset by debt costs and additional investment in IT. Gross sales grew by 17% to R215.5 billion,
with net client cash flow of R34.3 billion, up 61% on the prior year. FUM reached R989.9 billion at the year end.
In South Africa, gross sales were up 21% on the prior year to R162.7 billion, primarily due to excellent asset management flows in OMIG,
unit trust flows in Retail Affluent and two large deals in Corporate.
In Retail Affluent in South Africa, profit was up 11%, with the higher average market levels leading to increased asset-based fees. APE
sales grew by 26% to R3.5 billion, with strong growth in regular premium sales up 28% and with single premium sales growing by 24%.
Non-covered sales were up 26%. We continue to build our distribution capabilities ahead of the implementation of the South African Retail
Distribution Review.
In the Mass Foundation Cluster (MFC) in South Africa, profits rose 14%. APE sales, on a like-for-life basis, were up 10%. The innovative
2-IN-ONE product has seen particularly good growth with sales totalling R1.7 billion since launch in August 2014. During 2015 we entered
into a partnership with Telkom, the South African telecommunications company, which provides the opportunity for its subscribers to opt in
for funeral cover at no cost to the customer. We continue to grow our customer base and now have more than 3.0 million MFC customers,
up from 2.8 million at the end of 2014, and grew our average number of tied advisers in the year to 4,524.
Corporate profits in South Africa grew by 16% due to increased asset-based fees, a strong underwriting result and lower expenses. APE
sales rose 33% primarily due to large corporate deals secured in the second half of the year.
OMIG had a very strong year, with NCCF of R7.3 billion against net outflows of R4.6 billion in 2014. This has been OMIG's best NCCF
performance in the past 12 years and we have seen a continued improvement in investment performance. Profits were down 7%, largely
reflecting one-off investment profits in the prior year.
Property & Casualty (P&C) in South Africa continued to benefit from management actions, with a significant improvement in the
underwriting ratio to 3.1% (2014: 0.9%). Net underwriting profit of R273 million was significantly up (2014: R79 million) due to an improved
claims ratio of 58.1%.
Rest of Africa had a strong year, growing its profits by 31% to R1.4 billion. The main drivers of the profit growth were increased asset
management flows in Malawi, higher P&C profits in Zimbabwe and the strong US dollar exchange rate against the rand, partially offset by
integration costs in East Africa. APE sales were up 41% and non-covered sales up 34%.
During the period, we introduced the successful 2-IN-ONE product from South Africa into Malawi and Namibia and an endowment product
in Kenya, also based on the 2-IN-ONE product. Early sales of both products have been promising. Our West African businesses are
leveraging our bancassurance agreement with Ecobank. In Ghana, Ecobank and Old Mutual officially launched their partnership in May
and sales staff from all 79 Ecobank branches have been trained and are currently selling Old Mutual products. Additionally, we now have
670 advisers in West Africa.
In Asia & Latin America, profits were up marginally due to higher investment income, lower new business strain from bank channel sales
and one-off realised investment gains in Asia, partly offset by lower profits in Latin America due to increased distribution costs and
currency devaluation.
We continue to invest in improving our customer services and have started a R2.6 billion multi-year South African IT transformation
programme which will significantly improve our digital and mobile capability. This is an evolution of our IT strategy and is being managed
as a portfolio of projects in order to mitigate implementation risk.
Our aim is to build an African financial services champion with strong, differentiated franchises, where we can leverage our capabilities in
South Africa to deliver value in the medium term. In South Africa, we will continue to provide a full suite of financial solutions to retail and
corporate customers; strengthening our leading market share positions through investing in distribution, product innovation, technology
and leveraging the strong brand and capital base.
In the Rest of Africa, we will look to build a business that provides leading financial services to retail and corporate customers, primarily
through an integrated offering of life, property and casualty, asset management and retail credit products, giving us scale businesses that
are economically viable in markets that currently have small profit pools. In Latin America and Asia, we aim to build differentiated
franchises, where we leverage product and sales management capabilities we have in Africa, coupled with distribution partnerships we
have in these markets to deliver quality growth, risk and earning diversification and returns in the medium term.
Executing on our strategic intent will result in the delivery of sustainable growth, strong cash generation and good returns for
shareholders. We will use our mature South African business to seed the new growth markets in Africa, which will deliver medium to long
term growth of the business.
Nedbank
Nedbank Group is one of South Africa's four largest banks, offering a wide range of wholesale and retail banking services as well as
insurance, asset management and wealth management. These solutions are offered through four clusters: Nedbank Corporate and
Investment Banking; Nedbank Retail and Business Banking; Nedbank Wealth; and the Rest of Africa division. Nedbank is prudently run
with a large corporate and SME client base, highly regarded risk management and a strong middle market franchise. Nedbank's profits
have grown at an average rate 13% over the last three years. It had a market capitalisation on the JSE of R90.1 billion ($5.7 billion) on 29
February 2016. Old Mutual is a 54% shareholder.
Nedbank's primary market is South Africa: however, it continues to expand into the rest of Africa. Outside South Africa it has a presence
in six countries in the SADC and East Africa region. In West and Central Africa it has a partnership strategy and an approximate 20%
shareholding in Ecobank Transnational Incorporated (ETI), which provides a unique one-bank experience to clients across more than
2,350 branches in 39 countries.
Nedbank has five strategic priorities:
- Client-centred innovation: continuing focus on innovation, supported by more efficient processes.
- Growing transactional banking: this will remain the group's primary focus
- Optimise and Invest: taking an end-to-end view of the group to rationalise spend, maximise efficiencies and invest for growth
- Strategic portfolio tilt: optimise the group's returns through strategic portfolio decisions
- Pan-African banking network: grow the business in the SADC region and fully leverage the Ecobank investment
Operational Review for 2015
Nedbank performed resiliently in 2015 with headline earnings growing 9.6% to R10.8 billion. This was largely achieved through growth in
non-interest revenue (NIR), increased associate income from our investment in ETI and strong cost discipline, partly offset by an increase
in impairments. Earnings growth was stronger in the first half of the year boosted by trading revenues and a weaker base in 2014. In the
second half earnings growth slowed as NIR was impacted by inter alia reduced levels of card-related interchange and increased
impairments in Corporate and Investment Banking.
Diluted headline earnings per share (DHEPS) grew 8.5% to 2,242 cents (2014: 2,066 cents) and diluted earnings per share increased
8.3% to 2,219 cents (2014: 2,049 cents). Excluding associate income from our shareholding in Ecobank and the related funding costs, the
Nedbank's DHEPS increased 4.8%.
Economic profit (EP) increased 19.6% to R2.5 billion relative to a cost of equity of 13.0% (2014: 13.5%). The cost of equity metric is set
annually in advance and therefore the 2015 cost of equity of 13.0% is not reflective of the movements in long bond rates in December
2015. The cost of equity for 2016 is estimated at closer to 15.0% and had this been used throughout 2015, EP would have decreased
41.0%. Return on average ordinary shareholders' equity (ROE) excluding goodwill and ROE declined slightly to 17.0% (2014: 17.2%) and
15.7% (2014: 15.8%), respectively as a result of the lower return on assets (ROA) of 1.25% (2014: 1.27%) while gearing increased slightly
to 12.5 times from 12.4 times.
Nedbank's balance sheet remains strong. Our Basel III common-equity tier 1 (CET1) ratio of 11.3% (2014: 11.6%) continues to be well
within our Basel III 2019 internal target range of 10.5% to 12.5%. The liquidity coverage ratio (LCR) increased to 88.5% and is well above
the 60% requirement in 2015 and the 70% requirement in 2016. Our portfolio of high-quality liquid assets (HQLA) increased to a quarterly
average of R118.0 billion (December 2014: quarterly average R91.4 billion). Nedbank's combined portfolio of LCR-compliant HQLA and
other sources of liquidity amounted to R160.7 billion (2014: R126.1 billion) representing 17.4% (2014: 15.6%) of total assets.
Nedbank is committed to long-term value creation for its stakeholders.
Old Mutual Wealth
Old Mutual Wealth is a leading wealth management business focused on the upper and middle-market in the UK providing advice-driven
investment solutions to financial advisers and customers via a vertically integrated suite of businesses. Our model of integrating advice,
client service and asset and investment management allows Old Mutual Wealth to deliver better end-to-end wealth solutions for our
customers and so higher returns and higher retention of assets for our shareholders. We further benefit from economies of scale from the
cumulative growth of assets once we begin a relationship with clients, and this leads to a defendable long-term operating margin.
Excluding Quilter Cheviot and European divestments CAGR profits have grown by 25% over the last three years.
We have leading operations across the value chain, providing:
- Advice through Intrinsic Financial Services; one of the largest financial adviser networks in the UK with over 3,300 advisers
- Wealth management products and services via Old Mutual Wealth UK; a platform-based business largely servicing affluent
customers through advised multi-channel distribution; and, through Old Mutual International, a cross-border wealth business
focusing on high-net worth individuals
- An investment division, focused on delivering our customers' desired outcomes. We do this through Old Mutual Global Investors, a
leading asset manager with highly rated, experienced portfolio managers and a strong long term track record; and through Quilter
Cheviot, one of the UK's leading discretionary investment managers
Following considerable reforms of both wholesale and retail financial services sectors, covering conduct and capital adequacy, the UK
market presents great opportunities for us as it continues to recover from the global financial crisis. The investable asset pool we are
targeting is estimated to be GBP1.8 trillion.
Significant changes in pension regulation are boosting demand for advice, asset management and drawdown products for the
decumulation stage of retirement provision. Further changes are expected later in 2016 after the review of pension taxation. Old Mutual
Wealth is well positioned to benefit as people consolidate their retirement assets onto platforms offering access to flexible income options.
Operational Review for 2015
Old Mutual Wealth performed strongly in 2015 recording AOP of GBP307 million, an increase of 35%, as we continue to demonstrate the
advantage of the vertically integrated model. In 2012, we set a target of Old Mutual Wealth achieving an AOP of GBP270 million (excluding
Quilter Cheviot which we acquired in February 2015) and it recorded GBP273 million of profit, an increase of 20%. The operating margin for
Old Mutual Wealth increased over the year to 40% (2014: 36%), in line with our target. RoE was 16.7%, ahead of the target range of 12 –
15%. FUM at the year-end was GBP104.4 billion.
Profit growth has been predominantly achieved by revenue growth in our core businesses. Old Mutual Global Investors (OMGI) more than
doubled its profit to GBP71 million (2014: GBP33 million) and the UK Platform AOP grew by 74% to GBP33 million. Quilter Cheviot profits post-
acquisition were GBP34 million for the ten months ownership.
NCCF for the year was GBP6.9 billion, 86% higher than in 2014, 64% higher excluding Quilter Cheviot and the divestments we made in
Europe. At GBP20.8 billion, gross sales were up 30% on the prior year.
OMGI's NCCF of GBP3.5 billion was 40% higher than the previous year, with strong net inflows in key funds: GBP1.6 billion into Global Equity
Absolute Return; GBP1.0 billion into Cirilium; and GBP0.7 billion into UK Alpha. The Rates and Liability Driven Investment team started in
October and FUM has already reached GBP0.5 billion as clients look for alternative investments during equity market volatility. OMGI now
manages 14% of the Platform assets, up from 12% at the end of 2014. WealthSelect has attracted GBP1.0 billion of net flows, taking the
overall FUM to GBP1.7 billion. Since we acquired Quilter Cheviot it has attracted GBP1.0 billion of NCCF.
OMGI FUM increased 18% to GBP24.7 billion and Quilter Cheviot's FUM was GBP17.8 billion at the year end, resulting in 41% of total Old
Mutual Wealth FUM being managed by our asset and investment management businesses.
The UK Platform had NCCF of GBP2.7 billion for the year, 35% up on the prior year. This was driven primarily by net pension sales, up 52%,
as our revamped product range benefitted from the changes in the pensions freedom legislation. Withdrawals from pensions have slowed
in the second half of the year and as such we would expect continued growth in net flows. Sales onto the Platform via Intrinsic have grown
consistently and now account for 25% of all Platform NCCF for the year, while total Platform net flows into OMGI were GBP1.1 billion, up from
GBP0.9 billion in 2014. Intrinsic added another 202 restricted financial planners during the second half of 2015, as part of our agreement with
Sesame Bankhall, bringing the total number of restricted advisers to more than 1,200.
Old Mutual International NCCF of GBP0.7 billion was more than double prior year (2014: GBP0.3 billion). NCCF in all regions, excluding Europe,
is ahead of prior year with South Africa and Latin America performing particularly well.
We are continuing to invest in the future growth of Old Mutual Wealth and our focus will be to embed further the strategy and drive
collaboration and synergies between the business lines. In October 2015, we launched Old Mutual Wealth Private Client Advisers taking
the Old Mutual Wealth brand onto the High Street which will result in deeper levels of integration across the businesses. We have also
launched a financial adviser school, which will take its first cohort of students this year. To help build the Old Mutual Wealth brand in the
UK, we signed an agreement with English Rugby Football Union sponsoring the Autumn rugby internationals from 2016.
We are making a long-term investment in the UK platform market seeking to enhance both customer service and efficiency. The market
and regulatory environment has changed significantly in the last few years and we want to ensure we implement the programme with
minimum impact for advisers, customers and our business. Given our focus on the quality of the delivery, we will need to conduct
extensive testing and utilise a phased deployment for our roll-out. As a result, the expected delivery date has moved from end of 2016 to
H2 2018 for the main part of the Wealth implementation and to 2019 for the Heritage Book. We have spent GBP177 million to date, with GBP97
million in 2015 and now see the project spend to completion of an additional c.GBP250 million. In total over the 6 year period we estimate
that the current plan will cost us around GBP425 million - GBP450 million. We have also recently engaged Accenture to provide programme
management support to review the scope, planning and implementation approach for the programme. We plan to report back on the
programme, as well as the Accenture work at the interims. KPMG have been engaged to provide programme assurance. The
programme is a fundamental business transformation and outsourcing project, bringing significant propositional and business retention
benefits.
We anticipate sales growth of our platform products and the Cirilium fund range as the number of restricted financial planners in our
network increases. We will benefit from a full year's productivity from the additional Sesame Bankhall advisers and expect to grow the
advice network through our Practice Buy-Out initiative. In the run up to tax year end, we will highlight the benefits of our UK Platform
pension offering and support advisers as they seek to maximise one-off funding opportunities for their clients. We are also well positioned
to benefit from the new pension legislation through increased levels of vertical integration via our IncomeSelect proposition.
Within OMGI, we will continue to develop our global distribution channels whilst appraising opportunities for incremental further
development of our asset management capabilities as they arise. We expect positive impacts to our investment performance through the
combined capabilities of OMGI and Quilter Cheviot. Our earning profile will continue to shift to our new modern source of profits and away
from our heritage businesses and we will continue to target an operating margin of c.40% over the medium to long term.
We believe we have the right business model to drive substantial growth, earnings and value.
Institutional Asset Management
OM Asset Management
OM Asset Management (OMAM) is an institutionally driven, active investment management business delivered through seven highly
regarded boutique asset management firms that seek to generate consistent, sustainable alpha for clients around the globe. OMAM was
listed on the US NYSE in 2014 and had a market capitalisation of $1.4 billion on 29th February 2016. Old Mutual is a 65.8% shareholder.
The breadth of our product offering by asset class, geography and investment strategy, as well as our Affiliates' long-term relationships
with institutional clients, enhances our relative earnings stability and provides multiple sources of growth for us. Collectively, our Affiliates
offer over 100 distinct, active investment strategies in U.S., global, international and emerging markets equities, U.S. fixed income, and
alternative investments, including real estate and timber.
In addition, there is significant diversification within each of our Affiliate firms through the breadth of their respective investment
capabilities. Through our Affiliates, we serve a highly diverse investor base in the institutional and sub-advisory channels in the U.S. and
around the world. In addition to a strong U.S. client base, our Affiliates manage assets for clients in 28 countries.
Operational Review for 2015
OMAM produced a solid performance in 2015 against a backdrop of volatile markets in the second half of the year. Profit increased by 9%
to $229 million, including an exceptional performance fee profit of $19 million. OMAM's FUM ended the period at $212.4 billion, down 4%,
from 2014 (31 December 2014: $220.8 billion) due to challenging markets, coupled with $5.1 billion of net client cash outflows. Although
negative, NCCF for the year generated positive annualised revenue of $18.9 million, representing 2.6% of beginning of period run rate
management fee revenue, with inflows in higher fee global/non-US, emerging markets, and alternative products.
Revenues of $712 million for the period were 12% higher than 2014 ($635 million), resulting primarily from growth in average FUM for the
year of 5% and the higher performance fees. AOP margin before affiliate key employee distributions was 38%.
OMAM Affiliates continued to produce stable investment performance during a volatile period in the equity markets, although value-
oriented strategies faced headwinds throughout the year and particularly in the second half of the year.
OMAM remains committed to investing alongside its Affiliates in medium-term organic growth initiatives, including developing capabilities
in multi-asset class, LDI and global/non-U.S. equities and further penetration of specialized and non-U.S. markets through its Global
Distribution initiative. In addition, the company continues to make good progress in identifying and developing relationships with scale
asset management boutiques with strong investment and executive talent and a vision to enhance and expand their business by
partnering with OMAM.
OMAM has the financial resources necessary to execute its growth strategy using existing cash and its revolving credit facility capacity. It
also has a shelf registration filed for debt and equity securities, which facilitates capital markets access.
The volatile market environment so far in 2016 has presented challenges for the asset management industry. However, we believe that
OMAM is well positioned to withstand such market cycles, as its profit share model gives a high level of structural variability to expenses.
Rogge
Rogge had net outflows of GBP8.1 billion in the year, with FUM at GBP24.1 billion down from GBP32.3 billion at the beginning of the year. On 8
February 2016, we agreed to sell Rogge to Allianz Global Investors. We expect the transaction to conclude in the second quarter of 2016.
Bermuda
Old Mutual (Bermuda) Holdings Limited (OMBH), completed the sale of Old Mutual (Bermuda) Ltd (OMB) to Beechwood Bermuda Ltd
(Beechwood) on 31 December 2015. Old Mutual retains the liability in respect of the OMB guaranteed minimum accumulation benefits.
The final GMAB liability matures in August 2018
Responsible Business
In August we launched our Positive Futures Plan which focuses on delivering positive outcomes in financial wellbeing and responsible
investment. Our financial education programmes aim to help people make better financial decisions and, as custodians of our
customers money, we are growing our share of investments in infrastructure and mixed energy projects.
Through our financial wellbeing programmes, we have invested R116 million in financial education and supported 553,000 people
through activities such as educational workshops, financial health assessments and on-line training. The outcome has been that people
are more aware and equipped to manage their personal finances. In 2015 alone, 108,000 people attended our On The Money
workshops and 13,795 learners enrolled in 22 schools supported by our Schools Fund in South Africa.
To date, we have invested R9 billion in affordable housing with over 6,700 houses already built, R57 billion in other infrastructure
projects and committed R61 billion to renewable energy projects. For example, OMIG and Nedbank are supporting the South African
Government's renewable energy programme which is also driving job creation and enterprise development. This is one way we are
supporting the delivery of the National Development Goals.
We invested GBP16.7 million in our local communities through our foundations and trusts which will benefit numerous projects important to
our employees.
Black Economic Empowerment
Old Mutual South Africa achieved Level 2 Broad Based Black Economic Empowerment (BBBEE) status with its highest overall score of
94.92/100 in 5 years, with the score improving by over 5% in those 5 years. OMIG retains its Level 2 BBBEE rating, for the 3rd time in a
row and improved to 88.38 (2014: 88.14). M&F achieved a level 4 BBBEE rating.
Nedbank maintained its level 2 BBBEE contributor status for the sixth consecutive year and once again ranked first amongst its peer group.
Dividend for 2015
A second interim dividend has been declared for the year ended 31 December 2015 of 6.25p per share. Together with the first interim
dividend of 2.65p, this represents a total dividend for the year of 8.9p, an increase of 2% in sterling and 25% in rand.
The second interim dividend will be paid on 29 April 2016. A separate announcement of the related timetable has been issued today.
Adjusted Group NAV per ordinary share
Adjusted Group NAV per ordinary share was 178.9p compared to 221.9p at 31 December 2014. The decrease is largely due to
currency translation losses of 30.6p, a net loss of 14.9p due to adverse movements in the market value of Nedbank and OMAM and a
decrease of 8.6p due to dividend payments, partly offset by an increase due to general business growth and other movements of 12.1p.
Board changes
We were pleased to welcome Vassi Naidoo and Trevor Manuel to the Board as non-executive directors. Mr Naidoo's appointment on 1
May 2015 follows his appointment as Chairman of Nedbank Group Limited and Nedbank Limited. Mr Naidoo sits on the Board Risk and
Nomination and Governance Committees and was previously CEO of Deloitte Southern Africa. Mr Manuel joined the Board on 1 January
2016 and is a member of the Board Risk Committee. He previously served in the South African Government for more than 20 years,
including as Minister of Finance from 1996 to 2009.
