Interim Results - Part 4

Old Mutual PLC 4 September 2001 PART 4 OLD MUTUAL plc Results for the six months ended 30 June 2001 continued Notes to the financial statements continued for the six months ended 30 June 2001 5 Segmental £m Rm analysis (continued) South Rest of South Rest of 5(f) Funds Africa world Total Africa world Total under management (continued) At 31 December 2000 Investments 14,913 6,693 21,606 168,739 75,730 244,469 including assets held to cover linked liabilities Unit Trusts Asset management worldwide Old Mutual 1,266 779 2,045 14,325 8,814 23,139 Asset Managers Private - 1,252 1,252 - 14,166 14,166 client UK Other - 200 200 - 2,263 2,263 financial services 1,266 2,231 3,497 14,325 25,243 39,568 Third party Asset management worldwide Old Mutual 4,101 379 4,480 46,402 4,288 50,690 Asset Managers OMAM (US) - 50,153 50,153 - 567,471 567,471 Pilgrim - 11,735 11,735 - 132,779 132,779 Baxter Other UAM - 57,223 57,223 - 647,465 647,465 4,101 119,490 123,591 46,402 1,352,003 1,398,405 Private - 19,619 19,619 - 221,985 221,985 client UK Other 15 420 435 170 4,752 4,922 financial services 4,116 139,529 143,645 46,572 1,578,740 1,625,312 Total 20,295 148,453 168,748 229,636 1,679,713 1,909,349 funds under management At 30 June 2000 Investments 16,138 6,226 22,364 165,846 63,983 229,829 including assets held to cover linked liabilities Unit Trusts Asset management worldwide Old Mutual 2,053 588 2,641 21,098 6,043 27,141 Asset Managers Private - 1,221 1,221 - 12,548 12,548 client UK Other 866 129 995 8,900 1,326 10,226 financial services 2,919 1,938 4,857 29,998 19,917 49,915 Third party Asset management worldwide Old Mutual 4,444 379 4,823 45,670 3,895 49,565 Asset Managers Private - 20,384 20,384 - 209,481 209,481 client UK Nedcor 2,022 301 2,323 20,780 3,093 23,873 Investment Bank Managers Other 15 342 357 154 3,515 3,669 financial services 6,481 21,406 27,887 66,604 219,984 286,588 Total 25,538 29,570 55,108 262,448 303,884 566,332 funds under management Notes to the financial statements continued for the six months ended 30 June 2001 6 Insurance long term investment return In accordance with the requirements of the ABI SORP, profit on ordinary activities is stated after allocating an investment return earned by insurance businesses based on a long term investment return. This long term investment return is based on achieved real rates of return adjusted for current inflation expectations, and consensus economic investment forecasts. For life assurance business, the return is applied to an average value of investible shareholders' assets, adjusted for net fund flows. For general insurance liabilities, the return is an average value of investible assets supporting shareholders' funds and insurance liabilities, adjusted for net fund flows. Short term fluctuations in investment return represent the difference between actual return and long term investment return. The long term investment rate of return used in South Africa is 14 per cent. (2000: 14 per cent). The directors are of the opinion that this rate of return is appropriate and has been selected with a view to ensuring that returns credited to operating earnings are not inconsistent with the actual returns expected to be earned over the long term. £m Rm Analysis of 6 6 Year 6 6 months Year short term months months to 31 months to 30 to 31 Dec fluctuations to 30 to 30 Dec to 30 June 2000 in investment June June 2000 June 2000 returns 2001 2000 2001 Life assurance Actual 114 (129) 31 1,302 (1,331) 326 investment return attributable to shareholders Long term 82 114 215 937 1,178 2,262 investment return credited to operating result 32 (243) (184) 365 (2,509) (1,936) General insurance Actual 49 (1) 55 560 (9) 579 investment return attributable to shareholders Long term 23 26 44 263 269 463 investment return credited to operating result 26 (27) 11 297 (278) 116 Other shareholder's income / (expenses) Actual 45 (3) 10 514 (31) 105 investment return attributable to shareholders Long term 9 9 17 103 93 179 investment return credited to operating result 36 (12) (7) 411 (124) (74) Short term 94 (282) (180) 1,073 (2,911) (1,894) fluctuations in investment return 7 Exceptional items Profit attributable to shareholders is stated after crediting / (charging) the following exceptional items. £m Rm 6 months 6 months Year 6 months 6 months 6 months to 30 to 30 to 31 to 30June to 30 to 31 Dec June June Dec 2001 June 2000 2001 2000 2000 2000 (Loss) / gain (304) - 356 (3,467) - 3,746 on holding in / restructuring of Dimension Data Holdings plc and other interests before taxation and