Annual Financial Report 2010 and AGM 2011 - Part 3

RNS Number : 1754E

Old Mutual PLC

04 April 2011

Ref 33/11 (Part 3)

GROUP FINANCE DIRECTOR'S STATEMENT

During the year to 31 December 2010 ("the year") Old Mutual showed a very strong improvement in results compared to the prior year. Adjusted Operating Profit (AOP) earnings per share were 16.0p for 2010 compared to 11.6p for 2009. This was driven by improved operational performance across the Group and positive currency movements. Funds under management (core and continuing businesses) grew by 12% compared to the prior year, largely due to improved market conditions. Return on equity grew to 12.2%, primarily as a result of improved margins and favourable foreign exchange movements.

IFRS AOP on a pre-tax basis of £1,481 million for the year was £348 million higher than in the prior year. This was made up of £181 million (52%) due to improvement in trading results, and £167 million (48%) from the positive benefit of currency movements. On a constant currency basis, the AOP for 2009 was £1,300 million. Strong growth in new business sales, lower credit losses in banking, a close focus on overall cost control, improved persistency and higher profits in our general insurance business drove the underlying performance.

Net client cash flows (NCCF) doubled in LTS to £5 billion, and were positive in all our European businesses and in our Retail South African businesses. This was offset by outflows in the Corporate and OMIGSA businesses in South Africa, and in certain affiliates of USAM. The NCCF contribution from Wealth Management was particularly strong, increasing by 56% to £3.9 billion largely from the UK Platform and Italy.

Funds under management increased to £309 billion (core and continuing businesses) although there were periods of substantial market movements in the year. Across all our principal equity markets, second quarter falls more than eclipsed first quarter rises. Markets steadily rose from August onwards, all recording their 2010 highs in the last week of the year. The JSE All Share index rose by 16% in the year, the FTSE rose by 9%, the S&P-500 by 13% and the Swedish SAX:OMX by 23%.

Management Discussion and Analysis of Results for 2010

The principal businesses of the Group are the LTS division, Nedbank, Mutual & Federal and US Asset Management. During the period, Old Mutual owned on average 54% of Nedbank. At 31 December 2010 the market capitalisation of Nedbank was £6.2 billion. The results for each of the LTS businesses, Nedbank, Mutual & Federal and US Asset Management are discussed separately in the Business Review which follows this Report.

Summarised Financial Information

	£m 2010	£m 2009	% Change
IFRS results
Adjusted operating profit (IFRS basis, pre-tax)1	1,481	1,133	31%
Adjusted operating earnings per share (IFRS basis)¹	16.0p	11.6p	38%
Basic loss per share	(6.5p)	(7.8p)	17%
IFRS profit/(loss) after tax	(24)	(118)	80%
Sales statistics
Life assurance sales - APE basis	1,583	1,381	15%
Life assurance sales - PVNBP basis	12,155	10,217	19%
Value of new business	172	167	3%
Unit trust/mutual fund sales	10,305	7,567	36%
MCEV results
Adjusted Group MCEV (£bn)	11.0	9.0	22%
Adjusted Group MCEV per share	202.2p	171.0p	18%
Adjusted operating profit Group MCEV earnings (post-tax and non-controlling interests)	830	562	48%
Adjusted operating Group MCEV earnings per share	15.5p	10.7p	45%
Financial metrics
Return on equity^{1, 2}	12.2%	9.1%
Return on Group MCEV	10.9%	10.7%
Net client cash flows (£bn)	(6.2)	(2.7)	(130%)
Funds under management (£bn)	322.8	285.0	13%
Interim dividend	1.1p	-	-
Final dividend	2.9p	1.5p	93%
FGD (£bn)	2.1	1.5	40%

1 The year ended 31 December 2009 has been restated to reflect US Life as discontinued.

2 ROE is calculated as IFRS AOP (post-tax) divided by average shareholders' equity of core businesses (excluding the perpetual preferred callable securities).