Bruce Hemphill joined the Board as Group Chief Executive on 1 November 2015, replacing Julian Roberts, who stepped down from the
Board from 31 October 2015.
Dr Khoza stepped down as non-executive Director at our AGM on 14 May 2015, after serving nearly nine years on our Board. As
previously announced, Paul Hanratty, Chief Operating Officer and an executive director, will step down from the Board from 12 March 2016.
Outlook
Global volatility continues and the outlook for our largest market of South Africa is challenging, with low economic growth likely to lead to
deteriorating credit conditions and more strain on consumers' disposable income. Our businesses in South Africa remain very strong and
we continue to invest in them to strengthen our market leading positions.
OMW in the UK is in a strong position with industry dynamic supporting its growth prospects. OMAM is well positioned to withstand volatile
market cycles, as its profit share model gives a high level of structural variability to expenses.
Nedbank is forecasting growth in DHEPS for 2016 lower than its medium-to-long term target of GDP + CPI + 5%.
We expect 2016 to be a challenging year. We are making significant business transformation and IT investment across the Group. An
extended period of a weaker rand, the currency in which we generate most of our profits, is a significant non-operating determinant on our
reported sterling results. Additionally, with revenues of much of the Group based on fees charged on assets under management, low
market levels in the current year to date may put pressure on revenues.
The opportunity we have, despite tough conditions, at this pivotal moment for Old Mutual, is to capture the potential within the Group to
the benefit of all its stakeholders.
REVIEW OF FINANCIAL PERFORMANCE
AOP Analysis
Financial results in this part are on a reported basis unless otherwise stated
AOP analysis by business unit (GBPm)
2015 2014 % change
Old Mutual Emerging Markets 615 617 -
Nedbank 754 770 (2%)
Old Mutual Wealth 307 227 35%
Institutional Asset Management 149 131 14%
1,825 1,745 5%
Finance costs (83) (78) (6%)
Long-term investment return on excess assets 21 24 (13%)
Interest payable to non-core operations (4) (5) 20%
Corporate costs (57) (55) (4%)
Other net shareholder expenses (39) (26) (50%)
Adjusted operating profit before tax 1,663 1,605 4%
Tax on adjusted operating profit (403) (439) 8%
Adjusted operating profit after tax 1,260 1,166 8%
Non-controlling interests – ordinary shares (310) (280) (11%)
Non-controlling interests – preferred securities (19) (18) (6%)
Adjusted operating profit after tax attributable to ordinary equity holders of the 931 868 7%
parent(1)
Adjusted weighted average number of shares (millions) 4,813 4,845 (1%)
Adjusted operating earnings per share (pence) 19.3 17.9 8%
(1) IFRS profit after tax attributable to equity holders of the parent was GBP614 million for the year ended 31 December 2015 (31 December 2014: GBP582 million).
A full reconciliation of IFRS profit to AOP is presented on the next page
AOP by business unit
Old Mutual Emerging Markets (OMEM) profits rose 9% on a constant currency basis but were flat on a reported basis at GBP615 million,
following good life underwriting results, growth in asset-based revenues, increased ownership of Old Mutual Finance (OMF) (since
September 2014) and the significant improvement in the Property & Casualty underwriting result in South Africa. Life and savings
profits were up 12% in constant currency mainly due to higher asset-based fees, good underwriting results and increased profits in Asia.
OMEM banking and lending profits rose 18% in constant currency, due to the increased profit contribution from the consolidation and
growth of OMF and increased profits from Central African Building Society (CABS) in Zimbabwe. Additional interest costs were incurred
on debt issued in the period.
Nedbank profits increased 7% on a constant currency basis, reflecting a resilient performance in a deteriorating macro environment with
volatile markets and escalating regulatory requirements, but were down 2% in reported currency. Nedbank contributes 91% of the
Group's banking and lending profits and represents 96% of the Group's loans and advances.
Old Mutual Wealth profits rose 35% to GBP307 million, with strong profit growth in Old Mutual Global Investors (OMGI) (up 115%)
benefitting from both vertical integration particularly due to sales in Cirilium, and strong performance of the GEAR and UK Alpha funds
and the first time contribution of Quilter Cheviot which was acquired in February 2015. Excluding Quilter Cheviot, AOP was GBP273
million, exceeding the GBP270 million Old Mutual Wealth profit target announced in 2012.
Institutional Asset Management profits rose strongly as a result of higher performance and management fees. On a constant currency
basis, excluding one-off exceptional performance fees and Rogge, profits remained flat on the prior year.
The long-term investment return (LTIR) on excess assets decreased in 2015 as a result of the impact of the weaker rand and a lower
shareholder asset base following the use of excess assets to fund the acquisition of UAP by Old Mutual Emerging Markets. In constant
currency, LTIR on excess assets decreased 2%.
Finance costs increased largely as a result of the re-financing activity. During November 2015, the Group redeemed a EUR374 million Tier
2 bond and issued a new GBP450 million Tier 2 instrument, with a 10-year bullet maturity and coupon of 7.875%.
Other net shareholder expenses increased to GBP39 million due to the implementation costs for Solvency II. Based on the current
timetable and regulation of Solvency II, the total cost of completion will be up to GBP20 million, of which GBP10 million was incurred as
expected in 2015 and the balance will be incurred in 2016. In addition, Group initiatives of GBP11 million include costs associated with the
incoming Group Chief Executive, partly offset by GBP5 million of foreign exchange gains on dollar investments in the period.
Tax
The AOP effective tax rate (ETR) for the Group has decreased to 24% (2014: 27%), largely as a result of the Old Mutual Emerging
Markets ETR returning to the South African statutory rate of 28% and an increase in lower taxed income at Nedbank.
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 markets in which the International businesses operate. Interest and corporate costs incurred in
the UK can be offset against profits in Old Mutual Wealth UK in the same year.
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% as previously indicated.
IFRS Results
The Group IFRS profit after tax attributable to equity holders of the parent was GBP614 million for 2015 (2014: GBP582 million); mainly as a
result of the increase in IFRS profits at Old Mutual Wealth. Preference and ordinary cash dividends of GBP452 million were paid in the
year (2014: GBP426 million). As at 31 December 2015, the distributable reserves of the parent company, Old Mutual plc, were GBP2.4 billion
(2014: GBP2.5 billion).
Basic earnings per share was 12.7p for the year ended 31 December 2015 compared to 12.4p for the year ended 31 December 2014.
IFRS to AOP Reconciliation year end
December 2015 (GBPm) Old Mutual Institutional Discontinued
Emerging Old Mutual Asset and non-core
Markets Nedbank Wealth Management Other(2) operations Total
Profit/(loss) after tax attributable to
equity holders of the parent 362 309 42 66 (113) (52) 614
Total adjusting items(1) 76 (2) 266 31 (27) - 344
Tax on adjusting items (13) 1 (44) (5) 1 - (60)
Non-controlling interest in adjusting
items (7) (6) - (6) - - (19)
Discontinued and non-core operations - - - - - 52 52
AOP after tax attributable to equity
holders of the parent 418 302 264 86 (139) - 931
IFRS to AOP Reconciliation year end Old Mutual Institutional Discontinued
December 2014 (GBPm) Emerging Old Mutual Asset and non-core
Markets Nedbank Wealth Management Other(2) operations Total
Profit/(loss) after tax attributable to
equity holders of the parent 395 315 (37) 77 (119) (49) 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 attributable to equity
holders of the parent 410 301 179 96 (118) - 868
(1) Full details of the adjustment applied in determining AOP, are set out in note C1 to the Preliminary Financial Statements, which can be found in Part 3 of
this announcement
(2) Principally relates to post-tax central and finance costs
Adjusting items
Old Mutual Emerging Markets
Old Mutual Emerging Markets adjusting items have increased from GBP45 million to GBP76 million. These were attributable to a higher
amortisation of acquired intangibles and PVIF of GBP24 million (2014: GBP10 million), reflecting acquisitions made in the prior period. In
2015, there was a deemed profit of GBP15 million recognised on the additional 50% acquired in African Infrastructure Investment Managers
(AIIM) (in 2014 GBP66 million of deemed profit was recognised in respect of the additional stake acquired in OMF during 2014 and profit on
the sale of the interest in SA Corporate Real Estate). This was offset by reduced short-term fluctuations in investment returns of GBP36
million (2014: GBP59 million).
Old Mutual Wealth
Old Mutual Wealth adjusting items have increased from GBP230 million to GBP266 million. Adjusting items include costs related to the
development of the new Old Mutual Wealth platform capability and outsourcing of the UK business administration of GBP97 million (2014:
GBP60 million), a net loss on disposal of subsidiaries of GBP52 million (2014: GBP70 million) and amortisation of acquired intangibles and
acquired PVIF of GBP94 million (2014: GBP103 million).
Long-term investment returns (LTIR)
LTIR for the Group is marginally down from GBP152 million to GBP150 million. In constant currency, LTIR for the Group is up 8%. Emerging
Markets LTIR increased 10% in local currency due to 6% growth in the South African businesses and 31% in Rest of Africa. The strong
growth in Rest of Africa is due to the increased asset portfolio from recent acquisitions, although this reduced the LTIR from excess
assets which funded the acquisitions. Old Mutual wealth LTIR is flat on prior year at GBP5 million.
LTIR rates across the Group remain unchanged in 2016.
Institutional Asset Management
Institutional Asset Management adjusting items of GBP31 million (2014: GBP40 million) relate to amounts written off on legacy intangible
assets and adjustments in respect of equity plans.
Discontinued and non-core operations
Discontinued and non-core operations include the settlement of the litigation (in May 2015) arising from the disposal of US Life in 2011,
resulting in an expense of GBP21 million (2014: GBP19 million). The OM Bermuda operating loss of GBP31 million reflects the increase in GMAB
liabilities, partially offset by hedging gains due to weaker equity markets and benefits of Forward Start Options (FSO) for volatility
hedging. Given the length of time before the guarantees crystallise the business is being run with a view of minimising cash utilisation
albeit then introducing profit and loss volatility. The programme will be reviewed in the run up to the 10 year anniversary of policies in
2017 and 2018.
Return on Equity and Capital Allocation
Group ROE 2015 (GBPm) Average Return on Average Return on
shareholder shareholder shareholder shareholder
AOP (post- equity excl. equity excl. equity incl. equity incl.
tax & NCI) Intangibles(1) intangibles(2) Intangibles Intangibles
Old Mutual Emerging Markets 418 1,546 27.0% 1,867 22.4%
Nedbank 302 1,670 18.1% 1,906 15.8%
Old Mutual Wealth(5) 264 883 29.9% 2,378 11.1%
Institutional Asset Management 86 15 >100% 614 14.0%
Group Holding Company (139) 2,458(1,3) n/a (193) n/a
Group ROE 931 6,572 14.2%(4) 6,572 14.2%(4)
(1) Business unit ROE calculations exclude the Group share of 'Goodwill and other intangible assets' as reported in the segmental
balance sheet; however these assets are included in the Group ROE
(2) Calculated as AOP post-tax and NCI divided by average shareholders' equity excluding 'goodwill and other intangible assets'.
Group results are quoted including 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
(5) The inter-company loan of GBP566 million raised to acquire Quilter Cheviot has been capitalised in calculating all Old Mutual
Wealth measures
The Group ROE increased by 0.9% to 14.2%, at the upper end of the Group target range of 12% to 15%.
Profit after tax and non-controlling interest grew by 7%, benefitting from growth in Old Mutual Wealth due to a combination of
operational growth and corporate activity.
Average equity was flat at GBP6,572 million (December 2014: GBP6,545 million) as underlying growth in shareholders' equity has been offset
by the negative impact of foreign currency translation effects, losses following European disposals and costs related to the development
of the new Old Mutual Wealth platform capability and outsourcing of the UK business administration. IFRS profits of GBP590 million
(excluding profit attributable to perpetual preferred callable securities) were partially offset by GBP422 million of ordinary dividends,
contributing marginally to the increase in equity.
Average
Shareholder equity including intangibles (GBPm) shareholder AOP
equity post-tax ROE
Old Mutual Emerging Markets
South Africa 1,274 350 27.5%
Rest of Africa 435 49 11.3%
Asia & Latin America 158 19 12.0%
Total Old Mutual Emerging Markets 1,867 418 22.4%
Nedbank 1,906 302 15.8%
Old Mutual Wealth
UK 1,390 132 9.5%
Italy 114 16 14.0%
International 361 49 13.6%
Heritage 513 67 13.1%
Total Old Mutual Wealth 2,378 264 11.1%
Institutional Asset Management 614 86 14.0%
Central expenses (193) (139) n/a
Group ROE 6,572 931 14.2%
Within business units, there are substantial differences in the relative returns on equity and cash remittances reflecting the differing
maturity and investment profile in each business and geography. In the Emerging Markets business for example, Rest of Africa and
Asia and Latin America are building distribution and operational capacity, whereas South Africa has a more mature business profile.
Since 2014, in excess of GBP1.2 billion of capital has been spent on key acquisitions in UK and Africa, of which GBP0.6 billion has been
financed from asset disposals in the US and Europe. The significant recent acquisitions are shown in the table below.
AOP
post-tax Annualised
Returns generated from recent corporate activity at cost (GBPm) (excl. return on
Invested transaction invested
capital costs) capital
Significant acquisitions
Quilter Cheviot (acquired in February 2015) (100%) 585 29 5.9%
Intrinsic/Cirilium (completed in December 2014) (100%) 98 9 9.2%
Ecobank Transnational Incorporated (ETI) (acquired in October 2014) (approximately 20%) 305 26(1) 8.5%
UAP Holdings (UAP) (completed in June 2015) (60.7%) 162 2 2.5%
Capital deployed ROE 1,150 66 6.4%
(1) AOP post-tax (excluding transactions costs) reflects associate income, net of finance costs
Since 2014 we have deployed GBP1.2 billion of capital on acquisitions in structurally attractive markets with good growth prospects.
Looking purely at the acquisitions without the adjacent benefits that are reflected elsewhere, for example the Cirilium profits which are
reflected in OMGI, this capital is currently generating a 6.4% return. Whilst we recognise that returns from acquisitions take some time
to come through, this is well below our target range of 12%-15%, and each business is focused on ensuring that appropriate returns are
delivered. This is the principle that underpins our ongoing focus on operational execution.
The initial integration of Quilter Cheviot and Intrinsic has been completed and UAP is advancing well given the complexity of merging it
with the existing businesses in Kenya. Each relevant business is now focused on ensuring that the return on invested capital matches
the business case for their acquisition and can contribute to enhancing the ROE of the wider business as the growth potential
materialises.
These investments have been in part financed from the proceeds from disposal of European businesses and IPO and subsequent sell
down of OMAM during 2014 and 2015 respectively, set out in the table below.
Proceeds on disposal (post transaction costs)
GBPm
Old Mutual Asset Management sale of shares 340
Proceeds from disposals of European businesses(1) 233
Total proceeds on disposal 573
(1) AOP post-tax and NCI on an annualised basis in European business was GBP38 million in 2014
Free Surplus Generation
Our businesses have generated free surplus of GBP945 million in 2015 (2014: GBP897 million), which represents a conversion rate of 88% of
AOP post-tax and NCI (2014: 91%).
For Old Mutual Emerging Markets 69% (2014: 82%) of the AOP (post-tax and NCI) converted to free surplus. The reduction in the
conversion to free surplus was caused by the one-off impact of aligning the cash profile of the South African regulatory reserves for
Investment Contracts within the Retail Affluent business with IFRS reserving methodology. Significant growth in sales resulted in new
business strain and increased capital requirements.
The Old Mutual Wealth conversion rate is 102% (2014: 92%) despite higher required capital resulting from the growth in the business.
The increase arises from a one-off benefit to free surplus following the repayment of financial reinsurance and a change in the timing of
release of profit to surplus within Old Mutual Wealth's International business.
Nedbank and Institutional Asset Management free surplus is calculated as the AOP (post-tax and NCI) and therefore the conversion
rate is 100% for both businesses.
The analysis below sets out surplus generation between hard currency and emerging market businesses given the remittances and
dividend arrangements set out in the Group's demutualisation agreement.
2015 2014
% of AOP % of AOP
Source of free surplus (GBPm) converted converted
Free surplus to free Free surplus to free
generated surplus generated surplus
Old Mutual Wealth(1) 268 102% 164 92%
Institutional Asset Management(2) 86 100% 96 100%
Total hard currency 354 101% 260 95%
Old Mutual Emerging Markets 289 69% 336 82%
Nedbank(2) 302 100% 301 100%
Total emerging market 591 82% 637 90%
Total before interest and group costs 945 88% 897 91%
(1) Old Mutual Wealth no longer report full MCEV disclosures. Free surplus generation is on a local statutory basis. Comparatives
have been restated
(2) Nedbank and Institutional Asset Management free surplus generated reflects 100% of AOP post-tax and NCI. In 2014, only our share
of their cash dividend was disclosed as free surplus. Comparatives have been restated
Group cash flows (GBPm)
2015 2014
Opening cash and liquid assets at holding company at 1 January 1,003 545
Operational flows
Hard currency free surplus generated 354 260
Old Mutual Wealth business transformation costs (97) (60)
Other cash retained in the businesses (94) (46)
Operational receipts from hard currency businesses 163 154
Emerging market free surplus generated 591 637
Free surplus used for acquisitions (191) (254)
Other cash retained in the businesses (70) (73)
Operational receipts from emerging market businesses 330 310
Corporate costs (57) (55)
Other operational flows (40) 25
Total operational flows 396 434
Capital servicing
Preference dividends (30) (32)
Ordinary cash dividends (426) (411)
Paid to UK register (172) (184)
Paid to SA register (254) (227)
Interest paid (32) (32)
Total servicing of capital (488) (475)
Capital movements
Net debt issue in the period 187 -
Net business unit funding (118) 51
Issue of ordinary shares - (5)
Total capital movements 69 46
Other Group cash movements
Net corporate activity (funded)/received by plc directly (230) 453
Total Group cash movements (230) 453
Closing cash and liquid assets at holding company at 31 December 750 1,003
Operational cash flows
Hard currency free surplus increased to GBP354 million (2014: GBP260 million) reflecting the growth in free surplus for Old Mutual Wealth to
GBP268 million (2014: GBP164 million) consistent with the strong growth in AOP during the year. GBP163 million of the free surplus generated
was remitted to the Group. Surplus retained by Old Mutual Wealth was utilised for business transformation costs (GBP97m) and strategic
initiatives, including the acquisition of AAM Advisory, Sesame Bankhall's Financial Adviser School and the transition of 202 advisers
from Sesame Bankhall Group. Old Mutual Asset Management remitted GBP54 million, reflecting its dividend policy of paying 25% of
Economic Net Income (ENI). OMAM retained GBP32m of surplus as it continues to evaluate potential partnerships.
Emerging market free surplus reduced to GBP591 million (2014: GBP637 million) largely due to the weakening of the rand during the year.
GBP330 million (2014: GBP310 million) of the free surplus was remitted to Group. The amounts retained in 2015 were predominantly used for
acquisitions, including UAP and CGIC, to fund book growth in OMF and the funding requirements of the Latin American, Asian and
African businesses. Nedbank remitted GBP146 million, retaining GBP156 million, reflecting its publicly stated dividend policy.
Other operational flows in 2015 included the repayment of GBP39 million of deposits, held by the Group on behalf of Old Mutual Wealth,
which were transferred back to the business during the year (2014: GBP18m received by the Group).
Servicing of capital
Dividend payments to shareholders of GBP426 million (2014: GBP411 million) have been made in the year to date in relation to the final
dividend for 2014 and the interim dividend for 2015. Of this GBP254 million was paid to shareholders on the SA register in 2015 (2014:
GBP227 million).
Capital movements
In November 2015 the Group completed a GBP450 million bond issuance and redeemed EUR374 million of subordinated notes. Net business
unit funding in 2015 of GBP118 million, primarily reflects the repayment of inter-company loan notes in advance of the sale of Old Mutual
Bermuda to Beechwood in December 2015.
Corporate activity
Cash flows from corporate activity include the payment of GBP566 million to fund the Quilter Cheviot acquisition and litigation settlement of
GBP39 million relating to the disposal of US Life. There were receipts of GBP156 million (net of costs) from the sale in June of OMAM shares
in a secondary offering, and from the disposal of certain European businesses (GBP53 million net of costs) and from other corporate flows
of GBP166 million.
Liquidity
At 31 December 2015, the Group holding company had available liquid assets of GBP750 million (31 December 2014: GBP1,003 million)
invested in cash and near cash instruments, including: money market funds, UK government securities and a liquid corporate bond
portfolio. The Group holding company also has access to an undrawn committed facility of GBP800 million (31 December 2014: GBP800
million). These are considered adequate to support the Group under both normal and stressed conditions. In addition each individual
business also maintains liquidity and credit facilities sufficient to support its normal trading operations and to withstand stress events.