minority interests Taxation - - (5) - - (52) (Loss) / gain (304) - 351 (3,467) - 3,694 on holding in/ restructuring of Dimension Data Holdings plc and other interests before minority interests Minority 149 - (173) 1,702 - (1,821) interests (Loss) / gain (155) - 178 (1,765) - 1,873 on holding in/ restructuring of Dimension Data Holdings plc and other interests after taxation and minority interests In the second half of 2000, an exceptional gain was recognised following the exchange of Nedcor Limited's 25.1% interest in Dimension Data International Limited for the current holding of 8.2% of Dimension Data Holdings plc. In light of market movements in the first half of 2001, an exceptional diminution in the carrying value of the Group's investment in Dimension Data Holding plc has been recognised, reflecting a market value of R15.50 per share as at 23 July 2001. Although both events are exceptional in the context of their significance to the Group, the current year loss will form part of banking operating profit in the statutory financial statements, while the prior year gain was classified as non-operating in accordance with Financial Reporting Standard 3. Notes to the financial statements continued for the six months ended 30 June 2001 £m Rm 8 Tax on profit 6 6 Year 6 6 Year on ordinary months months to 31 months months to 31 activities to 30 to 30 Dec to 30 to 30 Dec June June 2000 June June 2000 2001 2000 2001 2000 United Kingdom taxation UK corporation 3 11 123 34 114 1,294 tax Double taxation - - (104) - - (1,094) relief 3 11 19 34 114 200 South African 43 50 171 491 516 1,799 tax Rest of world 12 2 9 137 21 95 tax Secondary 18 3 32 206 31 338 taxation on companies (STC) Deferred 31 18 (76) 354 186 (800) taxation Prior period - - 31 - - 326 adjustment Tax for the year 107 84 186 1,222 868 1,958 Reconciliation of tax charge Tax at UK rate 53 50 310 604 512 3,262 of 30.0 per cent. (2000: 30.0 per cent.) on profit on ordinary activities before tax Untaxed income (65) 37 (204) (742) 382 (2,146) (including tax exempt investment return) Disallowable 115 5 16 1,313 52 166 expenditure STC 18 3 32 206 31 338 Other (14) (11) 32 (159) (109) 338 Reported tax 107 84 186 1,222 868 1,958 charge Notes to the financial statements continued For the six months ended 30 June 2001 9 Acquisitions Americom In March 2001, the Group acquired Unified Life Insurance Company, a life assurance company licensed to do business in 43 states of the USA, for $25m. This operation commenced business in May 2001 and now operates under the name of Americom Life and Annuity Insurance company. The results of the company are brought to account in the life assurance technical result. Fidelity & Guaranty Life In April 2001, the Group announced that it had entered into an agreement to acquire Fidelity & Guaranty Life Insurance Company, a US based, fixed annuity and life assurance specialist, for $635 million (£445 million) in cash and ordinary shares. The acquisition is subject to receipt of regulatory approvals. Imperial Bank and Fleming Offshore Banking During the period, the Group's listed banking subsidiary, Nedcor Limited, acquired significant interests in the following: * 50.1 per cent. of Imperial Bank with effect from 1 January 2001; * 100 per cent. of Fleming Offshore Banking for R588 million (£52 million), with effect from 1 June 2001. It is expected that Old Mutual will acquire a 26 per cent. holding in Fleming Offshore Banking in the second half of the year in return for the transfer of Fairbairn Trust Company Limited, and that Fleming Offshore Banking will be renamed Gerrard Private Bank. US affiliate disposals In addition to the disposals of Murray Johnstone, Hellman Jordan and Chicago Asset Management Company during 2000, the Group has made further US affiliate disposals in the current period, namely Investment Research Company, Sterling Capital Management Inc. and Cooke & Bieler Inc. These have, in the current period, generated after tax proceeds of $14.5 million (£10.1 million). With the exception of Cooke & Bieler Inc., these affiliates were classified as assets held for resale. Notes to the financial statements continued for the six months ended 30 June 2001 £m Rm 10 Goodwill At At At At At At 30 June 31 Dec 30 June 30 June 31 Dec 30 June 2001 2000 2000 2001 2000 2000 At the 2,279 164 164 25,786 1,629 1,629 beginning of the period Adjustment in 12 - (3) 137 - (31) respect of prior year acquisitions Additions 50 2,162 485 571 22,747 5,031 arising on acquisitions during the period Disposals (4) - - (46) - - Amortisation (63) (33) (10) (720) (347) (103) for