Wrap Text
Annual Financial Report 2017
OLD MUTUAL PLC
ISIN CODE: GB00B77J0862
JSE SHARE CODE: OML
NSX SHARE CODE: OLM
ISSUER CODE: OLOML
Old Mutual plc
Ref 138/18
15 March 2018
Annual Financial Report 2017
Old Mutual plc (the “Company”) has today published its Annual Financial Report for 2017 on the Company’s
website at www.oldmutualplc.com. A copy of the Annual Financial Report, including the Strategic Report for
2017, will be submitted to the National Storage Mechanism and will shortly be available for inspection at
www.morningstar.co.uk/uk/NSM. From the end of March 2018 copies of the Annual Financial Report may also
be obtained from Investor Relations, Old Mutual plc, 5th Floor, Millennium Bridge House, 2 Lambeth Hill, London
EC4V 4GG, UK or from the Company Secretary, 6th Floor, K Block, Mutualpark, Jan Smuts Drive, Pinelands,
7415, Cape Town, South Africa.
In compliance with the Company's obligations under DTR 6.3.5, additional information is set out below which
has been extracted in full unedited text from the Annual Financial Report. Accordingly, page references and
section numbers in the text below refer to page numbers and section numbers in the Annual Financial Report.
This extracted information should be read in conjunction with the Company’s results announcement for the year
ended 31 December 2017, which the Company has also released today.
“Risks
2017 was a critical year for the delivery of the plc strategy. It marked a transition from planning and preparation to
execution and delivery of the managed separation. Plc Head Office and the businesses have made good progress
in preparing, planning and executing key steps in readiness for the Group’s separation, including completion of
the sell-down of the OMAM business and preparing three strong and appropriately capacitated and capitalised
businesses ready to stand alone in 2018. It also completed a number of important corporate finance transactions,
including the disposal of OMAM and Kotak and further reduction in plc external debt.
Once executed, managed separation will remove a number of key risks inherent to the current structure of the
Group. These include currency translation risk, constraints on capital fungibility, and the 1999 demutualisation
agreement under which the current plc costs and debt interest must be borne by the non-South African
businesses. The risks inherent to the Group structure increased during 2017, as regulation evolved and the Group
structure became even more South Africa focused. These longer-term strategic and structural risks are being
mitigated to a certain extent by the managed separation. In turn, separation introduces shorter-term risks; but
while significant, these are largely manageable, and contingency plans are in place for any unexpected delays.
Under the active portfolio manager model introduced at the start of the managed separation, the plc evaluates
each of the Group’s businesses as an asset. This model is now fully embedded, with a significant amount of
responsibility for meeting local capital and liquidity requirements delegated to the respective business Boards.
The OMW and OML Boards and their respective governance frameworks have been redefined and refreshed to
ensure their fitness to become listed companies.
The managed separation project governance framework has continuously adapted to meet changing project
needs. As might be expected with a programme of this size, project plans are complex with many
interdependencies, timelines are tight and external factors such as unexpected political and economic events can
exert additional pressures. Both financial and non-financial risks to the managed separation are constantly
monitored, ensuring that we remain within the plc financial risk appetite metrics: central liquidity resources, capital,
and earnings volatility. We also continue to monitor risk culture across the Group.
We review each managed separation activity in terms of balancing value, cost, time and risk, relative to diverse
stakeholder interests. Extensive stress and scenario testing (including macroeconomic and political risk) ensures
that we have a full understanding of the possible impacts of variances within the plan and available management
actions, and that the plc can remain within its financial risk appetite limits.
We continue to focus on managed separation contingency planning, to ensure that we anticipate and mitigate
risks and deploy appropriate responses in the event of unforeseen external issues or project management
slippage.
We have devoted considerable work to ensuring the orderly wind-down of the plc and transitioning activities and
capabilities to the businesses. The plc’s contingent liabilities and pre-existing risks such as the plc employee
pension scheme and internal reinsurance programme are being addressed. To ensure an effective handover to
OML, processes have been decommissioned where possible and data archived where necessary. The various
asset disposals, currency hedging activities and debt liability management exercises during 2017 have
substantially de-risked the residual plc balance sheet. To further reduce downside cash flow risks from equity
markets, OM Bermuda updated its hedging strategy at the end of October.
Within the businesses, the principal risks remain broadly consistent with those described in the 2015 and 2016
Annual Reports. However, there is a different emphasis on some risks. Execution risk relating to the managed
separation is elevated at plc Head Office and the subsidiaries all have significant strategic execution risks relating
to major IT or business change initiatives as well as the managed separation itself.
Macroeconomic risk in our principal markets continues to be a focus for the Group, as it is for financial services
firms generally. In OMW the risks to capital are small but the risks to earnings are very much dependent on market
conditions, given OMW’s reliance on asset-based fees. This contrasts with our African businesses, particularly in
South Africa, where macro conditions create risks to earnings, liquidity and local capital in the lending, insurance
and asset management operations.
In 2017, South Africa suffered several sovereign downgrades that increased economic pressures on the country,
and there is a significant risk that the country could be removed from international government bond indices.