Group debt
Group debt summary(1) 2015 2014
Senior gearing (gross of holding company cash) - IFRS basis 2.1% 2.1%
Total gearing (gross of holding company cash) - IFRS basis 15.8% 13.3%
Book value of debt - IFRS basis (GBPm)(2) 1,731 1,540
Total interest cover(3) 14.0 times 16.8 times
Hard interest cover(3) 4.8 times 4.3 times
(1) Excludes banking-related debt of GBP1,916 million at Nedbank and GBP150 million at Old Mutual Emerging Markets, of which GBP105 million
related to OMF, GBP27 million is held at CABS and GBP18 million is held at Faulu.
(2) Nominal value of debt is GBP1,710 million.
(3) Total interest cover and hard interest cover ratios exclude non-core operations. 2014 FY hard interest cover has been restated (previously 5.0 times)
to exclude Latin America and Asia AOP, as their earnings flow through OMEM and are not considered to be hard currency
Activity and profile of debt outstanding at 31 December 2015
The Group successfully refinanced debt at both Old Mutual plc and OMLAC(SA) during the second half of 2015.
In November, the holding company redeemed its EUR374 million (GBP263 million) Tier 2 bond and issued a new GBP450 million Tier 2 solvency
II compliant instrument, with a 10-year bullet maturity. The holding company has GBP112 million of senior debt maturing in October 2016,
GBP273 million of Tier 1 debt callable in March 2020 and GBP500 million of Tier 2 debt maturing in June 2021.
In October 2015, OMLAC(SA) exercised its option to redeem its R3,000 million Tier 2 debt on the first call date, which was historically
treated as Group holding company debt from a finance cost perspective. During the year, OMLAC(SA) raised R3,175 million (GBP139
million) in fixed rate Tier 2 bonds and R1,825 million (GBP80 million) in floating rate Tier 2 bonds in the South African bond market. All
instruments, including existing R1,000 million (GBP44 million) debt, contribute to overall Group debt. The fixed instruments have first calls
in 2019, 2020, 2022 and 2025, while the floating bonds have a first calls in 2019 and 2020.
Also included within Group debt, OM Asset Management has drawn $90 million (GBP61 million) on a $350 million Revolving Credit Facility
which matures in 2019 and UAP has debt of KES 3,000 million (GBP20 million) maturing in 2016 and 2017, along with $46 million (GBP31
million) maturing in 2016, 2022 and 2023.
During the year, Nedbank redeemed R1,752 million of old-style hybrid debt and R1,048 million of old-style Tier 2 subordinated debt.
This was partially offset by the issuance of R2.26 billion new-style Basel III-compliant Tier 2 subordinated debt instruments.
Principal risks
The Group is exposed to the following principal risks:
- Uncertain global economic conditions
- Political risk
- Strategic execution risk and breadth of regulatory change across the Group
- Currency translation risk, location of capital and sources of remittances
- Credit risk and location of credit risk across the Group
They are closely monitored and overseen by Group and subsidiary management and reported on to the Board on a regular basis.
Overall governance structures are performing in line with the Group Operating Model. Strong reliance is placed on the structures and
processes in place by business unit management and boards. In addition, strategic, systemic and operational risks are considered by
Group management and overseen by the plc Board. These structures and processes, together with businesses that are adequately,
though not excessively, capitalised, provide a solid base to support our business as we pursue our managed separation strategy over
the next few years.
How principal risks have changed over the year
Principal risks have remained broadly similar since the 2014 Annual Report. The following risks were highlighted in the 2014 Annual
Report and are emphasised less or no longer explicitly discussed:
- Power outages in South Africa: South African businesses have navigated through the disruption caused by outages.
- Solvency II: The Solvency II capital coverage ratio remains stable, within the range of expectations relative to last year, and
regulatory decisions on key aspects have been communicated.
- Tax risk and uncertainties: Legacy issues have been satisfactory closed and the Group has a low risk appetite for tax risk.
Regulatory and governance
The Group's existing governance arrangements, which are based on a "strategic controller" model, will be looked at afresh in light of the
outcome of the strategic review announced today. They are likely to evolve in keeping with the intended "active portfolio manager"
model during the implementation phase of the managed separation, which will have impacts in due course on the roles and
memberships of the plc and principal subsidiary boards and various Group functions. The Group and its business units will in the
meantime continue to prepare for the forthcoming regulations, cognisant of the implications of the managed separation and evolving
governance requirements.
Capital management and market communication during the period of the managed separation
As set out in Part 1, the Group will be implementing a capital management policy in respect of returns to shareholders for the period of
the managed separation. We will cease quarterly reporting to shareholders.
REVIEW OF FINANCIAL POSITION
Capital
Group regulatory capital – Financial Groups Directive (FGD) and Solvency II capital position
The Group currently reports its Group solvency and regulatory capital measure in accordance with the EU Financial Groups Directive
(FGD). With effect from 1 January 2016, the Group will measure Group solvency in accordance with the Solvency II Directive.
Accordingly, this is the last time that we will disclose a Group FGD surplus.
The Group's regulatory capital surplus, calculated under the FGD, was GBP1.7 billion at 31 December 2015 (31 December 2014: GBP2.1
billion) representing a statutory cover of 160% (31 December 2014: 164%). The Group Solvency II surplus is GBP1.6 billion at 1 January
2016, representing a Group Solvency II ratio of 135%. The Group's Solvency II result which is based on the standard formula approach,
excludes GBP0.8 billion of surplus from the South African businesses. As expected, this results in a Solvency II ratio that is lower than that
under FGD. Going forward, we will manage the business to target a Group ratio above our early warning threshold of 120%.
Group regulatory capital (GBPbn) FGD Solvency II
31 December 31 December 1 January
2015 2014 2016
Capital resources 4.6 5.4 6.0
Capital requirements 2.9 3.3 4.4
Surplus 1.7 2.1 1.6
Coverage 160% 164% 135%
The fall in cover and the level of the FGD surplus in 2015 is largely due to th acquisitions of Quilter Cheviot and UAP during the period
and increase in capital requirements, partially offset by net debt raised in Old Mutual Emerging Markets, Nedbank and OM plc and due
to the fact that a high proportion of capital resources and requirements are denominated in rand. The rand weakness effectively
improved the ratio by 4% due to a GBP0.8 billion decrease in resources and GBP0.6 billion decrease in requirements at closing rates in line
with sensitivities shown separately.
Composition of FGD capital 2015(1) 2014(2)
GBPbn % GBPbn %
Ordinary equity 3.8 83% 4.8 89%
Other Tier 1 equity 0.4 9% 0.4 7%
Tier 1 Capital 4.2 92% 5.2 96%
Tier 2 Capital 1.4 30% 1.3 24%
Deductions from total capital (1.0) (22%) (1.1) (20%)
Total capital resources 4.6 100% 5.4 100%
Total capital resource requirements 2.9 3.3
Group FGD surplus 1.7 2.1
Coverage ratio 160% 164%
(1) Based on the preliminary estimates. Formal filing due to the Prudential Regulation Authority (PRA) by 30 April 2016
(2) As submitted to the PRA on 30 April 2015
Of the Group FGD resources of GBP4.6 billion, 39% comprises of qualifying debt instruments (totalling GBP1.8 billion) compared to 31% in
2014. The increase in the proportion of debt in regulatory capital compared with the prior year is primarily due to the reduction in
valuation of rand denominated capital resources as a result of the depreciation of the rand and an increase in sterling-denominated
debt. The qualifying debt consists of debt instruments issued at the Group holding company level (including the GBP450m hybrid debt
issued in November 2015), GBP251 million at the Group's South African subsidiary Old Mutual Life Assurance Company (South Africa)
Limited (OMLAC(SA)) and GBP339 million within Group's share of Nedbank. Tier 1 capital instruments are held within the Group holding
company (GBP273 million) and Nedbank (GBP84 million) with all remaining subordinated instruments classified as Tier 2.
The Group Solvency II ratio is resilient to market and non-market stress events.
The table below presents the estimated sensitivity of the Group Solvency II 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 capital resources and capital requirements and consequently the Group Solvency II ratio. In addition, we have
included a non-financial stress assuming 10% of our insurance business in Old Mutual Wealth and Old Mutual Emerging Markets lapses
immediately.
Group Solvency II sensitivities
Solvency II and capital ratio at 1 January 2016 (GBPbn) Capital Group Restricted
requirements Surplus Ratio surplus
Base Solvency II surplus 4.4 1.6 135% 0.9
Equity markets fall by 25% 4.2 1.5 135% 0.7
Impact of 10% of business lapsing immediately(1) 4.2 1.5 135% 0.8
Interest rates rise by 100 basis points 4.4 1.5 135% 0.9
Credit spreads increase by 100 basis points(2) 4.5 1.6 135% 0.8
ZAR:GBP exchange rate depreciates by 30% (R30:GBP1) 3.7 1.6 142% 0.7
ZAR:GBP exchange rate appreciates by 10% (R21:GBP1) 4.8 1.6 132% 0.9
(1) Business lapse sensitivity for Old Mutual Wealth and Old Mutual Emerging Markets only
(2) A 100bps increase in credit spreads is generally assumed to be a one notch downgrade on BBB to BB- rating and two notches
downgrade on lower graded investments
Group capital - Economic Capital
The evolving risk based regulatory capital regimes provide an additional lens through which the economic performance of the
businesses can be viewed. As these regimes become more embedded in the business we will build on the preliminary work undertaken
in 2015 to establish the underlying economic profit of the businesses and their major clusters including by line of business and
geography. Using this as a tool and assessing performance rigorously against peers and market opportunities, we will seek to further
optimise the allocation of capital across the Group. 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 reporting twice a year on risk assessments and
consideration of the impacts of extreme stress scenarios for each business. Given the managed separation, we will assess the
relevance of continuing with EC at a Group level.
At 31 December 2015, the Group Economic Capital surplus was GBP4.6 billion, and the EC cover ratio was 229% (31 December 2014,
GBP5.2 billion, 226%). The decrease in surplus from the prior year is mainly attributable to the depreciation of the rand. Each of the
underlying individual business units have strong cover ratios. This is consistent with the Group's operating model and capital philosophy
which ensures that capital is allocated to where the risks lie.
The Group's Available Financial Resources is the value of assets held by the Group in excess of its economic liabilities. All resources in
the Group are assumed to be fully fungible. Economic Capital at Risk 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.
The Economic Capital position of each of the business units and the Group are presented in the table below. The final Group position
allows for assumed diversification between business units. The business unit positions allow for diversification between entities within
the business unit.
Economic Capital (GBPbn) Other
Old Mutual Business Sum of
Emerging Old Mutual Units and Group Group Group
Markets Nedbank(1) Wealth Adjustments(2) businesses(3) 2015(4) 2014
Available Financial Resources 3.4 1.7 2.0 1.1 8.2 8.2 9.2
Economic Capital at Risk 1.4 1.3 0.9 1.4 5.0 3.6 4.0
Economic Capital Surplus 2.0 0.4 1.1 (0.3) 3.2 4.6 5.2
Economic Capital cover ratio 241% 132% 230% n/a 165% 229% 226%
(1) 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
(2) Other reflects additions for Institutional Asset Management, OM Bermuda, Group specific risks (including currency translation risk
on non-GBP surplus), and adjustments for intra-group transactions
(3) The sum of the Group business position allows for assumed diversification between entities within business units but not between
business units with the business unit
(4) The final Group position allows for assumed diversification between business units. The business unit positions allow for diversification
between entities with the business unit
The table below presents the estimated sensitivity of the Group's Economic Capital under certain standard financial stresses. In
addition, we have included a non-financial stress assuming 10% of our insurance business in Old Mutual Wealth and Old Mutual
Emerging Markets lapses immediately. The results of the sensitivities show that the Group Economic Capital ratio is resilient to market
stresses and non-market events.
Group
Group Economic Capital position at 31 December 2015 (GBPbn) Group EC Group EC
EC at risk Surplus Coverage
Base Economic Capital Position 3.6 4.6 229%
Equity markets fall by 10% 3.5 4.5 228%
Equity markets fall by 25% 3.4 4.2 225%
Impact of 10% of business lapsing immediately(1) 3.5 4.5 229%
Interest rates fall by 100 basis points 3.6 4.7 230%
Interest rates rise by 100 basis points 3.6 4.6 227%
Credit spreads increase by 100 basis points(2) 3.6 4.6 228%
ZAR:GBP exchange rate depreciates by 30% (R30:GBP1) 3.0 4.1 236%
ZAR:GBP exchange rate appreciates by 10% (R21:GBP1) 3.9 4.9 226%
(1) Business lapse sensitivity for Old Mutual Wealth and Old Mutual Emerging Markets only
(2) A 100bps increase in credit spreads is generally assumed a one notch downgrade on BBB to BB- rating and two notches downgrade
on lower graded investments
Group Economic Capital position at 31 Old Mutual Emerging
December 2015 (GBPbn)(1) Markets Nedbank Old Mutual Wealth
EC Surplus EC EC Surplus EC EC EC
Coverage Coverage Surplus Coverage
Base Economic Capital Position 2.0 241% 0.4 132% 1.1 230%
Equity markets fall by 10% 1.9 239% 0.4 131% 1.1 231%
Equity markets fall by 25% 1.8 234% 0.4 129% 1.0 232%
Impact of 10% of business lapsing
1.9 242% n/a n/a 1.1 229%
immediately
Interest rates fall by 100 basis points 2.0 242% 0.4 134% 1.2 234%
Interest rates rise by 100 basis points 2.0 239% 0.4 131% 1.1 226%
Credit spreads increase by 100 basis points 2.0 237% 0.4 131% 1.1 230%
(1) The sensitivities for the purposes of this table are only shown for the three largest business units within the Group
As part of our ongoing stress and scenario testing, we have tested the impact of a downgrade in the investment status of South Africa,
coupled with a deteriorating economic outlook for the rest of the world and related equity market reductions. This stress testing has been
conducted over the three year business planning horizon. The following main parameters were used to stress test our capital, earnings
and cash position:
Equity risk
We assumed significant falls in our major markets in 2016 (South Africa 23%, UK 13%, US 14%) with modest recoveries in the ensuing
two years (10% in total over 2017 and 2018 in South Africa and 5% in the UK and US).
Interest rate risk
We assumed an immediate spike in interest rates in South Africa followed by a modest fall. We assumed that the Prime rate increases to
13.3% in 2016 followed by a fall back to 10.2% by 2018 and the 10 year bond rate increases to 10.9% in 2016 followed by a fall back to
8.7% by 2018.
Credit risk
We assumed a spread widening on corporate bonds in Old Mutual Emerging Markets of 100 basis points. Credit loss ratios in Nedbank
were assumed to increase by an additional 1.6% at their peak in 2017, and by an additional 2.7% on average in Old Mutual Emerging
Markets.
Business risk
We assumed new business in Old Mutual Emerging Markets reduced by 20% and lapses increased by 20%.
Currency risk
We assumed that the rand depreciated against the pound to an average of 29.2 over 2016 with a further depreciation to 33.4 in 2018.
Our stress testing demonstrated that the underlying business units had sufficient capital to withstand these very significant shocks and,
as management actions take effect, the capital positions recover.
The Group Solvency II ratio remains stable due to a combination of the resilience of Old Mutual Wealth and the ability of the restricted
surplus in Old Mutual Emerging Markets and Nedbank to absorb the effects of the shock and the depreciation of the rand. This remains
the case when combining the range of options for the routes we could pursue to give effect to the managed separation. Although the
capital position is resilient, this scenario would materially affect earnings in the business units. The Group dividend flexes within the
dividend policy to accommodate the materially lower earnings.
Further details on the Group's Solvency II and Economic Capital position at 1 January 2016 can be found in the separate disclosure on
the Group's website.
Selected regulated entity solvency statistics
The Group continues to maintain strong local regulatory capital as shown in the table below.
Capital Capital
Local currency Resources Requirements Surplus 2015 2014
OMLAC(SA)(1)(Rbn) 42.1 13.2 28.9 3.2x 3.1x
Mutual & Federal(2)(Rbn) 3.0 2.1 0.9 1.4x 1.8x
Nedbank(3)(Rbn) 70.5 50.1 20.4 1.4x 1.5x
Old Mutual Wealth (GBPbn) 0.5 0.2 0.3 2.2x 2.7x
Bermuda(4)($bn) 0.2 0.2 0.0 1.1x 1.3x
(1) South Africa Statutory Valuation Methods (SVM) in accordance with the FSB requirements
(2) Capital Adequacy Requirement (CAR) in accordance with the FSB requirements
(3) In accordance with Basel III and including unappropriated profits
(4) Enhanced Capital Requirement as set by the Bermuda Monetary Authority
Supplementary financial information (data tables)
Group gross flows and funds under management (FUM) (GBPbn)
Market and Net flows as
FUM Gross Gross other FUM % of opening
1-Jan-15 sales outflows Net flows movements 31-Dec-15 FUM
Old Mutual Emerging Markets 50.3 11.0 (9.2) 1.8 (8.7) 43.4 4%
Retail Affluent 6.9 3.5 (3.1) 0.4 (1.0) 6.3 6%
Mass Foundation - 0.5 (0.2) 0.3 (0.3) - -
Corporate 3.9 2.3 (2.1) 0.2 (1.1) 3.0 5%
OMIG 28.8 2.0 (1.6) 0.4 (4.7) 24.5 1%
Property & Casualty 0.2 - - - (0.1) 0.1 -
Rest of Africa 3.5 0.9 (0.7) 0.2 (0.5) 3.2 6%
Asia & Latin America 7.0 1.8 (1.5) 0.3 (1.0) 6.3 4%
Nedbank 12.6 13.8 (12.6) 1.2 (1.9) 11.9 10%
Old Mutual Wealth 82.5 20.8 (13.9) 6.9 15.0 104.4 8%
Invest and Grow markets(1) 73.4 22.6 (14.4) 8.2 17.6 99.2 11%
Manage for Value markets 17.1 1.4 (1.9) (0.5) (2.7) 13.9 (3%)
Eliminations (8.0) (3.2) 2.4 (0.8) 0.1 (8.7) 10%
Institutional Asset Management 174.0 20.5 (31.9) (11.4) 5.6 168.2 (7%)
OM Asset Management 141.7 17.4 (20.7) (3.3) 5.7 144.1 (2%)
Rogge(2) 32.3 3.1 (11.2) (8.1) (0.1) 24.1 (25%)
Total FUM 319.4 66.1 (67.6) (1.5) 10.0 327.9 -
Market and Net flows as
FUM Gross Gross other FUM % of opening
1-Jan-14 sales outflows Net flows movements 31-Dec-14 FUM
Old Mutual Emerging Markets 48.3 10.4 (9.2) 1.2 0.8 50.3 2%
Retail Affluent 5.7 3.2 (2.9) 0.3 0.9 6.9 5%
Mass Foundation - 0.5 (0.2) 0.3 (0.3) - -
Corporate 3.0 2.1 (1.6) 0.5 0.4 3.9 17%
OMIG 29.1 1.7 (2.0) (0.3) - 28.8 (1%)
Property & Casualty 0.2 - - - - 0.2 -
Rest of Africa 3.1 0.8 (0.7) 0.1 0.3 3.5 3%
Asia & Latin America 7.2 2.1 (1.8) 0.3 (0.5) 7.0 4%
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%
Rogge(2) 35.3 2.0 (8.3) (6.3) 3.3 32.3 (18%)
Total FUM 293.8 60.5 (55.6) 4.9 20.7 319.4 2%
(1) The acquisition of Quilter Cheviot completed in February 2015 Market and other movements include GBP17.5 billion of acquired FUM
(2) Rogge is classified as held for sale
At 31 December 2015, funds under management grew by 2% to GBP327.9 billion compared to those at 31 December 2014. Funds under
management in Old Mutual Wealth increased by 27%, primarily as a result of the acquisition of Quilter Cheviot in February 2015, which
added GBP17.5 billion of funds under management.
For the year to December 2015, net flows as a percentage of opening funds under management for Old Mutual Emerging Markets,
Nedbank and Old Mutual Wealth were higher than in the prior year. Group net flows were negative, largely due to GBP8.1 billion of net
outflows from Rogge. Excluding these outflows, NCCF increased over opening FUM by 2%.
Old Mutual International NCCF was GBP0.7 billion (2014: GBP0.3 billion), the increase reflecting strong growth in NCCF from South Africa and
Latin America to GBP0.5 billion (2014: GBP0.2 billion).