Summary adjusted operating profit statement

£m	Year ended 31 December 2010	Year ended 31 December 2009¹	% Change
Revenue
Net earned premiums	3,278	2,746	19%
Investment return (non-banking)	10,585	10,903	(3%)
Banking interest and similar income	4,082	3,989	2%
Fees & commissions	3,160	2,538	25%
Other revenue	298	311	(4%)
Total revenues	21,403	20,487	4%
Expenses
Net claims and benefits incurred	(4,564)	(3,126)	46%
Change in investment contract liabilities	(6,899)	(8,341)	(17%)
Bank interest	(2,500)	(2,627)	(5%)
Other expenses	(5,966)	(5,262)	13%
Total expenses	(19,929)	(19,356)	3%
Share of associated undertakings profit/(loss) after tax	7	2	250%
Adjusted operating profit/(loss) before tax and non-controlling interests	1,481	1,133	31%

1 The year ended 31 December 2009 has been restated to reflect US Life as discontinued.

	Net Margin (bps)
	2010	2009
LTS	72.2	64.8
Nedbank	98.8	95.4
USAM	5.5	5.8
TOTAL¹	43.0	38.7

1 Includes M&F and corporate costs. Margins are calculated on the average balance of funds under management and banking assets during the year

The improvement in our AOP earnings was principally driven by increased income from rising markets, better underwriting performance in all our insurance businesses, growth in Nedbank's non-interest revenue stream, and the benefit of positive currency movements.

The 19% increase in net earned premiums reflected the growth in new business sales, most notably, in Emerging Markets, Mutual & Federal and Wealth Management. The majority of the fee and commission income growth arose in Wealth Management, largely attributable to the increase in FUM over the period, and in Nedbank, reflecting a growing customer base. Investment return is driven by dividend and interest income, and gains and losses on the fair value of investments and securities, a large proportion of which are held attributable to investment contract holders. The decline in investment return in the year broadly matches the corresponding movement in investment contract liabilities in Wealth Management and Nordic given the investment nature of the contracts written in those businesses. However, in Emerging Markets the increase in investment return is not closely matched by a similar change in investment contract liabilities due to its larger proportion of insurance type products, and because substantial shareholder capital is held in South Africa. Other expenses grew by 13% over the period, reflecting increased levels of new business written, FX movements (primarily the strengthening of the rand) and increased remuneration costs in South Africa.

Group net margin (measured as net profits earned on average assets) increased by 4.3 basis points over the period from 38.7 basis points to 43.0 basis points. Of this, the European LTS businesses generated 3.9 basis points as the uplift in profits significantly exceeded their average asset growth, and 0.3 basis points came from Emerging Markets, where AOP grew at a marginally higher rate than growth in average assets, resulting in a small increase. The increase in profit from the non-LTS businesses resulted in a further 1.6 basis points increase, and the reduced LTIR contribution resulted in a decrease of 1.5 basis points.

Operating profit analysis

Finance costs increased mainly as a result of inclusion of a full-year interest charge on the £500 million seven-year 7.125% fixed rate senior bond placed in October 2009. The interest payable to non-core operations reflects the interest payable on the loan note arrangement between Bermuda and Group following a change to the terms of the arrangement. The decline in other net income and expenses is mainly attributable to a stamp duty reserve tax refund received in the first half of the year (£16 million) and higher dividend income (£5 million). Group costs for 2010 were £60 million (2009: £70 million).

As anticipated, the LTIR on the shareholder assets decreased from £91 million to £31 million. This was a result of the 390 basis point reduction to 9.4% in the rate applied to shareholder assets within Emerging Markets. This reflected the expected return from the asset allocation of 25% equities and 75% cash in 2010. The LTIR rate in Mutual & Federal was similarly reduced by 390 basis points in 2010. The LTIR rate for Emerging Markets and Mutual & Federal has been further reduced in 2011 to 8.4% to reflect the prevailing low interest rate environment in South Africa.

Operating profit analysis

£m	Year ended 31 December 2010	Year ended 31 December 2009 (constant currency)	% Change	Year ended 31 December 2009¹(as reported)	% Change
Long-Term Savings	897	713	26%	636	41%
Nedbank	601	548	10%	470	28%
Mutual & Federal	103	81	27%	70	47%
US Asset Management	87	84	4%	83	5%
Finance costs	(128)	(104)	23%	(104)	23%
LTIR on excess assets	31	91	(66%)	91	(66%)
Interest payable to non-core operations	(55)	(40)	38%	(40)	38%
Interest receivable from non-core operations	16	12	33%	12	33%
Other net income and expenses	(71)	(85)	(16%)	(85)	(16%)
Adjusted operating profit	1,481	1,300	14%	1,133	31%

