Interim Results 2011 Part 1 (BRD)

RNS Number : 8043L

Old Mutual PLC

05 August 2011

 



5 August 2011

Old Mutual plc

Interim results for the six months ended 30 June 2011

Operational delivery continues, on track for 2012 targets

Financial Summary1	H1 2011	Movement
Adjusted operating profit before tax (IFRS basis)	£845m	15%
Adjusted operating earnings per share (IFRS basis)	9.3p	12%
Net client cash flows - LTS	£2.4bn	(£0.3bn)
Net client cash flows - USAM	(£6.4bn)	(£1.2bn)
Funds under management	£302.8bn	1%2
Group ROE (annualised)	13.1%	+20bps
Adjusted MCEV per share	209.9p	43.3p3
Interim dividend	1.5p	36%
Total profit after tax for the financial period	£632m	£252m4

¹     All numbers refer to core continuing businesses except for total profit after tax. Percentage movements are shown on a constant currency basis.

²     Compared to 31 December 2010.

³        Compared to 30 June 2010.

⁴        Compared to H1 2010 as reported in IFRS consolidated income statement.

Strong financial performance

·     Profits up 15% at £845 million

·     EPS up 12% to 9.3p

·     Interim dividend up 36% to 1.5p

·     Strong performance from Emerging Markets, with South African Mass Foundation APE sales up 49%

·     Continued growth on UK platform with sales of £2.8 billion

Strategic and operational delivery continues

·     On-track to meet the ROE, cost and debt reduction targets

·     Developing operational and product synergies across our businesses

·     US Life sale completed

Robust financial position

·     FGD surplus at £2.0 billion

·     Strong cash generation and net £0.5 billion of debt repaid as at 31 July 2011

·     Adjusted MCEV 209.9p per share at 30 June 2011 (8.4p uplift due to sale of US Life)

·     Less than £5 million exposure to sovereign debt of Portugal, Ireland, Italy, Greece and Spain

·     Only $40 million exposure to US Government debt

Julian Roberts, Group Chief Executive, commented:

"Old Mutual is a resilient and robust group and this has been a successful half year for us. We have improved our operational performance and the impact of our cost control programme is now clearly visible in our results.

"Current economic conditions in some of the markets where we operate are highly uncertain and we remain cautious over the timing of any recovery. We have a good mix of Emerging Markets and developed world business. We are well placed to grow in Africa and Latin America, which are enjoying both GDP and population growth. In Europe, we are increasingly able to provide our retail customers with the choice and transparency they demand and to take the opportunities created by the changes in regulatory regimes.

"We remain on track to achieve our 2012 targets and despite volatile markets will continue to make further progress against our strategic goals as and when shareholder value can be created."

Old Mutual plc

Interim Results for the six months ended 30 June 2011

Enquiries

External Communications
Patrick Bowes	UK	[phone]
Investor Relations
Aleida White	UK	[phone]
Media
William Baldwin-Charles		[phone] [phone]

Notes

Unless otherwise stated, wherever the terms asterisked in the Financial Highlights are used, whether in the Financial Highlights, the Group Chief Executive's Statement, the Group Finance Director's Review or the Business Review, the following definitions apply:

*     For long-term business and general insurance businesses, adjusted operating profit is based on a long-term investment return, includes investment returns on life funds' investments in Group equity and debt instruments, and is stated net of income tax attributable to policyholder returns. For the US Asset Management business, it includes compensation costs in respect of certain long-term incentive schemes defined as non-controlling interests in accordance with IFRS. For all businesses, adjusted operating profit excludes goodwill impairment, the impact of acquisition accounting, put revaluations related to long-term incentive schemes, profit/(loss) on disposal of subsidiaries, associated undertakings and strategic investments, dividends declared to holders of perpetual preferred callable securities, and fair value (profits)/losses on certain Group debt instruments.

**    Adjusted operating earnings per ordinary share is calculated on the same basis as adjusted operating profit. It is stated after tax attributable to adjusted operating profit and non-controlling interests. It excludes income attributable to Black Economic Empowerment (BEE) trusts of listed subsidiaries. The calculation of the adjusted weighted average number of shares includes own shares held in policyholders' funds and BEE trusts.

Cautionary statement

This announcement has been prepared solely to provide additional information to shareholders to assess the Group's strategies and the potential for those strategies to succeed. It should not be relied on by any other party or for any other purpose.

This announcement contains forward-looking statements with respect 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, UK domestic and global 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 or of future acquisitions or combinations within relevant industries, as well as the impact of tax and other legislation and other 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 forth in Old Mutual plc's 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 and Q&A will be broadcast live at 9:00am (BST), (10:00am (CET)/10:00am (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 passcode 6624519#:

UK/International	[phone]
US	[phone]
Sweden	[phone]
South Africa (toll-free)	[phone]

Playback (available for 14 days from 8 March), using pass-code 6624519#:

UK/International	[phone]
US	[phone]

Copies of these Results, together with high-resolution images and biographical details of the Executive Directors of Old Mutual plc, are available in electronic format to download from the Company's website at www.oldmutual.com.

A Financial Disclosure Supplement relating to the Company's Interim Results can be found on the website. This contains key financial data for 2011 and 2010.

Foreign exchange rates

	GBP/ZAR exchange rates		GBP/SEK exchange rates		GBP/EUR exchange rates		GBP/USD exchange rates
	Average exchange rate	Closing exchange rate	Average exchange rate	Closing exchange rate	Average exchange rate	Closing exchange rate	Average exchange rate	Closing exchange rate
H1 2011	11.14	10.86	10.30	10.16	1.15	1.11	1.62	1.61
H1 2010	11.49	11.45	11.27	11.63	1.15	1.22	1.53	1.50
FY 2010	11.31	10.28	11.14	10.42	1.16	1.16	1.55	1.55

Group Chief Executive's Review

 

Review of Operations

Introduction

This has been a period of good operational performance and strong profit growth for Old Mutual. IFRS basis Adjusted Operating Profit (IFRS AOP or AOP) was up 15% on the comparative period from improved trading results and we expect the initial impact of operational improvements to provide a more significant contribution to earnings in the future. This improved performance was made against a backdrop of continued economic uncertainty in a number of our markets. We continue to focus on our strategy and we remain on track to meet our 2012 targets.

The Group is in a strong financial position. At 30 June 2011 our FGD surplus was £2.0 billion and we had total liquidity headroom of £1.7 billion.

Strategy Update

We continue to make good progress in delivering the strategy that we set out in March 2010. This is to build a long-term savings, protection and investment group by leveraging the strength of our people and capabilities in South Africa and the rest of the world, which will enhance value for both our customers and shareholders, increase our international cash earnings and enhance our overall return on equity.

Our progress against the targets that we set to achieve by the end of 2012 has been maintained. As at 30 June 2011 we have delivered £82m of run rate expense savings versus our target of £100 million, and have delivered a return on equity for the Long Term Savings business of 18.8%, above our target of 16%-18%. At 31 July 2011 we had repaid a net £482 million of debt and are confident of achieving our £1.5 billion debt reduction target by the end of 2012.

We have continued to rationalise our business and reduce its complexity. On 7 April 2011 we announced the completion of the sale of US Life to Harbinger Group inc for $350 million. We have announced that we are closing our Swiss operation to new business. We will maintain our strict value criteria for deciding which businesses remain within the Group.

We are increasing our focus on the consumer by rolling out new and revamped products across our businesses and aligning our business models to the needs of our customers. We continue to look at ways of improving synergies across our businesses and have recently agreed to outsource the South African IT, voice and data infrastructure network services of Old Mutual, Nedbank and Mutual & Federal to Dimension Data. The agreement is expected to generate significant local savings for the operating businesses involved over the next five years.

We have always been clear that any corporate activity we undertake must create demonstrable value for shareholders. In this context, and given the difficult and uncertain economic climate Switzerland was put into run off rather than sold and the new US Asset Management (USAM) management team is focusing on building margins, improving investment performance and driving growth as preparation for a potential IPO.

Dividend

The Board has considered the position in respect of an interim dividend for 2011, and is declaring a dividend of 1.5p per share (or its equivalent in other currencies). The increase reflects our progress in the first half, the Board's confidence in the outlook and also an intention to rebalance the interim and final payouts towards approximately a one third: two thirds ratio. A scrip alternative will be offered to eligible shareholders.

Further details about the interim dividend and scrip dividend alternative can be found in the separate announcement (Ref 76/11) released by the Company this morning.

Long-Term Savings (LTS)

Our LTS division delivered strong results for the year with operating profits of £474 million up 3% on a constant currency basis. This was driven by strong profit growth in our Emerging Markets business. LTS APE Life sales for the half-year were down 3% however unit trust sales were up 10% on a constant currency basis. Funds under management (FUM) increased and underlying margins improved.

We have built on last year's progress in implementing the LTS strategy. We have delivered £67 million of run rate savings against the targeted cost reduction of £75 million. In the Nordic business, we have removed 331 roles from the business in the first half of the year. Wealth Management has met its targeted £45 million in cost savings in July, well ahead of the end of 2012 target.

We are leveraging off the expertise, knowledge and skills we have in South Africa to help grow our other LTS businesses. We launched the South African protection product, Greenlight, in Mexico under the name of Skandia Vive and we expect Greenlight to be launched into other territories in due course.

LTS: Emerging Markets

Our South African business delivered a strong performance with APE life sales up 11% and unit trust sales up 16%. The Mass Foundation Cluster delivered an exceptional performance, with APE Life sales up 49% driven by a combination of the increase in the number of advisers, improved productivity from advisers and improved collection of premiums and persistency. Against a very strong comparative period, Retail Affluent showed flat regular premium sales, with single premium sales down 15% at R4.6 billion. We have continued to introduce new products: in our Corporate segment we have recently launched South Africa's first group disability product that provides 100% income protection; and in the Mass Foundation segment we have launched a 'pay-when-you-can' family funeral plan.

We have made significant progress in preparing our advisers in South Africa to ensure that they pass the FAIS regulatory exams, the deadline for which has been postponed for six months until 30 June 2012. This is an onerous process and one that may have an impact on our sales although it is too early to quantify what this will be.

Emerging Market Net Client Cash Flow (NCCF) improved from an outflow of R2.4 billion in the first half of 2010, to an outflow of R0.2 billion in this period. Within this, South African NCCF improved by R3.8 billion, although remaining negative, and the rest of the Emerging Markets business delivered a positive flow of R1.2 billion. FUM decreased by 1% to R582 billion due to lower market levels.

OMIGSA had a positive half year, with AOP up 13% on the prior period and investment performance for the half remaining stable. Additionally, during the period, OMIGSA secured R9.0 billion of commitments for its innovative Housing Impact Fund for South Africa which aims to provide 120,000 low cost houses and is currently in the process of raising funds for a South African agriculture fund and an African infrastructure fund. OMIGSA also launched a shariah compliant asset allocation fund during the half.

In the Rest of Africa, Namibia saw good performance in Retail Mass and Retail Affluent in both regular premium sales, up 24%, and single premium sales, up 18%. During the period we launched two new unit trusts in Swaziland and we will introduce the first unit trust product into Malawi in the second half. In Kenya, we signed an agreement with PesaPoint, the country's leading independent ATM network, allowing our customers to use the ATM network to pay their premiums and make investments. In the second half of 2011, we will be launching a revised suite of products for the Kenyan mass market and are currently exploring the possibility of broadening our distribution channels. In Zimbabwe, we have rolled out a revamped suite of products.

The first half of the year saw a 14% uplift in life APE sales in Mexico and the Retail Mass team is making good progress and currently accounts for 15% of sales. We further diversified our distribution channels in China through a national distribution deal with Bank of China which will help build on the good first half of this year, with sales up 80% on the comparative period. Our JV in India with Kotak reported 81% growth in single premium sales.

LTS: Nordic

Nordic business performed well in the first half of the year, with sales up 12% and underlying profits, excluding restructuring charges and a one off private equity gain in the comparative period, were strong. NCCF for the period was SEK4.3 billion, down 7% on the first half of 2010, with FUM at SEK142.7 billion down 2% from 31 December 2010.

The introduction of tied agents to Denmark, coupled with innovative products, has led to excellent sales growth, up 64%. We believe that through our tied agency force we are well positioned to prosper from the result of the ban on commission which was introduced on 1 July 2011 in Denmark. In Sweden, retail premium sales rose 9% including strong single premium sales from our Depå product. Mutual fund sales were down 14% as clients switched into attractive savings accounts in Skandiabanken.

Our new management team has made excellent progress in restructuring the business with a reduction in headcount by 331 during the first half. We are continuing to improve our product offerings and the revamped Depå pension product was released in June in Sweden. In the second half of this year, we will launch an Occupational Pension version of the Depå product.

LTS: Retail Europe

Retail Europe had an encouraging first half, with APE sales up 11% against a backdrop of volatile markets and cautious consumer sentiment. New distribution initiatives, combined with our cost saving programme, saw the value of new business increase by 50% over the comparative period. NCCF of €196 million was down marginally on the comparator with FUM at €5.7 billion also down marginally from 31 December 2010.

We have continued to see good growth in Poland, with APE up 22%, driven through increased marketing activity and via new distribution partners in the IFA and bank channels. We launched new products in Germany and Austria in the first half. The new branch in Cape Town, which provides customer service processing and IT support for Retail Europe is functioning well and has processed more than 30,000 transactions. It currently has 25 employees which we expect to grow to 50 as we reach full capacity.