Investment Performance
2015 2014
1 Year 3 Year 5 Year 1 Year 3 Year 5 Year
Old Mutual Emerging Markets - OMIG(1)
Proportion of funds outperforming:
Market index benchmarks(2) 79% 75% 80% 63% 61% 73%
CPI benchmarks(2) 89% 100% 100% 100% 100% 100%
Peer median(2) 52% 55% 44% 63% 44% 56%
Nedbank
South African unitised funds percentage of FUM
ahead of:
Peer median 71% 78% 78% 52% 51% 62%
Old Mutual Wealth(4)- OMGI
Core funds(3)percentage of FUM ahead of:
Market index benchmarks 62% 85% 84% 77% 85% 96%
Peer median 53% 64% 86% 66% 84% 80%
Total funds percentage of FUM ahead of:
Market index benchmarks 62% 83% 77% 70% 80% 88%
Peer median 54% 64% 84% 67% 78% 75%
OM Asset Management
Revenue-weighted performance 60% 83% 92% 63% 66% 78%
Asset-weighted performance 72% 73% 91% 48% 52% 64%
(1) This table represents OMIG managed assets on an end manager basis
(2) From HY 2014 we have changed the basis of our fund performance reporting. Previously it measured the performance of all
clients on an individual basis irrespective of asset weighting; we now measure the performance of key funds representing
more than 80% of assets under management
(3) Core funds exclude sub-advised and non-strategic funds
(4) There are no meaningful investment performance statistics for Quilter Cheviot's discretionary asset management service
Old Mutual Emerging Markets
Old Mutual Investment Group had strong investment performance in 2015 particularly in its South African equity funds, reflected in the
79% outperformance against market index benchmarks on a one year basis and 80% outperformance on a five year basis. Life
products continue to perform strongly against client targets and benchmarks. Institutional products exceeded objectives compared to
benchmarks and peers, whilst retail funds generally outperform the peer group.
Nedbank
The Asset Management division of Nedbank Wealth has had an outstanding year, with excellent fund performance and net inflows. This
has been reflected in 71% outperformance versus peer median on a one year basis and 78% on the two and three year basis and has
resulted in Nedgroup Investments winning both the SA and Offshore Management Company of the Year awards in 2015 at the Annual
Raging Bull Awards.
Nedbank's Best of Breed™ model selects a range of exceptional external managers to partner with and manage funds on behalf of
investors to deliver good long-term performance.
Old Mutual Wealth
Old Mutual Global Investors (OMGI) has good investment performance over one year on AUM weighted basis with over 53% of funds
ahead of median and 62% ahead of market index benchmarks. The one year measure is typically more volatile and we consider a
longer term view of performance more appropriate.
OM Asset Management
The increase in relative performance compared to 31 December 2014 was driven primarily by improvement in U.S. value equity
strategies.
Fund Profile by Investment Type (GBPbn)
2015 2014
Share- Share- Share-
Total FUM holder holder Total FUM holder Share-
(excl. SF) FUM % funds % (excl. SF) FUM % funds holder %
Old Mutual Emerging Markets
Fixed interest 9.4 23% 0.2 9% 14.8 31% 0.2 9%
Equities 15.6 38% 0.6 24% 18.5 39% 0.7 26%
Cash 7.0 17% 1.2 52% 6.2 13% 1.6 59%
Property and Alternatives 9.0 22% 0.4 15% 8.1 17% 0.2 6%
Total 41.0 100% 2.4 100% 47.6 100% 2.7 100%
Retail 20.1 49% - - 22.8 48% - -
Institutional 20.9 51% - - 24.8 52% - -
Total 41.0 100% - - 47.6 100% - -
Nedbank
South African equity 2.4 20% - - 3.2 25% - -
Global/non-S.A equity 1.4 12% - - 1.1 9% - -
Fixed income 0.1 1% - - 0.1 1% - -
Multi-asset 3.3 28% - - 3.4 27% - -
Interest bearing 1.8 15% - - 2.0 16% - -
Money market 1.3 11% - - 1.3 10% - -
Other 1.6 13% - - 1.5 12% - -
Total 11.9 100% - - 12.6 100% - -
Old Mutual Wealth
Fixed interest 23.7 23% 0.2 18% 21.1 26% 0.3 23%
Equities 63.0 61% - - 48.8 60% - -
Cash 7.2 7% 1.0 81% 7.3 9% 0.9 77%
Property and Alternatives 9.3 9% - 1% 4.1 5% - -
103.2 100% 1.2 100% 81.3 100% 1.2 100%
Retail 83.6 81% - - 65.9 81% - -
Institutional 19.6 19% - - 15.4 19% - -
Total 103.2 100% - - 81.3 100% - -
OMAM
Fixed interest 10.0 7% - 5% 9.9 7% - 12%
Equities 109.4 76% - 38% 110.5 78% 0.1 44%
Cash - - - 9% - - - 7%
Property and Alternatives 24.5 17% 0.2 48% 21.2 15% - 37%
Total 143.9 100% 0.2 100% 141.6 100% 0.1 100%
Retail 4.3 3% - - 5.7 4% - -
Institutional 139.6 97% - - 135.9 96% - -
Total 143.9 100% - - 141.6 100% - -
Rogge
Fixed interest 22.6 94% - - 30.0 93% - -
Cash 1.5 6% - - 2.3 7% - -
Total 24.1 100% - - 32.3 100% - -
Retail - - - - - - - -
Institutional 24.1 100% - - 32.3 100% - -
Total 24.1 100% - - 32.3 100% - -
AOP analysis by line of business by geography (GBPm)
2015 2014 % change
Life & Savings
South Africa 421 376 12%
Rest of Africa 34 59 (42%)
Asia & Latin America 11 2 450%
United Kingdom & Rest of World 202 217 (7%)
Total Life & Savings 668 654 2%
Asset Management
South Africa 71 97 (27%)
Rest of Africa 12 6 100%
Asia & Latin America 17 28 (39%)
United States 150 128 17%
United Kingdom & Rest of World 104 36 189%
Total Asset Management 354 295 20%
Banking & Lending
South Africa 703 702 -
Rest of Africa 51 16 219%
United Kingdom & Rest of World (13) 23 (157%)
Total Banking & Lending 741 741 -
Property & Casualty
South Africa 55 48 15%
Rest of Africa 7 7 -
Total Property & Casualty 62 55 13%
Central Activities (162) (140) (16%)
Total adjusted operating profit before tax 1,663 1,605 4%
AOP analysis by line of business (GBPm)
2015 2014 % change
Line of business
Life & Savings 668 654 2%
Asset Management(1 354 295 20%
Banking & Lending(2) 741 741 -
Property & Casualty 62 55 13%
1,825 1,745 5%
Central activities (162) (140) (16%)
Adjusted operating profit before tax 1,663 1,605 4%
(1) Includes Institutional Asset Management, OMGI and Quilter Cheviot, OMEM's and Nedbank's asset management businesses
(2) Includes Nedbank, Old Mutual Specialised Finance (OMSFIN), Faulu in Kenya, Central African Building Society (CABS)
in Zimbabwe and Old Mutual Finance (OMF)
Old Mutual Emerging Markets
Highlights (Rm)
2015 2014 % change
AOP (pre-tax) 12,001 11,033 9%
Gross Sales 215,528 184,999 17%
Covered sales (APE) 12,732 9,706 31%
NCCF (Rbn) 34.3 21.3 61%
FUM (Rbn)(1) 989.9 904.9 9%
IFRS profit after tax attributable to equity holders of the parent 7,067 7,059
(1) FUM is shown on an end manager basis
Operating environment
Old Mutual Emerging Markets delivered a strong set of results in 2015 despite challenging macro-economic conditions across many of
the markets in which we operate. GDP growth across emerging markets fell to 4.0% from initial estimates of 4.7% for 2015 due to lower
commodity prices triggered by a slowing Chinese economy. The much anticipated increase in US interest rates by the US Federal
Reserve contributed to higher net outflows from emerging markets into developed markets.
In South Africa, economic growth slowed during 2015 as a result of electricity supply constraints, a challenging socio-political
environment, lower commodity prices, increased market volatility and weak business and consumer confidence.
Despite the fall in crude oil prices, the Rand continued to decline against major currencies and ended the year 34% weaker against the
US dollar. The depreciation in the Rand was further exacerbated by the changes in the Finance Minister in December. These factors,
combined with severe drought conditions and a negative inflation outlook, led to a 50 basis point increase in the benchmark interest rate
during 2015.
Nevertheless, South African equity markets were strong during the first half of the year reaching all-time highs. These gains were
reversed during the second half of 2015 with the JSE All Share Index ending the year 1.9% up on prior year. Equity markets remain
extremely volatile.
Across the remaining emerging markets, the sharp decline in oil and precious metal prices has negatively impacted government
revenues and economic growth for net exporter countries, resulting in the depreciation of local currencies in Mexico, Colombia and sub-
Saharan African countries against the US dollar. The East African economies proved to be relatively resilient, whilst West Africa
recorded lower than expected economic growth. The Zimbabwean economy continues to slow down amid considerable political
uncertainty and the Zimbabwean stock exchange declined by 29% in 2015. The Kenyan stock exchange was down 21% and the
Nigerian stock exchange was down 17% over the same period.
Latin American economies remained subdued in 2015, due largely to falling commodity prices, the strengthening US dollar and financial
strain from high government debt. However, both Mexican and Colombian economies are expected to continue growing at 2.0%-4.5%
annually, despite the drop in oil prices, depreciating local currencies and global macro-economic turbulence.
China's economic growth continues to slow from historically strong levels of growth to an estimated 6.9% per annum for 2015. India
continues to outperform most markets. Investment markets in India have been strong with sentiment of recovery across several sectors.
The Indian economy expanded 7.3% year-on-year in the last three months of 2015, slowing slightly from the 7.7% growth in the
previous quarter.
Business developments
Expansion across emerging markets
We continue to expand our operations through both acquisitions and organic growth. We have significantly increased our sales force,
continued building strategic partnerships and alliances across emerging markets and have, over the course of the year, developed
several new innovative product offerings.
In the rest of Africa, we completed the acquisition of a majority stake (60.7%) in UAP for R2.9 billion in June 2015. This provides us with
an excellent platform to accelerate growth in Kenya and the East Africa region. The integration of UAP is progressing well and the
leadership structure across the businesses is now in place. There is work underway focusing primarily on the optimisation of the UAP
balance sheet and the management of the property portfolio. Despite profits being down due to the challenging operating environment,
the core business is strong.
In South Africa, Mutual & Federal (M&F) successfully completed the purchase of a further 33.6% interest in Credit Guarantee Insurance
Corporation (CGIC), increasing the total stake to 86%. An offer to acquire the remaining 14% minority interests in CGIC has been
accepted, subject to regulatory approvals. Old Mutual Investment Group (OMIG) also completed a 100% buy-out of African
Infrastructure Investment Managers (AIIM) during the second half of 2015, in which they previously held a 50% stake.
Our West African businesses continue to leverage our bancassurance relationship with Ecobank to grow sales. In Ghana, Ecobank and
Old Mutual officially launched their partnership in May and sales staff from all 79 Ecobank branches have been trained and are now
selling Old Mutual products. The retail mass market distribution channel launched in Nigeria towards the end of 2014 registered good
growth in premiums and customer numbers in 2015.
Rest of Africa's profit contribution is up to 13.1% (2014: 9.8%) as a percentage of South Africa profits. This is below the target of 15%,
as a result of the increased stake in OMF in 2014, stronger than expected life results in South Africa, and timing of the African
acquisitions.
In Latin America, AIVA, our independent distribution channel continues to deliver good results through its third party agency channel in
the Retail Affluent market. In India, distribution via Kotak bank branches continues to grow, further supported by the merger of Kotak
Mahindra Bank with ING Vysya.
We have grown our customer base to more than 10.7 million customers at the end of 2015, with the Rest of Africa representing
approximately 4.0 million of those customers.
Product and business development
Our product innovation and development pipeline has been very active in 2015, with key capabilities being developed that can be
leveraged and replicated across our operations.
In South Africa, Old Mutual Invest, a Tax Free Savings Account (TFSA) was launched in March 2015 as the first mainstream product
offered through direct/digital and intermediated channels resulting in excellent life APE sales of R367 million by the end of 2015. We
have also launched the innovative Old Mutual Money Account to primarily lower-middle income market clients and have already
acquired approximately 55,000 customers. M&F launched two new Property and Casualty products; Motorsure, a standalone vehicle
insurance product; and Prosure in collaboration with Retail Affluent, a comprehensive insurance policy with preferential rates,
exclusively for Old Mutual Greenlight customers.
We entered into a partnership with Telkom Mobile that provides its subscribers with the opportunity to opt in for funeral cover when they
recharge their pre-paid airtime, at no additional cost. This product is just the first of several partnership initiatives intended to drive value
for both organisations.
In Namibia we launched our unique 2-IN-ONE savings plan in May, which was built on innovations introduced in South Africa, and a
Malawi 2-IN-ONE savings plan which offers the mass market proposition that seamlessly develops into an Affluent-type product as the
fund size increases. In Kenya we have seen encouraging sales from a new endowment product called Lengo, which is based on the 2-
IN-ONE savings plan.
In Mexico we launched a regular premium savings and protection product (Old Mutual Crea) for sale through AIVA.
In South Africa, we continue to enhance our customer segmentation in the Affluent markets with a dedicated Wealth offering and are
building new distribution mechanisms in advance of the Retail Distribution Review (RDR). We continue to expand our distribution
footprint in Mass Foundation with its tied adviser force growing by an average of 4% over the year. Sales made through OMF branches
account for 25% of total Mass Foundation Cluster (MFC) covered APE sales, highlighting the effectiveness of this channel. Retail
persistency remains stable with good improvements in MFC on that of the prior year.
In the Rest of Africa, East and West Africa contributed to 16% of the Rest of Africa covered APE sales, up from 12% in the prior year.
Bancassurance sales now account for 18% of total Rest of Africa covered APE sales, nearly twice the proportion of last year. In East
Africa we have grown the retail sales headcount by 75% to 729 advisers. In West Africa we have increased our sales headcount by
85% to 670 advisers.
In India, our business in partnership with Kotak Mahindra Bank has delivered excellent Life APE growth of 69% year-on-year on the
back of strong bank sales and tied agency productivity improvements. Net client cash flow has grown 95% on prior year supported by
strong inflows and business retention initiatives.
Investment performance in South Africa continues to show steady improvement across key equity and multi-asset class funds.
Institutional fund performance and key retail equity and multi-asset class funds have shown good investment performance improvement
and remain generally positioned above peer median and client targets over 1 and 3 years. Our continuing drive to increase the use of
alternative asset class capacity continues to be enhanced with major initiatives in Responsible Investing. We are seeing increasing
linkages and co-ordination in our asset management capabilities, bancassurance skills and product development across Africa.
Group collaboration
We continue to make good progress with increased collaboration amongst our businesses in South Africa and in the rest of Africa. By
deepening Group relationships and growing the existing substantial business flows between them, and through new initiatives, Nedbank
and Old Mutual Emerging Markets (including M&F) have achieved synergies of c. R300 million and are on track to deliver R1 billion pre-
tax synergies by the end of 2017. These include cost-saving initiatives such as the previously announced outsourcing of certain Old
Mutual IT infrastructure functions to Nedbank, generating synergy benefits for both parties, as well as revenue-generating activities in
the retail and wholesale businesses. Synergies achieved in 2015 are roughly 60% revenue-related and 40% cost-related.
Supporting economic transformation in SA
Old Mutual South Africa retained its Level 2 BBBEE status, for the fifth consecutive year with a 6% increase in employment equity score
over the prior year.
The Association of Black Securities and Investment Professionals presented Old Mutual South Africa with the Presidential Award in the
Game Changers category for driving transformation in the financial services sector.
Following the maturity of the 10-year Broad Based Black Economic Empowerment schemes in May 2015, OMEM together with
Nedbank committed R100 million each over 3 years to invest in initiatives aligned to the National Development Plan. Funding has been
extended to WIPHOLD one of our BEE partners, with further initiatives still being investigated with Brimstone and Izingwe. The
WIPHOLD project, aims to support the large scale commercialisation of small-scale agriculture, which seeks to address rural
unemployment, sustainable income generation and food security in the Centane region of the Eastern Cape.
Since it was established in 2007, Masisizane has grown into a self-sustaining fund, with a capital base of R1.0 billion, and plans to
invest R420 million into viable Small Medium and Micro-sized Enterprises by the end of 2017 to further support and enable positive
socio-economic transformation across South Africa. To date, 1,453 jobs have been created through direct enterprise funding and 46,057
jobs through partnerships with Micro-Enterprise Finance Institutions.
Old Mutual is also involved in various funding educational initiatives through the Old Mutual Education Flagship Project, an investment
initiative set up to significantly improve maths and science in underperforming South African public high schools . It will run over seven
years with a total budget of R350 million to support the National Development Plan's aim of improving the South African education
system. This initiative aims to reach 250 schools, with the intention of positively influencing the lives of 250 000 learners.
Old Mutual together with the state-owned National Housing Finance Corporation, has allocated more than R1.3 billion to provide
affordable mortgage loan finance to the lower end of the housing market. Loan instalments will be increased with salary adjustments
rather than interest rate movements, making these loans more affordable for customers than traditional loan finance. Of the R1.3 billion
allocated, R625 million has already been drawn down, with the balance committed for housing still under development.
We remain committed to support responsible business initiatives through our Development Impact Funds, IDEAS Renewable Energy
Fund, Agri Funds and Futuregrowth Impact Funds, in which we are managing in excess of R57 billion. These funds, along with other
infrastructure investments across OMIG, drive socio-economic growth and support financial inclusion in South Africa.
Financial highlights
Pre-tax AOP
OMEM delivered good profit growth of 9% on the prior year benefitting from higher asset-based fees, better life underwriting profits, the
consolidation of OMF, and the turnaround in Property and Casualty's underwriting profits in South Africa. Profit growth in the second half
of 2015 was constrained by a weaker economic environment, lower markets and finance costs on new debt issued. Excluding debt
costs, profits were 11% up on prior year.
By segment
Retail Affluent profits were 11% up, supported by increased asset-based fees from higher average market levels and positive mortality
assumption changes. This was marginally offset by higher new business strain.
MFC profits were 14% ahead of the prior year largely due to the increased ownership of OMF (from September 2014), positive
persistency experience, lower new business strain. The prior year profits were boosted by positive mortality basis changes.
Corporate profits were up 16% mainly due to higher asset-based fees, good underwriting results, and lower expenses as the business
benefits from the EB transformation (Future Fit) programme.
OMIG profits were 7% below the prior year, due to 2014 profits being boosted by a one-off gain in the Alternatives boutique. Profits were
further impacted by lower performance fees due to a reduction in fee basis for some SA retail funds. This was partly offset by higher
asset based fees and investment returns in OMSFIN.
In the Rest of Africa, profits were up 31% due to increased asset management profits in Malawi, higher Property & Casualty profits in
Zimbabwe and the consolidation of UAP in the second half of 2015, partly offset by integration costs. Profits in Zimbabwe also benefited
from a stronger US dollar.
Profits in Latin America were down due to increased distribution costs and the effect of weaker local currencies. In Asia, profits were
417% up due to higher investment income, lower new business strain from bank channel sales and one-off realised investment gains.
The Property & Casualty underwriting result in South Africa of R273 million improved significantly from R79 million in 2014. The
improvement is attributable to the strong underwriting performance across all segments, particularly in CGIC following good new
business growth and the absence of the large claims experienced in 2014.
Total Emerging Markets central costs rose 20% on the prior year reflecting the initiation of investment in information technology to
improve customer experience and deliver efficiencies. The IT investment programme is a managed evolution of our IT infrastructure,
and as such being managed as a portfolio of investment projects to mitigate the known risk of big multi-year IT programmes. Central
costs include a R61 million increase in Asia and Latin America relating to a provision for a deferred payment to AIVA. The increase was
due to the strengthening of the US dollar.
Debt costs of R296 million were incurred following the issuance of new OMLAC(SA) debt over the last 12 months.
NCCF: Excellent net client cash flows up 61%
NCCF was R13.0 billion up on the prior year mainly due to large non-covered deals secured by Corporate and OMIG, and improved
asset management flows in Retail Affluent and Rest of Africa, partly offset by a number of large terminations of low margin mandates in
both Corporate and Retail Affluent. OMIG experienced large client outflows in the prior year. Latin America NCCF was 14% up on the
prior year in constant currency due to good Corporate flows in Mexico.
Gross sales: Strong growth in Corporate and OMIG
Gross sales increased by 17% to R215.5 billion due to good non-covered sales growth of 15% (up from R134.5 billion to R154.5 billion)
as well as exceptional covered sales growth of 31%.
The strong growth in non-covered sales in South Africa was mainly due to large deals secured by Corporate and good Retail Affluent
unit trust and OMIG sales. In the Rest of Africa non-covered sales are 34% up on the prior year mainly due to strong asset management
flows in Namibia and Malawi. Latin America sales were 1% up in constant currency, with increased voluntary pension sales, offset by
lower mandatory pension sales, as a result of strong competition from the government social security system.