1 The year ended 31 December 2009 has been restated to reflect US Life as discontinued.

Reconciliation of Group AOP and IFRS profits

The key adjusting items between our AOP and IFRS profits for the year are deductions of £214 million in respect of acquisition accounting (mainly the amortisation of acquired present value of in-force business), £83 million for short-term fluctuations in investment return (of which £71 million relates to the smoothing of previous years' deferred tax assets), and £203 million in respect of the impact of marking-to-market of Group debt, as the improvement in the external valuation of Group debt in the year negatively impacted profit after tax for the year. This reverses previous years' mark-to-market gains on Group debt. Other adjustments net to £18 million.

Reconciliation of Group AOP and IFRS profits

		£m
	Year ended 31 December 2010	Year ended 31 December 2009¹
Adjusted operating profit	1,481	1,133
Adjusting items	(482)	(973)
Non-core operations - Bermuda	(3)	1
Profit before tax (net of policyholder tax)	996	161
Income tax attributable to policyholder returns	149	192
Profit before tax	1,145	353
Total income tax	(456)	(400)
Profit/(loss) from continuing operations after tax	689	(47)
Profit/(loss) from discontinued operations after tax	(713)	(71)
Profit/(loss) after tax for the financial year	(24)	(118)
Other comprehensive income for the financial period	1,151	1,228
Total comprehensive income for the financial period	1,127	1,110
Attributable to
Equity holders of the parent	594	709
Ordinary shares	428	334
Preferred securities	105	67
Total comprehensive income for the financial period	1,127	1,110

1 The year ended 31 December 2009 has been restated to reflect US Life as discontinued.

As previously reported, the prior year AOP results benefited from the structural tax efficiency applicable to UK companies writing unit-linked business in the UK, together with the smoothing of previous years' deferred tax assets. These assets arose during the significant market volatility of the preceding two years where falls in the value of policyholder assets resulted in the recognition of significant deferred tax assets in the IFRS income statement, which were spread forward under AOP. The pre-tax smoothing for 2010 gave rise to a profit of £71 million, a similar amount to 2009. For 2011, the pre-tax impact will be a profit of £27 million, falling to nil thereafter.

The profit on continuing operations of £689 million was offset by a loss on discontinued operations of £713 million, resulting from the impairment of the US Life business in anticipation of its sale at the terms agreed with the purchaser. The Group produced a loss after tax of £24 million on an IFRS basis. In addition to this the Group generated other comprehensive income of £1,151 million largely from favourable currency movements. There was therefore an increase in net assets of £1,127 million in the period.

Group cost savings and ROE and margin targets

At the 2009 Preliminary Results and Strategy Update, the Group introduced three-year cost saving and return on equity targets. The improvement in RoE has been driven by the achieved cost savings, and increased FUM resulting from strong growth in new business sales and positive market levels.

We are in the process of delivering the reduction in the cost base of our businesses as announced in March 2010. Wealth Management has made good progress with £35 million of run-rate savings achieved to date against the 2012 target of £45 million. Retail Europe has achieved £6 million of run-rate savings as a result of reduced staff costs and centralisation of functions in Berlin. US Asset Management delivered around £15 million of actual savings in the year as a result of restructuring in 2009, and therefore on a run-rate basis, the business is already exceeding its target. Costs to achieve this in 2010 totalled £45 million. Our focus in 2011 and 2012 will be on continued execution, particularly in Wealth Management, Nordic and Retail Europe, while maintaining the reductions we have achieved to date. The costs of executing the cost reduction process will restrict 2011 profits from these businesses. Nordic restructuring costs are anticipated to be approximately £30 million in 2011.