Following a detailed review of operations, we announced the closure of Switzerland to new business, as it was unable to meet our criteria for scale or adding value to another part of the company.

LTS: Wealth Management

Wealth Management had another strong half year, building on the successful operational performance of 2010. Although life sales were down against the first half of 2010, which benefited from the tax shield in Italy, margins improved further. The cost reduction programme has met its £45 million target nearly eighteen months early. NCCF excluding Italy was up 6%.

The UK Platform continues to grow with gross sales increasing 7% against the comparative period and with gross UK sales at £3.4 billion, up from £3.3 billion in the first half of 2010. Wealth Management NCCF growth was strong with net inflows of £1.8 billion. We have focused our sales approach on higher value IFAs and early indications are that we are winning a higher share of wallet. Despite new entrants to the market and increasing competition, we maintained our 6% share of the total UK savings market.

Continental Europe saw APE sales decrease by 43% against the comparative period, as a result of the tax shield granted to Italian residents in the comparative period. Sales in Italy on an APE basis were £40 million during the first half of 2011 (H1 2010: £84 million). Sales in the International business declined by 12% as the result of a planned decline in our lower margin regular premium business and a focus on the higher margin, single premium business, which had the consequence of a marked increase in VNB.

SIG's assets under management continued to grow thanks to the strong performance of its core multi and single manager funds. Its increasingly popular risk targeted Spectrum fund range now exceeds £1 billion in FUM while its sales capability now covers more than 20 countries across four continents.

Nedbank

Nedbank had a very strong six months with headline earnings increasing by 28.8% to R2.77 billion and diluted headline earnings per share up 26.3% to 600 cents. Profits were driven by ongoing strong non-interest revenue (NIR) growth, improving margins and lower retail impairments. This growth was achieved while continuing to invest for the future and strengthening portfolio impairments given the uncertain economic conditions. Given the improvement in operating performance, the Nedbank dividend increased by 25%.

Nedbank Retail increased its earnings from R133 million in the first half of 2010, to R826 million in this period and its ROE from 1.7% to 9.9%. The new strategy of focusing on customers by growing the client base while leveraging product lines is proving successful and is generating high levels of NIR growth and a significantly improving credit loss ratio.

While Nedbank Capital's earnings reduced by 5.9% on the comparative period, the other Cluster's performed strongly: Nedbank Corporate achieved earnings growth of 24.0% driven by improved margins, fair value adjustments and improved income from its private equity property portfolio; Nedbank Business Banking's earnings were up 3.9%, which reflected the difficult conditions for small and medium-sized businesses; and Nedbank Wealth achieved good earnings growth of 16.6%.

The balance sheet remained well capitalised with the core Tier 1 capital adequacy ratio increasing to 10.7%. Nedbank's liquidity buffers were increased by R9 billion and the funding profile continued to lengthen to 27% in preparation for Basel 3.

Mutual & Federal

Mutual & Federal had a very positive first half with a strong underwriting result, despite competitive market conditions, and an improved ROE of 15.8%. Business lines were favourably impacted by improved underwriting and a slight reduction in claims.

The decrease in claims ratio to 64.6% from 68.5% had a positive impact on profits as we contained claims costs and most portfolios delivered satisfactory returns. Our businesses in Namibia and Botswana continued to make a satisfactory contribution. During the period Mutual & Federal, paid dividends of R938 million.

Peter Todd was appointed Chief Executive in January and is building a team to address the business challenges including strengthening the market facing areas and implementation of the step-change programme. Mutual & Federal will continue to improve its IT systems and service and will look to grow its contribution from alternative channels. The direct insurance initiative, iWYZE, is progressing well and is continuing to meet the targets we have set.

US Asset Management

USAM profits improved by 25% due to a change in asset mix, seed gains and tighter expense control. FUM were $260 billion at 30 June 2011, up $1 billion from 31 December 2010 as equity market appreciation was offset by net cash outflows.

Investment performance improved significantly over the past six months, with the one-year outperformance of 73% of USAM's assets against benchmark an important leading indicator. Net outflows have continued with $10.4 billion during the period of which $6.3 billion were from short-term, lower margin products. Gross inflows for the period totalled $14.7 billion (H1 2010: 14.6 billion), with long-term fixed income products and US value investment seeing good inflows. Gross outflows were $25.1 billion for the half (H1 2010: $22.6 billion), largely driven by outflows from stable value, large cap value equity and quant products. Although investment performance is improving, we do not anticipate that the current trend in outflows, particularly in stable value, will reverse in this financial year.

Our new Chief Executive Peter Bain has commenced a strategic global distribution effort in order to leverage USAM's reach and is focusing on addressing various initiatives to increase margin. With continuing improvement in investment performance we believe that cash flows will improve but this may take time.

Outlook

Current economic conditions in some of the markets where we operate are highly uncertain and we remain cautious. We have a good combination of emerging markets and capital efficient developed market businesses and we are well placed to withstand any market volatility.

Julian Roberts
Group Chief Executive
5 August 2011

Group Finance Director's Review

GROUP RESULTS

Overview of Interim 2011 results

£m
Group Highlights1	H1 2011	H1 2010 (constant currency)	% Change	H1 2010 (as reported)	% Change
AOP (IFRS basis, pre-tax)	845	734	15%	714	18%
Adjusted operating earnings per share (IFRS basis)	9.3p	8.3p	12%	8.1p	15%
Life assurance sales - APE basis	763	786	(3%)	769	(1%)
Unit trust/mutual fund sales2	6,806	5,947	14%	5,865	16%
Return on equity3	13.1%			12.9%	20bps
Net client cash flows (£bn)	(3.6)	(1.7)	(>100%)	(2.0)	(80%)
LTS net client cash flows (£bn)	2.4	2.7	(11%)	2.7	(11%)
Funds under management (£bn)	302.8	300.44	1%	309.34	(2)%
Interim dividend for the year	1.5p			1.1p	36%
Total profit after tax for the financial period	632			380	66%

¹        The figures in the table are in respect of core continuing businesses only and the H1 2010 comparatives have been restated accordingly

²        Includes all non-covered business sales

³        ROE is calculated as core business IFRS AOP (post-tax) divided by average shareholders' equity (excluding the perpetual preferred callable securities)

⁴        As at 31 December 2010

Overview

During the six months ended 30 June 2011 ('H1 2011' or 'the period') Old Mutual showed strong growth in profits compared to the six months ended 30 June 2010 ('H1 2010' or 'the comparative period').

AOP earnings per share were up 15% to 9.3p for H1 2011 (H1 2010: 8.1p). AOP on a pre-tax basis was £845 million for the period, an increase of £131 million on H1 2010. On a constant currency basis profits have increased by £111 million with notable improvements in underwriting profitability in Emerging Markets, increased non-interest revenue income in our South African banking business, improvement in operating performance at USAM and a strong underwriting performance at Mutual & Federal. This improved result has been achieved after expensing restructuring charges of £14 million, an approximate £35 million charge in respect of a modelling change for Emerging Markets' Corporate business, and booking a £20 million private equity gain in Emerging Markets.

Group net margin (measured as profit before tax on average assets) increased by 4.7 basis points over the period from 42.6 basis points to 47.3 basis points. The increase was driven by a strong improvement in the net margin at Nedbank, partially offset by reduced margins in the LTS business, which were boosted last year by Nordic private equity gains and UK policyholder tax smoothing.

Return on equity increased to 13.1%, primarily as a result of the increased profits despite an increase in the Group's equity base given the high scrip dividend take-up for the final dividend for 2010 and foreign exchange impacts.

There was a Group net client cash outflow of £3.6 billion in the period, primarily due to net outflows of £6.4 billion in USAM in the period. However, for the half year in aggregate net inflows continued in all our European businesses and in our Emerging Markets business, excluding PIC outflows. USAM's investment performance improved significantly and gross inflows into its affiliates' long-term strategies were higher than the comparative period.

On a constant currency basis FUM increased by 1% driven by positive NCCF in LTS and positive market returns in USAM. The Dow Jones, S&P-500 and the MSCI World rose by 7%, 5% and 4% respectively during the period. The FTSE rose by 1%, but the JSE All Share Index fell by 1% and the SAX ALSI (Stockholm) fell by 4% during the period.

Dividends

The Board has declared a dividend of 1.5p per share and will continue with a progressive dividend policy over time to achieve cover of at least 2.5 times our earnings, consistent with our Group strategy. The Board intends to rebalance the interim and final payouts towards approximately a one third: two thirds ratio. We will offer a scrip dividend election to eligible shareholders.

Exposure to Sovereign Debt in Portugal, Italy, Ireland, Greece, Spain and the US

The Group's exposure to the sovereign debt of Portugal, Italy, Ireland, Greece and Spain remains very low. At June 2011 the Group had less than £5 million exposure to bonds issued by the Italian and Spanish Governments and no exposure to the debt issued by the Greek, Irish or Portuguese Governments. The exposure to US Government debt is $40 million.

Management Discussion and Analysis of Results for H1 2011

The principal businesses of the Group are the Long Term Savings (LTS) division, Nedbank, Mutual & Federal and US Asset Management. 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.

 

£m
AOP analysis	H1 2011	H1 2010 (constant currency)	% Change	H1 2010* (as reported)	% Change
Long-Term Savings	474	461	3%	447	6%
Nedbank	359	274	31%	266	35%
Mutual & Federal	47	34	38%	33	42%
US Asset Management	47	37	27%	40	18%
	927	806	15%	786	18%
Finance costs	(60)	(68)	12%	(68)	12%
LTIR on excess assets	18	16	13%	16	13%
Net interest payable to non-core operations	(9)	(9)	-	(9)	-
Other net income and expenses	(31)	(11)	(182%)	(11)	(182%)
AOP	845	734	15%	714	18%

*     The six months ended 30 June 2010 has been restated to reflect US Life as discontinued

Financial Performance

LTS AOP was favourably impacted by foreign exchange with the Rand and Swedish Krona strengthening against Sterling. On a constant currency basis, LTS AOP increased by 3% driven by Emerging Markets with improved profits in Life & Savings and OMIGSA and reduced project spend against the comparative period.

Nedbank's earnings increased during the period driven by strong non-interest revenue (NIR) growth, improving margins and lower retail impairments.

Mutual & Federal delivered a strong underwriting result in the first half of 2011 with Credit Guarantee risks performing particularly well, and reduced claims in many of the other divisions.

USAM AOP benefited from revenue growth driven by positive markets, gains on seed capital, and improvements in investment performance fees.

Finance costs decreased as a result of the reduction in debt levels during the period. However, due to a higher rate on the recent issue of a £500 million 10 year bond we expect a modest rise in net finance charges for the remainder of 2011. Future finance charges will depend on the execution of our debt reduction programme. Total interest cover has increased during the period.

LTIR on excess assets increased due to a large increase in the asset base, set off by a marginal decline in the long-term rate from 9.4% in 2010 to 9.0% in 2011.

The increase in other net income and expenses from £11 million in H1 2010 to £31 million in H1 2011 is primarily due to the non-recurrence of a £16 million stamp duty reserve tax refund in H1 2010.

Long-Term Savings

Key performance statistics for the LTS division are as follows:

£m
H1 2011	Emerging Markets	Nordic	Retail Europe	Wealth Management	Total
NCCF (£bn)	-	0.4	0.2	1.8	2.4
FUM (£bn)	53.6	14.0	5.2	57.7	130.5
AOP (IFRS basis) (pre-tax)	299	60	22	93	474
Unit trust/mutual fund sales2	3,158	305	11	2,454	5,928
Life assurance sales (APE)	255	126	36	346	763
PVNBP (covered business)	1,656	736	276	2,977	5,645
Value of new business (covered business)	38	28	3	39	108
Operating MCEV earnings (covered business) (post tax)	188	63	(6)	100	345
(VNB + Exp Var)/MCEV (covered business)	7.3%	3.7%	0.6%	5.5%	5.3%

£m
H1 2010 (as reported1)	Emerging Markets	Nordic	Retail Europe	Wealth Management	Total
NCCF (£bn)	(0.2)	0.4	0.2	2.3	2.7
FUM as at 31 December 2010 (£bn)	57.0	13.9	5.0	55.9	131.8
AOP (IFRS basis) (pre-tax)	269	58	25	95	447
Unit trust/mutual fund sales2	2,729	324	12	2,207	5,272
Life assurance sales (APE)	223	102	32	412	769
PVNBP (covered business)	1,561	553	243	3,611	5,968
Value of new business (covered business)	38	25	2	31	96
Operating MCEV earnings (covered business) (post tax)	144	63	24	64	295
(VNB + Exp Var)/MCEV (covered business)	4.5%	6.4%	(1.1)%	3.9%	4.3%

¹     The six months ended 30 June 2010 has been restated to reflect US Life as discontinued

²        Includes all non-covered business sales

Emerging Markets profits improved largely due to better results in Retail Affluent, Mass Foundation Cluster and OMIGSA, and Wealth Management underlying profits increased as a result of higher FUM.

LTS NCCF decreased by £0.3 billion to £2.4 billion. Wealth Management UK platform NCCF continued to grow but this was offset by reduced inflows from Continental Europe, as a result of the end of the Italian tax shield that generated a sales boost in 2010. Net client cash inflows increased in the Retail segment of Emerging Markets.

FUM for LTS at 30 June 2011 decreased by 1% to £130.5 billion (31 December 2010: £131.8 billion). On a constant currency basis FUM increased by £1.2 billion from £129.3 billion at 31 December 2010, driven by positive NCCF offset by negative market movements and the divestment of Lärarfonder, an unprofitable component of Nordic mutual fund assets.