Although the ANC leadership change at the end of 2017 has been positively received by the markets, political
and policy uncertainty will continue in 2018 and potentially until the April 2019 national elections. We undertake
extensive stress and scenario tests focusing on these economic and political risks, and business plans have been
designed to accommodate this difficult macroeconomic position.
Finally, given the high level of organisation change, we are mindful of culture and heightened people risk at plc
Head Office and across the businesses. Management of the working environment and stress-related risks has
been a focus area for us, using specialist external resources where required. We have made good progress in
developing resource contingency plans at plc Head Office, and in determining and implementing appropriate
values for each new standalone business.
Sue Kean
Group Chief Risk Officer
Key risks to the managed separation strategy
Old Mutual plc’s key mission is executing the managed separation strategy. When this is complete, the Group will
be separated, OMW will become a separately listed entity and OMEM, Nedbank, OMB and the residual plc will
be subsumed into OML, the newly-listed holding company. Given the centrality of managed separation, the risks
to its execution are inherently the Group’s top risks, and will remain so until managed separation is complete.
Although the managed separation is designed to be capable of being executed in adverse market-situations,
volatile markets combined with the complexities of the process could in extreme situations impact the timetable
for and/or the value realised from the OMW listing. Therefore the macroeconomic and political risks are included
within the key business risk sections (pp21-25) rather than below in the risks to execution of managed separation
section.
The risks are listed in order of descending materiality. All key risks, and their related mitigating actions, are
overseen by the plc Board and the plc Board Risk Committee.
Current impact and risk outlook Risk mitigation and management actions
OMEM, OMW and Nedbank need to be sufficiently capacitated and capitalised to operate as successful
independently listed entities.
For the unlisted businesses to be successful standalone Good progress has been made in capacitating OML and
businesses they need to be sufficiently well capacitated OMW. Both businesses have appointed strong and
and capitalised. This means strengthening resource in independent new Boards, enhanced senior management
areas where plc provided support (eg treasury, investor capability and undertaken significant work to review and
relations and finance), setting up appropriate Governance begin implementing new operating models, including
arrangements and ensuring that each business has enhancing their risk functions. These processes have
adequate capital. been tracked and monitored by the plc management
team.
Perceived weaknesses in any of the businesses’ balance
sheets, strategies, operations, governance structures or Significant progress has also been made in developing
leadership could potentially affect the managed and internally agreeing the approach and structure of their
separation approvals and the ultimate value obtained. initial balance sheets to ensure that capital is appropriate
for the risks within the businesses even after stress
OML estimates that, after its primary listing on the JSE, its
scenarios.
effective Black Economic Empowerment (BEE)
shareholding may be slightly below the Financial Sector OML will consider appropriate transitions, if required, to
Charter (FSC) target of 25%, but this will only be known achieve its BEE ownership targets in due course. The
once the share register settles. As a JSE primarily listed OML Board will be tasked with exploring multiple
business, OML’s methodology for calculating its BEE mechanisms to ensure this goal is met as agreed.
ownership percentage will change, in line with the
provisions of the revised FSC. The BEE shareholding will
also be impacted by the corporate transactions involved in
the managed separation. OMEM will be using the new
scoring methodology for its 2017 scorecard, anticipating
the impact of the corporate restructure, in line with the
provisions of the revised Financial Services Code that
came into effect on 1 December 2017.
Current impact and risk outlook Risk mitigation and management actions
The managed separation listings and scheme need to be executed in a manner that balances value, time,
cost and risk to ensure the best outcome for all stakeholders.
Managed separation is an inherently complex project with Robust project management and governance
many inter-dependencies and will require multiple internal frameworks have been implemented, co-ordinated across
and external approvals. Project delivery delays or failure plc, OML and OMW with adviser support. The managed
to obtain regulatory or court approvals could potentially separation governance frameworks have evolved as the
impact the separation timelines and increase costs. project evolves.
People stretch, both at plc and within the businesses, The financial and execution risks to managed separation
remains a key risk to the managed separation execution. are regularly reviewed and assessed, with action taken to
The businesses are implementing managed separation mitigate risks balancing time, cost and value.
and their own internal change projects concurrently.
A number of risks are largely outside Old Mutual’s direct
South African political risk could impact or delay the control – such as obtaining timely regulatory and court
regulatory approvals required for completion of the approvals. We have taken action to mitigate these risks
managed separation. as far as possible: for example, early and proactive
engagement on the required regulatory approvals,
implementation of a shareholder engagement strategy,
and the liability debt management exercise.
In 2017, we paid particular attention to people and stretch
risk. In plc we reviewed all resourcing and made
contingency plans for delays to managed separation. The
businesses acquired additional resource or upskilled as
required, and each area put in place plans to address their
particular concerns.
While we remain a Group, plc needs to ensure that we meet our fiduciary duties while winding-down the
businesses in an orderly manner.
The wind-down of plc needs to be undertaken in a manner Plc’s fiduciary duties for the remainder of managed
that will still allow plc to fulfil its fiduciary duties. Wherever separation have been identified and processes are
possible the plc contingent liabilities and pre-existing plc in place to ensure these are met.
risks need to be wound down or addressed to minimise
In 2017 we made significant progress in addressing plc
transferring these to either OML or OMW.
contingent liabilities and pre-existing risks. Actions
included the Kotak sale, the resolution of the two legacy
pension schemes and the repayment and repurchase of
a significant amount of debt. As a result the plc balance
sheet will have a positive net asset value on transfer to
OML.