Covered APE sales: Excellent growth in Retail sales in South Africa, Rest of Africa and Asia
Covered sales increased by 31% to R12.7 billion underpinned by a 25% growth in sales in South Africa, with strong single premium
sales in Corporate and good recurring premium sales in Retail Affluent and MFC. Excellent sales performances were seen in Rest of
Africa and Asia.
Retail Affluent delivered single premium sales growth of 24% supported by strong XtraMAX and Wealth sales. Recurring premium sales
have increased by 28% largely due to the success of the new TFSA product. Recurring risk sales were marginally up on the prior year,
and recurring savings sales grew 59%.
MFC sales were up 18% on the prior year following the launch of the new risk offering in late 2014. Sales growth was offset by a partial
reduction in the credit life pricing at the end of 2014 and slower loan sales growth in 2015. MFC sales (excluding the reporting
methodology change and the impact credit life sales in OMF) were 10% up on the prior year.
Corporate sales were 33% up on the prior year due to large single premium sales (including a large CPI-linked annuity deal) secured in
the second half of 2015, supported by strong retail platform Absolute Growth Portfolio sales.
Rest of Africa sales were 41% ahead of the prior year mainly due to strong new business in Malawi, increased adviser numbers and the
inclusion of credit life sales in Zimbabwe, strong corporate sales in Namibia and Nigeria, the net positive impact of currency movements
and the consolidation of UAP.
Latin America sales were up 32% on prior year, supported by growth from the AIVA channel in Mexico as well as improved retail adviser
productivity. Asia sales were 81% ahead of the prior year, driven by strong individual, group and credit term sales in India, supported by
strong internet and broker channel sales in China, which are not expected to repeat following the discontinuation of the internet-based
product.
Property & Casualty: Gross written premiums
Growth of 17% on the prior year was mainly due to the inclusion of UAP (9% up excluding UAP) and good premium growth in South
Africa from both personal and commercial lines, however agricultural premiums fell as a result of the drought conditions.
Rest of Africa gross written premiums (excluding UAP) grew 13%, primarily due to strong new business flows in Zimbabwe following
new marketing campaigns and increased insurance premiums from the CABS mortgage business.
Banking and lending: Responsible growth in loan book
The OMEM banking and lending businesses operate primarily in South Africa (OMF), Zimbabwe (CABS) and Kenya (Faulu). Each of
these businesses is different in the range of products that they offer, with OMF focused on the retail sector and CABS and Faulu
focused on retail and business sectors.
OMF grew its gross loan book by 1% to R10.1 billion, and improved the collections ratio to 92.9% mainly through optimising the
collections process. The reported credit loss ratio improved from 12.4% at the end of 2014 to 10.8%. Non-interest revenue was up 6%
on the prior year mainly due to higher returns earned on non-defaulted loans.
The CABS gross loan book has grown 29% in constant currency, with strong growth in deposits of 27%. The CABS impairment
provisions have been adjusted given the deterioration in the Zimbabwean economic landscape and this resulted in an increase in the
CABS credit loss ratio to 3.1% (2014: 1.1%).
Faulu's gross loan book grew by 15% in constant currency compared to the prior year. There has been increased focus during the year
in growing the deposits, which are up 19% from the prior year. A more cautious approach has been taken with regard to impairment
provisioning, which has marginally increased the credit loss ratio to 1.0% (2014: 0.9%).
Value of new business (VNB) and margins
VNB improved by 24% to R2.4 billion, driven by positive assumption basis changes at year end and higher sales volumes across all
segments. The PVNBP margin was down by 0.1% to 3.3% due to a less profitable mix of business largely offset by the positive impact
of the basis changes. The PVNBP margin in South Africa improved to 3.4% (2014: 3.3%) largely as a result of the significant sales
growth in Retail Affluent and Corporate, further boosted by distribution efficiencies in Retail Affluent. This was offset by lower proportion
of Group Assurance and AGP sales in Namibia and a higher proportion of low margin savings sales in Zimbabwe.
Embedded value:
Operating MCEV earnings (post-tax) increased by 48% to R7.5 billion, resulting in an increase in the Return on Embedded Value
(RoEV) from 9.9% to 13.5%. This was largely due to positive other operating variances, higher expected returns, improved persistency
experience variances and an increase in the value of new business. These were offset by negative operating assumption changes and
higher development costs.
Despite the strong operating earnings for OMEM, the capital cost of the UAP acquisition (the bulk of which relates to non-life business
and is hence not included for MCEV purposes), the repayment of the R3.0 billion subordinated debt issued in 2005 and finance costs in
respected of the subordinated debt raised in 2014 and 2015, contributed to MCEV only increasing by 1% over the year.
Free surplus generated reduced over the period mainly as a result of OMEM's investments in UAP, AIIM and CGIC during the period, as
well as higher new business strain.
Outlook
Sub-Saharan Africa economic growth in 2016 is forecast to be higher than in South Africa, although growth has slowed as global
conditions impact the emerging markets' outlook. Drought conditions in sub-Saharan Africa will continue to affect agriculture yields and
increased inflation in this region is expected.
South Africa
Lower growth forecasts for 2016 to below 1.0% and a rising interest rate cycle will continue to increase financial pressure on the
consumer which may affect persistency and credit losses in the coming years. Higher inflation is expected in 2016 as food prices
increase in response to the drought and the impact of a weaker rand on all imported goods, including grains. The average inflation
forecast for 2016 is slightly above the South African Reserve Bank's 3%-6% target range at 6.2%. Low oil prices will temper the inflation
forecast to some extent, which may support levels of growth in disposable income of our Mass Foundation customers.
Further increases in interest rates are anticipated following a 50 basis points increase announced on 28 January. This, along with rising
taxes, higher water and electricity costs, and possible job losses in struggling sectors will place pressure on consumers over the course
of the year.
The risk of a downgrade of South Africa's sovereign credit rating by rating agencies has increased. Should this materialise, the Rand
could weaken further, causing a more severe inflation and interest cycle than is currently foreseen. Equity market weakness results in
both lower based fee revenue but also lowering confidence in consumer product markets. The tightening overall economic condition
could also lead to worsening credit loss and persistency, particularly in the Mass Foundation business.
Rest of Africa
The economies of Nigeria and Ghana are expected to remain under pressure with higher inflation (9.6% and 17.7%, respectively) as a
result of depreciation of their currencies following the significant fall in oil prices.
In Kenya, the economy is expected to accelerate slightly in 2016 sustained by an accommodating fiscal policy, infrastructure projects
and robust private consumption despite the continuing devaluation of the local currency. We expect that our Kenyan business will
recover from market weakness and further benefit from the integration of UAP.
Asia and Latin America
Annual growth for India is expected to reach 7.5%, the highest in the Asia region. China remains vulnerable to further equity market
volatility and credit losses and is expected to slow down to 6.0% growth per annum over the medium term. We see continued strong
growth opportunities for our Indian business.
Lower commodity prices, an economic deceleration in major trading partners and persistent domestic challenges continues to affect
levels of economic growth in the Latin American region. Colombia remains exposed to lower oil prices and the effects of the drought on
the country threaten to dampen a fragile recovery.
Emerging Markets data tables (Rand)
Adjusted operating profit by cluster (pre-tax, Rm)
2015 2014 % change
Retail Affluent 3,893 3,519 11%
Mass Foundation 2,993 2,629 14%
Corporate 1,522 1,310 16%
OMIG 951 1,027 (7%)
Property & Casualty 273 79 246%
LTIR 1,788 1,714 4%
Central expenses and administration(1) (1,079) (865) (25%)
South Africa 10,341 9,413 10%
Rest of Africa 1,026 834 23%
LTIR 632 484 31%
Central expenses and administration (251) (244) (3%)
Rest of Africa 1,407 1,074 31%
Asia & Latin America 549 546 1%
Debt costs (296) - (100%)
Total Emerging Markets 12,001 11,033 9%
(1) Included in central expenses and administration in South Africa, are costs relating to Asia & Latin America of R111 million (2014: R50 million)
Adjusted operating profit by product (pre-tax, Rm)
2015 2014 % change
Life & Savings(1,2) 8,462 7,529 12%
Asset Management(1,2) 1,430 1,810 (21%)
Banking & Lending(3) 1,266 1,070 18%
Property & Casualty 843 624 35%
Total Emerging Markets 12,001 11,033 9%
(1) With effect from FY 2015, R315 million of central expenses have been re-allocated from Life & Savings to Asset Management. Comparatives have not
been restated. 2014 equivalent was R238 million
(2) Included in asset management AOP is R154 million of profit relating to life-wrapped business invested in OMUT unit trusts. These profits have been
accounted for as covered business for MCEV
(3) Comprises Faulu in Kenya, CABS in Zimbabwe, OMSFIN and OMF in South Africa
Embedded Value (Rm)
2015 2014 % change
PVNBP sales(1) 71,938 57,533 25%
PVNBP margin (%)(1) 3.3% 3.4%
Return on MCEV (RoEV) %(1) 13.5% 9.9%
VNB 2,394 1,938 24%
MCEV operating earnings (post-tax and NCI) 7,529 5,099 48%
(1) No PVNBP is calculated in respect of life APE sales in India, China and Colombia. Latin America is Mexico only
Gross sales and funds under management (Rbn)(1)
Market and Net flows as
FUM Gross Gross other FUM % of opening
1-Jan-15 sales(2) outflows Net flows movements(3) 31-Dec-15 FUM
715.9 162.7 (138.4) 24.3 33.5 773.7 3%
Total South Africa
Retail Affluent 123.8 69.1 (62.2) 6.9 12.0 142.7 6%
Mass Foundation(4) - 9.8 (4.4) 5.4 (5.4) - -
Corporate 71.0 45.2 (40.5) 4.7 (7.5) 68.2 7%
OMIG(4) 518.6 38.6 (31.3) 7.3 34.3 560.2 1%
Property & Casualty 2.5 - - - 0.1 2.6 -
Rest of Africa 62.2 18.1 (13.7) 4.4 5.5 72.1 7%
Asia & Latin America 126.8 34.8 (29.2) 5.6 11.7 144.1 4%
Total Emerging Markets 904.9 215.5 (181.2) 34.3 50.7 989.9 4%
Market and Net flows as
FUM Gross Gross other FUM % of opening
1-Jan-14 sales 2 outflows Net flows movements(3) 31-Dec-14 FUM
661.5 134.4 (120.9) 13.5 40.9 715.9 2%
Total South Africa
Retail Affluent 99.8 57.8 (53.0) 4.8 19.2 123.8 5%
Mass Foundation(4) - 8.7 (4.0) 4.7 (4.7) - -
Corporate 51.9 36.8 (28.2) 8.6 10.5 71.0 17%
OMIG(4) 506.9 31.1 (35.7) (4.6) 16.3 518.6 (1%)
Property & Casualty 2.9 - - - (0.4) 2.5 -
Rest of Africa 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 840.8 184.9 (163.6) 21.3 42.8 904.9 3%
(1) FUM shown on an end manager basis
(2) Gross sales are cash inflows for the period and therefore will include current period recurring premium flows
on policies sold in prior periods
(3) Includes the foreign exchange impact of translating FUM managed outside of South Africa
(4) Mass Foundation gross sales are recorded by segment but all FUM is managed by OMIG
Covered sales - APE (Rm)
Single premium APE Regular premium APE Total APE
By cluster: 2015 2014 % change 2015 2014 % change 2015 2014 % change
Total South Africa 3,527 2,377 48% 6,100 5,354 14% 9,627 7,731 25%
Retail Affluent 1,694 1,370 24% 1,801 1,403 28% 3,495 2,773 26%
Mass Foundation(1,2) 4 3 33% 3,632 3,080 18% 3,636 3,083 18%
Corporate 1,829 1,004 82% 667 871 (23%) 2,496 1,875 33%
Rest of Africa 209 145 44% 879 628 40% 1,088 773 41%
Asia & Latin America(3) 433 377 15% 1,584 825 92% 2,017 1,202 68%
Total Emerging Markets 4,169 2,899 44% 8,563 6,807 26% 12,732 9,706 31%
Single premium APE Regular premium APE Total APE
By product: 2015 2014 % change 2015 2014 % change 2015 2014 % change
Savings 3,711 2,552 45% 4,551 3,568 28% 8,262 6,120 35%
Retail Affluent 1,512 1,201 26% 1,031 650 59% 2,543 1,851 37%
Mass Foundation 4 3 33% 1,645 1,475 12% 1,649 1,478 12%
Corporate 1,569 832 89% 316 454 (30%) 1,885 1,286 47%
Rest of Africa 193 139 38% 485 348 39% 678 487 39%
Asia and Latin America 433 377 15% 1,074 641 68% 1,507 1,018 48%
Protection - - - 4,012 3,239 24% 4,012 3,239 24%
Retail Affluent - - - 770 753 2% 770 753 2%
Mass Foundation - - - 1,987 1,605 24% 1,987 1,605 24%
Corporate - - - 351 417 (16%) 351 417 (16%)
Rest of Africa - - - 394 280 41% 394 280 41%
Asia and Latin America - - - 510 184 177% 510 184 177%
Annuity 458 347 32% - - - 458 347 32%
Retail Affluent 182 169 8% - - - 182 169 8%
Mass Foundation - - - - - - - - -
Corporate 260 172 51% - - - 260 172 51%
Rest of Africa 16 6 167% - - - 16 6 167%
Asia and Latin America - - - - - - - - -
Total Emerging Markets 4,169 2,899 44% 8,563 6,807 26% 12,732 9,706 31%
(1) OMF credit life sales included within Mass Foundation protection sales increased 5% to R275 million (2014: R263 million)
(2) From January 2015, Mass Foundation conformed the recognition basis for APE sales to that of Retail Affluent. The impact
of this change on FY 2014 APE sales is R245 million
(3) Asia & Latin America represents Mexico, Colombia from Q4 2015 only (R51 million APE) and a proportional share of India and China
Non-covered sales (Rm)
Unit trust sales Other non-covered sales Total non-covered sales
2015 2014 % change 2015 2014 % change 2015 2014 % change
South Africa(1,2) 44,000 35,033 26% 71,231 59,416 20% 115,231 94,449 22%
Africa (ex. SA) 6,760 5,801 17% 5,014 2,955 70% 11,774 8,756 34%
Asia & Latin America(3,4) 27,538 31,249 (12%) - - - 27,538 31,249 (12%)
Total Emerging Markets 78,298 72,083 9% 76,245 62,371 22% 154,543 134,454 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 2015 amount to R21,081 million (2014: R15,365 million)
(2) Old Mutual International non-life sales amounting to R5,480 million (2014: R4,971 million) are not included in the OMEM non-life sales
as these sales are reported in Old Mutual Wealth (UK)
(3) AIVA sales amounting to R7,699 million (2014: R2,806 million) are not included in the OMEM non-life sales as these sales are reported
in Old Mutual Wealth (UK)
(4) Represents Colombia and Mexico only
Value of new business (Rm)
2015 2014 % change
Retail Affluent 653 426 53%
Mass Foundation 1,204 1,035 16%
Corporate 333 241 38%
Total South Africa 2,190 1,702 29%
Rest of Africa 257 246 4%
Asia & Latin America(1) (53) (10) (430%)
Total Emerging Markets 2,394 1,938 24%
(1) No VNB is calculated in respect of Life APE sales in India, China and Colombia. Latin America is Mexico only
Old Mutual Emerging Markets banking and lending disclosures
The information presented below is the manner in which the Group currently manages the underlying businesses. Refer to note G1:
Loans and Advances in the Old Mutual plc Annual Financial Statements for full disclosure relating to unsecured retail lending.
Old Mutual Finance (Rm) 2015 2014 % change
Gross loans and advances(1) 10,058 9,928 1%
Performing 7,324 7,437 (2%)
Defaulted 2,824 2,491 13%
Balance sheet impairment provision(2) 2,173 1,975 10%
Impairment coverage ratio(3) 21.6% 19.9% 170bps
Income statement impairments(4) 1,081 1,126 (4%)
Credit loss ratio(5) 10.8% 12.4% (160bps)
Value of loan pay-outs 6,008 6,708 (10%)
Net Interest Income (NII) 1,828 1,693 8%
Non-Interest revenue (NIR) 865 818 6%
Loan disbursal rate (average) 33.4% 33.8% (40bps)
Equity 1,801 1,516 19%
Return on equity(6) 41% 42% (100bps)
Branches 261 259 1%
Staff 2,696 2,463 9%
(1) Gross loans and advances exclude long outstanding loan balances with a gross value of R3,692 million (2014: R2,521 million)
(2) Balance sheet impairment provisions exclude amounts provided for long outstanding loan balances with a value of R3,300 million (2014: R2,276 million)
(3) Impairment coverage ratio is calculated as balance sheet impairment provision over the gross loans and advances balance. This excludes long
outstanding loan balances.
(4) Income statement impairments represent charges relating to performing, defaulted, and long outstanding loans
(5) Credit loss ratio is calculated as income statement impairments (including long outstanding loans) as a percentage of gross loans and advances (excluding
long outstanding loans)
(6) Return on equity is calculated as net profit after tax before capital charges divided by average equity (excluding preference share capital)
CABS (Rm) 2015 2014 % change
Gross loans and advances 9,062 5,311 71%
Balance sheet impairment provision 393 151 160%
Income statement impairments 157 66 138%
Credit loss ratio(1) 3.1% 1.1% 200bps
Net interest income (NII) 753 469 61%
Non-interest revenue (NIR) 535 397 35%
Equity(2) 2,311 1,552 49%
Branches 58 56 4%
Staff 666 483 38%
Faulu (Rm) 2015 2014 % change
Gross loans and advances 2,548 1,868 36%
Balance sheet impairment provision 37 20 85%
Income statement impairments 21 16 31%
Credit loss ratio(1) 1.0% 0.9% 10bps
Net interest income (NII) 286 242 18%
Non-interest revenue (NIR) 37 65 (43%)
Equity(2) 643 484 33%
Branches 41 34 21%
Staff 817 884 (8%)
(1) Credit loss ratios for CABS and Faulu have been calculated on a local currency basis and divides the income statement impairments by gross loans and
advances.
(2) Reflects closing equity balance, including preference share capital
Property & Casualty (Rm)
2015 2014 % change
Gross written premiums 14,297 12,189 17%
South Africa 11,686 10,774 8%
Rest of Africa (excl. OMK-UAP) 1,600 1,415 13%
OMK - UAP 1,011 -
Net earned premiums 10,579 9,457 12%
South Africa 8,866 8,607 3%
Rest of Africa (excl. OMK-UAP) 991 850 17%
OMK - UAP 722 -
Underwriting result 301 138 118%
South Africa 273 79 246%
Rest of Africa (excl. OMK-UAP) 74 59 25%
OMK - UAP (46) -
Underwriting margin (%) 2.9% 1.4% 150bps
South Africa 3.1% 0.9% 220bps
Rest of Africa (excl. OMK-UAP) 11.0% 6.7% 430bps
OMK - UAP (6.4%) -
Claims ratio(1) 57.4% 68.7%
South Africa 58.1% 63.1%
Rest of Africa (excl. OMK-UAP) 51.4% 73.4%
OMK - UAP 57.4% -
Combined ratio 97.1% 98.6%
South Africa 96.9% 99.1%
Rest of Africa (excl. OMK-UAP) 92.0% 93.3%
OMK - UAP 106.4% -
(1) Includes claims administration costs transferred from management expenses
Nedbank
Highlights (Rm)
2015 2014 % change
AOP (pre-tax) 14,729 13,757 7%
Headline earnings 10,831 9,880 10%
Net interest income 23,885 22,961 4%
Non-interest revenue 21,748 20,312 7%
Net interest margin 3.30% 3.52%
Credit loss ratio 0.77% 0.79%
Efficiency ratio (including Associate income) 56.1% 56.5%
Return on Equity 15.7% 15.8%
Return on Equity (excluding goodwill) 17.0% 17.2%
Common equity Tier 1 ratio 11.3% 11.6%
IFRS profit after tax attributable to equity holders of the parent(1) 6,037 5,600 8%
(1) Reflects IFRS profit after tax and non-controlling interest attributable to equity holders of Old Mutual plc (Rm)
The full text of Nedbank's results for the year ended 31 December 2015, released on 2 March 2016, can be accessed on our website
http://www.oldmutual.com/ir/news/viewNews.jsp?newsId_id=28051. The following is an edited extract:
Banking and economic environment
Globally the economic climate remained challenging, with improved growth in developed markets insufficient to offset the effects on
emerging markets of depressed oil and commodity prices and the broader impact of the slowdown in China. Additionally the tightening
of US monetary policy has placed further pressure on emerging markets as capital flows are diverted towards developed markets.