Mutual fund sales in LTS were up by 12% to £5,928 million, with continued strong sales in Wealth Management and Emerging Markets' South African and Latin American businesses. Sales of mutual funds, which make up the bulk of Wealth Management and a large proportion of South African Retail Affluent sales, are not included in the APE margin, PVNBP or Value of New business calculations since they do not fall under the definition of covered business.

The Emerging Markets business accounts for 63% of the LTS IFRS AOP earnings (H1 2010: 60%), 41% of LTS FUM (H1 2010: 43%), and 33% of LTS APE sales (H1 2010: 29%).

Covered business performance

APE Sales decreased by 3% for the LTS division on a constant currency basis but APE sales in Emerging Markets, Nordic and Retail Europe were strongly up. Strong growth in Mass Foundation Cluster regular premiums in Emerging Markets and very strong sales growth in Nordic's Danish business were offset by lower sales in Wealth Management, primarily as a result of the one-off Italian tax shield in 2010.

Regular premium business showed strong growth in the Emerging Markets business driven by the Mass Foundation Cluster, Rest of Africa and Asia & Latin America. Wealth Management, Nordic and Retail Europe showed strong growth in single premiums.

The market-consistent value of new business (VNB) improved for LTS driven by strong UK platform sales and higher margin International business in Wealth Management and higher margin sales in Nordic's Danish businesses.

Across LTS as a whole, new business APE margins have improved to 14% for H1 2011 (H1 2010: 13%), primarily driven by Wealth Management. In Wealth Management, the APE margin increased from 8% to 11%, with beneficial product mix in the International off-shore business, lower acquisition costs in the UK business, and positive persistency and rebate experience. Retail Europe's APE margin increased from 6% to 8% reflecting improved pricing and successful expense management. The APE margin in Emerging Markets decreased from 17% to 15% as increased high margin sales from Mass Foundation Cluster were offset by lower sales and reduced margin in Retail Affluent, and a reduced margin in Corporate due to a change in the mix of business sold. In Nordic, the APE margin decreased from 25% to 23% as a result of assumption changes in Q4 2010 and a lower proportion of top-ups on existing contracts. For LTS as a whole the PVNBP margin improved to 1.9% (H1 2010: 1.4%).

A key metric by which we judge the performance of the business is Group Value Creation for the LTS covered business. It measures the contribution to return on embedded value from management actions of writing profitable new business and managing expense, persistency, risk and other experience compared to that which was assumed. The metric improved by 100 basis points to 5.3%, driven by an increase in Emerging Markets, due to improved persistency experience in Mass Foundation Cluster and improved mortality and morbidity experience in both Mass Foundation Cluster and Retail Affluent, and an increase in Wealth Management, aided by strong growth in VNB with favourable changes in product mix. The metric for Nordic decreased as a result of positive experience variances in H1 2010, relating to the divestment of a private equity holding and positive fund rebate experience.

Outlook

We see positive market dynamics for all of our markets and we are taking further steps to create efficient methods to deliver our business and tailor our distribution to our customers, primarily single premium sales to Affluent market segments and regular premium sales to Developing market segments. We have successfully transferred products between territories and expect to see further benefit in this regard over time.

We see further scope in the field of IT and centralised processing to improve margin and maintain a higher level of IT controls. This will allow local sales teams to operate with lower overheads and high operating leverage. This is demonstrated by the recent signing of a second generation communications outsourcing agreement worth approximately R2.5 billion over a five-year term with Dimension Data and its partner Telkom. The flexibility built into this new outsourcing contract will help us to deliver improved services as well as significant cost reductions across South Africa.

Our Emerging Markets business continues to seek growth opportunities by leveraging the strength and core competencies within its South African business. Management is also focused on the new regulatory requirements on its sales force in South Africa. The FSA has recently indicated that it intends to consult further on charging but there is currently no change to the timetable for the introduction of Retail Distribution Review (RDR), which will take effect from 31 December 2012. Our Wealth Management business is well-placed for the proposed RDR changes, with a portion of the current charging structure for new business already written on the basis of client-agreed fees for platform use.  We are currently considering our plans to introduce a fully unbundled charging structure. Nordic management is focused on improving sales, particularly in respect of cross selling between insurance and banking, and improving the distribution and product offerings to enhance NCCF. In Retail Europe there have been a number of initiatives to further leverage its Skandia branch in South Africa.

Further discussion on the outlook for the individual LTS business units is given in the individual Business Reviews which follow this Review.

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.

ROE and margin targets	H1 2011	FY 2010	FY 2009	Target
Long Term Savings*
Emerging Markets **	26%	25%	23%**	20%-25%
Nordic	12%	11%	12%	12%-15%
Retail Europe	13%	20%	9%	15%-18%
Wealth Management	14%	14%	8%	12%-15%
LTS Total	18.8%	18.5%	14.8%	16%-18%
USAM Operating Margin	20%	18%	18%	25%-30%

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

**    Within Emerging Markets, OMSA is calculated as return on allocated capital, and 2009 is adjusted for 2010 LTIR rates.

Good progress is being made by businesses in meeting the ROE targets. At the end of June 2011, Emerging Markets and Wealth Management were comfortably within their target range. Nordic was at the lower end of the target, due to the one-off costs associated with the cost reduction programme. Excluding these costs, Nordic ROE was 12.8%. Retail Europe's ROE has reduced since last year, largely due to ongoing restructuring costs, but it remains on track to deliver its required level of return by 2012.

USAM has made progress with its operating margin and improved seed gains and performance fees have been earned.

£m
Cost reduction targets	Cumulative  run rate savings  at H1 2011	2011 YTD Cost to achieve	Cumulative cost incurred to date	2012 run rate  target
Long Term Savings*
Emerging Markets	-	-	-	5
Nordic	16	9	14	10
Retail Europe	7	2	7	15
Wealth Management	44	3	43	45
LTS Total	67	14	64	75
USAM	15	-	20	10
Group-wide corporate costs	-	-	-	15
Total	82	14	84	100

We are well advanced in delivering the reduction in the cost base of our businesses as announced in March 2010, with £82m of run rate savings met. Wealth Management has substantially delivered its 2012 target of £45 million. Nordic exceeded its headcount reduction target in H1 2011 and now moves to the second phase of its cost reduction programme. Retail Europe has achieved £7 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 savings in 2010.The newly formed LTS global IT function has made significant steps forward to become an effective operation across all our LTS businesses.

The costs of executing the cost reduction process is restricting 2011 profits from these businesses, and will continue to do so until the programmes are completed. Costs to achieve these savings in H1 2011 totalled £14 million. Restructuring costs of £9 million were incurred at Nordic in the period. Total Nordic restructuring costs are anticipated to be approximately £24 million in 2011, in order to deliver additional identified savings. Retail Europe costs to achieve include an element of dual running costs, while activity is transitioned to South Africa.

Summary MCEV results

	p
Adjusted Group MCEV per share at 31 December 2010	202.2
Adjusted operating Group MCEV earnings per share	9.8
Covered business	6.6
Non-covered business	3.2
Below the line effects	(2.1)
Economic variances and other earnings	(1.3)
Foreign exchange and other movements	(6.8)
Dividends paid to ordinary and preferred shareholders	(3.1)
Nedbank market value uplift	4.6
BEE and ESOP adjustments	1.1
Mark to market of debt	(2.2)
Proceeds of US Life	3.7
Elimination of US Life MCEV	3.4
Retention of OM Re (previously part of US Life)	1.3
Impact of issue of new shares	(2.8)
Adjusted Group MCEV per share at 30 June 2011	209.9

The adjusted Group MCEV per share increased by 4% (or 7.7p) from 202.2p at FY 2010 to 209.9p at H1 2011 (H1 2010: 166.6p).

The adjusted operating Group MCEV earnings per share increased by 1.6p from 8.2p (10.6p including US Life) to 9.8p for H1 2011.

Covered business operating MCEV earnings per share increased by 0.5p from 6.1p for H1 2010 (8.5p including US Life) to 6.6p for H1 2011, as a result of:

·     A strong positive contribution from experience variances, largely attributable to favourable mortality and persistency experience;

·     An improved contribution from new business; and

·     An adverse contribution from methodology changes.

Non-covered business operating earnings per share increased by 1.1p from 2.1p for H1 2010 to 3.2p for H1 2011 as a result of:

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

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

A substantial component of the increase in adjusted Group MCEV per share during 2011 was due the impact of the sale of US Life, which resulted in an uplift of £451m (8.4p).

Free surplus generation

The Group generated £521 million of free surplus in the period (H1 2010: £246 million) of which £312 million (H1 2010: £206 million) was generated by the LTS division. £313 million (2010: £204 million) was generated from covered business (which includes US Life and Bermuda). We anticipate that the value of our in-force business will generate at least £1 billion by the end of 2012 and approximately £3 billion by the end of 2015. Over 65% of this surplus is expected to come from non-Emerging Market entities. Non-covered business generated £208 million (H1 2010: £42 million) from banking, property & casualty and asset management.

Sources and uses of free surplus

Gross inflows from core and continuing operations were £690 million (H1 2010: £497 million) and new business spend was £231 million (H1 2010: £227 million). Total free surplus generated from core operations of £521 million is significantly higher than the £176 million in H1 2010 due to higher transfers from the VIF and positive experience in the life businesses, improved profits in the non covered businesses and a lower transfer to capital requirements in Nedbank.

Debt strategy, activity profile and maturities

We have set a target to reduce the Group's debt by £1.5 billion by the end of 2012, while ensuring that the Group's balance sheet and the holding company liquidity continues to be prudently managed. In 2010 the Group repaid net £110 million of debt and in January 2011 we repaid a £300 million Lower Tier 2 security at a cash cost of £397 million (as this had been swapped into Swedish Krona upon issue in 2006). In July 2011 we bought back €550 million of an existing €750 million bond, and we have an option to call the remaining €200 million in January 2012. The Group has followed the FSA's requirements and given six months advance notice of its right to call the remaining €200 million. Notwithstanding such notice, the Board at this time has not made any decision and is not making any representation to bondholders as to whether it will call the bond at the first call date.

The Group issued a £500 million 10 year Tier 2 bond in June 2011, which is expected to be compliant with the anticipated Solvency 2 requirements and qualifies as Tier 2 capital for FGD purposes.

We are confident of our ability to generate sufficient group liquidity to meet our debt reduction target without recourse to capital markets either for IPO proceeds or any sale of shares in Nedbank. A final release of £130 million of cash as a result of selling US Life is expected by the end of 2012 and other initiatives are also being pursued, including the planned legal transfer of certain parts of the Emerging Markets businesses to our South African operations for up to £300 million in cash. The election in H1 2011 by many shareholders to receive scrip dividend allowed for approximately £90 million of cash that would otherwise have been used to make dividend payment to be retained and it can be used to repay debt. We expect these scrip elections to continue. We are assuming that Old Mutual Bermuda can meet its obligations to its customers from its own resources over the next 18 months; our current forecasts suggest that it can.

In the medium term the Group has further first calls on debt instruments amounting to £728 million in 2015 and £500 million in 2016 as well as $750 million retail preferred instrument, which is callable quarterly. In 2020 we have a call on a further £350 million instrument. The £500 million 10 year bond issued in June 2011 is callable in 2021.

Liquidity

In April 2011 the Group renewed its bank facilities by negotiating a five-year, £1.2 billion, syndicated revolving credit facility, which was strongly supported by 17 banks.

At 30 June 2011, the Group had available cash and committed facilities of £1.7 billion (31 December 2010: £1.4 billion). Of this, cash on hand at the holding company was £0.7 billion (31 December 2010: £0.4 billion); a significant proportion of this was used to settle the €550 million bond tender in early July 2011.

In addition to the cash and available resources referred to above at the holding company level, each of the individual businesses also maintain liquidity to support their normal trading operations. During the period a total of R938 million (£84 million) of special & ordinary dividends were paid by Mutual & Federal as a consequence of their implementation of a revised capital management strategy.

Group (excluding Nedbank) net debt movements (IFRS basis)

£m
	H1 2011		H1 2010		FY 2010
Opening net debt		(2,436)		(2,273)		(2,273)
Inflows from businesses		337		184		433
Outflows to businesses		(35)		(118)		-
Holding company expenses and interest costs		(110)		(102)		(188)
Change in cash from net repayment / issue of debt		94		(44)		(110)
Gross debt raised	(500)		-		(10)
Gross debt repaid	406		44		120
		(94)		44		110
Ordinary dividends paid (net of scrip dividend elections)		(29)		(37)		(65)
Equity issuance		3		2		4
Other movements		(64)		(149)		(334)
Closing net debt		(2,334)		(2,493)		(2,436)
Net decrease/(increase) in debt		102		(220)		(163)

In addition to the £406 million of debt repaid during the period and the £500 million of debt issued, the Group repaid a further €550 million of debt in July 2011. The Group's gross nominal debt as at 31 July 2011 was £2,750 million compared to gross nominal debt of £3,162 million as at 31 December 2009.

At a Group holding Company level, net inflows from businesses improved from an inflow of £66 million in H1 2010 to an inflow of £302 million in H1 2011. The inflow in the period included a remittance from US Life for £216 million. The holding company made ordinary dividend payments in the period of £29 million and offered a scrip dividend election. The total other movements of £64 million, are in respect of foreign exchange movements, the revaluation of the fair value of Group bonds relating to improved credit spreads, changes in the fair value of associated derivatives and other net flows.