the period Foreign 105 (14) (2) 1,306 1,757 (11) exchange and other movements At the end of 2,379 2,279 634 27,034 25,786 6,515 the period The goodwill amortisation charge for the period of £69 million (R788 million) (June 2000: £10 million (R103 million); December 2000: £54 million (R568 million)) comprises £63 million (R720 million) (June 2000: £10 million (R103 million); December 2000: 33 million (R347 million)) disclosed in note 10 above, and £6 million (R68 million) (June 2000: £ nil (R nil); December 2000: £21 million (R221 million)) included in interests in associated undertakings. In accordance with Financial Reporting Standard 7, adjustments have been made to the goodwill of £1,795 million (R19,147 million) that arose on the acquisition in September 2000 of Old Mutual (US) Holdings. The increase of £12 million (R137 million) reflects the latest estimate of the consideration paid in respect of the purchase of revenue shares of certain affiliates combined with the effect of disposing of affiliates held for resale at values in excess of the original estimated carrying amount. The ultimate costs of purchasing these revenue shares will remain uncertain as they are dependent upon future events and hence are subject to adjustment in future years. Notes to the financial statements continued for the six months ended 30 June 2001 £m Rm 11 Amounts owed At At At At At At to credit 30 June 31 Dec 30 June 30 June 31 Dec 30 June institutions 2001 2000 2000 2001 2000 2000 (including convertible bond) Bank overdrafts 3 22 - 34 249 - Bank loans 659 544 55 7,489 6,156 565 Other loans 527 658 107 5,989 7,445 1,100 1,189 1,224 162 13,512 13,850 1,665 Repayable Within one year 67 398 107 762 4,090 1,100 Greater than 1,122 826 55 12,750 9,760 565 one year 1,189 1,224 162 13,512 13,850 1,665 Of the £527 million of other loans, £448 million relates to US$650 million 3.625 per cent. Convertible Bonds 2005 issued by Old Mutual Finance (Cayman Islands) Limited on 2 May 2001 guaranteed by and convertible into the ordinary shares of Old Mutual plc, at a conversion price of 190p. The proceeds of the issue were used to repay senior debt which had previously financed the acquisition of the Old Mutual (US) Holdings. Embedded Value Information 1. Embedded value The embedded value of Old Mutual plc at 30 June 2001 is set out below, together with the corresponding positions at 31 December 2000 and 30 June 2000. £m Rm At At At At At At 30 June 31 Dec 30 June 30 June 31 Dec 30 June 2001 2000 2000 2001 2000 2000 Adjusted net 4,815 4,730 4,450 54,723 53,517 45,737 worth Equity 3,692 3,618 3,361 41,954 40,937 34,540 shareholders' funds Excess of market 1,143 1,132 1,108 12,994 12,805 11,388 value of listed subsidiaries over their net asset value Adjustment to (20) (20) (19) (225) (225) (191) include OMI life subsidiaries on a statutory solvency basis Value of 880 823 764 9,999 9,314 7,846 in-force business Value of 968 886 840 10,998 10,028 8,628 in-force business before cost of solvency capital Cost of solvency (88) (63) (76) (999) (714) (782) capital Embedded value 5,695 5,553 5,214 64,722 62,831 53,583 An embedded value is an actuarially determined estimate of the economic value of a life assurance company, excluding any value that may be attributed to future new business. Old Mutual plc's embedded value is the sum of its adjusted net worth and the present value of the projected stream of future after-tax profits from its life assurance business in force at the valuation date, adjusted for the cost of holding solvency capital equal to the South African Statutory Capital Adequacy Requirement (or equivalent for non-African operations). The adjusted net worth is equal to the consolidated equity shareholders' funds adjusted to reflect the Group's listed subsidiaries at market value, and Old Mutual International (OMI) life assurance subsidiaries on a statutory solvency basis. The embedded value does not include a market valuation of the Group's asset management subsidiaries (including asset management business written through the life assurance companies), nor of any other in-force non-life business of the Group. The economic basis and assumptions have been revised as shown in section 4 below. The embedded value at 30 June 2001 also allows fully for the capital gains tax due to be introduced in South Africa with effect from 1 October 2001. The impact of the revised economic assumptions and allowance for capital gains tax is set out in section 2 below. The embedded values at 31 December 2000 and 30 June 2000 have not been restated. The assumptions used to calculate