Economic conditions in SA have also deteriorated as reflected by our 2015 gross domestic product (GDP) growth forecast of 1.3%. This
is considerably less than the 2015 GDP growth of 2.5% we had forecast in February 2015. Various factors, including inadequate
infrastructure, economic policy uncertainty, concerns around government debt levels and the drought-related contraction in the
agricultural sector, resulted in the USD/ZAR exchange rate depreciating significantly in 2015, notwithstanding interest rate increases of
50 basis points (bps) and inflation remaining below 6.0%.
These and other factors led to Fitch Ratings downgrading the sovereign ratings to one notch above investment grade at BBB- (from
BBB) with a stable outlook. Moody's sovereign rating of Baa2/P-2 is currently two notches above investment grade and Standard &
Poor's sovereign rating of BBB-/A-3 is one notch above investment grade. Both Moody's and Standard & Poor's revised the outlook on
their ratings from stable to negative, indicating a likelihood of a possible downgrade in the next rating review, which could place
Standard & Poor's sovereign rating of SA at sub-investment grade.
Against this challenging background wholesale credit demand has slowed, but remains ahead of retail demand, as consumers face
increasing pressures from the risk of job losses, high levels of indebtedness, increasing administrative costs and higher interest rates.
Wholesale credit demand continues to be supported by infrastructure-related projects.
Government, business and labour are working together to use the challenging economic environment as a catalyst for increased
collaboration to accelerate the rate of economic growth and job creation and to strengthen public finances. Nedbank has been and will
continue to be an active participant in these discussions.
Review of results
Headline earnings grew 9.6% to a record level of R10,831 million (2014: R9,880 million). This was largely achieved through growth in
non-interest revenue (NIR), strong cost discipline and increased associate income from our investment in Ecobank Transnational
Incorporated (ETI), partly offset by an increase in impairments. Pre-provisioning operating profit (PPOP) increased 7.3% (2014: 3.5%).
Earnings growth was stronger in the first half of the year, boosted by robust trading revenues and a weaker base in 2014. In the second
half earnings growth slowed as NIR was impacted by, among others, reduced levels of card-related interchange and increased
impairments in Corporate and Investment Banking (CIB).
Other comprehensive income benefited from foreign currency translation gains and as a result total profit attributable to equity holders of
the parent increased 22.9% to R12.8 billion.
Diluted headline earnings per share (DHEPS) grew 8.5% to 2,242 cents (2014: 2,066 cents) and diluted basic earnings per share
increased 8.3% to 2,219 cents (2014: 2,049 cents). Excluding associate income from our shareholding in ETI and the related funding
costs, Nedbank's DHEPS increased 4.8%.
Economic profit (EP) increased 19.6% to R2,525 million (2014: R2,112 million) relative to a cost of equity of 13.0% (2014: 13.5%). The
cost of equity metric is set annually in advance and therefore the 2015 cost of equity of 13.0% is not reflective of the movements in long
bond rates in December 2015. The cost of equity for 2016 is estimated at closer to 15.0% and, had this been used throughout 2015, EP
would have decreased 41.0%. Return on average ordinary shareholders' equity (ROE) (excluding goodwill) and ROE declined slightly to
17.0% (2014: 17.2%) and 15.7% (2014: 15.8%), as a result of the lower return on assets (ROA) of 1.25% (2014: 1.27%), while gearing
increased slightly to 12.5 times from 12.4 times.
Nedbank's balance sheet remained strong. Our Basel III common-equity tier 1 (CET1) ratio of 11.3% (2014: 11.6%) continues to be well
within our Basel III 2019 internal target range of 10.5% to 12.5%. The liquidity coverage ratio (LCR) increased to 88.5%, above the 60%
requirement in 2015 and the 70% requirement in 2016. Our portfolio of LCR-compliant, high-quality liquid assets (HQLA) increased to a
fourth-quarter average of R118.0 billion (2014: fourth-quarter average R91.4 billion). Nedbank's combined portfolio of LCR-compliant
HQLA and other sources of quick liquidity amounted to R160.7 billion (2014: R126.1 billion), representing 17.4% (2014: 15.6%) of total
assets.
Net asset value per share continued to increase, growing 9.0% to 15,685 cents (2014: 14,395 cents).
Cluster financial performance
Our business clusters delivered headline earnings growth of 13.2% and an ROE of 19.3% (2014: 19.7%) on an increased average
capital allocation of R59.6 billion (2014: R51.4 billion).
Nedbank CIB's earnings growth of 10.2% was driven by good top-line performance, demonstrating the strength of the underlying
businesses and well managed expenses. This was partly offset by an increase in impairments largely relating to clients impacted by the
downturn in the commodity cycle. PPOP increased 21.9%. The ROE decreased to 22.6% (2014: 27.0%) following a 32.0% increase in
capital allocated. This increase was mainly due to ratings migration across certain portfolios, and the introduction of an industrywide
regulatory capital charge for credit value adjustments (CVA) on over-the-counter (OTC) ZAR derivatives and OTC derivatives with local
counterparties not cleared through a central counterparty.
Nedbank RBB grew earnings 10.6% and benefited from an ongoing reduction in impairments following a number of years of selective
origination strategies across all asset classes, combined with proactive risk management and continued strengthening of balance sheet
impairments. Top-line growth improved, notwithstanding the deliberate slowdown in personal-loan advances, lower interchange fees,
and the run rate effect of selected fee reductions implemented in the second half of 2014. We continued to invest in our distribution
channels, marketing and client-centred innovation, while managing costs diligently and extracting efficiencies. The improvement in ROE
from 14.6% to 16.6% was particularly pleasing, given the focus we have had on this metric.
Nedbank Wealth achieved headline earnings growth of 8.8% and ROE increased to 41.5%. The strong momentum experienced in the
first half of 2015 continued both locally and internationally in our Wealth Management businesses. Nedbank Private Wealth benefited
from strong advances and liabilities growth, while stockbroking and financial planning delivered a solid set of results. Asset Management
had an outstanding year, with excellent fund performance and record net inflows. Insurance continues to be impacted by the historic
slowdown in retail lending volumes.
Rest of Africa's performance was largely driven by associate income from our investment in ETI, while earnings from our African
subsidiaries in the Southern African Development Community (SADC) and East Africa were affected by a single once-off impairment
charge. We account for our share of ETI's earnings using its publicly disclosed results one quarter in arrears. This means that
Nedbank's 2015 results contain our share of ETI's earnings for their 12-month period ended 30 September 2015.
The centre reported a loss of R662 million mainly as a result of the R108 million after-tax impact of the R150 million increase in the
central provision to R500 million, prime/Johannesburg Interbank Agreed Rate (JIBAR) margin squeeze of R184 million post tax as a
result of short-term funding costs repricing faster than prime-linked assets and accounting mismatch on certain hedged portfolios of
R155 million post tax that will reverse over time.
Financial performance
Net interest income
Net interest income (NII) grew 4.0% to R23,885 million (2014: R22,961 million), with growth in average interest-earning banking assets
of 11.0%, including significantly higher levels of HQLA required for regulatory compliance with the LCR. Excluding HQLA, growth in
average interest-earning banking assets was 9.6%.
As expected, margins remained under pressure with the net interest margin (NIM) narrowing to 3.30% (2014: 3.52%) as the 10 bps
combined benefit of endowment income and asset and liability margin repricing was offset by:
Asset margin compression of 17 bps reflecting
- 12 bps from the asset mix change, including the slowdown, albeit at a reduced pace, of our personal-loans book;
- 5 bps from holding higher levels of lower-yielding HQLA for Basel III LCR requirements; and
Liability margin compression of 15 bps including,
- 7 bps related to the increased cost of wholesale funding, including 4 bps of ETI funding costs;
- 6 bps from the relative prime JIBAR reset cost as prime rate changes lagged increases to JIBAR during 2015; and
- 2 bps linked to the cost of lengthening and diversifying the liquidity risk profile, through capital market and foreign funding
sources in preparation for the transition to the Basel III net stable funding ratio in 2018.
Impairments charge on loans and advances
Impairments increased 6.3% to R4,789 million (2014: R4,506 million) and the credit loss ratio (CLR) improved slightly to 0.77% (2014:
0.79%). Continued improvements in retail impairments were offset by increased impairments in the wholesale clusters. Additional
overlays were raised in RBB and at the centre as deteriorating economic conditions prompted further strengthening of provisioning
levels in the second half of 2015.
Nedbank's through-the-cycle target range for the CLR was changed to between 0.6% and 1.0%, from 0.8% and 1.2% of banking
advances with effect from 1 January 2016. The lower range reflects the change in advances mix towards a higher proportion of
wholesale advances of the total book, as well as the change in mix within Nedbank Retail towards a lower proportion of personal loans.
At its peak, personal loans was 4.2% of total gross advances and this has now reduced to 2.7%.
Improvements in retail impairments were driven by home loans, MFC and personal loans. Our strong collections focus led to further
reductions in the CLR in personal loans to 7.48% (2014: 10.04%) and in home loans to 0.06% (2014: 0.13%). Post write-off recoveries
increased 20.8% to R1,137 million (2014: R941 million), including recoveries in Retail of R1,015 million (2014: R854 million), largely
comprising personal loans of R398 million (2014: R343 million) and MFC of R280 million (2014: R193 million). This quantum of post
write-off recovery is indicative of ongoing conservative provisioning levels.
Lower oil and commodity prices resulted in higher impairments in CIB and the Rest of Africa. In addition, RBB's total impairment overlay
increased to R699 million (2014: R404 million) and takes into consideration, inter alia, an estimate of the impairment impact that has
been incurred in our agricultural book as a result of the drought and in our personal loans book due to job losses in the mining sector,
but are not yet evident. Portfolio provisions in the centre were R350 million at the start of 2015 and during the course of the year most of
the items for which this provision was held were either satisfactorily resolved or appropriate provisions were raised in the clusters. In the
second half of the year the central portfolio provision was further strengthened to R500 million to take into account risks, particularly in
commodities and in the Rest of Africa, that have been incurred but are only expected to emerge in 2016. Total balance sheet
impairments increased to R11,411 million (2014: R11,095 million).
Nedbank's total coverage ratio of 65.0% (2014: 70.0%) was driven by a lower specific coverage ratio of 38.0% (2014: 43.1%), largely
due to the implementation of the SARB directive 7/2015 on restructured accounts which reduced specific coverage by 3.5%, improved
impairments in retail and the change in mix of retail and wholesale defaulted advances. Wholesale advances are assessed individually
and are predominantly secured with collateral resulting in relatively lower loss expectations in the event of default and, accordingly,
lower specific impairments and coverage levels. The portfolio coverage ratio for impairments remained stable at 0.70% (2014: 0.70%).
Total defaulted advances to total advances also remained stable at 2.53% (2014: 2.54%) as total defaulted advances increased 10.8%
to R17,559 million (2014: R15,846 million) in line with the growth in advances.
Non-interest revenue
NIR increased 7.1% to R21,748 million (2014: R20,312 million), underpinned by:
- Commission and fee income growth of 7.3% to R15,627 million (2014: R14,570 million), supported by continued client
acquisitions, cross-sell and annual inflation-related fee increases. Growth was, however, negatively impacted by lower card-
related interchange rates amounting to R261 million, the slowdown in personal loans and the run rate effect of pricing
reductions in the second half of 2014 in Small Business Services and Business Banking.
- Trading income growth of 19.6% to R3,167 million (2014: R2,648 million) following improved cross-sell and a strong
performance from our client-led Markets business.
- Insurance income reduced 7.9% to R1,830 million (2014: R1,986 million) owing to the historic slowdown in retail unsecured
lending volumes, partially offset by a good weather-related claims experience.
- Private-equity income, being of a less predictable nature, increasing 16.3% to R886 million (2014: R762 million), mostly from
realisations.
Expenses
Expenses were well managed and grew at 6.4% to R26,110 million (2014: R24,534 million), including continued investment in our RBB
and Rest of Africa Clusters and the ongoing cost of compliance with increasing regulatory demands. Excluding the Rest of Africa
Cluster, expenses grew at 5.6%. The main drivers were:
- Staff-related costs rising 3.3% (2014: 9.6%), reflecting an increase in remuneration of 6.7% (2014: 8.8%), additional staff
employed in regulatory compliance support functions, and 2.4% lower variable performance-related incentives.
- Computer processing costs growing 14.4% to R3,543 million, including amortisation costs increasing 9.6% to R718 million.
- Fees and insurance costs increasing 23.9% to R2,801 million (2014: R2,260 million) due to increased costs associated with
cash handling, compliance and higher volumes of card issuing and acquiring.
Our strong cost discipline and focus on efficiency through our 'Optimise and invest' strategy led to cost efficiencies of R915 million,
supporting ongoing investment for the future and contributing to a positive jaws ratio of 0.6% (2014: -2.5%).
Associate income
Associate income, largely from our share of approximately 20% of ETI's attributable income, increased to R871 million (2014: R161
million). Associate income is equity-accounted one quarter in arrears using ETI's publicly disclosed results. The related funding costs of
R370 million (2014: R79 million) are included in NII.
Statement of financial position
Capital
Nedbank maintained a well-capitalised balance sheet. Our CET1 ratio of 11.3% (2014: 11.6%) remains around the mid-point of our
Basel III 2019 internal target range. The tier 1 and total capital ratios continue to be affected by the Basel III transitional requirements.
Consequently, the tier 1 ratio decreased following the redemption of R1.8 billion of old-style hybrid debt, and the total capital ratio
decreased with the redemption of NED11, representing R1 billion of old-style tier 2 subordinated debt, on its call date in September
2015. This was partially offset by the issuance of R2.3 billion of new-style Basel III-compliant tier 2 subordinated-debt instruments.
The CET 1 ratio was impacted by risk-weighted assets (RWA) growing 13.7% to R501.2 billion (2014: R440.7 billion) largely as a result
of an increase in credit RWA due to:
- Ratings migration across certain wholesale portfolios in line with the deteriorating economic environment;
- An industrywide CVA capital charge by the South African Reserve Bank for over-the-counter (OTC) ZAR derivatives and OTC
derivatives with local counterparties not cleared through a central counterparty, which increased RWA by R6.5 billion; and
- Growth in loans and advances.
Overall capital adequacy was further impacted by investments in Rest of Africa resulting in higher capital impairment.
Funding and liquidity
Our funding profile and liquidity position remains strong and well-diversified as reflected by the Nedbank's average long-term funding
ratio for the fourth quarter of 28.7% (2014: fourth-quarter average 25.4%).
Nedbank's average LCR for the fourth quarter increased to 88.5% (2014: fourth-quarter average 66.4%), exceeding the minimum
regulatory requirement, which increased from 60% in 2015 to 70% from 1 January 2016. Our portfolio of LCR-compliant, HQLA
increased to a fourth-quarter average of R118.0 billion (2014: fourth-quarter average R91.4 billion). In addition to LCR-qualifying HQLA,
Nedbank also holds other sources of quick liquidity, including corporate bonds, listed equities and other marketable securities that can
be accessed in times of stress. Nedbank's combined portfolio of LCR-compliant HQLA and other sources of quick liquidity amounted to
a fourth-quarter average of R160.7 billion at December 2015, representing 17.4% of total assets.
Liquidity Coverage Ratio
2015 2014 % change
High quality liquid assets (Rm) 117,997 91,423 29%
Net cash outflows (Rm) 133,272 137,725 (3%)
Liquidity Coverage ratio (%)(1) 88.5 66.4
Regulatory Minimum (%) 60.0 n/a -
(1) Average for the quarter
Loans and advances
Loans and advances grew 11.2% to R681.6 billion (2014: R613.0 billion). Excluding lower-yielding trading advances, banking advances
growth was 10.5% following gross new pay-outs of R184.7 billion (2014: R166.8 billion).
Banking advances growth was primarily driven by CIB advances increasing 15.7% mainly as a result of drawdowns in credit extended to
clients in the renewable-energy and commercial property sectors, as well as stronger growth in Rest of Africa and Wealth.
RBB grew advances by 4.1%, comprised of MFC (vehicle finance) increasing 7.6%, Home Loans by 1.2%, Card by 3.3% and
Relationship Banking by 24.7%. Excluding R4.9 billion of advances transferred from Business Banking to Retail Relationship Banking in
the first half of the year, Relationship Banking's advances grew 4.7%, while Personal Loans decreased 4.5%.
Advances growth in the Rest of Africa Cluster was driven by growth in the African subsidiaries as a result of footprint expansion, new
products and client value propositions.
Deposits
Nedbank's strategy of building its deposit franchise through innovative products and competitive pricing led to deposit growth of 11.1%
to R725.9 billion (2014: R653.5 billion) resulting in a loan-to-deposit ratio of 93.9% (2014: 93.8%), which has remained consistently
below 100%.
We continued to focus on growing Basel III-friendly deposits, emphasising retail and commercial deposits and reducing reliance on
wholesale funding. Retail deposit growth was 15.9% and commercial and wholesale deposits grew at 9.7%.
Current accounts increased 8.6%, in line with the 8.5% growth in main banked clients. Our savings accounts grew 20.3%, with good
take-up of our tax-free savings product, GoalSave, and foreign currency savings deposits in Nedbank Wealth reflecting higher values as
a result of a weaker rand. Growth in fixed deposits of 14.0% and in negotiable certificates of deposit of 16.7% was driven by demand for
longer-term deposits on the back of increased interest rate expectations. Call and term deposits increased 7.2%. Nedbank also
successfully increased foreign currency funding by 50.8% to support foreign denominated lending and to diversify the funding base.
Total funding-related liabilities grew 11.9% to R770.8 billion (2014: R689.1 billion), including R15.5 billion of long-term debt capital
market funding issued as part of our strategy to lengthen the funding profile.
Economic outlook
Economic conditions are unlikely to improve in 2016. Nedbank's current forecast for 2016 GDP growth is 0.2%. Interest rates are
expected to increase by a cumulative 125 bps for 2016, having already increased by 50 bps in January in response to a higher inflation
outlook caused by administered price increases, higher food prices and the weaker rand.
Rising interest rates will increase borrowing costs and dampen consumer credit demand. Credit defaults are also expected to increase
as a result of rising rates as consumer debt levels remain high, with the job market unlikely to grow meaningfully in the short term.
Transactional banking activity is anticipated to grow modestly in line with consumer spending.
Growth in wholesale banking will continue to be limited by infrastructure constraints in SA, poor global demand and low international oil
and commodity prices. There remain pockets of growth in infrastructure as well as in renewable-energy projects. Sub-Saharan Africa
will still represent an area of growth for many SA corporates as indicated by the International Monetary Fund (IMF) in its 2016 GDP
growth forecast of 4.0% for the region.
Prospects
Our guidance on financial performance for the full 2016 year is as follows:
- Advances to grow at mid-to-upper single digits.
- NIM to be in line with the 2015 level of 3.30%.
- CLR to be within the revised through-the-cycle target range of 60 to 100 bps.
- NIR (excluding fair-value adjustments) to grow above mid-single digits, prior to the consolidation of Banco Único.
- Expenses to increase by mid to upper-single digits, prior to the consolidation of Banco Único.
In the current environment forecast risk remains elevated and as a result our guidance for performance in the year ahead is harder to
formulate. In this context we currently forecast that growth in DHEPS for 2016 will be lower than the growth we achieved in 2015 and
below our medium-to-long-term target of consumer price index + GDP growth + 5%. Given the increased forecast risk, we will update
this guidance at the time of our June 2016 results.
Our medium-to-long-term targets remain unchanged, with the exception of the CLR through-the-cycle target range, which changed to
between 0.6% and 1.0% from 0.8% and 1.2% of banking advances. The lower range reflects the change in advances mix towards a
higher proportion of wholesale advances, as well as the change in mix within Nedbank Retail towards a lower proportion of personal
loans. At its peak, personal loans was 4.2% of total gross advances and this has now reduced to 2.7%.
Nedbank's cost of equity for 2016 has been increased from 13.0% to 15.0% to capture the higher cost of capital imputed by the increase
in the SA long-bond yield during late 2015. We will take cognisance of this significant change in the cost of equity and during 2016 we
will review our medium-to-long-term target for ROE (excluding goodwill), being cost of equity + 5%.