Progress against ROE and margin targets

	2010	2009	2012 Target
Long-Term Savings¹
Emerging Markets	25%	23%²	20%-25%
Nordic	11%	12%	12%-15%
Retail Europe	20%	9%	15%-18%
Wealth Management	14%	8%	12%-15%
LTS Total	18.5%	14.8%³	16%-18%
USAM Operating Margin	18%	18%	25%-30%

^{1 ROE is calculated as IFRS AOP (post tax) divided by average shareholders' equity, excluding goodwill, PVIF and other acquired intangibles.}

^{2 Within Emerging Markets, OMSA is calculated as return on allocated capital. Full year 2009 has been adjusted to the 2010 LTIR rate.}

^{3 Long-Term Savings 2009 restated from 14.9%.}

Progress against 2012 cost reduction targets

£m	2010¹	Cost to achieve in 2010	2012 Target
Long-Term Savings
Emerging Markets	-	-	5
Nordic	3	5	10
Retail Europe	6	5	15
Wealth Management	35	27	45
LTS Total	44	37	75
USAM	15	8	10
Group-wide corporate costs	-	-	15
Total	59	45	100

1. Run-rate savings delivered to date.

Summary MCEV results

	p
Adjusted Group MCEV per share at 31 December 2009	171.0
Adjusted operating Group MCEV earnings per share	15.5
Covered business	11.0
Non-covered business	4.5
Below the line effects	15.7
Economic variances and other	11.2
Foreign exchange movements	15.9
Dividends to shareholders	(2.7)
Nedbank market value adjustment	1.7
M&F dilution	(7.1)
BEE and ESOP adjustment	1.1
Marking debt to market value	(4.4)
Adjusted Group MCEV per share at 31 December 2010	202.2

Summary MCEV results

The adjusted Group MCEV increased 22% from £9.0 billion at 31 December 2009 to £11.0 billion at 31 December 2010. The adjusted Group MCEV per share increased by 18% (or 31.2p) from 171.0p to 202.2p over the same period.

The adjusted operating Group MCEV earnings per share increased by 4.8p from 10.7p for 2009 to 15.5p for 2010.

Non-covered business operating earnings per share, at 4.5p, were 3.2p higher for 2010 compared to the 2009 result of 1.3p, as a result of:

· Higher profits in the asset management businesses, arising from higher funds under management, and

· Higher sterling profits in the banking business due to greater fee income and lower bad debt charges.

Covered business operating MCEV earnings of 11.0p were 1.6p higher in 2010 compared to 9.4p in 2009 as a result of:

· A strong turn-around in the contribution from experience variances, due to improved persistency experience relative to the assumption changes made at December 2009, and improved expense experience;

· Lower contribution from operating assumption changes, particularly for persistency and expenses; offset by

· A lower expected existing business contribution, mainly resulting from a reduction from the contribution made by US Life due to lower yields on the corporate bond portfolio at the start of 2010 compared to the start of 2009; and

· An adverse contribution from methodology changes and error corrections, (reflected as part of other operating variances).

The net risk-free return from investment in new business in LTS (calculated as VNB based on the risk-free return, divided by the free surplus invested in new business) has increased from 35p per £1 in 2009 to 48p per £1 in 2010, with all LTS businesses contributing to the improvement.

A substantial component of the increase in adjusted Group MCEV per share during 2010 was due to significant foreign exchange gains as a result of the strengthening of the rand, dollar and krona to sterling. The balance of the increase was due to the impact of economic variances (the increase in the equity markets and reductions in interest rates), and the expected existing business contribution from covered business. This is partially offset by the dilutionary effect of the Mutual & Federal (M&F) acquisition of minorities and the adjustment to mark the debt to market value.

The M&F minority interests were acquired on 8 February 2010, in consideration for 147 million Old Mutual plc shares. This transaction diluted the adjusted Group MCEV per share by 7.1p as a result of a change of the basis of valuation of M&F as an unlisted entity (reduction of 2.5p), and the additional shares issued as consideration to the M&F minorities (reduction of 4.6p). M&F is now incorporated in the adjusted Group MCEV at the IFRS net asset value (31 December 2010: £409 million). Previously it was included at the Group's share of the market value (31 December 2009: £448 million), which was higher than IFRS net asset value (31 December 2009: £265 million).

The MCEV methodology does not capitalise returns on assets in excess of the adjusted risk-free reference rates. For the US Life business, we have estimated that the present value of credit spreads not valued at December 2010 amounted to £593 million, compared to £571 million at December 2009.

Taking this into account, we estimate that the value of US Life including an appropriate allowance for additional credit spreads (a proxy to the European Embedded Value basis) was £404 million at December 2010 compared to £253 million at December 2009.