Financial Groups Directive Results

The Group's regulatory capital surplus, calculated under the EU Financial Groups Directive, at 30 June 2011 was £2.0 billion. Following the notice given to the FSA of its right to call the €750 million bond the Group followed the FSA's requirements and excluded the instrument from the regulatory capital surplus calculations as at 30 June 2011. If this instrument had been included in the calculation the surplus would have been £2.7 billion, and on a like-for-like basis the surplus at 31 December 2010 was £2.4 billion and £1.5 billion at 31 December 2009. The reported result at 31 December 2010 was £2.1 billion after deducting the £300 million bond that was called in January 2011.

The like for like increase since 31 December 2010 comprises statutory profits in Emerging Markets and Nedbank and the issue of the £500 million bond in June. These increases have been offset by the impact of the US Life sale (£100 million) and by the payment of Group ordinary and preferred dividends.

The FGD surplus of £2.0 billion represented a coverage ratio of 150%, compared to 146% at 31 December 2010. The Group comfortably met the recent stress tests as required under the EU wide Solvency 2 project.

The Group's FGD surplus is calculated using the 'deduction and aggregation' method, which determines the Group's capital resources less the Group's capital resources requirement. Group capital resources is the sum of the business unit net capital resources, which is calculated as a business units 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.

Our subsidiary businesses continue to have strong local statutory capital cover.

Business unit ratios	H1 2011	FY 2010	H1 2010
OMLAC(SA)	4.1x	3.9x	3.9x
Mutual & Federal	1.45x	2.02x	1.84x
Nordic	6.4x	9.8x	11.0x
UK	5.1x	2.8x	3.6x
Nedbank*	Core Tier 1: 10.7% Tier 1: 12.4% Total: 15.2%	Core Tier 1: 10.1% Tier 1: 11.7% Total: 15.0%	Core Tier 1: 9.9% Tier 1: 11.5% Total: 14.8%

*     This includes unappropriated profits.

The recent transfer of the Skandia UK Holding Company from Nordic to the Group holding company has led to a reduction in Nordic's capital cover during the period. Mutual & Federal's capital cover has also reduced following the payment of R938 million in dividends.

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

		H1 2011		FY 2010*		H1 2010
Regulatory capital	£m	%	£m	%	£m	%
Ordinary Equity	4,902	80	5,269	77	4,228	69
Other Tier 1 Equity	633	10	653	10	623	10
Tier 1 Capital	5,535	90	5,922	87	4,851	79
Tier 2	1,984	32	2,336	35	2,584	42
Deductions from total capital	(1,403)	(22)	(1,502)	(22)	(1,351)	(21)
Total Capital Resources	6,116	100	6,756	100	6,084	100

*     Capital as reported to FSA. Numbers may vary slightly to those reported in Annual Report and Accounts 2010.

Regulatory capital under Solvency 2

Two key areas for the group in respect of regulatory capital under Solvency 2 are:

·     The discussion on the treatment of EPIFP (Expected Profits In Future Premiums), as to whether it should be fully eligible to be treated as Tier 1 capital under Solvency 2 continues. No consensus has yet been reached between the different European bodies.

·     We await the completion by regulators of the initial equivalence assessments of the first three non-EEA jurisdictions, one of which is Bermuda. Results are due in November.

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. During the period the sale of US Life was completed. We will explore certain reinsurance arrangements with anticipated completion by the end of 2012. We have closed the Swiss business in Retail Europe to new business and continue to pursue cash generating corporate activities to achieve the Group debt repayment and investment goals.

Following the consolidation in 2010 of operational management of all of the Old Mutual Group's Emerging Markets businesses under a unified management team based in Johannesburg, we now plan to effect the legal transfer for value of the Group's ownership interest of those businesses. The fair value of these interests will be determined independently but is expected to be up to £300m.

Bermuda

The business continued to execute against its run-off strategy of risk reduction while managing for value, including ongoing business service improvements, enhancements to liability management and further de-risking initiatives targeted specifically at the Guaranteed Minimum Accumulation Benefits (GMABs) of the in-force book.

Surrender activity is being proactively managed through further service enhancements and fund expansion, with conservation strategies focused on the non-Universal Guarantee Option book of business (circa $1.7 billion). In excess of 50 funds are currently open on the platform, including a number of new funds added in the reporting period. Engagement with distributors is ongoing, with a strengthening advisor focused strategy to continue to develop the customer proposition and experience. OMB is maintaining high levels of customer service through continued operational and service improvements. 

Total surrender activity during the period was higher than in H1 2010, amounting to 9% of the 2010 year-end book. This was a result of initiatives allowing account holders with non-Hong Kong Universal Guarantee Option policies the opportunity to surrender their contracts without incurring penalties. These initiatives increased the rate, value and number of surrenders across this book, with overall surrender activity across GMAB contracts for the period at over four and a half times H1 2010 levels (June 2011: 2,020 policies; June 2010: 446 policies). Management will continue to assess demand for similar offers in the future. We believe that future surrender behaviour will be influenced by the extent to which the underlying fund values of the policyholders are close to the level of the guarantee.

Reserves in respect of GMAB/GMDB liabilities to which shareholders are exposed reduced by $42 million (31 December 2010: $673 million) as a result of the positive performance of equity markets and a weakening dollar.

There have been no investment losses in the period to date and realisations of the fixed income portfolio in the period have been achieved with no net loss compared to holding value. The portfolio has current average rating of A3 (Moody's rating scale).

We continue to monitor daily liability positions and adjust our hedges to manage risk, liquidity and capital accordingly. The hedge portfolio was actively managed over H1 2011 and at 30 June 2011 the business maintained a 55% hedge coverage over equities (31 December 2010: 58%), 22% over foreign exchange (31 December 2010: 39%) and nil on interest rates (31 December 2010: nil).

As disclosed in our Preliminary Results of 2010, Bermuda remains a non-core business, and as such its profits are excluded from the Group's IFRS AOP. However the interest charged on internal loans from Bermuda to Group Head Office are charged to AOP. IFRS pre-tax profit of $79 million was favourably impacted by the guarantee performance in Q2 2011 and partially hedged positions (2010: $83 million loss). Given current equity market conditions, the business still expects some volatility in earnings in the medium term. Statutory capital was $654 million at 30 June 2011 (31 December 2010: $625 million). No further capital injection is anticipated other than in extremely adverse scenarios.

Risk Allocation, Solvency 2 and iCRaFT and Financial Controls Initiative update

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 during the period.

The new Solvency 2 internal model being developed in our integrated Capital, Risk and Finance Transformation (iCRaFT) project 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 and hence support better informed decision-making.

The iCRaFT project is progressing to plan and is on track to deliver the requirements for Solvency 2 compliance. Despite the ongoing uncertainty in respect of certain Solvency 2 detailed implementation measures we remain confident in our current design. We are now entering a phase of the project, in which we will demonstrate the extent that we have embedded the new tools and risk management processes. This marks a significant milestone in the project and ensures that the iCRaFT deliveries are being integrated into business processes and are adding insight in our key risk decisions. This will place us in a favourable position for the 'Use Test' requirements under Solvency 2.

The Group has implemented an internal controls framework which is designed to mitigate the risk of material misstatement in the Group's financial reporting numbers. The control environment is subject to ongoing assessment by management to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements across all relevant reporting units.

Tax and non-controlling interests

Overall, the effective tax rate on AOP is 22.6%, 21.7% in the comparative period and 23.4% for the full 2010 year. Factors affecting the June 2011 AOP tax rate compared to June 2010 and December 2010 include a decreased proportion of profits being earned on low-taxed dividends and capital profits and increased secondary tax on companies (STC) costs on dividends, offset by prior year adjustments in OMSA and a reduction in the UK tax rate.

Looking forward we would anticipate that the full year effective tax rate on AOP would be around 24% depending on market conditions, profit mix and no significant change in strategic direction.

The non-controlling interests' share of AOP increased by 20% to £151 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.

The Group continues to monitor external factors, including market and regulatory developments, which could have an adverse effect on the ability of the Group to create value and continue to meet Group and individual entity capital requirements and day to day liquidity needs.

The market remains competitive and competition for customers is increasing from both traditional and new players in all markets. We continue to enhance our product development process to deliver product offerings that are fit for purpose (based on feedback received from customers and distributors), remain competitive (by re-pricing products as a result of the economic climate, demographic experiences and also the competitive environment) and closing/discontinuing products where they are no longer viable. We have clear governance structures in place to support this process by providing Group policies, standards and a framework of clear accountability for all decision makers.

The implementation of Solvency 2 requirements continues to dominate the industry and there is still some uncertainty about the details of the directive. Old Mutual is well positioned to meet increased regulatory expectations. The Group provides a co-ordination role in relation to the FSA, which is the lead regulatory authority for Old Mutual plc under the Financial Groups Directive, and liaises with them regularly.

The Group is assessing the implications of the US Foreign Account Tax Compliance Act (FATCA). The legislation will require foreign (non-US) financial institutions (FFIs) to report to the US Internal Revenue Service (IRS) on financial accounts held by US taxpayers. Non-compliant FFIs may have tax withheld on US source income and on the proceeds from US assets.

The implementation of the Group operating model is continuing. 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.

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 and business planning process.

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 announcement.

Philip Broadley
Group Finance Director
5 August 2011

			£m
Summarised Financial Information IFRS results (as reported)	H1 2011	H1 20101	% Change
AOP (IFRS basis)(pre-tax)	845	714	18%
Adjusted operating earnings per share (IFRS basis)	9.3	8.1	15%
Basic earnings per share	9.7p	5.1p	90%
IFRS profit after tax	632	380	66%
Sales statistics
Life assurance sales - APE basis	763	769	(1)%
Life assurance sales - PVNBP basis	5,645	5,968	(5)%
Value of new business	108	96	13%
Unit trust/mutual fund sales	6,806	5,865	16%
MCEV results
Adjusted Group MCEV (£bn)	11.6	9.15
Adjusted Group MCEV per share	209.9p	166.6p5
AOP Group MCEV earnings (post-tax and non-controlling interests)	529	440	20%
Adjusted operating Group MCEV earnings per share	9.8p	8.2p	20%
Financial metrics
Return on equity2	13.1%	12.9%
Return on Group MCEV	11.0%	11.2%
Net client cash flows (£bn)	(3.6)	(2.0)	(80%)
Funds under management (£bn)	302.8	309.33	(2%)
Interim dividend	1.5p	1.1p	36%
FGD4 (£bn)	2.0	2.13	(5%)
Net asset value per share	150.8p	153.6p

¹        The six months ended 30 June 2010 has been restated to reflect US Life as discontinued

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

³     As at 31 December 2010

⁴     The Group's regulatory capital surplus, calculated under the EU Financial Groups Directive, at 30 June 2011 was £2.0 billion. The Group has followed the FSA's requirements, and has given it six months advance notice of its right to call a €750 million Lower Tier 2 instrument at the first call date of 18 January 2012. As a result of that notice, the Lower Tier 2 instrument has been excluded from the regulatory capital surplus calculations as at 30 June 2011. Notwithstanding such notice, the Board at this time has not made any decision and is not making any representation to Bondholders as to whether it will call the bond at the first call date. On a like for like basis, the regulatory capital surplus at 30 June 2011 was £2.7 billion

⁵     Includes US Life

£m
Group return on equity*	H1 2011	H1 2010	FY 2010
AOP including accrued hybrid dividends - core operations	503	433	855
Opening shareholders' equity excluding hybrid capital - core operations	7,472	6,591	6,591
Half year shareholders' equity excluding hybrid capital - core operations	7,872	6,877	6,877
Closing shareholders' equity excluding hybrid capital - core operations	-	-	7,472
Average shareholders' equity - core operations	7,672	6,734	6,980
Return on average equity (annualised)	13.1%	12.9%	12.2%

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

			£m
Group debt summary	H1 2011	H1 2010	FY 2010
Debt securities in issue at book value	539	622	550
Liquid assets held centrally	(694)	(309)	(438)
Derivative (asset) / liability related to senior debt	-	(5)	-
Senior debt	(155)	308	112
Hybrid capital and preferred securities	1,146	1,146	1,146
Subordinated debt	1,447	1,069	1,198
Derivative (asset) / liability related to hybrid capital	(104)	(30)	(20)
Total subordinated debt	2,489	2,185	2,324
Total net debt	2,334	2,493	2,436
Adjusted Group MCEV	11,605	9,068	11,030
Senior gearing	(1.1%)	2.7%	0.8%
Total gearing	16.7%	21.6%	18.1%

			£m
Debt	H1 2011	H1 2010	FY 2010
MCEV basis	3,195	2,619	2,829
Total book value of debt	3,132	2,837	2,894

£m
Interest cover	H1 2011	H1 2010*	FY 2010
Finance costs	60	68	128
Less reserve movements, revaluation of borrowed funds and derivative assets/ liabilities	-	(6)	(2)
Interest payable	60	62	126
Preferred security costs	19	20	39
Total debt costs	79	82	165
Less African debt costs	(12)	(12)	(24)
Total debt costs (excluding Africa)	67	70	141
AOP before tax and minority interests	845	714	1,481
Less Non-controlling interests of Nedbank & M&F pre-tax earnings	(178)	(133)	(268)
Add back finance costs included in AOP	60	62	126
AOP before tax and debt service costs	727	643	1,339
Total interest cover	9.2 times	7.8 times	8.1 times
AOP before tax and debt service costs	905	776	1,608
Less Africa AOP	(705)	(565)	(1,234)
Non-Africa AOP before tax and debt service costs	200	211	374
Hard interest cover	3.0 times	3.0 times	2.6 times

*     The six months ended 30 June 2010 has been restated to reflect US Life as discontinued

 

 

Business Review

 

Long-Term Savings: Emerging Markets

Encouraging results combined with strong growth in regular premium sales

			Rm
Highlights	H1 2011	H1 2010	% Change
AOP (IFRS basis, pre-tax)	3,347	3,099	8%
Return on equity*	26%	27%
Life assurance sales (APE)	2,846	2,560	11%
Unit trust/mutual fund sales and other non-life sales	35,187	31,357	12%
PVNBP	18,458	17,931	3%
Value of new business	422	441	(4%)
APE margin	15%	17%
PVNBP margin	2.3%	2.5%
Operating MCEV earnings (covered business, post-tax)	2,101	1,650	27%
Return on embedded value (covered business, post-tax)	13.3%	11.9%
Net client cash flows (NCCF) (Rbn)	(0.2)	(2.4)	92%

			Rbn
	H1 2011	FY 2010	% Change
Funds under management	581.8	585.7	(1%)

*     ROE is calculated as IFRS AOP (post tax) divided by average shareholders' equity, excluding goodwill, PVIF and other acquired intangibles, for the rest of Africa and Asia and Latin America, whilst within Emerging Markets, OMSA is calculated as return on allocated capital.