the embedded value are set out in section 4. The table below sets out a geographical analysis of the value of in-force business at 30 June 2001, 31 December 2000 and 30 June 2000. £m Rm At At At At At At 30 June 31 Dec 30 June 30 June 31 Dec 30 June 2001 2000 2000 2001 2000 2000 South Africa 769 706 650 8,735 7,988 6,686 Individual 512 451 424 5,814 5,098 4,362 business Group business 257 255 226 2,921 2,890 2,324 Rest of World 111 117 114 1,264 1,326 1,160 Value of 880 823 764 9,999 9,314 7,846 in-force business 2. Embedded value profits Embedded value profits represent the change in embedded value over the period, adjusted for any capital raised and dividends proposed. The after-tax embedded value profits for the six months to 30 June 2001 are set out below, together with the corresponding figures for the six months to 30 June 2000 and the year to 31 December 2000. £m Rm 6 6 Year 6 6 Year to months months to months months 31 Dec to to 31 to to 2000 30 June 30 Dec 30 30 2001 June 2000 June June 2000 2001 2000 Embedded value at 5,695 5,214 5,553 64,722 53,583 62,831 end of period Embedded value at 5,553 5,414 5,414 62,831 53,794 53,794 beginning of period Increase/(decrease) 142 (200) 139 1,891 (211) 9,037 in embedded value Less capital raised (4) - (177) (46) - (1,956) Issue of new capital - - (153) - - (1,691) in respect of re-equitisation of Pilgrim Baxter & Associates and employee share option schemes Proceeds from sale (4) - (24) (46) - (265) of shares previously held to satisfy claims and errors on demutualisation and issue of new shares Plus dividends 59 55 163 674 569 1,714 proposed Embedded value 197 (145) 125 2,519 358 8,795 profits The components of the embedded value profits are set out below: £m Rm 6 months 6 months Year to 6 months 6 months Year to to 31 Dec to to to 30 June 30 June 2000 30 June 30 June 31 Dec 2001 2000 2001 2000 2000 Profits from 27 26 74 310 272 782 new business - Point of 26 25 68 300 259 718 sale - Expected 1 1 6 10 13 64 return to end of period Expected 69 70 144 791 728 1,514 return Experience 17 27 28 198 280 289 variances Experience - 72 - 757 assumption changes Profits 113 123 318 1,299 1,280 3,342 before investment and exceptional items Investment 13 (22) (14) 146 (228) (143) variances Economic 109 10 1,244 101 assumption changes Impact of (52) - - (592) - - capital gains tax Development (9) - - (103) - - costs Investment 51 (38) 484 585 (388) 5,092 return on adjusted net worth Exchange rate (28) (208) (673) (60) (306) 403 movements Embedded 197 (145) 125 2,519 358 8,795 value profits The profits from new life assurance business comprise the value of new business written during the period, determined initially at the point of sale and then accumulated to the end of the period by applying the discount rate to the value of new business at the point of sale and adding back the expected cost of solvency capital between the point of sale and the end of the period. The profits from new life assurance business for the six months to 30 June 2001 are based on the revised economic assumptions, and allow fully for the impact of capital gains tax in South Africa (figures for prior periods have not been restated). The profits from existing life assurance business consist of the expected return on the in-force business, experience variances and changes in experience assumptions. The expected return is determined by applying the discount rate to the value of in-force business at the beginning of the period and adding back the expected cost of solvency capital over the period. The experience variances are caused by differences between the actual experience in the period and the assumptions used to calculate the value at the start of the period. The investment variances represent the differences between the actual returns in the period and the assumptions used to calculate the value at the start of the period. The economic assumption changes for June 2001 represent the combined impact of declining interest rates in South Africa and the changes to the differentials between the various economic assumptions and the risk discount rate shown in section 4. The impact of capital gains tax relates to capital gains tax to be introduced in South Africa in October 2001. Development costs reflect the costs incurred in developing the Group's new businesses in the US (Americom) and UK (due to launch later this year). The investment return on adjusted net worth represents the actual investment return earned on the shareholder portfolio investments (which includes the return on the market value of the shareholders' investments