Risk management using Economic Capital and Market Consistent Embedded Value

The Group's current internal Economic Capital models form the basis of the Risk Appetite and limit-setting framework, which is applied on the basis of Market Consistent valuation methodologies and assumption setting processes. In this way the Group is able to ensure that Risk Appetite and exposures are derived with respect to a risk-neutral benchmark, which adds value by ensuring that the Group makes explicit decisions regarding risk assumption inherent in New Business and management of the in-force book. We believe that this disciplined approach facilitated better decision-making around risk assumption over the past year. The new Solvency II internal model builds on the work done under the current Economic Capital model, and will be used in future to generate benefit in respect of making decisions which formally quantify potential investment and market risk exposures, hence support better informed decision-making.

Free surplus generation

The Group generated £759 million of free surplus in the period (2009: £434 million), of which £503 million (2009: £581 million) was generated by the LTS division. £519 million (2009: £249 million) of the £759 million was generated from covered business (which includes US Life and Bermuda). We anticipate that the value of our in-force business will generate £3 billion of free surplus from the covered business over the next five years. Free surplus generated from the in-force business is used to cover investment in new business, to pay dividends, and to provide free cashflow to the Group.

Sources and uses of free surplus

Gross inflows from core and continuing operations were £1,016 million (2009: £1,064 million), and new business spend was £419 million (2009: £438 million). Total net free surplus generated of £645 million was lower than the £782 million in 2009 due to cash costs of restructuring in 2010 and the acceleration of cash flow in respect of the VIF financing for Skandia International in 2009.

Capital, liquidity and leverage Capital

The Group's regulatory capital surplus, calculated under the EU Financial Groups Directive, at 31 December 2010 was £2.1 billion. The Group followed the FSA's requirements, and gave it six months advance notice of its right to call a £300 million Lower Tier 2 instrument at the first call date of 21 January 2011. The bond was subsequently called on this date. As a result of that notice, the Lower Tier 2 instrument had been excluded from the regulatory capital surplus calculations as at 31 December 2010. On a like-for-like basis, the regulatory capital surplus at 31 December 2010 was £2.4 billion (31 December 2009: £1.5 billion). The FGD of £2.1 billion represented a coverage ratio of 146%, compared to 135% at 31 December 2009. The increase in the coverage ratio since 31 December 2009 comprises statutory profits in LTS (Emerging Markets and UK) and Nedbank, reduced resilience risk capital requirement in Bermuda due to hedging and a reduction in Nedbank's capital requirement reflecting a change to the "capital floor" regime operated by the South African Reserve Bank. These positive changes have been partially offset by increased capital requirements in Emerging Markets, deduction of intangible assets in Nedbank for the first time and by the payment of Group ordinary and preferred dividends. On completion of the US Life transaction, and as previously announced, we would anticipate a reduction in FGD surplus of approximately £100 million.

Our Group regulatory capital, calculated in line with the FSA's prudential guidelines, is structured in the following way as noted in the table below:

Capital

				£m
	2010	%	2009¹	%
Ordinary Equity	5,168	77	4,171	71
Other Tier 1 Equity	653	10	611	10
Tier 1 Capital	5,821	87	4,782	81
Tier 2	2,363	35	2,562	44
Deductions from total capital	(1,439)	(22)	(1,497)	(25)
Total Capital	6,745	100	5,848	100

1 2009 restated to reflect actual FSA submission.

Subsidiary businesses' local statutory capital cover

	At 31 December 2010	At 31 December 2009
Business unit	Ratio	Ratio
OMLAC(SA)	3.9x	4.1x
Mutual & Federal	2.02x	1.53x
US Life	350%	312%
Nordic	9.8x	10.8x
UK	2.8x	2.9x
Nedbank¹	Core Tier 1: 10.1%	Core Tier 1: 9.9%
	Tier 1: 11.7%	Tier 1: 11.5%
	Total: 15.0%	Total: 14.9%

1 This includes unappropriated profits.

Tier 1 Capital includes £203 million of hybrid debt capital reported for accounting purposes as minority interests and Tier 2 includes £338 million of capital hybrid debt, which is reported as Group preference shares.

The Group's FGD surplus is calculated using a method called "deduction and aggregation", and is the Group's capital resources less the Group's capital resources requirement. Group capital resources is the sum of the business unit net capital resources, which is calculated as its stand-alone capital resources less the book value of the Group's investment; the Group capital resources requirement is the sum of each business unit's capital requirement.