Overview

A new leadership team was put in place at the beginning of April and the Emerging Markets business has been organised into Life and Savings, with Retail Affluent, Mass Foundation Cluster (MFC), Corporate, the Rest of Africa and Asia & Latin America under the leadership of Ralph Mupita, and OMIGSA with all our boutiques under the leadership of Diane Radley. We are pleased with the new focus that this structure has brought to our businesses.

Equity markets have been volatile in the first half of 2011 and have not repeated the strong gains recorded in the second half of 2010. The JSE All Share fell by 1% in the first half of 2011 and markets in Colombia and Mexico declined by 9% and 5% respectively. However, the South African economy remains comparatively strong. Despite the continuing low interest rates South African inflation has increased from 3.5% at the end of 2010 to 4.6% at the end of May, driven by fuel and electricity price increases, although inflation still remains within the Reserve Bank target range of 3% and 6%. Unemployment remains high. Year-on-year GDP growth was 3.6% in the first quarter of 2011. Other Emerging Markets economies also achieved positive year-on-year GDP growth. Chinese GDP grew 9.5% for the second quarter of 2011 and Mexico and Colombia grew by 2.4% and 5.1% respectively in the first quarter of 2011.

Our MFC business performed exceptionally well in the first half of the year with Life APE sales growth of 49%, mainly due to an increase in adviser numbers, higher productivity levels and improved premium collection. We have continued to focus on expanding our distribution network and in South Africa we have achieved significant growth in the retail sales force, up 19% on June 2010. This investment in manpower, training and accreditation, combined with the new jobs created through our iWYZE and Old Mutual Finance (OMF) offerings, underlines our commitment to sustainable job creation in South Africa. Retail Affluent sales were muted on the back of a highly effective single premium product campaign in 2010, and management actions on product mix and training time on regulatory exams in 2011. Corporate sales improved following a large inflation linked annuity deal in the second quarter.

In the first week of July an adapted version of South Africa's Greenlight product was officially launched in Mexico as Skandia Vive, a significant step in our expansion into selected emerging markets. The product is the first pure risk product that we sell in Mexico and offers life and disability cover, with South Africa providing the back-office servicing, IT and product support. In China we have secured a national distribution agreement with the Bank of China which should improve production over the remainder of the year.

Once again, Old Mutual South Africa won a number of awards, including three Imbasa Yegolide Awards (designed to recognise and reward those service providers who render excellent service to funds) for Employee Benefit Administrator of the Year, for the second year in a row, OMIGSA's Absolute Return Investments boutique as Hedge fund provider of the year and FutureGrowth received the Socially Responsible investor of the year award.

AOP grew by 8% to R3,347 million driven by higher sales and improved asset management results.

Net client cash flow

Excluding Public Investment Corporation (PIC) outflows, NCCF was positive improving from a net outflow of R1.4 billion in the first half of 2010 to a net inflow of R2.2 billion in the first half of 2011. PIC outflows were R2.4 billion in H1 2011 compared to R1.0 billion in H1 2010. No further PIC outflows are expected in the second half of 2011. Total NCCF improved from a net outflow of R2.4 billion in the first half of 2010 to a net outflow of R0.2 billion in the period.

Retail South African NCCF improved significantly from R1.4 billion in H1 2010 to R4.3 billion in H1 2011 benefitting from positive net flows into non-life businesses with ACSIS securing a large deal worth R1.4 billion during the first quarter. MFC has reported steady growth mainly as a result of high sales volumes, improved persistency due to enhanced debit order premium collection and reduced maturity pay-outs. Corporate had increased single and regular premium flows and excluding PIC outflows OMIGSA has reported a slightly lower net outflow of R2.3 billion compared to outflows of R2.6 billion in the first half of 2010. This is largely a result of R1.5 billion money market outflow at FutureGrowth and Symmetry in 2011, and a R300 million outflow at Old Mutual Property.

While not included in NCCF, OMIGSA has R9.0 billion committed to its Housing Impact Fund. Responsible Funds are an important part of our commitment to helping build South African infrastructure and increasing jobs for all parts of society.

The rest of our Emerging Markets businesses delivered positive NCCF of R1.2 billion, a reduction from R2.8 billion in the comparative period. In the Latin America business recent market volatility caused higher surrenders in the Colombian Corporate segment and money market fund. This was offset by continued retention efforts resulting in lower surrenders in the voluntary pension fund. NCCF for Mexico was in line with the comparative period. In Namibia, NCCF decreased by R0.7 billion to a net outflow of R0.3 billion as a result of lower unit trust inflows.

Funds under management

FUM decreased by 1% from 31 December 2010 to R581.8 billion as a result of lower market levels. Of the total, R488 billion (FY 2010: R498 billion) is managed in South Africa.

OMIGSA received three Raging Bull awards with OMUT's Mining and Resources Fund (Best Outright Performance over three years to the end of December 2010) and Marriott's Dividend Growth Fund receiving two awards (Best Domestic Equity General Fund and Best Broad-Based Domestic Equity Fund on a Straight Performance basis).

IFRS AOP results

IFRS AOP (pre-tax) increased by 8% from R3,099 million to R3,347 million, with strong growth in profits for Retail Affluent (up 30% to R1,358 million) and MFC (up 48% to R802 million).

			Rm
	H1 2011	H1 2010	% Change
Retail Affluent	1,358	1,048	30%
Mass Foundation Cluster	802	543	48%
Corporate	67	548	(88%)
Rest of Africa	84	107	(21%)
Asia & Latin America	97	86	13%
LTIR	575	602	(4%)
Life and Savings	2,983	2,934	2%
OMIGSA	682	604	13%
Central expenses and administration	(318)	(439)	28%
AOP (IFRS basis, pre-tax)	3,347	3,099	8%

Life and Savings profits benefited from improved mortality and morbidity experience in the retail businesses and improved persistency experience in MFC mainly due to continued retention efforts and positive investment variances. This was offset by an approximately R400 million increase in the Investment Guarantee Reserve for the Corporate business due to modelling changes related to dynamic policyholder behaviour on Smoothed Bonus products. The LTIR decreased by 4% to R575 million following the reduction in the LTIR rate from 9.4% in 2010 to 9.0% in 2011. The reduction of the LTIR rate reflects the anticipation of lower cash returns on assets supporting the Capital Adequacy Requirement in South Africa.

Despite the comparative period including significant performance fees and mark to market profits in Old Mutual Specialised Finance (OMSFIN), OMIGSA has reported profit growth of 13% mainly due to private equity gains and higher base fees earned on FUM, which were partly offset by lower transactional income.

Central expenses have reduced mainly due to a release of share based payment provisions and lower project costs.

Life APE sales summary

APE sales increased by 11% from R2,560 million to R2,846 million, largely due to strong growth in regular premium sales in MFC.

										Rm
By Cluster:	Gross single premiums			Gross regular premiums			Total APE			Total PVNBP
New business	H1 2011	H1 2010	+/-%	H1 2011	H1 2010	+/-%	H1 2011	H1 2010	+/-%	H1 2011	H1 2010	+/-%
South Africa
Mass Foundation Cluster	12	6	100%	952	640	49%	953	641	49%	4,092	3,080	33%
Retail Affluent	4,614	5,448	(15%)	647	645	0%	1,109	1,189	(7%)	8,011	8,638	(7%)
Corporate	3,023	2,098	44%	205	226	(9%)	507	437	16%	4,462	3,944	13%
OMIGSA	810	1,305	(38%)	-	-	-	81	129	(37%)	810	1,305	(38%)
Total South Africa	8,459	8,857	(5%)	1,804	1,511	19%	2,650	2,396	11%	17,375	16,967	2%
Rest of Africa*	312	265	18%	109	88	23%	140	115	22%	827	729	13%
Total Asia & Latin America**	112	101	11%	45	38	21%	56	49	14%	256	235	9%
Total Emerging Markets	8,883	9,223	(4%)	1,958	1,637	20%	2,846	2,560	11%	18,458	17,931	3%
By Product:
New business	H1 2011	H1 2010	+/-%	H1 2011	H1 2010	+/-%	H1 2011	H1 2010	+/-%	H1 2011	H1 2010	+/-%
South Africa
Savings	6,309	7,100	(11%)	886	692	28%	1,517	1,402	8%	10,513	10,726	(2%)
Protection	-	4	(100%)	918	819	12%	918	819	12%	4,713	4,488	5%
Annuity	2,150	1,753	23%	-	-	-	215	175	23%	2,149	1,753	23%
Total South Africa	8,459	8,857	(5%)	1,804	1,511	19%	2,650	2,396	11%	17,375	16,967	2%
Rest of Africa*	312	265	18%	109	88	24%	140	115	22%	827	729	13%
Total Asia & Latin America**	112	101	11%	45	38	18%	56	49	14%	256	235	9%
Total Emerging Markets	8,883	9,223	(4%)	1,958	1,637	20%	2,846	2,560	11%	18,458	17,931	3%

*     Rest of Africa represents Namibia only

**    Asia & Latin America represents Mexico only

OMSA

Single premium sales

Single premium sales decreased by 5% due to a 15% reduction in Retail Affluent sales following exceptional sales volumes in the comparative period, which resulted from very competitive Fixed Bond pricing. Retail Affluent annuity sales have been negatively impacted by prevailing low interest rates with customers seeking alternative investment options, as reflected in the 10% growth in living annuity sales. Corporate sales increased by 44% due to improved annuity and savings sales, which have benefited from strong flows into smoothed bonus savings products and a large inflation linked annuity transaction, which was secured in the second quarter.

Regular premium sales

Regular premium sales grew by 19% relative to the comparative period through 49% growth in MFC sales which benefited from an increase in the number of advisers, improved adviser productivity and improved debit order premium collection at early policy durations. Retail Affluent sales were in line with the comparative period. Corporate sales decreased by 9%, primarily due to lower risk sales as large scheme wins in 2010 were not repeated, partly offset by a 70% increase in savings sales driven by improved Evergreen and non-umbrella sales. Evergreen sales into Symmetry are now being reported as regular premium sales in Corporate.

Rest of Emerging Markets

Namibian regular premium sales increased by 24% following good Retail Mass performance in the Traditional channel and Retail Affluent sales increased by 17% driven by improved sales through the broker channel. Corporate regular premium sales increased by 51% due to significant business secured in June. Single premium sales increased by 18% with strong Max Investments sales in Retail Affluent, partly offset by lower annuity sales as 2010 included a significant outsourcing deal.  

Sales growth of 14% in Asia & Latin America was largely due to an 18% increase in regular premium sales in Mexico, relative to the comparative period, benefiting from an increase in financial planner numbers and improved productivity. The Retail Mass distribution team introduced in December 2010 is continuing to make good progress and new contracts represent 15% of total sales.

Life APE sales in China increased by 80% from CNY49 million in the first half of 2010, when sales were negatively impacted by a short-term interruption to the Bank of China distribution channel in Beijing, to CNY88 million in the first half of 2011. Sales benefited from the new product and distribution strategy. China continues to benefit from high growth rates in telemarketing, which was a new channel introduced in early 2010. India has reported healthy growth in single premium business and Group business, which has offset weaker regular premium sales to date. The Indian market is adjusting to the new unit-linked regulations implemented in September 2010.

Unit trust / mutual fund sales and other non-life sales

			Rm
New business	H1 2011	H1 2010	+/-%
OMSA	9,058	7,784	16%
Rest of Africa	1,608	2,258	(29%)
Asia & Latin America	7,078	6,231	14%
Total unit trust & mutual fund sales	17,744	16,273	9%
Other non-life sales	17,443	15,084	16%
Total Emerging Markets	35,187	31,357	12%

Total unit trust sales rose by 9%. In South Africa, unit trust sales grew by 16% to R9.1 billion, driven by growth in Max LISP and Galaxy sales, increased Marriott inflows and higher reinvested distributions. Sales in Namibia declined by 29% to R1.6 billion as the significant inflows from two corporate clients during the first half of 2010 were not repeated in 2011. Unit trust sales in Latin America were 14% ahead of the comparative period with strong growth in Colombian voluntary and mandatory pension flows, driven by initiatives focused on attracting new customers and a marketing campaign looking at cross-selling opportunities. Mexican sales benefited from a larger financial planner sales force and improved productivity.