As part of the wider managed separation process there
are robust plc closure plans in place. Wherever possible,
redundant processes and tasks have already been closed
down. This will continue into 2018 to ensure a streamlined
plc is handed over to OML.
We have anticipated the risk of not retaining enough plc
Head Office operational capacity and capability to run the
residual Group effectively in the event of a delayed
separation. Although not considered likely, it has been
mitigated through contingency planning.
Current impact and risk outlook Risk mitigation and management actions
Some risks arise from the constraints of the existing Group structure, and will be reduced by managed
separation.
Our Group earnings, dividend and surplus capital are Managed separation seeks to allow each business to
reported in sterling but the majority of our earnings and meet its capital requirements and debt interest in matched
surplus capital are denominated in South African rand. currencies and cash flows. Each business will have the
This creates currency translation and foreign exchange appropriate capital to succeed independently and to be
control risk, and our reported Group earnings are more closely aligned to its natural shareholder base.
particularly sensitive to rand/GBP exchange movements.
Regular stress and scenario testing helps us understand
Managed separation will address this risk, by removing
and monitor the resilience of our capital and liquidity over
the current Group structure.
the managed separation time horizon. Our modelling
The recent regulatory trend in both the UK and South shows we are sufficiently capitalised in line with our
Africa has been to encourage the independence of philosophy of holding capital where the risks lie.
subsidiary Boards while retaining an expectation of Group
We have implemented dividend hedging on a six-month
oversight and control. Managed separation mitigates the
forward-looking basis, in line with the expected timing for
potential risks arising from this ambivalence, but any delay
the completion of managed separation.
could present challenges.
Risks presented by conflicting regulatory expectations
relating to Group control versus subsidiary independence
will ultimately be removed as the Group separates. In the
meantime, we seek to address them through open and
timely communication with both our subsidiaries and the
regulators, and through the continued role played by plc
executives on the subsidiaries’ Boards.
We have also expanded our documentation of real or
perceived conflicts of interest, and this is regularly
refreshed in light of real or perceived case studies.
Key risks to OMEM and Nedbank, and OMW
In addition to the risks relating to the execution of the managed separation, OML and OMW are exposed to a
number of risks inherent to the products they offer and the markets that they operate in.
OMEM and Nedbank (ultimately OML)
Current impact and risk outlook Risk mitigation and management actions
Volatile or difficult macroeconomic conditions, particularly within South Africa, could potentially increase
financial pressure on consumers –impacting OML’s future earnings and credit risk.
In 2017 South Africa’s real GDP growth increased OML continuously monitors its financial risk appetite
marginally to 0.9%, with the IMF forecasting similar rates metrics and builds multiple external economic factors into
of growth in 2018. There were also several sovereign stress and scenario testing to understand their possible
downgrades which may trigger South Africa’s impact on earnings, liquidity and capital resilience.
subsequent exclusion from the Citi World Government
In anticipation of 2017’s sovereign downgrades, we built
Bond Index.
the possible impacts into OML’s business plans and
downside projections. Both Nedbank and OMEM are
The 21 February 2018 Budget introduced a number of tax
focused on managing discretionary costs resulting from
increases, which sought to address the rising South African
lower growth and potentially slowing revenues as
government’s fiscal deficit. One of these was a 1% increase
consumers come under increasing pressure.
to VAT, which together with a continued low growth rate for
the economy could increase financial pressure on Within OMEM, market and liquidity risks arising from
consumers. The result of such pressure could be reduced guaranteed products, and the hedges in place to mitigate
demand for OML’s financial products and services, and an them, are actively overseen by the Balance Sheet
increase in lapses and credit default rates. Management team.
Nedbank, and to a lesser but growing extent OMEM, have OMEM’s Credit Loss Ratio remained within limits during
significant exposure to credit risk through their banking 2017, and work continues to develop an improved credit
businesses. Nedbank has a greater proportion of wholesale risk governance framework. Due to the current
funding than the market norm; and it is exposed to macroeconomic environment, lending is being further
significant credit risk within the core South African market restricted to keep OMEM within risk appetite, and this may
and in the Rest of Africa, where there are particular impact planned earnings.
challenges due to low growth. Nedbank’s credit losses were better than planned, due
The economic situation in Zimbabwe remains volatile, with mainly to good risk management and provisioning.
a lack of liquidity and substantial increases in equity, which Nedbank remains well positioned to deal with potentially
may not be sustainable. Local exchange controls may severe stress scenarios.
reduce OMEM’s ability to remit dividends back to South OMEM continuously reviews developments in Zimbabwe
Africa. and undertakes separate stress and scenario testing to
understand exposures and identify possible management
actions.
Changing government policies and public sentiment, particularly in South Africa, could adversely influence
external perceptions of OML and impact regulations (including business ownership and fungibility
restrictions within Africa).
Global and South African political risk remained elevated OML monitors political developments and their possible
throughout 2017, but has stabilised somewhat following the impacts on the business.