The contribution made by each business unit to the Group's regulatory surplus will, therefore, be different from its locally reported surplus since the latter is determined without the deduction for the book value of the Group's investment. Thus, although all our major business units have robust local solvency surpluses, a number of them do not make a positive contribution to the Group's FGD position. The corollary of this is that a disposal of a business unit at a value equal to or greater than its net asset value will normally have the effect of increasing the Group's FGD surplus.

We have set a target to reduce the Group's debt by at least £1.5 billion on a cash basis by the end of 2012, whilst ensuring also that the Group's balance sheet and the holding company's liquidity continues to be prudently managed against our internal targets. In 2010 the holding company repaid £97 million of Old Mutual senior debt and on 21 January 2011 the Group repaid its £300 million Lower Tier 2 security.

Liquidity

As a Group we continue to maintain effective dialogue and strong commercial relationships with our banks and credit investors. As of 31 December 2010, the Group has available cash and committed facilities of £1.4 billion (31 December 2009: £1.2 billion). Of this cash on hand at the holding company was £0.4 billion (31 December 2009: £0.4 billion).

In addition to the cash and available resources referred to above at the holding company level, each of the individual businesses also maintains liquidity to support their normal trading operations.

Net inflows from businesses less expenses increased compared to 2009 and included a net remittance from US Life of £51 million. The holding company made ordinary dividend payments in the period of £65 million and offered a scrip dividend election. Of the total other movements of £334 million, £183 million is in respect of the revaluation of the fair value of Group bonds relating to improved credit spreads and the balance is foreign exchange movements and other net flows.

Holding company net debt

		£m
	2010	2009
Opening net debt	(2,273)	(2,263)
Inflows from businesses	433	529
Outflows to businesses and expenses	(201)	(339)
Debt and equity movements:
Ordinary dividends paid (net of scrip dividend elections)	(65)	-
Equity issuance	4	-
Other movements	(334)	(200)
Closing net debt	(2,436)	(2,273)
Net decrease/(increase) in debt	(163)	(10)

Dividend

Dividend policy

The Board intends to pursue a progressive dividend policy consistent with our strategy, having regard to overall capital requirements, liquidity and profitability, and targeting dividend cover of at least 2.5 times IFRS AOP earnings over time.

Final dividend for 2010

The Board has carefully considered the position in respect of a final dividend for 2010, and is recommending the payment of a final 2010 dividend of 2.9p per share (or its equivalent in other applicable currencies). A scrip option is also being offered.

Corporate disposals and acquisitions and related party transactions

As set out in the Strategy Update in March 2010, the Group continues to simplify its structure and reduce its spread of businesses to focus on areas of key competence and competitive strength, and drive operational improvements.

On 6 August 2010, the Group announced the disposal of the US Life operations to Harbinger Capital Partners. In February 2011, we agreed to enter into an amended SPA with an affiliate of Harbinger Capital Partners LLC. The Board of Harbinger Group Inc. - a public company listed on the NYSE - has recently agreed to acquire this affiliate. We await regulatory approval for the transaction, and closing is expected at or around the end of the first quarter of 2011. The US Life business has been classified as a non-core discontinued operation, and as such its profits are excluded from the Group's IFRS adjusted operating profit. US Life made a trading profit of £51 million before the deduction of inter-company interest paid to Group. In accordance with IFRS 5, the assets and liabilities of US Life have been classified as held for sale in the statement of financial position for the current year. The amount recognised as the impairment on remeasuring the business to fair value (less the costs to sell) was £827 million. The loss after tax on the sale was £713 million. A summarised review of the operating performance of US Life is set out in the Review of Non-core and Discontinued Business Operations which follows the core operating Divisions.

Solvency II, Risk Allocation and iCRaFT and Financial Controls Initiative project update

Our integrated Capital, Risk and Finance Transformation ("iCRaFT") project is progressing well. The Group has entered the FSA's internal model approval process, and is on track to deliver all requirements for Solvency II compliance. We were the first major UK retail group to submit our Group QIS5 results and the Self Assessment Questionnaire in respect of the internal model to the FSA. In 2011, we will enter the "Use Test" phase, during which we will demonstrate the extent to which we have embedded the new tools and processes, and will hold dry runs of selected Solvency II processes. We expect to be ready to make our full internal model application at the earliest date that the FSA is ready to accept such submissions.