Other non-life sales (in excess of unit trust/mutual fund sales) grew by 16% to R17.4 billion for H1 2011, driven by growth in the ACSIS business.

Value of new business and margins

The value of new business decreased by 4% to R422 million despite an increase in sales volumes due to a reduction in new business margins, with the APE margin decreasing from 17% in the first half of 2010 to 15% in the first half of 2011. APE margin was 3%, 29% and 8% for Retail Affluent, MFC and Corporate respectively. Increased high-margin sales from MFC were offset by lower value of new business in Retail Affluent as a result of lower sales, a less profitable sales mix and erosion of new business profitability of fixed bonds. The value of new business in Corporate has also decreased. This was caused by a less profitable sales mix due to a shift from with-profit annuities to CPI linked annuities.

MCEV results

Operating MCEV earnings (post-tax) increased by 27% compared with the first half of 2010. Operating experience variances were significantly higher than the comparative period, with improved experience variances for mortality in the retail businesses, persistency and expenses. However, these variances are caused partly by seasonality, non-recurring variances from releases from reserves and the unusually high mortality experience profit on one of our major products in the first half of the year. These positive experience variances were partly offset by the increase in the Investment Guarantee Reserve for Corporate business and by a significant reduction in the expected existing business contribution due to the reduction in one-year swap yields during 2010.

Other significant movements affecting the closing MCEV include positive investment variances on our annuity portfolios which were partly offset by negative investment variances on policyholder funds due to lower than expected investment returns and an increase in the swap yield, at most terms, causing a reduction in VIF.

The overall growth in Emerging Markets MCEV was 7.3% for the first half of 2011.

Outlook

We continue to make significant progress towards achieving our strategic objectives of investing in our Emerging Markets businesses by focusing on our customers and promoting a savings culture in the emerging markets in which we operate. While we anticipate that the full potential impacts of the FAIS regulatory exams in South Africa will only emerge in 2012, we have implemented extensive training plans and other measures to assist our representatives in passing the exams in advance of the revised 30 June 2012 deadline. We have accelerated our Retail Affluent and Corporate sales training in the first half of 2011 and expect the emphasis of training in the second half of 2011 will be on the MFC.

Our key areas of focus for the second half of the year will be to continue driving strong sales growth and seeking growth opportunities by leveraging the strength and core competencies of the wider Group.

Long-Term Savings: Nordic

Increased underlying profits and continued strong APE margin

			SEKm
Highlights	H1 2011	H1 2010	% Change
AOP (IFRS basis, pre-tax)	618	655	(6%)
Return on equity*	11.7%	11.7%
Life assurance sales (APE)	1,295	1,154	12%
Unit trust/mutual fund sales	3,142	3,647	(14%)
PVNBP	7,584	6,235	22%
Value of new business	293	284	3%
APE margin	23%	25%
PVNBP margin	3.9%	4.6%
Operating MCEV earnings (covered business, post-tax)	647	712	(9%)
Return on embedded value (covered business, post-tax)	8.4%	9.5%
Net client cash flows (SEKbn)	4.3	4.6	(7%)

			SEKbn
	H1 2011	FY 2010
Funds under management	142.7	145.4	(2%)

*     Return on equity is IFRS AOP (post-tax) divided by average shareholders' equity, excluding goodwill, PVIF and other acquired intangibles

Overview

The Nordic economies are showing a higher degree of stability than much of the rest of Europe. Although GDP growth has been strong in recent years, especially in Sweden, the Nordic economies are relatively small and are dependent on foreign trade and as a result currencies and equity markets have inevitably been impacted by the European economic turbulence. The Swedish stock exchange (OMX Stockholm 30) fell by 7% in the first half of 2011. Excluding restructuring costs of SEK96 million the Nordic business delivered a strong IFRS AOP result in H1 2011. Changes in the management team have helped refocus the business in delivering its key priorities; strengthening distribution power and improving the product offering to customers, stimulating future NCCF growth, increasing operational efficiency to secure profitable growth, and optimising structures and risk frameworks to unlock value. Product development has been accelerated with the release of the Depå pension product in June and a bank savings account, distributed by our internal sales force, which generated deposit inflows of approximately SEK 1.1 billion during the period. The business has implemented voluntary staff redundancy plans in H1, under which 331 employees have left the business, and is well placed to meet efficiency and profitability targets in a rapidly changing business environment.

The Nordic business is making good progress towards the implementation of Solvency 2, as a component of the overall Group Solvency 2 initiative, and is also implementing new UCITS and bank regulatory frameworks.

Net client cash flow

NCCF during the period was SEK4.3 billion, a decrease of 7% against the comparative period. This was driven by a combination of the higher value of surrenders (due to the higher policy fund values), and an increase in partial surrenders in the occupational pension business and lower mutual fund sales.

Funds under management

FUM was SEK142.7 billion at 30 June 2011, down 2% from the position at 31 December 2010. The decline is mainly due to the declining stock markets and the divestment of Lärarfonder (SEK1.8 billion at 31 December 2010), an unprofitable part of Skandia mutual funds, partially offset by positive NCCF in the period.

Life sales summary

										SEKm
	Gross single premiums			Gross regular premiums			Total APE			Total PVNBP
New business	H1 2011	H1 2010	+/-%	H1 2011	H1 2010	+/-%	H1 2011	H1 2010	+/-%	H1 2011	H1 2010	+/-%
Sweden
Corporate	716	897	(20%)	534	542	(1%)	606	631	(4%)
Retail	2,500	1,865	34%	81	117	(31%)	330	304	9%
Total Sweden	3,216	2,762	16%	615	659	(7%)	936	935	0%	5,117	4,885	5%
Denmark
Total Denmark	1,115	442	152%	247	175	41%	359	219	64%	2,467	1,350	83%
Total Nordic	4,331	3,204	35%	862	834	3%	1,295	1,154	12%	7,584	6,235	22%

APE sales of SEK1,295 million were up 12% compared to H1 2010, driven by strong sales performance in Denmark but also due to improved retail sales in Sweden. APE sales in the Swedish Retail business increased by 9%, with strong single premium sales in the Depå product. Depå sales have benefited from improved investment alternatives within the product and increased focus during the period. The growth of the Corporate business was restricted by the delay to the launch of the Occupational Pension version of the Depå product, now due to be launched during H2. In addition, current market conditions favour guarantee products, which we currently do not provide under Skandia Link. The introduction of Tied Agents and innovative products in Denmark led to excellent new sales growth during the period. Skandia is well positioned to take advantage of the ban on commission in Denmark introduced on 1 July 2010 and is increasing market share. Denmark now accounts for 28% of the total Nordic APE sales.

Unit trust / mutual fund sales summary

Mutual fund sales of SEK3,142 million were down 14% on H1 2010, as turbulent stock markets led clients to switch funds to attractive savings accounts in Skandiabanken.

			SEKm
New business	H1 2011	H1 2010	+/-%
Skandia fonder	1,131	1,390	(19%)
Skandiabanken	2,011	2,257	(11%)
Total Nordic	3,142	3,647	(14%)

IFRS AOP results

IFRS AOP (pre-tax) was SEK618 million (H1 2010: SEK655 million). The H1 2010 result included a one-off income of SEK126 million related to a divestment of a private equity holding. H1 2011 includes restructuring costs of SEK96 million. The staff restructuring process came to an end on 30 June. A headcount reduction of 331 was achieved, marginally ahead of target. Excluding these one-off items, the underlying result in H1 2011 increased 35% compared to H1 2010. This increase is due to higher fund-based fees and rebates in the unit-linked business, improved net interest margin in Skandiabanken and lower administrative expenses (excluding restructuring costs).

			SEKm
	H1 2011	H1 2010	% Change
Long-term business AOP	516	554	(7%)
Banking business AOP	87	88	(1%)
Asset management AOP	15	13	15%
AOP (IFRS basis, pre-tax)	618	655	(6%)

Skandiabanken results were in line with 2010 levels. An increase in net interest income, driven by increased market interest rates, was partially offset by increased restructuring costs. Credit losses remain very low at 0.06% in H1 2011 (H1 2010: 0.11%), reflecting the traditionally low-risk nature of our lending business. Deposits increased by 8% compared to H1 2010 and we have seen a strong inflow in the second quarter driven by attractive interest rates and sales by our internal sales force. In a Norwegian customer poll, Skandiabanken had the most satisfied banking customers for the 10th year in a row.

In Q2 Sweden's Supreme Court ruled that past income received from fund rebates would not be taxable.

Value of new business and margins

The value of new business increased, driven by positive new sales in Skandia Link Denmark. The APE margin reduced from 25% to 23% following assumption changes made in Q4 2010 and a lower level of top-ups.

MCEV results

Operating MCEV earnings after tax decreased to SEK647 million (H1 2010: SEK 712 million). The reduction in H1 2011 is primarily due to restructuring expenses and a change in the modelling of tax on expenses. Without these two non-recurring effects operating MCEV earnings after tax would be SEK795 million, a strong increase from 2010. The 2010 comparative period was also positively affected by the SEK 126 million realised gain from the Private Equity divestment.

Outlook

The economic outlook for 2011 remains positive and interest levels are expected to rise as the economy continues to expand. The Nordic savings market is expected to grow, although the environment is competitive with significant pressure on fees and volatile markets driven by the uncertainties regarding the deficits in other European countries. The long term savings market is splitting into an advised market with high levels of service from financial advisers, and a 'self service' market. Management continues to focus on improving sales, especially via cross selling and up selling activities combining insurance and banking; creating and maintaining sustainable margins; delivering the next phase of the cost savings targets, and improving the distribution and product offerings to enhance NCCF. Our restructuring programme, with the announced voluntary redundancies is designed to prepare the business for a sustainable future. In H2 2011, cost reduction activity will continue and we estimate restructuring costs of approximately SEK240 million (£24 million) for the full year.

Long-Term Savings: Retail Europe

Solid first half year with increasing sales

			€m
Highlights	H1 2011	H1 2010	% Change
AOP (IFRS basis) (pre-tax)	25	29	(14%)
Return on equity*	13%	20%
Life assurance sales (APE)	41	37	11%
Unit trust/mutual fund sales	13	14	(7%)
PVNBP	317	279	14%
Value of new business	3	2	50%
APE margin	8%	6%
PVNBP margin	1.0%	0.7%
Operating MCEV earnings (covered business, post-tax)	(7)	27
Return on embedded value (covered business, post-tax)	0.6%	5.1%
Net client cash flows (€bn)	0.2	0.2	-

			€bn
	H1 2011	FY 2010	% Change
Funds under management	5.7	5.8	(2%)

*     Return on equity is IFRS AOP (post-tax) divided by average shareholders' equity, excluding goodwill, PVIF and other acquired intangibles

Overview

GDP growth and unemployment rates improved in all markets in which Retail Europe operates. This was driven by state stimulus packages and strong export conditions. Equity markets were volatile during the period and varied by market. The German DAX posted a gain of 6.7% during the period. Customer sentiment remained cautious in Germany and Austria with demand primarily for guaranteed products. IFAs in these markets currently prefer traditional life policies, given the uncertain outlook, and this has led to a challenging sales environment, given our focus on unit-linked contracts.

Retail Europe's performance in H1 2011 has been encouraging with growth in sales. We continued to bed down changes to the Retail Europe organisation including the relocation of certain administration activities to South Africa. We also developed initiatives to maintain and grow relationships with our existing distribution partners. These initiatives, underpinned by strong cost containment, ensured improvement in our value of new business, which improved by 50% over the comparative period.

Following a detailed review of operations, we have decided to cease writing new business in Switzerland. Significant staff reductions have been communicated and initiatives to protect the value of in force have been implemented.

AOP IFRS was €25 million, €4 million lower than H1 2010.

Net client cash flow

NCCF was €196 million for H1 2011 slightly down on H1 2010, due to the increase in fund values of surrenders resulting from equity market growth over 2010. Persistency levels were improved year-on-year.

Funds under management

FUM of €5.7 billion at 30 June 2011 was marginally lower than 31 December 2010, driven by lower stock market performance outside of Germany.

Sales

APE sales increased 11% to €41 million due to increased new sales of single premiums in Germany and regular premium business in Poland. Our market share in Germany increased compared to H1 2010.

										€m
	Gross Single Premiums			Gross Regular Premiums			Total APE			Total PVNBP
New business	H1 2011	H1 2010	+/-%	H1 2011	H1 2010	+/-%	H1 2011	H1 2010	+/-%	H1 2011	H1 2010	+/-%
Germany	20	16	25%	12	13	(8%)	14	15	(7%)	123	123	-
Poland	9	10	(10%)	10	7	43%	11	9	22%	61	51	20%
Austria	4	4	-	9	9	-	9	9	-	57	61	(7%)
Switzerland	6	6	-	6	4	50%	7	4	75%	76	44	73%
Total Retail Europe	39	36	8%	37	33	12%	41	37	11%	317	279	14%

The sales volumes in Poland benefited from increased marketing activity and new distribution partners in the IFA channels and the newly developed bank channel. Distribution activities showed increased focus on external events and relationship management with new and existing business partners. We successfully launched new products in the first half year in Austria and Germany.