February 2018 leadership transition. In H2 2017 media
Where there are potential systemic risks such as the
attention focused on issues relating to corruption and state
KPMG allegations, cross-businesses teams are
capture. The resignation of Jacob Zuma as President and
mobilised to review the potential impacts of the event,
the appointment of Cyril Ramaphosa as his successor in
ascertain the actions that can be taken, and work with
February 2018 was well received by markets. Tackling
external stakeholders.
corruption and renewing investor confidence will be Nedbank’s CEO began engagement with Cyril
government priorities. Ramaphosa after his election as ANC leader,
emphasising the need for economic policy certainty.
Key risks to OML include the business received from
OMEM’s CEO is an active member of Business
collective labour organisations and public sector workers,
Leadership South Africa and the Association for
which could present a risk of mass exits from our products
Savings and Investments South Africa, and attended
following a change in sentiment or could be affected by
and sponsored the JSE South African investment
government cutbacks.
conference in New York in November 2017.
South African political risk also creates additional risks in the
macroeconomic environment (see above). During 2017, Nedbank enhanced its monitoring and
The recent military-backed transfer of power in Zimbabwe governance over reputational risk in relation to
raised concerns around political instability. To date the customers, suppliers and other stakeholders.
transition has been orderly and introduces potential upside
political risk, particularly if the new leadership is able to
introduce measures aimed at supporting economic growth.
Current impact and risk outlook Risk mitigation and management actions
Delivery of multiple major change programmes increases the risks of non-delivery and people stretch, and
could reduce OML’s ability to operate successfully as a standalone entity.
Both OMEM and Nedbank are currently undertaking All major change programmes are overseen by
multiple change programmes. These include the managed appropriate governance structures and, ultimately, the
separation and listing, significant IT transformation, and respective OMEM and Nedbank Boards.
responding to major regulatory change including the
People risk will remain elevated throughout the managed
introduction of Twin Peaks regulation in South Africa, SAM
separation and is compounded by the increased need to
and Basel III.
manage costs due to the depressed South African
The volume of these simultaneous change programmes economic environment.
places strain on management and resourcing, and
Where required, interim and contingency resources will
increases delivery risk. This applies particularly at OMEM,
be identified and deployed.
where the additional demands of functioning as an
independent organisation and embedding a new Nedbank has launched its People and Culture 2020
management team have put the business under strain. journeys, aimed at increasing efficiency and enhancing
execution.
We also recognise that OMEM needs to develop and
embed a new customer-focused and digital culture
OMEM has a broad range of credible contingency
to support the new strategy.
arrangements – including construction of a grey water
The continuing Cape Town water crisis presents a collection and filtration plant on its Cape Town
significant risk of disruption to OMEM’s Cape Town operations centre, due to come onstream in early May
operations. 2018.
Velocity of regulatory change in South Africa and increased risk of regulatory enforcement.
In South Africa, the new Twin Peaks supervisory regime Change and readiness programmes are underway to
and SAM regulations will be implemented over the next few ensure compliance with the new regulatory framework,
years. Both will drive significant changes for our businesses. although resourcing within the Risk and Finance functions
remains a challenge.
Development of the SAM regulations has continued through
2017. Two major issues affecting OMEM and OML are the Nedbank began with the design and introduction of a
treatment of the Nedbank holding and the agreement of a conduct risk framework in 2016. In 2017 it began a full-
transitional period for capital. scale Market Conduct regulatory programme, assisted by
EY.
Conduct risk remains significant, with an increased focus on
the quality of advice provided with the distribution of our
mass market products, presenting a risk of regulatory OMEM is developing a new Market Conduct framework
intervention and redress. which will support enhanced oversight of advice risk.
Both Nedbank and OMEM will be impacted by the Both OMEM and Nedbank continue to engage actively
implementation of IFRS9 and IFRS17, the FICA with government, regulators and industry forums to
Amendment Act and Basel III – which come into effect positively influence the evolving public policy landscape.
during 2018 and 2019 – and have programmes underway
Nedbank and OMEM continue to embed their Anti Money
to ensure compliance.
Laundering (AML) frameworks and controls, particularly
in their Rest of Africa subsidiaries.
Current impact and risk outlook Risk mitigation and management actions
Failure to adequately anticipate or respond to competitive pressures or changing customer expectations,
particularly in relation to enhancing the digital offering.
OMEM faces significant competitive pressures in its core De-risking and de-scoping OMEM’s IT transformation
markets and there is a risk of being left behind in the programme has reduced project delivery risk. A robust
customer proposition development race. project governance framework is in place and progress is
monitored by the OMEM Board IT Committee, which has
OMEM is undertaking several strategic investments to
been augmented with experienced non-executive
improve customer processes and experience, respond to
directors.
new regulatory requirements, and integrate the UAP
business, acquired in 2015, with investment in sales and Nedbank has a strong and established IT governance
service enablement in Africa (starting in the Faulu and framework and has enhanced second-line oversight.
CABS businesses). OMEM is currently reviewing its entire IT capability
framework to ensure that it can support the future
Nedbank is currently implementing the digital journey and
strategy.
managed evolution of its existing IT infrastructure. Its
Managed Evolution systems roll out, now underway, and
digital fast lane strategy are bringing large-scale
changes; some increase in IT disruption and impact to
systems availability must therefore be expected.