In the LTS showcase presented on 13 October 2010, we published the Group's target risk profile versus current risk profile, along with a range of risk preferences, which considered the trade-offs between capital required to back different classes of liabilities, the risk assumed when underwriting these liabilities, and the margins available from doing so. The work that we have done is focused on ensuring that we deploy capital to underwrite risks that increase shareholder value, within a framework that fully protects promises made to policyholders. The Business Planning process requires business units to define and adopt their risk strategies, indicating how they intend to manage their existing liabilities and which products they wish to offer in future, within the framework of applying capital to these risks in order to create value at the BU level. We are satisfied that we are making good progress with this activity, and that we are achieving our objective to delivering better outcomes, within a stronger risk, capital and value framework.

In 2010, we completed the implementation of our Financial Controls Initiative project putting in place an internal certification framework across all the Group's financial reporting processes to a standard broadly equivalent to the US Sarbanes-Oxley requirements.

Tax and non-controlling interests

The effective tax rate on adjusted operating profits was 23% (2009: 25%). The effective rate reduced as an increased proportion of profits were earned on low-taxed dividends and capital profits, utilisation of group relief against taxable UK income in appreciating markets, and the benefit of secondary tax on companies (STC) credits in OMSA. This was partially offset by increased provisions and deferred tax assets not being recognised on losses arising in the UK. Looking forward, and depending on profit mix, we would anticipate the long term effective tax rate on AOP returning to the 25% to 28% range.

The non-controlling interests' share of adjusted operating profit increased by £34 million reflecting the minority share of higher Nedbank earnings, supported by the strengthening of the rand.

Risks and Uncertainties

There are a number of potential risks and uncertainties that could have a material impact on the Group's performance and cause actual results to differ materially from expected and historical results.

Whilst world economic conditions have improved from a year ago a number of other factors could impact the Group's ability to create value. Increasingly, governments are recognising the need for effective retirement provision, which provides future opportunities. At the same time, the regulatory environment is moving towards more transparency and providing consumers with more choice, protection and better value for money. Whilst we believe that many of our products align with this requirement, increased consumerism could lead to adverse reputational outcomes across the industry, which may have an impact on our business even though our products may not be the ones leading to such outcomes. Regulatory developments are also impacting on commission structures. The increased regulatory activity may increase the cost of doing business and drive margins down, resulting in a more competitive environment and competition for customers is increasing from both traditional and new players in all markets.

Continued economic uncertainty has contributed to lower consumer confidence, and may influence product preferences to lower risk investment products and affect termination experience in respect of existing and new business. There is also an increased drive from consumers for products with increased capital protection rather than complexity. Movements in asset prices lead to changes in funds under management and the fees that the Group earns from those funds. In instances where these lead to reduced fund values and fees, such movements will have an adverse impact on earnings.

The Group monitors these uncertainties, takes appropriate actions wherever possible, and continues to meet Group and individual entity capital requirements and day to day liquidity needs. Progress has been made with the US Life sale, effective management of Bermuda Variable Annuity guarantee risks and initial activity to explore the US Asset Management IPO.

The implementation of the new operating model is almost complete. Changes designed to implement the "strategic controller" model at the Group level through revision of the governance structure and processes, clarifying roles and responsibilities of Group and business units, and increasing Group presence on business unit Boards and Committees are progressing. Risks remain and may arise from the implementation of cost reduction programmes, streamlining of businesses and processes and other strategic initiatives. Business Performance Executives were appointed in 2010 and form a key part of the Operating Model, increasing engagement and understanding between the Group Head Office and Business Units, focusing on strategic delivery and informing the appropriate decisions.

The Group continues to strengthen and embed its risk management framework, with increasing importance placed upon ensuring business decisions are within Risk Appetite, and that risk exposures are monitored against Appetite, allocated limits and budgets. Risk Appetite limit allocation is now a key part of the Business Planning Process and the Group is progressing in embedding the Risk Appetite process by increased challenge on risks and management actions, as part of the Quarterly Business Reviews.

The Board of Directors has the expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the financial statements contained in this document.