Nedbank data tables (Rand)
Headline earnings (Rm) RoE (%)
Cluster performance
2015 2014 % change 2015 2014
Nedbank Corporate & Investment Banking 5,208 4,727 10% 22.6% 27.0%
Nedbank Retail & Business Banking 4,460 4,031 11% 16.6% 14.6%
Nedbank Wealth 1,134 1,042 9% 41.5% 36.8%
Rest of Africa 691 357 94% 10.2% 10.1%
Business clusters 11,493 10,157 13% 19.3% 19.7%
Centre (662) (277) (139%)
Total 10,831 9,880 10% 15.7% 15.8%
Average Allocated Capital Economic Profit (Rm)
Cluster performance (Rm)
2015 2014 % change 2015 2014 % change
Nedbank Corporate & Investment Banking 23,096 17,497 32% 2,205 2,365 (7%)
Nedbank Retail & Business Banking 26,924 27,565 (2%) 960 310 210%
Nedbank Wealth 2,734 2,830 (3%) 778 660 18%
Rest of Africa 6,799 3,549 92% (193) (122) (58%)
Business clusters 59,553 51,441 16% 3,750 3,213 17%
Centre 9,864 11,865 (17%) (1,225) (1,101) (11%)
Total 69,417 63,306 10% 2,525 2,112 20%
Cost of equity(1) 13.0% 13.5%
(1) The cost of equity metric is set annually in advance and therefore the 2015 cost of equity of 13.0% is not reflective of the movements in long bond rates in
December 2015. The cost of equity for 2016 is estimated at closer to 15.0%. Had this been used throughout 2015, Economic Profit would have decreased
by 41%
Credit loss ratio by cluster (%) % banking Through-the-cycle
advances 2015 2014 target ranges
Nedbank Corporate & Investment Bank 47.6% 0.40% 0.19% 0.15% - 0.45%
Nedbank Retail & Business Banking 45.5% 1.14% 1.39% 1.30% - 1.80%
Nedbank Wealth 4.3% 0.15% 0.17% 0.20% - 0.40%
Rest of Africa 2.6% 1.25% 0.23% 0.75% -1.00%
Total credit loss ratio 100% 0.77% 0.79% 0.60% - 1.00%
Credit loss ratio analysis (%)
2015 2014
Specific impairments 0.70% 0.72%
Portfolio impairments 0.07% 0.07%
Total credit loss ratio 0.77% 0.79%
Net Interest Margin
Loans and advances by cluster (Rm)
2015 2014 2015 2014 % change
Nedbank Corporate & Investment Bank 1.98% 1.90% 355,784 305,158 17%
Banking activity n/a n/a 321,699 278,153 16%
Trading activity n/a n/a 34,085 27,005 26%
Nedbank Retail & Business Banking 4.89% 4.97% 279,929 268,882 4%
Nedbank Wealth 1.93% 1.94% 28,206 24,819 14%
Rest of Africa 3.53% 4.75% 16,515 14,073 17%
Centre n/a n/a 1,198 89 1,246%
Total 3.30% 3.52% 681,632 613,021 11%
Capital (Basel III)
2015 2014 Internal target range Regulatory minimum(1)
Common equity Tier 1 ratio 11.3% 11.6% 10.5% - 12.5% 6.5%
Tier 1 ratio 12.0% 12.5% 11.5% - 13.0% 8.0%
Total capital ratio 14.1% 14.6% 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.
Metric 2015 performance Medium-to-long-term targets 2016 outlook
RoE (excluding goodwill) 17.0% 5% above cost of ordinary shareholders' Below target
equity (to be reviewed during 2016)
Growth in diluted headline earnings per 8.5% > consumer price index + GDP growth + Below 2015 growth and
share 5% below target
Credit loss ratio 0.77% Between 0.6% and 1.0% of average Within target range
banking advances
NIR-to-expense ratio 83.3% > 85% Below target
Efficiency ratio(1) 56.1% 50.0% to 53.0% Above target
Common equity tier 1 capital adequacy 11.3% 10.5% to 12.5% Within target range
ratio (Basel III)
Economic capital Internal Capital Adequacy Assessment Process (ICAAP): A debt rating (including 10% capital
buffer)
Dividend cover 2.06 times 1.75 to 2.25 times Within target range
(1) Includes associate income in line with industry accounting practices.
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.
Old Mutual Wealth
Highlights
2015 2014 % change
AOP (pre-tax, GBPm) 307 227 35%
AOP, excluding Quilter Cheviot (pre-tax, GBPm) 273 227 20%
Gross sales (GBPm) 20,801 15,992 30%
NCCF (GBPbn) 6.9 3.7 86%
FUM (GBPbn) 104.4 82.5 27%
Pre-tax operating margin(1) 40% 36%
IFRS profit/(loss) after tax attributable to equity holders of the parent (GBPm) 42 (37)
(1) Pre-tax revenue operating margin is calculated as pre-tax AOP divided by net revenue
Excluding divested businesses and Quilter Cheviot
2015 2014 % change
AOP (pre-tax, GBPm) 264 185 43%
NCCF (GBPbn) 5.9 3.6 64%
FUM (GBPbn) 86.6 79.7 9%
Operating environment
Global investment markets were volatile during 2015 with investors cautious about the future of the Eurozone and the uncertain outlook
for the global economy. Market levels influence fund values and revenue for Old Mutual Wealth and our competitors. True Alpha-
generating investments such as risk-adjusted absolute return asset classes have proven popular with investors as they look for
alternative investment options to attain positive returns. We have continued to experience strong flows into equity asset classes as they
remain more attractive than bond markets in a continuing low interest rate environment.
Our business model is well placed to react to changes in the regulatory environment. We are continuing to develop our proposition to
ensure that we remain competitive and are able to capitalise on the new pension freedoms that became effective on 6 April 2015. The
increased flexibility and changes in UK pension legislation have resulted in higher levels of inflows and outflows across the industry. Our
UK Platform business has seen a 52% growth in net pension flows year on year (industry net sales were reporting 41% higher at Q3
2015) and has successfully transferred to clean charging structures in line with the changes in regulation.
Sterling has strengthened against the Euro over 2015. This has lowered funds under management, net flows and profits from our
International offshore and Italian businesses when reported in Sterling.
Business developments
Notwithstanding the market headwinds, Old Mutual Wealth's performance in 2015 has been strong and we have achieved our public
targets for profit, return on equity and operating margin. Our vertically integrated business model is performing well, with improved
operating margins and increased operating profit across all of our key strategic business lines. Our multi-service distribution and
investment capabilities allow us to acquire and retain assets and build wealth for our clients for the long term.
The sale of our businesses in France and Luxembourg to APICIL completed on 2 February 2015, the sale of our Switzerland business
to Life Invest Holding completed on 30 September 2015 and the acquisition of Quilter Cheviot completed on 25 February 2015. This
strategic realignment of our business further positions us as a leading retail investment management business focused on the UK and
select international markets.
We continue to grow strongly in our markets and our performance across the business has been recognised with numerous awards. In
2015, Old Mutual Global Investors won 'Best Investment Fund Provider' at the MoneyFacts Investment, Life & Pension Awards; our
International business won six awards at the International Adviser Life Awards; our UK platform won 'Best Platform for Restricted
Advisers' at the Professional Adviser Awards; Intrinsic won 'Best Large Network' at the Mortgage Strategy Awards; Quilter Cheviot won
'Best Boutique Wealth Manager' at the Wealth Adviser Awards; and both UK Platform and Quilter Cheviot won five star service awards
at the FTAdviser.com Online Service Awards.
Following the introduction of new pension reforms in April 2015, we launched our Redefining Retirement marketing campaign to support
advisers and customers. This included a new flexi-access drawdown facility and the removal of our drawdown charge. To complement
our in-retirement proposition, we have developed our Generation funds to become more accessible and understandable for our
customers. Our new retirement proposition, IncomeSelect, brings together our Retirement Income Explorer tool, our market-leading
platform pension and the revamped Generation fund range. The proposition enables advisers to create bespoke investment strategies
for customers before and during retirement.
Our national advice business, Old Mutual Wealth Private Client Advisers, was launched in October 2015. This builds upon our belief in
financial advice and brings together our platform capability and high quality investment and asset management to deliver integrated
solutions to customers. To complement our national advice business we have acquired Sesame Bankhall's Financial Adviser School.
This demonstrates our commitment to improving the strength and sustainability of the industry and helping to close the advice gap by
improving customer access to advice.
We successfully transitioned 202 advisers from Sesame Bankhall Group into our restricted financial planning network within Intrinsic.
Production volumes from the new advisers have been higher than expected. Together with other recruitment initiatives including our
ongoing Practice Buy-Out initiative, the number of financial planners is now 1,230, up 300 over 2015. This increase will drive growth in
Intrinsic and across the Old Mutual Wealth business.
In Old Mutual International, our new Wealth Interactive platform is bedding down and we have seen strong sales and profit growth in the
business, whilst our wealth solutions have been recognised by the adviser community through multiple industry awards. On 2 February
2016, we announced an agreement to acquire the leading expatriate adviser business in Singapore, AAM Advisory, which currently has
over 30 advisers and over 3,000 clients. This acquisition will strengthen our commitment to the Asian region and to the financial advice
market, and supports our distribution strategy of developing a multi-channel advice business. The acquisition is expected to complete
during the first half of 2016.
Bringing the management of Quilter Cheviot and Old Mutual Global Investors together via the newly created Investment Division allows
us to integrate our investment expertise and leverage the combined capabilities for the benefit of our clients. As a result, we have
restructured our multi-asset team and changed the fund management teams for Spectrum and Voyager.
Quilter Cheviot has added some of our high-performing OMGI funds to its buy-list and been added to Intrinsic's discretionary fund
manager panel. Most recently, a new International bond has been launched in the UK targeting high net worth investors, offering
discretionary fund management via Quilter Cheviot.
In Old Mutual Global Investors, the on-boarding of our Rates and Liability Driven Investment team completed during Q4 2015 with the
launch of two new funds; the Old Mutual Absolute Return Government Bond fund and the Old Mutual Liquid Macro fund. Net new flows
over the two funds are GBP345 million with 20% of net inflows through internal channels, and we expect to see further positive flows over
2016. Cirilium now has GBP3.0 billion in assets under management and we continue to see strong net inflows, delivering GBP950 million net
flows in 2015 including GBP550 million flowing through our platform. Old Mutual Global Investors has a wide range of high-performing
funds to cater for a diverse range of investment styles, and our success in asset management has earned us a top-ten ranking for UK
net retail sales in the 2015 Pridham report.
AOP results
Old Mutual Wealth profit of GBP307 million for 2015 was 35% higher than prior year (2014: GBP227 million), largely driven by revenue growth.
Excluding Quilter Cheviot, profit was GBP273 million, ahead of our GBP270 million profit target. Excluding the impact of divested business and
Quilter Cheviot, profit has increased 43% since 2014.
Overall, the operating margin for Old Mutual Wealth has increased over the year to 40% (2014: 36%), in line with our operating margin
target. Return on internal equity is 16.7%, ahead of our target range of 12%-15%.
Old Mutual Global Investors profit has more than doubled from GBP33 million in 2014 to GBP71 million in 2015. We saw strong operating
results from the vertical integration between our platform and Intrinsic via Cirilium and the continuing performance of popular funds such
as Global Equity Absolute Return and UK Alpha. Above benchmark investment performance in OMGI funds (primarily Global Equity
Absolute Return and UK Dynamic Equity) generated additional performance-related fees which added to profit in the year.
Post-acquisition profits from Quilter Cheviot are GBP34 million for the ten months of 2015 for which it was part of the Group, in line with our
expectations reflecting the integration costs in the period and lower market levels seen during 2015.
Our UK Platform also showed good growth with profits increasing by 74% from GBP19 million in 2014 to GBP33 million in 2015, benefiting
from strong net flows over 2015 and funds under management outperforming the UK stock market. All relevant policies in our UK
Platform investment business have been migrated to our unbundled charging structures in compliance with the FCA sunset clause.
During 2015, we have also removed our minimum investor charge and drawdown charge, simplifying our charging structure so that
customers pay a single platform fee. The trend for some time in the platform market is towards low margin, high volume business,
which favours scale players and use of efficient technology to get operational leverage. In 2016, we expect the combined impact of
these changes to reduce revenue by around GBP5 million.
Intrinsic continues to deliver strong net flows into Old Mutual Global Investor's Cirilium range and on to the UK Platform and is a key
contributor to revenue growth in these businesses. Intrinsic's advice profits were affected in 2015 by increased industry-wide FSCS
regulatory fees and also costs associated with the set-up of Old Mutual Wealth Private Client Advisers.
Our Old Mutual International business saw profits increase by 35% from GBP37 million in 2014 to GBP50 million in 2015 through strong net
flows and reduced Wealth Interactive implementation costs.
Old Mutual Wealth Italy has seen a marginal reduction in profit in Sterling terms, due to weakening in the Euro exchange rate. Local
currency results in Old Mutual Wealth Italy are marginally higher than 2014 with 3% profit growth. The underlying business performance
remains strong.
UK Heritage had robust profit growth in 2015 driven by reduced operating expenses which are trending downwards as the book runs off.
As expected, profits from our European Heritage businesses are significantly reduced from prior year as we have divested these
businesses. Switzerland was sold on 30 September 2015 and Austria, Germany and Liechtenstein were sold in the fourth quarter of 2014.
IFRS profit
IFRS profit of GBP42 million includes costs related to the development of the new Old Mutual Wealth platform capability and outsourcing of
the UK business administration, amortisation of acquired intangibles and acquired PVIF and a net loss on disposal of our European
Heritage business.
Net client cash flow (NCCF)
Our integrated strategy of owning distribution, an investment platform, discretionary fund management and asset management is
contributing to the delivery of strong net flows. NCCF for 2015 was GBP6.9 billion, 86% higher than last year (2014: GBP3.7 billion). The final
quarter of 2015 produced NCCF of GBP2.3 billion, consistent with the strong performance in Q3 2015. Excluding Quilter Cheviot and
European divestments, NCCF was GBP5.9 billion, 64% up on prior year. Gross sales were GBP20.8 billion, 30% ahead of prior year (22%
excluding inorganic activity) following strong sales into Old Mutual Global Investors, UK Platform and Old Mutual International.
Old Mutual Global Investors NCCF of GBP3.5 billion is 40% ahead of prior year (2014: GBP2.5 billion), with strong performance in several key
funds. The Global Equity Absolute Return fund and our Cirilium fund range are our top-selling funds in the year with net inflows of GBP1.6
billion and GBP1.0 billion respectively. Our UK equity funds continued to attract good net inflows, with GBP0.7 billion into our UK Alpha fund
and GBP0.3 billion into UK Mid Cap. Since the Rates and Liability Driven Investment team launched the Old Mutual Absolute Return
Government Bond Fund in October, NCCF was GBP345 million as investors look for alternative asset classes in which to invest following
stock market volatility over the second half of 2015. A single institutional mandate of GBP200 million during Q4 has also boosted inflows.
WealthSelect has attracted GBP1.0 billion worth of net new investments over 2015, taking overall funds under management to GBP1.7 billion.
We continue to review the funds available to enhance our proposition and offer financial advisers and customers access to the very best
fund managers.
Quilter Cheviot has contributed NCCF of GBP1.0 billion since its acquisition in February 2015. NCCF for the full year to 31 December 2015
was GBP1.1 billion, consistent with prior year. December saw the first inflow from the newly launched European Wealth Bond through Old
Mutual International, with Quilter Cheviot the designated discretionary fund manager.
UK Platform delivered full year NCCF of GBP2.7 billion, 35% higher than prior year (2014: GBP2.0 billion). This is primarily driven by strong net
pension sales, which were 52% higher than prior year, as we continue to benefit from the changes in pensions freedom legislation. We
have observed a slowdown in pension withdrawals over the second half of 2015 and continued sales growth and as such we expect
growth in net flows to continue. Sales of our platform products through the Intrinsic restricted advice panel have grown consistently and
now account for 25% of all UK Platform NCCF over the full year. Total UK Platform net flows into OMGI were GBP1.1 billion, up from GBP0.9
billion over 2014.
Old Mutual International full year NCCF of GBP0.7 billion was more than double prior year (2014: GBP0.3 billion). NCCF in all regions,
excluding Europe, is ahead of prior year with South Africa and Latin America performing particularly well. Sales in Latin America have
benefited from our Miami licence as well as via the controlled distribution through AIVA. In Old Mutual Wealth Italy, we continue to see
the benefit of our expanded distribution agreement with a key distributor, with NCCF of GBP0.6 billion matching 2014's performance.
Excluding the divested businesses, our Heritage book had net outflows of GBP1.1 billion, consistent with prior year as we have experienced
a marginal increase in pension outflows following the new pension legislation. Despite the increased pension outflows, our overall
surrender rate has remained level at 9% reflecting our continued strategic focus on asset retention. In our UK Institutional business,
several large corporate pension schemes have added to our inflows.
Funds under management (FUM)
Funds under management were GBP104.4 billion at the end of 2015, up 27% from the end of 2014 with the acquisition of Quilter Cheviot
adding GBP17.5 billion and the divestment of our Switzerland, France and Luxembourg businesses reducing FUM by GBP2.7 billion. Excluding
this corporate activity, funds under management were 9% higher than 2014 year end due to positive NCCF in the period. Excluding the
impact from positive NCCF and corporate activity, our FUM has outperformed equity markets over 2015, growing by 1% compared to a
fall of 5% in the FTSE 100.
UK Platform assets were GBP34.5 billion, up 12% since the start of the year (December 2014: GBP30.8 billion). OMGI FUM, including Cirilium,
was GBP24.7 billion, up 18% on the start of the year (December 2014: GBP21.0 billion). Investment performance at OMGI remains good, with
55% of OMGI core funds in the first quartile over a three-year period and a total of 64% of funds above the median (by weight of
assets). OMGI now manages 14% of Platform assets, increasing from 12% at December 2014. Including Quilter Cheviot, which has
FUM of GBP17.8 billion, 41% of total Old Mutual Wealth FUM was being managed by our asset and investment management businesses.
Outlook
Old Mutual Wealth is committed to exceptional service, as demonstrated by our Gold rating from Defaqto for service on our current
platform. We have introduced top of the range drawdown products during 2015 and will continue to introduce new functionality to our
existing systems. At the same time we are making a long-term investment in the UK platform market seeking to enhance both customer
service and efficiency. The market and regulatory environment has changed significantly in the last few years and we want to ensure we
implement the programme with minimum impact for advisers, customers and our business. Given our focus on the quality of the
delivery, we will need to conduct extensive testing and utilise a phased deployment for our roll-out. As a result, the expected delivery
date has moved from the end of 2016 to H2 2018 for the Platform implementation and to 2019 for the heritage life and pensions book.
We have spent GBP177 million to date, with GBP97 million in 2015 and now see the project spend to completion of an additional c.GBP250
million. In total over the six year period we estimate that this will cost GBP425 million - GBP450 million. We have also recently engaged
Accenture to provide programme management support to review the scope, planning and implementation approach for the programme.
We plan to report back on the programme, as well as the Accenture work at the interims. KPMG have been engaged to provide
programme assurance. The programme is a fundamental business transformation and outsourcing project, bringing significant
propositional and business retention benefits.
We will continue to invest in building the market profile of Old Mutual Wealth. In December 2015, we announced our four-year title
sponsorship of the RFU Autumn Rugby International series, becoming a Principal Partner of England Rugby, encompassing both the
men's and women's senior teams. In January 2016, we launched Old Mutual Wealth Kids First Rugby, a new approach to deliver
tailored rugby training to children across England. With this sponsorship agreement, we will significantly enhance the Old Mutual Wealth
brand in our core UK retail market.
Growth in Old Mutual Wealth Private Client Advisers will drive increased levels of vertical integration across the business, through our
platform capabilities and investment and asset management. Our Financial Adviser School will welcome its first cohort in 2016. We
expect at least 75 student financial advisers over the first year.
We anticipate sales growth of our platform products and the Cirilium fund range from our own advisers over 2016, as the number of
restricted financial planners increases. We will benefit from a full year's production from the additional Sesame Bankhall advisers and
expect to grow the advice network through our Practice Buy-Out initiative, which will encourage retention and ensure customers
continue to receive high quality financial advice from advisers within the Intrinsic network.
Much of our fee income is derived from charges on funds under management and a fall in markets in 2016 would constrain projected
earnings if they remain at lower levels than during 2015.
In the run-up to tax year end, we are well-positioned to benefit from the changes in UK pension legislation due to the strength of our
advice and investment management solutions together with our pension drawdown functionality. Online functionality for our protection
offering will be launched during H1 2016, with the enhanced functionality and flexibility expected to have a positive impact on sales
during 2016. Within Old Mutual Global Investors, we will continue to develop our global distribution channels whilst appraising
opportunities for incremental further development of our asset management capabilities as they arise. We expect positive impacts to our
investment performance through the combined capabilities of Old Mutual Global Investors and Quilter Cheviot.
Following significant transformation activity over the past three years, our vertically integrated strategy of owning distribution, an
investment platform, discretionary fund management and asset management is performing well, contributing to the strength of new
flows into the business. Our focus over 2016 is to further embed the strategy, driving collaboration and synergies between our
outstanding individual businesses whilst delivering great customer outcomes.