OMEM is exposed to risks relating to the stability and
maintenance of its existing IT infrastructure in its Rest of
Africa businesses.
Strategic and governance risks in the Rest of Africa subsidiaries.
Nedbank and OMEM’s Rest of Africa businesses have been The Rest of Africa businesses remain closely monitored
subject to strategic and governance risks and in some and overseen by the respective Nedbank and OMEM
cases underperformance. As some of these subsidiaries Group functions and Board committees. Progress has
are separately listed and not fully owned, there are potential been made in strengthening and aligning governance and
issues relating to information flows and strategic alignment. control frameworks and the integration of Rest of Africa
In addition, businesses in some jurisdictions may be subject subsidiaries remains a focus area.
to government restrictions on repatriation of profits.
Nedbank has identified a need for a centralised and co-
Nedbank’s strategic alliance with ETI was significantly ordinated operating framework to align the subsidiaries
affected by the fall in oil prices and the downturn in the with the main business, increasing monitoring and
Nigerian economy, resulting in losses and lower-than- oversight at the subsidiary level. This framework is in its
expected business flows. However, there have been a early implementation stages.
number of positive developments during the year, including
The outlook for the ETI alliance improved during 2017, as
Nigeria exiting recession.
Nigeria’s exit from recession helped to boost business
OMEM has been working to integrate the UAP business performance. ETI governance committees have been
with a focus on embedding governance and control strengthened with key appointments.
frameworks. The CABS business has the risk of volatile
results due to the challenging environment.
A cybersecurity breach may cause business disruption, reputational damage and material adverse effects on
the business’ financial condition, operational results and prospects.
Both OMEM and Nedbank are exposed to increasing cyber Nedbank has an experienced Chief Information
security risks, with legacy infrastructure particularly Security Officer and has made significant progress in
vulnerable. Cyber attacks could result in operational losses, enhancing cyber-resilience during 2017. Nedbank
interruption of business operations, the loss of critical data continues to invest substantially on this front.
and reputational damage.
OMEM has recruited a new Chief Information Security
Officer and strengthening its cybersecurity team. The
effectiveness of the control environment is assessed by
regular external assurance.
OMW
Current impact and risk outlook Risk mitigation and management actions
Volatile or difficult global macroeconomic conditions could potentially impact OMW’s earnings, particularly
asset-based fees.
Global markets maintained historic highs in 2017, with OMW regularly undertakes stress and scenario testing to
market volatility relatively subdued. However, there is a understand the effect of severe macroeconomic events
continuing risk of a rapid correction or return of increased and their potential impact on the business.
volatility.
During 2017 OMW incorporated the implications of a ‘hard
FTSE100 equity levels remained high, with a weaker pound Brexit’ scenario into its stress and scenario testing to
boosting sterling profitability for many multinational firms in understand any possible longer-term implications on
the index. A potential market correction could impact OMW capital and liquidity.
by reducing asset-based fees.
Changing government policies and public sentiment in our key markets could adversely influence external
perceptions of OMW and impact regulatory change.
Global political risk remained elevated throughout 2017, We continuously monitor political developments and
with tensions in the Middle East impacting oil prices, and the review the possible impacts.
ongoing stand-off on the Korean peninsula.
During 2017, OMW undertook scenario testing for
In the UK, concerns remain over the implementation of possible changes in government policy.
Brexit and the impact of the Conservative government
losing its majority in the April 2017 election. This created
additional risk in financial markets.
Delivery of multiple major change programmes increases the risk of non-delivery and people stretch, and
could reduce OMW’s ability to operate successfully as a standalone entity (including the separation and sale
of its single-strategy business, OMGI).
OMW is currently undertaking multiple change All major change programmes have appropriate and
programmes, including the managed separation and listing, robust governance structures, and are ultimately
the sale and separation of the OMGI single-strategy overseen by the strengthened OMW management team
business, the platform transformation programme, and and Board.
responding to major regulatory changes such as MiFID II
To reduce people risk, OMW is identifying those most at
and GDPR.
risk, offering coaching, additional resource and wellbeing
This volume of concurrent change inevitably imposes packages, and providing monthly people reports to
strains on management, particularly resource and project management.
management, increasing delivery risk. There is an
increased risk of human resources process failures
regarding employee recruitment, retention, reward and
development.
Current impact and risk outlook Risk mitigation and management actions
Failure to adequately anticipate or respond to competitive pressures or changing customer expectations,
particularly in relation to enhancing and developing a new platform.
OMW must continue to anticipate and respond to The new platform transformation programme has a robust
competitive pressures and customer expectations relating governance framework. It is overseen by OMW’s Board
to product design, distribution and customer experience. IT Committee, which includes non-executive directors
Failure to do so could result in reduced new business with transformation project experience. The programme’s
volumes and outflows. well defined project management framework includes risk
identification and monitoring, with a clearly defined risk
This is particularly relevant to OMW’s IT and systems, appetite framework and statements. Its progress has
where key IT initiatives may not deliver what is required remained on-plan from the outset.
either on time or within budget or provide the performance
Lessons learned from a review of the initial project have
levels required to support current and future needs.
been implemented. Actions included ensuring strong
Failure to devote significant resources to support existing second-line oversight and the creation of the OMW Board
systems and upgrade legacy systems could impair our IT Committee.
ability to gather information for pricing, underwriting and
reserving, and to attract and retain customers, for whom
online functionality is increasingly important.