IFRS AOP results

IFRS AOP (pre-tax) decreased €4 million to €25 million in the period. This was due to slightly higher costs for our South African relocation activities, given the duplication of costs in the handover period, and increased sales related expenses and was partially offset by higher fund fees resulting from higher average market levels.

Value of new business and margins

The value of new business increased by €1.2 million to €3.3 million, with a PVNBP margin for the half year of 1.0% and an APE margin of 8%. The main reasons for the improvement were higher new sales, driven in part by new tariffs, and successful expense management.

MCEV results

Operating MCEV earnings after tax decreased by €33.7 million from the comparative period to a loss of €6.8 million, driven by a methodology change in calculating costs for non-hedgeable risks (CNHR).

Outlook

Macro-economic factors continue to have a significant impact on our markets in 2011. The ongoing volatility of equity and bond markets have not supported consumer confidence in the unit-linked markets.

However, we have made significant progress in meeting our 2012 targets and have begun several strategic growth initiatives, most notably in Poland, to build scale and leverage our Skandia branch in South Africa, while maintaining our rigorous cost and capital management controls.

Long-Term Savings: Wealth Management

A strong start for Wealth Management

			£m
Highlights	H1 2011	H1 2010	% Change
AOP (IFRS basis, pre-tax)	93	95	(2%)
Return on equity*	14%	15%
Life assurance sales (APE)	346	412	(16%)
Unit trust/mutual fund sales	2,454	2,207	11%
PVNBP	2,977	3,611	(18%)
Value of new business (post-tax)	39	31	26%
APE margin	11%	8%
PVNBP margin	1.3%	0.9%
Operating MCEV earnings (covered business, post-tax)	100	64	56%
Return on embedded value (covered business, post-tax)	9.0%	6.7%
Net Client Cash Flows (£bn)	1.8	2.3	(22%)

			£bn
	H1 2011	FY 2010	% Change
Funds under management	57.7	55.9	3%

*     Return on equity is IFRS AOP (post-tax) divided by average shareholders' equity, excluding goodwill, PVIF and other acquired intangibles

Overview

Wealth Management continued to build on its strong operational performance in 2010. Overall gross sales levels remained constant with 2010 levels while margins improved further. The cost reduction programme has already delivered its end of 2012 target of £45 million of run-rate savings in July, 17 months earlier than planned, which contributed further to improved profitability. FUM remained at record levels for the business with NCCF continuing to make a good contribution to overall fund growth.

Covered new business sales were 16% below the levels recorded in the comparative period, where the tax shield granted to Italian residents caused an increase in sales. This shield expired at the end of H1 2010 and the markets and sales levels have returned to more normal levels in Italy since then. Sales in Italy on an APE basis were £40 million during the first half of 2011 (H1 2010: £84 million).

Sales on the UK Platform continued to grow with a 7% increase against the comparative period. APE Platform sales were up 10%. Gross sales for the UK were £3.4 billion in H1 2011 compared to £3.3 billion in H1 2010. We have taken a targeted sales approach focusing on higher value IFAs in order to increase our share of their total sales. This is an ongoing initiative with early indications that we are already winning a higher 'share of wallet'. As previously highlighted, following a product review in advance of RDR, we decided to close some legacy products to new business in 2010 and are actively planning for widening our platform product portfolio.

VNB for Wealth Management overall improved by 26% and APE margin increased to 11% in H1 2011 from 8% in H1 2010. This was largely driven by actions to improve product mix in the International off-shore products.

On an underlying basis (excluding the smoothing of policyholder tax) profits for Wealth Management increased by 34%, driven by higher FUM and reduced expenses, although on a reported basis AOP decreased by £2 million to £93 million.

Our highly successful Spectrum fund range now has FUM in excess of £1 billion. The risk adjusted profile of the fund has proved popular with customers, and the performance of the range of funds has been excellent since launch. Other UK platforms now offer Spectrum on their platforms too; this is a strong endorsement for this fund range. The Skandia Shield protected investment product has now also been made available to ISA clients following its launch earlier this year, and we are now starting to see strong flows into this fund. The performance of the funds managed by Skandia Investment Group, our in-house fund manager, continues to improve quarter on quarter.

Net client cash flow

NCCF for the period was £1.8 billion, down 22% on H1 2010 when they were boosted by the high sales in the Italian market during the Italian tax shield. Excluding Italian NCCF, total NCCF increased from £1.6 billion in H1 2010 to £1.7 billion in H1 2011. The UK platform business continued to deliver approximately £1 billion of NCCF per quarter.

Funds under management

FUM grew in line with strong NCCF of £1.8 billion to £57.7 billion a 3% rise in the last six months and an 18% rise from the 30 June 2010 level. This represents a substantial rise on the comparable period in 2010. Markets at 30 June 2011 were flat compared to 31 December 2010. FUM included UK assets of £35.3 billion (31 December 2010: £33.9 billion). Of the UK assets, SIS platform assets totalled £18.7 billion, a 12% rise in the last six months and a 41% rise from the 30 June 2010 level, further solidifying our position as one of the largest participants in this market.

Sales

APE sales decreased by 16% to £346 million, this was mainly attributable to lower sales in Italy. Unit Trust fund sales rose by 11% to £2,454 million predominantly in the UK.

										£m
	Gross single premiums			Gross regular premiums			Total APE			Total PVNBP
Life new business	H1 2011	H1 2010	+/-%	H1 2011	H1 2010	+/-%	H1 2011	H1 2010	+/-%	H1 2011	H1 2010	+/-%
UK market
Pensions	1,084	1,136	(5%)	43	40	8%	151	153	(1%)
Bonds	244	296	(18%)	-	-		25	30	(17%)
Protection	-	-		4	5	(20%)	4	5	(20%)
Savings	-	-		3	5	(40%)	3	5	(40%)
Total UK	1,328	1,432	(7%)	50	50	-	183	193	(5%)	1,557	1,654	(6%)
Of which UK platform	1,159	1,067	9%	21	18	17%	137	125	10%	1,283	1,168	10%
International markets
Unit-linked	134	174	(23%)	17	28	(39%)	30	45	(33%)
Bonds	643	633	2%	12	12	-	77	76	1%
Total International	777	807	(4%)	29	40	(28%)	107	121	(12%)	881	997	(12%)
Continental Europe markets
Unit-linked	520	936	(44%)	4	3	33%	56	98	(43%)	539`	960	(44%)
Total Wealth Management	2,625	3,175	(17%)	83	93	(11%)	346	412	(16%)	2,977	3,611	(18%)

£m
Mutual fund new business	H1 2011	H1 2010	+/-%
UK market	1,891	1,666	14%
International markets	555	525	6%
Continental Europe markets	8	16	(50%)
Total Wealth Management	2,454	2,207	11%

The market context for our UK business continues to evolve as an increasing number of IFAs convert their business to platforms. Our strong platform sales in the period reflect this, with APE sales totalling £137 million of the total £183 million sales in the UK, an increase of 10% on sales of £125 million on the comparative period. We continued to experience strong single premium pension business, although this was slightly down on the comparative period. UK mutual fund sales grew strongly up 14% in the period. As in the prior year, we benefited from the seasonality of the tax year-end, along with increased ISA allowances.

APE sales in the UK Legacy market of £46 million decreased by £22 million from £68 million in the equivalent period in 2010. This decrease reflects a reduction in the range of legacy products being offered in 2011.

In the offshore International market APE sales decreased by 12% to £107 million. This was the result of a managed decline in our lower margin regular premium business across the international markets to focus on higher margin, single premium products. As a consequence, the APE margin from international improved from 14% in H1 2010 to 23% in H1 2011. This was the main driver of the improvement in VNB for the Wealth Management business.

Continental Europe APE sales decreased by 43% to £56 million. This represented a 44% increase on the first half of 2009, which we consider to be a more appropriate comparator period given the impact of the one-off tax shield in Italy in 2010.

IFRS AOP results

IFRS AOP (pre-tax) decreased by 2% to £93 million. Adjusting for the effects of policyholder tax profit grew by 34% for Wealth Management driven by higher FUM balances and reduced absolute levels of expenses. Smoothing of policyholder tax gave rise to a profit of £36 million in H1 2010 and £14 million in H1 2011. There will be no further impact from policyholder tax smoothing from 2011.

Net margin post tax

Underlying net margin post tax (excluding the smoothing for policyholder tax) has improved from 24 basis points in H1 2010 to 25 basis points in H1 2011. This is as a result of the business gaining operational leverage as FUM increase and the expense base becoming more efficient through the benefits of the cost reduction programme. Margin increases have been achieved with the backdrop of continued development spend, in particular on IT infrastructure in the run up to RDR, and the transition of the UK business from the current legacy products to new products on the platform offerings. Wealth Management delivered the targeted £45 million of run rate savings in July 2011.

Value of new business and margins

The value of new business increased by £8 million to £39 million and the APE margin and PVNBP margin increased to 11% (H1 2010: 8%) and 1.3% (H1 2010: 0.9%) respectively. The increase in margins is predominately driven by a more beneficial product mix in International due to increased focus on higher margin portfolio bond products and lower acquisition costs. Margins also increased due to favourable experience from economic assumption changes and positive impacts from persistency and rebate assumption changes made at the end of December 2010.

MCEV results

MCEV operating earnings post tax increased by £36 million to £100m for H1 2011, reflecting modelling changes in the Platform business, favourable experience variances (persistency and rebates) and an increase in VNB.

MCEV increased by 4% from £1,977m at the end of 2010 to £2,063m at H1 2011. This was driven predominantly by operating earnings and positive economic variances, partially offset by transfers from covered business.

Return on Embedded Value increased from 6.7% in H1 2010 to 9.0% in H1 2011.

Outlook

Based on the results for the first half of the year, and continuing positive investor sentiment, our outlook for 2011 remains optimistic. Our 2011 sales continue to be in line with our expectations. We expect sales and retail NCCF momentum in the UK to increase once clarity around RDR is achieved and as a result of our plan to widen our product offering on the UK Platform.

A further paper on the Retail Distribution Review (RDR) was issued by the FSA in August 2011. We believe that we are well-placed for the RDR changes since a large proportion of our new business is already written on the basis of something akin to a client-agreed adviser remuneration. In addition, we are considering plans to introduce a fully unbundled charging structure, under which we will pass on rebates to the customer in advance of December 2012.

Despite having achieved our cost targets, our focus on cost reduction will continue and we remain confident that we will meet our 2012 ROE targets.

Nedbank Group (Nedbank)

Strong earnings growth while further strengthening portfolio impairments

			Rm
Highlights	H1 2011	H1 2010	% Change
AOP (IFRS basis, pre-tax)	4,002	3,052	31%
AOP (IFRS basis) (pre-tax) (£m)	359	266	35%
Headline earnings*	2,772	2,153	29%
Net interest income*	8,683	8,082	7%
Non-interest revenue*	7,139	6,158	16%
Net interest margin*	3.43%	3.34%
Credit loss ratio*	1.21%	1.46%
Cost to income ratio*	55.9%	55.3%
Return on Equity*	12.2%	10.7%
Return on Equity (excluding goodwill)*	13.7%	12.2%
Core Tier 1 ratio*	10.7%	9.9%

*     As reported by Nedbank in its report to shareholders as at 30 June 2011.

      Certain of the Nedbank's reporting ratio calculations have been adjusted, to reflect the move from simple average to daily average measures of the denominator. Comparatives have been restated accordingly.

The full text of Nedbank's results for the six months ended 30 June 2011, released on 1 August 2011, can be accessed on our website http://www.oldmutual.com/mediacentre/pressReleases/viewPressRelease.jsp?pressItem_id=14827. The following is an edited extract:

Economic environment

Global demand has slowed in 2011 as industrial production and consumer spending in China and other large emerging markets moderated due to tighter monetary conditions. In many developed markets the fragile recovery faltered as surging oil prices and reduced fiscal and monetary stimulus negatively impacted consumer confidence and spending. In addition, concerns remain about the scale and increasing cost of sovereign debt in many parts of Europe.

Locally, real GDP grew at an annualised rate of 4.8% in the first quarter of 2011. Conditions softened in the second quarter, with the mining and manufacturing sectors in particular having been impacted by the loss of momentum in global markets and the strong rand. Capacity utilisation and confidence levels remain low, resulting in limited demand for corporate credit.

In the retail sector household loan growth was mostly from continued demand for unsecured loans and instalment sales. Mortgage advances growth remained depressed as buyers continue to be cautious in line with the flat outlook for house prices, high levels of consumer debt and increased living costs.

Given the weak global environment, domestic growth is largely dependent on further fixed-investment spending and an ongoing improvement in consumption levels.

Review of results

Nedbank produced strong earnings growth for the six months ended 30 June 2011 in line with the guidance provided in the trading statements released in July this year.

Headline earnings increased by 28.8% to R2,772 million and profit from operations before taxation and non-trading and capital items was up 36.1%. Diluted headline earnings per share (HEPS) increased by 26.3% from 475 cents to 600 cents. Diluted basic earnings per share increased by 26.2% from 474 cents to 598 cents.

Earnings growth was driven by ongoing strong non-interest revenue (NIR) growth, improving margins and lower retail impairments. This growth was achieved while continuing to invest for the future and strengthening portfolio impairments.

Return on assets increased from 0.75% to 0.92% for the period. This increase, together with a decline in gearing to 13.3 times, resulted in Nedbank's return on average ordinary shareholders' equity (ROE), excluding goodwill, increasing from 12.2% to 13.7%. ROE increased from 10.7% to 12.2% for the period.