Old Mutual Wealth data tables
Adjusted operating profit pre-tax (GBPm)
2015 2014 % change
Invest & Grow markets
UK Platform 33 19 74%
UK Other(1) 17 9 89%
International 50 37 35%
Old Mutual Global Investors 71 33 115%
Quilter Cheviot 34 - 100%
Total Invest & Grow 205 98 109%
Manage for Value markets
Europe – open book(2) 24 26 (8%)
Heritage business(3) 78 103 (24%)
Total Manage for Value 102 129 (21%)
Total Old Mutual Wealth 307 227 35%
(1) Includes Protection, Series 6 pensions, UK Institutional business and Intrinsic profits
(2) Includes business written in Italy and divested businesses in France and Luxembourg (sold in February 2015) and Poland (sold in May 2014)
(3) Includes UK Heritage, Switzerland (sold September 2015) and divested businesses in Germany, Austria and Liechtenstein (sold in Q4 2014)
Adjusted operating profit by line of business (pre-tax, GBPm) 2015 2014 % change
Asset management 105 33 218%
Life and savings - Invest & Grow 100 65 54%
Life and savings - Manage for Value 102 129 (21%)
Gross sales and funds under management (GBPbn)
Market and Net flows as
FUM Gross Gross other FUM % of opening
1-Jan-15 inflows outflows Net flows movements 31-Dec-15 FUM
Invest & Grow markets 73.4 22.6 (14.4) 8.2 17.6 99.2 11%
UK Platform(1) 30.8 6.2 (3.5) 2.7 1.0 34.5 9%
UK Other(2) 6.0 1.1 (0.8) 0.3 (0.1) 6.2 5%
International 15.6 2.2 (1.5) 0.7 (0.3) 16.0 4%
Old Mutual Global Investors(3) 21.0 10.9 (7.4) 3.5 0.2 24.7 17%
Quilter Cheviot(4) - 2.2 (1.2) 1.0 16.8 17.8 -
Manage for Value markets 17.1 1.4 (1.9) (0.5) (2.7) 13.9 (3%)
Europe - open book(5) 6.7 1.1 (0.5) 0.6 (2.1) 5.2 9%
Heritage business(6) 10.4 0.3 (1.4) (1.1) (0.6) 8.7 (12%)
Elimination of intra-Group
assets(7) (8.0) (3.2) 2.4 (0.8) 0.1 (8.7) 10%
Total Old Mutual Wealth 82.5 20.8 (13.9) 6.9 15.0 104.4 8%
Market and Net flows as
FUM Gross Gross other FUM % of opening
1-Jan-14 inflows outflows Net flows movements 31-Dec-14 FUM
Invest & Grow markets 63.9 17.0 (12.2) 4.8 4.7 73.4 8%
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) 16.0 9.2 (6.7) 2.5 2.5 21.0 16%
Manage for Value markets 22.0 2.1 (2.5) (0.4) (4.5) 17.1 (2%)
Europe - open book(5) 6.6 1.5 (0.8) 0.7 (0.6) 6.7 11%
Heritage business(6) 15.4 0.6 (1.7) (1.1) (3.9) 10.4 (7%)
Elimination of intra-Group
assets(7) (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%
(1) UK Platform FUM excludes intra-Group assets from our International business of GBP1.4 illion at 31 December 2015 (31 December 2014: GBP1.5 billion)
(2) Includes Protection, Series 6 pensions and UK Institutional business
(3) OMGI FUM includes GBP0.1 billion of shareholder assets at 31 December 2015 (31 December 2014: GBP0.1 billion)
(4) The acquisition of Quilter Cheviot completed on 25 February 2015, within market and other movements GBP17.5 billion of acquired FUM is included
(5) Includes business written in Italy and divested businesses in France and Luxembourg (sold in February 2015) and Poland (sold in May 2014)
(6) Includes UK Heritage, Switzerland (sold in September 2015) and divested businesses in Germany, Austria and Liechtenstein (sold in Q4 2014)
(7) The elimination represents the removal of double-counting of assets and flows managed by OMGI and Quilter Cheviot on behalf of other Old Mutual
Wealth businesses.
Fund-based revenue margin (bps) 2015 2014
Invest & Grow markets
UK Platform(1) 38 42
UK Other 28 34
International(2) 80 79
Old Mutual Global Investors 64 60
Quilter Cheviot(3) 80 82
Total Invest & Grow 63 58
Manage for Value markets
Europe - open book(4) 105 120
Heritage business(5) 65 60
Total Manage for Value 79 79
Total Old Mutual Wealth 62 61
(1) Includes fixed fees, as they convert to fund-based fees over the period as policies migrate to our unbundled charging structure.
This will be consistent with 2016, as all policies are now migrated to the new charging structure following the FCA sunset clause
(2) Includes fixed fees, as International charging structures can be chosen by the customer and each policy can contain a differing
proportion of each fee type
(3) Prior year comparative included for information only. Current year figure also includes revenue earned pre-acquisition
(4) Italy business only - excludes divested business to provide a consistent comparison
(5) Represents our closed UK Heritage book - excludes divested business to provide a consistent comparison
Institutional Asset Management
Institutional Asset Management consists of OM Asset Management plc (OMAM), listed on the New York Stock Exchange
(market capitalisation $1.8 billion as at 31 December 2015), and Rogge. Further information is included in Old Mutual plc's
Financial Disclosure Supplement and at OMAM's corporate website -http://ir.omam.com/investor-relations/news/
Highlights: Old Mutual Asset Management
2015 2014 % change
AOP (pre-tax, $m) 229 211 9%
Operating margin, before affiliate key employee distributions 38% 40%
Operating margin, after affiliate key employee distributions 33% 33%
Net client cash flows ($bn) (5.1) 9.5 (154%)
Funds under management ($bn) 212.4 220.8 (4%)
IFRS profit after tax attributable to equity holders of the parent (GBPm)(1) 66 77 (14%)
(1)Institutional Asset Management, including Rogge
Overview
OMAM generated solid results despite significant market volatility in the second half of 2015. The stability of OMAM's core earnings
demonstrated the strength and diversity of its affiliates and the benefits of growth in higher margin product areas over the year. Client
cash flows into products such as global and non-US equities and alternative investments led to increases in the company's investment
management fee rate and positive revenue impact from net client cash flows. The company also benefited from an exceptional
performance fee in 2015 largely earned on certain alternative assets.
The full text of OMAM's 2015 earnings announcement, released on 4 February 2016, can be accessed via the OMAM corporate website
– http://ir.omam.com/investor-relations/news/
Business developments
OMAM paid a quarterly interim dividend of $0.08 per share on 29 December, 2015. In addition, the OMAM Board of Directors
authorised a $150 million share repurchase programme, subject to shareholder approval.
AOP results and operating margin
AOP increased by 9% to $229 million. Excluding the pre-tax AOP impact of exceptional performance fees earned in an alternative
strategy of $19 million, IFRS AOP of $210 million was flat (2014: $211 million), as increased management fees were offset by additional
expenses, including the first full-year costs of being a public company.
Revenues of $712 million for the period were 12% higher than 2014 ($635 million), resulting primarily from growth in average FUM for
the year of 5%, higher average fee rates, and the higher performance fees. Performance fees in the period were $61.8 million (2014:
$34.3 million).
AOP margin before affiliate key employee distributions decreased 2% to 38%, as overall expenses increased at a higher rate relative to
the revenue increase. On a post affiliate key employee distributions basis, reported operating margin remained consistent with the
comparative period at 33%.
Investment performance
OMAM Affiliates continued to produce solid investment performance during a volatile period in the equity markets. While OMAM's value-
oriented strategies faced headwinds particularly in the second half of the year, affiliates continued to generate long-term track records of
relative outperformance.
OMAM's aggregate investment performance is reported as weighted by the revenue generated by its products. As of 31 December
2015, assets representing 60%, 83%, and 92% of revenue outperformed benchmarks over the one-, three- and five-year periods
(31 December 2014: 63%, 66%, and 78%; 30 September 2015: 68%, 84%, and 93%). On an asset-weighted basis, over the one-, three-
and five-year periods ended 31 December 2015, 72%, 73% and 91% of assets outperformed benchmarks (31 December 2014: 48%,
52% and 64%; 30 September 2015: 61%, 75%, and 95%). The increase in relative performance compared to 31 December 2014 was
driven primarily by improvement in U.S. value equity strategies.
Funds under management and net client cash flows
Funds under management and net client cash flows ($bn)
2015 2014
Opening FUM 220.8 198.8
Gross inflows 26.6 32.0
Gross outflows (29.3) (20.8)
Total client-driven net flows (2.7) 11.2
Hard asset disposals (2.4) (1.7)
Net client cash flows (5.1) 9.5
Other 0.4 (0.4)
Market (3.7) 12.9
Closing FUM 212.4 220.8
Annualised revenue impact of net flows ($m)(1) 18.9 54.5
Derived average weighted net client cash flows(2) 5.5 16.5
(1) Annualised revenue impact of net flows represents the difference between annualised management fees expected to be earned on new accounts and net
assets contributed to existing accounts, less the annualised management fees lost on terminated accounts or net assets withdrawn from existing accounts,
including equity-accounted affiliates. Annualised revenue is calculated by multiplying the annual gross fee rate for the relevant account by the net assets
gained in the account in the event of a positive flow or the net assets lost in the account in the event of an outflow
(2) Derived Average Weighted NCCF reflects the implied NCCF if annualised revenue represents asset flows at the weighted fee rate for OMAM overall (i.e.
34.3 bps in 2015). For example, NCCF annualised revenue impact of $18.9 million divided by average weighted fee rate of OMAM's overall AUM of 34.3
bps equals the derived average weighted NCCF of $5.5 billion
Fund Mix ($bn)
2015 2014
US Equity 76.9 87.3
Global/non-US Equity 84.8 84.0
US Fixed income 13.8 15.2
Alternative, real estate & timber 36.9 34.3
Total OM Asset Management FUM 212.4 220.8
OMAM's FUM ended the period at $212.4 billion, down $8.4 billion, or 3.8%, from 2014 (31 December 2014: $220.8 billion) due to
challenging markets (reducing FUM by $3.7 billion), coupled with $5.1 billion of net client cash outflows (2014: $9.5 billion positive net
client cash flows). Although negative, net client cash flows for the year are expected to generate positive annualised revenue of $18.9
million, representing 2.6% of beginning of period run rate management fee revenue, with inflows in higher fee non-US, emerging
markets, and alternative products, offsetting outflows in lower fee US sub-advisory assets.
OMAM's FUM consists of long-term investment products diversified across US equities (36.2%), global & non-US equities (39.9%), fixed
income (6.5%) and alternative, real estate & timber investments (17.4%).
Gross inflows totalled $26.6 billion (2014: $32.0 billion) at a weighted average fee of 45.9 bps, with flows driven by global/non-U.S.
equities, managed volatility equities, dividend focus equities and real estate assets. Gross inflows of $9.7 billion were from new client
accounts.
Gross outflows (including hard asset disposals) totalled $31.7 billion (2014: $22.5 billion) at a weighted average fee of 32.6 bps, driven
by US value equities and some global/non-US equity products. Outflows in 2015 were higher in part due to additional investment-driven
hard asset disposals of $2.4 billion (2014: $1.7 billion), sovereign wealth fund withdrawals and reductions in US equity sub-advisory
assets.
The OMAM Global Distribution team continues to work with Affiliates to expand their non-US client base in key markets and jurisdictions
around the world. Non-US clients currently account for approximately 19% of FUM (31 December 2014: 20%). The Global Distribution
initiative raised $1.4 billion in 2015 and is expected to generate run-rate profitability in 2016. Overall, client cash flows generated by
OMAM from seed and co-investment capital, expansion initiatives and global distribution represented approximately 25% of OMAM's
gross sales of $26.6 billion for the year.
Balance sheet and capital management
During the year, cash generated by OMAM was used to pay dividends of $39 million, repay $37 million of notes payable to Old Mutual
plc, and pay down $87 million on OMAM's revolving credit facility. At 31 December 2015, $90 million was outstanding on OMAM's $350
million revolving credit facility, representing 0.4x debt/EBITDA. At year-end, equity equalled $166 million and cash equalled $136
million, including approximately $122 million at the affiliates and $14 million at the holding company.
Outlook
The volatile market environment to date in 2016 has presented the asset management industry with challenges. However, OMAM
believes that its business is well positioned to withstand such market cycles, as its profit share model gives a high level of structural
variability to expenses. OMAM remains committed to investing alongside its affiliates in medium-term organic growth initiatives,
including developing capabilities in multi-asset class, LDI and global/non-US equities and further penetration of specialised and non-
U.S. markets through its Global Distribution initiative. In addition, the company continues to make good progress in identifying and
developing relationships with at-scale asset management boutiques with strong investment and executive talent and a vision to enhance
and expand their business by partnering with OMAM. OMAM has the financial resources necessary to execute its growth strategy using
existing cash and its revolving credit facility capacity. It also has a shelf registration filed for debt and equity securities, which facilitates
capital markets access.
On 3 February 2016, OMAM's Board of Directors authorised a $150 million share repurchase program, subject to shareholder approval
on 15 March 2016. The Board believes that share repurchases can be an accretive and value-enhancing form of capital management in
conjunction with the payment of ordinary dividends.
NON-CORE BUSINESS – BERMUDA
Business Strategy and development
Old Mutual Bermuda has continued its focus on reducing risk and managing capital efficiently in preparation for an exit of the business
by the end of 2018. As part of these preparations, on 31 December 2015 Old Mutual (Bermuda) Holdings Limited (OMBHL), completed
the sale of Old Mutual (Bermuda) Ltd (OMB) to Beechwood Bermuda Ltd. (Beechwood). Prior to the sale, Old Mutual repaid
approximately $100 million of inter-company loan notes to OMB in December 2015 to provide cash backing for certain liabilities
transferred. OMBHL retains the liability in respect of the OMB guaranteed minimum accumulation benefits (GMABs) through Old Mutual
(Bermuda) Re Ltd. (OMBRE), a Bermuda licensed insurer and subsidiary of OMBHL. OMBRE commenced (re)insurance of the GMAB
risks on 1 July 2015. This (re)insurance will extend through to the final GMAB maturity, in August 2018. The impact of the sale on
earnings and capital for the continuing business is not material.
As part of the transaction, OMBHL has agreed to provide Beechwood with policyholder administration services for the next three years.
Regulatory approvals required for OMBHL to provide these services were received on 8 January 2016. All other guarantees and
responsibilities for policyholder administration past the three year OMBHL tenure have been transferred to the buyer.
OMBRE's existing suite of hedging programmes (dynamic tail hedging strategy, structured look back options, and forward start options)
continue to manage effectively both the potential downside associated with the 120% Capital Return Guarantee and the Highest
Anniversary Value features for the retained GMAB obligations.
IFRS results of Old Mutual Bermuda
Old Mutual Bermuda was closed to new business in March 2009 and has subsequently been reported as a non-core business.
Consequently, its results are excluded from Group IFRS AOP. IFRS post-tax loss for the period was $45 million (2014: $1 million
profit), reflecting the increase in GMAB liabilities, partially offset by hedging gains, due to weaker equity markets and a stronger US
dollar in the latter half of 2015.
Policyholder surrender experience
Policy count for the business reduced to 9,497 (31 December 2014: 10,692) and AuM to $828 million (31 December 2014: $1,107
million) up to the date of sale on 31 December 2015. There were $217 million overall surrenders for the year. OMBHL, through
OMBRE, provides(re)insurance coverage on the GMAB guarantees associated with 8,219 underlying OMB policies as at 31
December 2015 (31 December 2014: 9,086). OMB GMAB policy surrenders for 2015 were $139 million (2014: $199 million), reducing
the overall account value covered, along with the overall decline in market levels, to $583 million (31 December 2014: $766 million).
A breakdown of policies and AuM is provided in the table below:
Product 2015 2014
Policies AUM ($m) Policies AUM ($m)
UGO GMAB* 7,938 530 8,668 686
CGO GMAB* 281 53 418 80
Total GMAB* 8,219 583 9,086 766
Other 1,278 245 1,606 341
Total 9,497 828 10,692 1,107
* GMAB covered by OMBRE (re)insurance agreements effective 1 July 2015
Bermuda Guarantees and hedging
The guarantee risks that OMBRE (re)insures relate primarily to the underlying OMB policies that contain Universal Guarantee Options
(UGOs), and to a lesser extent, a Capital Guarantee Option (CGO) GMAB, a product predecessor to the UGO, with less onerous
guarantees and which does not give rise to significant risk. The UGO GMAB provides for a Capital Return Guarantee of 120% of the
original investment value at the 10 year anniversary date. On an account value basis, at 31 December 2015, 72% of the OMB policies
with UGOs had a value below the 120% Capital Return Guarantee (31 December 2014: 78%).
In addition, there is a Highest Anniversary Value (HAV) feature whereby, if elected, certain OMB 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 OMB policies in 2017 and 2018.
Forward Start Options (FSOs) were purchased during the year to take advantage of historically low volatilities across global equity
markets earlier in 2015. The FSOs have fixed the cost of the future put option strategy in relation to market volatility, although they do
not provide cover against absolute market levels until the start of the put options in January 2017. The FSOs have expiration dates
that are staggered to coincide with the maturities of the UGO GMAB guarantees. They provide equity cover on circa 79% (based on
current market levels) starting from January 2017. The total premium paid for the FSOs was $22 million.
In addition to the FSOs, OMBRE's dynamic tail hedging strategy offers protection from significant equity and foreign currency
exchange market declines. Hedge coverage is systematically adjusted in response to market movements by progressively increasing
(or decreasing) hedge coverage as markets fall (or rise). Dynamic tail hedging coverage was 19% of equity and foreign currency
exchange exposures as at 31 December 2015 (31 December 2014: 16%), at which time the median account value was below
invested premiums by circa 5%, compared to 6% above as at 31 December 2014. The tail hedging approach increases coverage
toward 100% if policy values fall below 72% of invested premiums. As the 10 year anniversary of OMB policies approach, the dynamic
hedging strategy will be reviewed and potentially adapted to manage uncovered market risks associated with the required guarantee
top-up payments.
Highest Anniversary Value feature
On an account value basis, at 31 December 2015, 85% of the UGO GMAB policies that OMBRE (re)insures have the HAV feature, the
same as prior year (31 December 2014: 85%). In order to hedge the HAV equity and currency risks associated with the OMB Hong
Kong UGO GMAB policies, structured "look-back" options (HAV Options) were acquired in 2013. The HAV Options provide protection
against markets rising above the 120% guarantee and subsequently falling. OMBRE's non-Hong Kong UGO GMAB HAV exposure is
not hedged as this exposure is less significant. The HAV Options are performing as intended with an uncovered HAV liability of $6
million at 31 December 2015.
OMBRE Abridged statement of IFRS financial position
The statement of financial position illustrates the excess assets backing the liabilities for OMBRE
$m 31-Dec-15 01-Jul-15 % change
Assets
Cash and hedge collateral 46 45 2%
Group Seed investments 260 260 -
Inter-company loan notes 118 121 (2%)
Other assets 7 2 250%
Total Assets 431 428 1%
Liabilities
GMAB reserves 125 92 36%
Other liabilities 3 - -
Total Liabilities 128 92 39%
Total Equity 303 336 (10%)
Liquidity requirements for operating costs and hedging activities can be met by drawing down the inter-company loan notes. These
are structured in tranches, which allows for capital and treasury management flexibility.
At 31 December 2015, liabilities relating to the GMAB Reserves were $125 million (31 December 2014: $82 million), an increase of
$43 million, mainly due to an increase in the value to policyholders of the remaining guarantees, given the lower equity markets at
the end of 2015 compared to 2014.
Capital position and outlook
The table illustrates the capital and capital requirements of Old Mutual Bermuda:
31 Dec 2014
(Total
OMBRE Bermuda statutory capital surplus ($m) 31-Dec-15 Bermuda)
Capital 293 387
Capital requirement 284 295
Surplus 9 92
Cover (times requirements) 1.0 1.3
Statutory capital of $293 million (31 December 2014: $387 million) compares to IFRS equity of $303 million, due to the inadmissibility
of certain assets for statutory purposes. Statutory capital decreased mainly due to the $45 million IFRS loss over the period, and the
removal of the capital in the sold company, OMB. Capital repatriation by the business in the year in preparation for the sale of OMB
was circa $23 million and executed through the cancellation of inter-company loan notes.
The $284 million capital requirement was determined based upon the 31 December 2014 Statutory Return submission, and is lagged
approximately one year. It does not reflect the impact of the volatility hedging strategy (FSOs) adopted in 2015, or the impact of
reduced exposure due to continued business run-off. The updated capital requirement from the Bermuda Monetary Authority is
expected to be communicated in Q3 2016 post the 2015 Statutory Financial filing in Q2 2016.
Sponsor
Merrill Lynch South Africa (Pty) Ltd
Date: 11/03/2016 08:00:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of
the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct,
indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on,
information disseminated through SENS.
Sharenet Sites 