The initial platform project experienced significant cost and
time over-runs and was terminated in 2017. It was replaced
by a new platform transformation programme, with FNZ
replacing IFDS as lead external partner. Failure of the new
programme could materially affect OMW’s financial position
and client relationships.
Extensive regulatory change in core markets increases the risk of failing to comply with existing and new
regulations.
OMW is subject to extensive regulation in the UK and OMW has built a regulatory change framework to allow
internationally and thus faces compliance risks, including effective planning and management across the
conduct risk. The underlying businesses are subject to the organisation, and to ensure prompt identification of
risk of adverse changes in the laws, regulations and regulatory change affecting one or more OMW
regulatory requirements in the markets in which they businesses.
operate. It is difficult to accurately predict the timing, scope
OMW-level projects are in place for key regulatory
or form of future regulatory initiatives, although it is widely
changes such as MiFID II and GDPR to ensure that a
expected that there will continue to be a substantial amount
consistent approach to both interpretation and
of regulatory change. Notable developments include the EU
implementation is taken across all businesses, tracked by
General Data Protection Regulation (GDPR) and UK Senior
the OMW Regulatory Delivery Committee.
Managers and Certification Regime (SMCR) and a high
degree of supervisory oversight of regulated financial A specialist Regulatory Liaison team facilitates effective
services firms, challenging firms on the extent to which relations and communications with OMW’s primary
compliance with requirements and the interests of regulators, the FCA and PRA, ensuring careful
customers have been achieved. tracking and delivery of regulatory requests and actions.
The activities of this team are closely monitored by
OMW is currently under investigation over to the treatment
executive management and the Board Risk Committee.
of long-standing customers of closed-book products.
OMW is cooperating with the FCA in its investigation,
which is ongoing.
A cybersecurity breach may cause business disruption, reputational damage and material adverse effects on
the business’ financial condition, operational results and prospects.
OMW is increasingly exposed to the risk that third parties or We have made significant investments across OMWs
malicious insiders may attempt to use cybercrime businesses to increase system security and resilience,
techniques, including distributed denial of service attacks, to and an Information Security Improvement Programme is
disrupt the availability, confidentiality and integrity of its IT underway. We have appointed a new Chief Information
systems. This could result in disruption to key operations, Security Officer and are strengthening the support team.
make it difficult to recover critical services, damage assets
and compromise data.
Overview of the Group’s risk and governance structures
The active portfolio manager governance model, introduced in 2016 after the announcement of the managed
separation strategy, is now fully embedded. Under this model we evaluate each of the Group’s businesses
as an asset, with a view to realising maximum value through separation.
The businesses, particularly OMW and OML, have developed their own governance capabilities – such as
appointing independent chairmen, and defining their own values and culture, risk strategies and appetite
frameworks. The plc still oversees these processes and will continue to monitor them centrally until
separation.
Risk strategy
Our risk strategy remains unchanged from 2016. We continue to use the following principles to guide our
actions and choices throughout the managed separation:
- All our actions must be directed towards our objective and aligned with these measures of success, within the
parameters and risk appetite agreed by the plc Board
- We will have to make trade-offs between four principal considerations: the value unlocked, the cost involved in
delivering the strategy, the time it takes to do so, and the risks incurred or mitigated by our actions
- To maintain market confidence we must demonstrate meaningful action in a reasonable timeframe at valuations
that are perceived to be, at a minimum, fair
- We are committed to treating shareholders fairly. We will seek to communicate our intentions and plans in an
open and proactive manner, as appropriate in the context of our fiduciary obligations
- We are willing to accept short-term price volatility in our stock as the market digests each action and begins to
value each business and the plc appropriately
- We will continue to discharge our fiduciary and regulatory responsibilities in an appropriate manner.
Risk appetite
Plc liquidity and regulatory capital have remained our key risk appetite metrics throughout 2017, supported
by earnings volatility and risk and control culture. The financial metrics are projected over the horizon of
managed separation: we evolve and recalibrate them as the managed separation progresses, by undertaking
extensive stress and scenario testing.
The businesses have developed their own qualitative and quantitative risk appetite metrics reflecting their
own business models, industries and risk strategies. These are monitored by the business Boards as well
as the plc. At both plc and business levels we use risk appetite limits and early warning thresholds (EWTs)
to define the boundaries of risk taking and manage our risk/return profile.