The balance sheet remained well-capitalised, with the core Tier 1 capital adequacy ratio increasing to 10.7% (December 2010: 10.1%), while Nedbank's Tier 2 capital position was reduced when the R1.5 billion Ned 5 bond was repaid in April 2011 and not replaced. Nedbank's liquidity buffers were increased by R9.0 billion and the long-term funding profile continued to lengthen to 27.0%, all this in proactive preparation for Basel III.

Net asset value per share grew by 6.1% (annualised) from 9,831 cents in December 2010 to 10,128 cents in June 2011.

Cluster performance

Total operating cluster headline earnings increased strongly by 43.0% from R2,015 million to R2,881 million. Nedbank Retail increased earnings from R133 million in 2010 to R826 million and, importantly, improved ROE from 1.7% to 9.9%. The repositioning of Nedbank Retail is being driven through a client-centred strategy of growing the primary-client base while leveraging the strong product lines. This has generated high levels of NIR growth and a significantly improving credit loss ratio, notwithstanding the continued strengthening of portfolio impairments.

Nedbank Capital's earnings reduced by 5.9% on the comparative period, with fee income down from lower market activity, and the credit loss ratio showed a slight deterioration from the prior period's elevated level. Nedbank Capital reported an increase of 4.3% in its NIR from trading. There has been some margin compression in foreign exchange flow businesses, and the market provided limited trading opportunities.

Nedbank Corporate achieved strong earnings growth of 24.0%, driven by improved margins, fair-value adjustments and improved income from its property private-equity portfolio.

Nedbank Business Banking's earnings were up 3.9%, reflecting the difficult conditions being experienced in the small to medium-sized business sector. In spite of this the cluster achieved an improvement in margins, above-inflation growth in fees and commission, primary-client acquisitions and deepened cross-sell.

Nedbank Wealth achieved good earnings growth of 16.6%, with strong contributions from insurance and asset management together with an improvement in the international wealth management businesses. Apart from strong growth in advice-based sales of financial planning, local Wealth Management had a disappointing performance in the first half of the year as a result of subdued activity and higher impairments.

Further segmental information is available on Nedbank's website at www.nedbankgroup.co.za.

Outlook

Domestic economic growth of 3.5% is currently anticipated for the full year. Increases in international food and fuel prices are expected to push inflation to the upper limit of the target band of 3% to 6% in the final quarter of 2011. Nedbank expects interest rates to remain at current levels for the balance of 2011, with increases currently expected from the first quarter of 2012. Asset growth is expected to remain at conservative levels due to slow employment growth, relatively high levels of debt compared with historic levels, increases in electricity and fuel costs, and concerns about the possibility of interest rate hikes in 2012.

The growth in the South African economy will be dependent on global economic and financial developments, further fixed and infrastructure investment and ongoing improvement in consumption levels. Economic activity is expected to be subdued for the balance of 2011. However, corporate credit demand is expected to improve slightly as the recovery in capital expenditure builds momentum and demand for funding increases. The operating environment for small and medium-sized businesses remains challenging.

Government infrastructure spending will be relatively insensitive to the economic cycle, with substantial amounts set aside to accelerate social and economic infrastructure as announced in this year's National Budget. The flow of this investment should improve as the year progresses, but is only expected to accelerate in 2012.

The retailbanking sector should continue to improve modestly as a result of transactional volume growth, with lending activity remaining much the same as in this reporting period.

Prospects

For the full year Nedbank currently expects:

·     interest margins to remain at similar levels to those of the first half;

·     banking advances to grow in the lower to mid-single digits;

·     impairments to continue improving, with the credit loss ratio reducing but remaining above the upper end of Nedbank's target range of 0.60% to 1.00%;

·     NIR (excluding fair-value adjustments) to grow at double digits; and

·     expenses to grow in early double digits, but to remain less than NIR growth.

The balance sheet remains liquid, strongly capitalised and in a good position to take advantage of growth opportunities as they arise.

Nedbank has had a positive start to the year and remains in a good position to deliver growth in 2011 earnings in excess of its medium- to long-term financial target. 

Shareholders are advised that these forecasts have not been reviewed or reported on by Nedbank's auditors.

Mutual & Federal (M&F)

Strong performance following renewed focus

			Rm
Highlights	H1 2011	H1 2010	% Change
Underwriting result	187	88	113%
Long-term investment return (LTIR)	316	310	10%
Restructuring costs	-	(14)
AOP (IFRS basis, pre-tax)	503	384	31%
Gross premiums	4,361	4,205	4%
Earned premiums*	3,448	3,396	2%
Claims ratio	64.6%	68.5%
Combined ratio	94.7%	97.4%
Solvency ratio	63.5%	62.0%
Return on equity	15.8%	14.5%

*     Gross of inter-company

Overview

Mutual & Federal delivered an improved ROE and strong underwriting result in the first half of 2011. All business lines benefited from improved underwriting and a slight reduction in commercial and corporate claims, despite seasonally heavy rains in the period.

iWYZE, our direct insurance joint venture with Old Mutual Emerging Markets, is progressing well. It is meeting its growth targets, and is on track to deliver underwriting profitability in accordance with expectations.

We are also making good progress in our preparation for Solvency 2 and its equivalent in South Africa, Solvency Assessment and Management (SAM).

Underwriting and IFRS AOP results

Premiums increased modestly against the comparative period, primarily through inflation adjustments. Increased competition from new direct players has restricted growth in the personal business area but Commercial business lines continue to perform well. Profitability overall was positively impacted by the decrease in the claims ratio from 68.5% to 64.6%, as claims costs were successfully contained. Most risk portfolios delivered satisfactory returns and Credit Guarantee risks performed particularly well. The operations in Namibia and Botswana continued to deliver a satisfactory contribution.

Expenses increased largely due to development costs associated with iWYZE and expenditure related to SAM as well as investment in the strategic step-change programme.

Outlook

In 2011 we anticipate continued benefits of increased collaboration with the wider Old Mutual Group. With new management structures in place, we have begun delivering on the three-year strategic step-change plan focusing on growth while improving operating efficiencies across the business.

We have restructured our capital base and following the payment of almost R1.0 billion of dividends we anticipate a reduction in LTIR earnings but a positive impact on ROE due to the resulting lower Equity levels.

We will continue to develop growth in association with our intermediary partners and grow our market share through improving systems and service. In 2011 we anticipate a growing contribution from alternative channels including iWYZE, niche business and underwriting management agencies. These initiatives are designed to grow revenue while improving expense ratios and so mitigate the impact of any softening in rates in 2011 and 2012 following the recent strong underwriting environment.

US Asset Management

Profits up 25% on higher average FUM, as management aligns business for future growth

			$m
Highlights	H1 2011	H1 2010	Change
AOP (IFRS basis, pre-tax)	76	61	25%
Return on Capital	4.4%	4.2%
Operating margin	20%	17%
Net client cash flows ($bn)	(10.4)	(8.0)	(30%)

			$bn
	H1 2011	FY 2010	% Change
Funds under management	260	259	-

Overview

US Asset Management (USAM) is a global, multi-boutique business comprised of 18 distinct affiliated investment firms which offer over 160 diverse investment strategies. The business provides institutionally driven active investment management and seeks to generate consistent positive alpha. USAM provides strategic capabilities to our affiliates that help them deliver superior investment performance, innovative offerings, and service to their clients.

At 30 June 2011, FUM across all affiliates totalled $260 billion, up marginally by $0.9 billion from 31 December 2010. Equity market appreciation was substantially offset by net cash outflows. While investment performance in long-term products improved during the period, short term products, in particular stable value funds, continued to experience net cash outflows.

Management focus is on improving net client cash flow, margins and investment performance.

Investment performance

Long-term investment performance improved during the period across equity, fixed income and alternative products. For the one-year period ended 30 June 2011, 73% of assets outperformed benchmarks, up from 43% at 31 March 2011. Over the three- and five-year periods to 30 June, 42% and 62% of assets outperformed benchmarks. Since 31 March 2011, the percentage of assets beating benchmarks has improved over each of the one-, three- and five- year periods. Management remains confident that its multi-boutique model, which encourages autonomous investment processes and retention of investment talent, will deliver investment outperformance over the full market cycle. Improving investment performance throughout the business continues to be a focus for the remainder of 2011 and beyond.

IFRS AOP results

IFRS AOP of $76 million increased 25% over the comparative period due to higher revenues combined with expense control. Revenue growth of 7% was driven by positive markets, including gains on seed capital, and improvements in investment performance fees. Operating expenses before variable compensation grew less than 3%.

Management fees were up $6.9 million or 2% over the comparative period. This increase was largely driven by a 2% increase in average FUM over the first half of 2010. Performance and transactions fees were up $3.9 million from H1 2010 to $5.1 million. Seed capital investment returns were up $14.6 million over the comparative period, primarily due to strong market performance in the first quarter.

FUM-driven expenses increased marginally as a result of higher average FUM than the comparative period. Operating margin of 20% was up 300 basis points compared with the period ended 30 June 2010. The improvement was largely driven by increases in seed capital investment returns.

Net client cash flows

						$bn
H1 2011	Opening FUM	Gross inflows	Outflows	Net outflows	Market and other	Closing FUM
Short-term flows	42.3	1.0	(7.3)	(6.3)	0.4	36.4
Long-term flows	216.4	13.7	(17.8)	(4.1)	10.9	223.2
Total	258.7	14.7	(25.1)	(10.4)	11.3	259.6

						$bn
H1 2010	Opening FUM	Gross inflows	Outflows	Net outflows	Market and other	Closing FUM
Short-term flows	47.5	1.9	(4.8)	(2.9)	(0.9)	43.6
Long-term flows	213.2	12.7	(17.8)	(5.1)	(8.6)	199.6
Total	260.7	14.6	(22.6)	(8.0)	(9.5)	243.2

While investment performance has improved significantly over the last 6 months, particularly as measured by one-year performance, net outflows have continued through the first half of the year. Net client cash outflows totalled $10.4 billion for the period (comparative period: $8.0 billion). Net outflows from short-term products were $6.3 billion (comparative period: $2.9 billion). Net outflows from long-term strategies for the period were $4.1 billion (comparative period: $5.1 billion). Net long-term strategy outflows improved compared with long term net outflows of $8.2 billion in the second half of 2010.

Gross inflows during the period totalled $14.7 billion (comparative period: $14.6 billion), with long-term fixed income products continuing to experience significant gross inflows. During the period, $4.4 billion of gross inflows came from new client accounts.

Gross outflows totalled $25.1 billion for the period (comparative period: $22.6 billion), largely driven by outflows from stable value funds, large cap value equity, and quantitative products (such as global, international and 130/30). Gross outflows from long-term strategies for the period were $17.8 billion compared to $17.8 billion in the six month period to 30 June 2010 and $23.4 billion for the six month period to 31 December 2010. Outflows in Large Cap Value, EAFE and quantitative strategies were seen across the market in Q1 of 2011.

We continue to improve our analysis and management processes in identifying and better managing assets at risk.

Funds under management

FUM ended the period at $260 billion, up $1 billion from 31 December 2010, as positive market returns were substantially offset by net client cash outflows. $223 billion (86%) of total FUM was in long-term investment products and $37 billion (14%) was in short-term products, compared to a mix of 82% and 18% at 30 June 2010. Long-term investment products were broadly diversified across equities ($132 billion, 59%), fixed income ($62 billion, 28%) and alternative investments ($29 billion, 13%). Short-term products comprised stable value funds ($36 billion, 97%) and cash ($1 billion, 3%).

Non-US clients currently account for 29% of FUM. International, emerging markets, and global equity products account for 22% of the FUM.

Product developments

USAM affiliates launched several new products during the period. Ashfield Capital Partners, LLC and Echo Point Investment Management, LLC both launched global equity product extensions and Acadian Asset Management LLC and Rogge Global Partners launched emerging markets product extensions.

Outlook

The return of public markets to more normal trading fundamentals, which began in 2010, has continued in 2011, providing the opportunity for USAMs' value and quantitative managers to continue to outperform their benchmarks. The one-year outperformance by 73% of USAM's assets is an important leading indicator of a future turn in net flows. While three-year returns remain below benchmark in a number of key products, we expect the near term positive trend to result in client decisions to maintain their relationships with our largest managers. Cash flows for Institutional mandates are often lumpy in nature, and there is often a lag between the turn of performance, the slowing of outflows, and the increase of inflows. However, assuming a continuation of the positive performance trends for long-term assets, USAM expects improved, though still negative, long term flows in the second half of the year, with continued progress in 2012.

The 25% increase in AOP over the comparative period indicates progress in the business. The 2011 full year result is unlikely to show a similar growth rate given ongoing outflows, investment in the business, and the level of seed capital gains experienced in the second half of last year. The challenge of net outflows is the key issue facing USAM. Achieving positive net flows, combined with appreciating markets, will drive the accomplishment of our other goals including increasing AOP growth and improving operating margins. In addition, USAM continues to invest for the future by funding the growth plans of several smaller affiliates who have strong products and performance but sub-scale asset bases. Although these investments currently impact operating margin by approximately 4% we believe that these affiliates are positioned to become engines of growth in the future.

With a new management team in place, we continue to refine and execute the growth strategy for USAM. We are committed to developing our non-US distribution capability, and we expect to report further progress on the execution of the business plan at the year end.

 

END

 

 

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