The plc’s appetite and intentions are set out below, with the metrics used to measure each:
Capital Earnings Liquidity Culture
The Group has no appetite We accept that as part of our The capital management We measure our risk and
for regulatory intervention plc strategy of managed policy introduced with the control culture by
(whether perceived or real) separation, and as our managed separation considering our
during managed separation. businesses consolidate their strategy allows significant governance and tone from
As such, we hold a buffer past expansion, execution flexibility in managing the top, understanding of
above minimum risks and earnings volatility liquidity. risk, attitude to risk, control
requirements in order to are likely to increase. functions, quality of
We hold a buffer at Group
remain solvent. However, we have no management information,
level to support this, sufficient
appetite for big surprises, and remuneration
During 2017, we continued for a liquidity survival horizon
such as earnings volatility structures.
to set Solvency II capital risk of at least 12 months. We
that cannot be anticipated by
appetite at 110% with an also have a multi-year Qualitative assessment of
the market we operate in or
EWT at 120%. This reflects liquidity view over the our risk and control culture
the significant level of significant operational managed separation focuses on the values and
disallowed surplus capital losses. horizon. The Group should behaviours embedded in
within South Africa under the be able to meet extreme but the businesses that shape
Solvency II calculations. We plausible short-term losses. risk decisions.
indicated at our 2017 Interim
Results that we could accept
the possibility of dipping
below our EWT when
considering options for our
capital structure.
Monitoring and management
Our key principle is that all At the plc level, we make The plc liquidity metric is Each business undertakes
our businesses should be extensive use of multi-year continuously monitored and culture monitoring half-
well capitalised as if they stress testing to understand reported to the plc Board. yearly using a 50-question
were standalone the possible impact of risks The limits and EWT are qualitative assessment.
businesses, and that the on dividends and earnings. calculated dynamically so
We set threshold levels for
Group position must be We also use business- are refreshed each month.
positive responses, with an
compliant with regulatory specific monitoring to identify
In 2017, plc liquidity EWT of 70% and a limit of
requirements at all times. and assess risks within
remained above both the 50%.
individual businesses.
There is ongoing monitoring limits set and the EWT.
At year end 2017 one
of our Solvency II position We monitor earnings
business was slightly below
and the impact of managed volatility by reviewing year-
EWT but on an improving
separation activities on this to-date pre-tax AOP on a
trend. Ongoing actions are
are projected. constant currency basis. In
being taken to improve the
2017, earnings remained
We remained above our position.
above this indicator.
EWT throughout 2017.
Based on stress tests, the
Board agreed at the time of
the Liability Management
exercise in November that
the Group could operate
below the EWT where the
reasons for it do not reflect
the underlying economic
position of the Group,
providing the Group
remained above risk appetite
of 110%.
“Related parties
(a) Transactions with key management personnel, remuneration and other compensation
Key management personnel are those persons having authority and responsibility for planning, directing and
controlling the activities of the Group, directly or indirectly, including any director (whether executive or otherwise)
of the Group. Details of the compensation paid to the Board of directors as well as their shareholdings in the
Company are disclosed in the Remuneration Report on page 97 to 128.
(b) Key management personnel remuneration and other compensation
Year ended 31 December 2017 Year ended 31 December 2016
Number of Number of
personnel £'000 personnel £'000
Directors' fees 11 2,081 11 1,584
Remuneration 21,758 25,133
Cash remuneration 9 4,830 14 6,228
Short-term employee benefits 10 5,444 14 9,828
Long-term employee benefits 9 123 14 280
Share-based payments 9 11,361 11 8,797
23,839 26,717
Share options
Year ended 31 December 2017 Year ended 31 December 2016
Number of Number of
Number of options/share Number of options/shares
personnel s '000s personnel '000s
Outstanding at beginning of the year 4 58 4 52
Granted during the year 6
Exercised during the year (23) –
Outstanding at end of the year 3 35 4 58
Restricted shares Year ended 31 December 2017 Year ended 31 December 2016
Number of Number of
Number of options/share Number of options/shares
personnel s '000s personnel '000s
Outstanding at beginning of the year 10 23,494 10 11,346
Leavers (2) (1,346) (2) (2,974)
New appointments 1 1,087 2 5,215
Granted during the year 948 11,659
Exercised during the year (673) (236)
Vested during the year (952) (1,516)
Outstanding at end of the year 9 22,558 10 23,494
(c) Key management personnel transactions
Key management personnel and members of their close family have undertaken transactions with Old Mutual
plc and its subsidiaries, joint ventures and associated undertakings in the normal course of business, details of
which are given below. For current accounts positive values indicate assets of the individual whilst for credit
cards and mortgages positive values indicate liabilities of the individual.
Year ended 31 December 2017 Year ended 31 December 2016
Number of Number of
personnel £000s personnel £000s
Current accounts
Balance at beginning of the year 4 2,951 5 2,208
Net movement during the year 870 743
Balance at end of the year 5 3,821 4 2,951
Credit cards
Balance at beginning of the year 4 30 5 20
Net movement during the year 2 10
Balance at end of the year 5 32 4 30
Mortgages
Balance at beginning of the year 1 121 3 110
Net movement during the year 85 11
Balance at end of the year 3 206 1 121
Property & casualty contracts
Total premium paid during the year 2 6 1 6
Claim paid during the year 1 9 – –
Life insurance products
Total sum assured/value of investment at end of the year 9 24,375 9 23,325
Pensions, termination benefits paid
Value of pension plans as at end of the year 9 8,461 9 3,339
Various members of key management personnel hold or have at various times during the year held,
investments managed by asset management businesses of the Group. These include unit trusts, mutual funds
and hedge funds. None of the amounts concerned are material in the context of the funds managed by the
Group business concerned, and all of the investments have been made by the individuals concerned either on
terms which are the same as those available to external clients generally or, where that is not the case, on the
same preferential terms as were available to employees of the business generally.
(d) Other transactions with related parties
Peter Moyo, the Chief Executive Officer of Old Mutual Life Assurance Company (South Africa) Limited,
OMLAC(SA), a wholly owned subsidiary of the Group, and one of the Company’s key management personnel,
is also a founder and Executive Director of NMT Capital, and holds an equity interest in NMT Capital and NMT
Group Proprietary Limited (NMT Group).
OMLAC(SA) has provided equity and preference share funding to the NMT Group and has also provided
preference share funding to a family trust of Peter Moyo, which trust has an equity interest in NMT Capital.
Included in dividend income from associated undertakings for the year eneded 31 December 2017, is £0.1
million (R2 milllion) of preference share dividends received from NMT Capital (Pty) Ltd. OMLAC(SA) has
invested in preference shares to the value of £4 million (R62 million) in NMT Capital and has also invested in
ordinary and preference share capital of NMT Group (Pty Ltd) £8 million (R142 million), and the preference
share capital of Amabubesi Capital Travelling (Pty) Ltd of £1 million (R18 million), RZT Zeply 4971 (Pty) Ltd of
£0.7 million (R13 million), RZT Zeply 4973 (Pty) Ltd of £0.7 million (R13 million) and STS Capital (Pty) Ltd of
£0.7 million (R13 million), all of which are considered to be related parties of NMT Capital (Pty) Ltd. Preference
share dividends totalling £0.5 million (R8 million) was received by OMLAC(SA) during the year.
The Group also holds £1 million (R14 million) of the ordinary share capital in NMT capital.”
“Related parties
Old Mutual plc enters into transactions with its subsidiaries in the normal course of business. These are principally
related to funding of the Group’s businesses and head office functions. Details of loans, including balances due
from/to the Company, are set out below. Disclosures in respect of the key management personnel of the Company
are included in the Group’s related parties disclosures in note J3.
There are no transactions entered into by the Company with associated undertakings.
£m
At At
31 31
December December
2017 2016
Balances due from subsidiaries 301 4,070
Balances due to subsidiaries (236) (3,908)
Balances due from other related parties – Nedgroup Trust Limited 16 16
Income statement information
At 31 December £m
Year ended 31 December 2017 Year ended 31 December 2016
Ordinary Other Ordinary Other
Interest dividends amounts Interest dividends Amounts
received received paid received received paid
Subsidiaries 44 1,739 (117) 74 95 (108)
“Responsibility statement of the directors in respect of the annual financial report
We confirm that to the best of our knowledge:
- the financial statements, prepared in accordance with the applicable set of accounting standards, give a true
and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings
included in the consolidation taken as a whole; and
- the strategic report includes a fair review of the development and performance of the business and the
position of the issuer and the undertakings included in the consolidation taken as a whole, together with a
description of the principal risks and uncertainties that they face.
We consider the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides
the information necessary for shareholders to assess the Group's position and performance, business model and
strategy.
Bruce Hemphill Ingrid Johnson
Group Chief Executive Group Finance Director
14 March 2018”
Enquiries
External communications
Patrick Bowes +44 20 7002 7440
Investor relations
Dominic Lagan (Old Mutual plc) +44 20 7002 7190
John-Paul Crutchley (Old Mutual Wealth) +44 20 7002 7016
Nwabisa Piki (Old Mutual Emerging Markets) +27 11 217 1951
Media
William Baldwin-Charles +44 20 7002 7133
+44 7834 524833
Sponsor:
Merrill Lynch South Africa (Pty) Ltd
Joint Sponsor:
Nedbank Corporate and Investment Banking
Notes to Editors
About Old Mutual plc
Old Mutual plc is a holding company for several financial services companies. In March 2016, it announced a new
strategy of managed separation entailing the separation of its underlying businesses into independently-listed,
standalone entities.
The managed separation strategy seeks to preserve and release the value currently trapped within the group structure.
The managed separation will be materially complete by the end of 2018.
OM Asset Management, a US based institutional asset manager, is now independent from Old Mutual. The remaining
underlying businesses are:
Old Mutual Emerging Markets: Old Mutual Emerging Markets seeks to become a premium African financial services
group that offers a broad spectrum of financial solutions to retail and corporate customers across key market segments
in 17 countries.
Nedbank: Nedbank ranks as a top-5 bank by capital on the African continent and Ecobank, in which Nedbank maintains
a 21.2% shareholding, ranks within the top-10 banks by assets on the African continent.
Old Mutual Wealth: Old Mutual Wealth is a leader in the UK and in selected offshore markets in wealth management,
providing advice-led investment solutions and investment platforms to over 900,000 customers, principally in the affluent
market segment.
For the year ended 31 December 2017, Old Mutual reported an adjusted operating profit before tax of £2.0 billion. For
further information on Old Mutual plc and the underlying businesses, please visit the corporate website at
www.oldmutualplc.com.
Date: 15/03/2018 09:01:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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