in Nedcor, Mutual & Federal and Nedcor Investment Bank), as well as the profits arising from other non-life businesses within the Group 3. Value of new business The value of new business (VNB) written in the period is the present value of the projected stream of after-tax profits from that business, adjusted for the cost of holding solvency capital. The value is determined initially at the point of sale and then accumulated to the end of the period as described in section 2 above. The tables below set out a geographical analysis of the value of new business for the six months to 30 June 2001, six months to 30 June 2000 and year to 31 December 2000. New business profitability (as measured by the ratio of the value of new business to the Annual Premium Equivalent) is also shown. Annual Premium Equivalent (APE) is calculated as recurring premiums (RP) plus 10% of single premiums (SP). 6 months to 30 June 2001 6 months to 30 June 2001 RP SP APE VNB Margin RP SP APE VNB £m £m £m £m Rm Rm Rm Rm South Africa 62 521 114 25 22% 704 5,954 1,300 287 Individual 58 382 96 18 19% 663 4,367 1,100 210 business Group business 4 139 18 7 38% 41 1,587 200 77 Rest of World 8 62 14 2 15% 87 712 158 23 Total 70 583 128 27* 21% 791 6,666 1,458 310* * Value of new business net of cost of solvency capital of £2 million (R24 million). The increase in the value of new business arising from the net impact of the revised economic assumptions and the allowance for future capital gains tax in South Africa amounted to £3 million (R35 million). 6 months to 30 June 2000 6 months to 30 June 2000 RP SP APE VNB Margin RP SP APE VNB £m £m £m £m Rm Rm Rm Rm South Africa 86 564 142 24 17% 884 5,825 1,467 247 Individual 65 395 104 9 9% 670 4,075 1,078 97 business Group business 21 169 38 15 39% 214 1,750 389 150 Rest of World 11 98 21 2 12% 113 1,014 214 25 Total 97 662 163 26* 16% 997 6,839 1,681 272* * Value of new business net of cost of solvency capital of £2 million (R23 million). Year to 31 December 2000 Year to 31 December 2000 RP SP APE VNB Margin RP SP APE VNB £m £m £m Rm Rm Rm Rm £m South 179 1,097 289 67 23% 1,886 11,542 3,040 708 Africa Individual 131 805 212 38 18% 1,384 8,465 2,230 399 business Group 48 292 77 29 38% 502 3,077 810 309 business (excl free shares) Rest of 20 211 41 5 13% 212 2,216 434 56 World Total 199 1,308 330 72 22% 2,098 13,758 3,474 764 (pro forma) SA Group - 78 8 2 22% - 818 82 18 (free shares) Total 199 1,386 338 74* 22% 2,098 14,576 3,556 782* * Value of new business net of cost of solvency capital of £5 million (R52 million). The value of new group business for the year to 31 December 2000 includes an amount of £2 million (R18 million) in respect of the proceeds of free shares issued to retirement funds at demutualisation, and re-invested with Old Mutual. The results for the prior periods have not been restated to reflect the new economic assumptions and the impact of capital gains tax. The value of new business excludes the value of new individual unit trust and some group market-linked business written by the life companies, as the profits on this business arise in the asset management subsidiaries. It also excludes premium increases arising from indexation arrangements in respect of existing business, as these are already included in the value of in-force business. The value of new business however includes the value of new Investment Frontiers business that originated from existing policies that matured. A reconciliation of the new business premiums shown in the notes to the financial statements to those shown above is set out below. £m Rm Recurring Single Recurring Single premiums premiums premiums Premiums New business premiums in the 90 727 1,028 8,303 notes to the financial statements Less: - Group market-linked - (165) - (1,877) business not valued - Unit trust business not - (34) - (388) valued - New business premiums (20) - (237) - arising from indexation Plus transfer of maturing - 55 - 628 policies to Investment Frontiers New Business premiums as per 70 583 791 6,666 embedded value report The assumptions used to calculate the value of new business are set out in section 4 below. 4. Assumptions The principal assumptions used in the calculation of the value of in-force business and the value of new business are set out below. * The pre-tax economic assumptions used for South African business were as follows: South Africa At At At 30 June 31 Dec 30 June 2001 2000 2000 Fixed Interest Return 11.0% 13.0% 14.5% Equity Return 13.0% 16.0% 17.5% Property Return 12.0% 16.0% 17.5% Inflation 7.0% 9.0% 10.5% Risk Discount Rate 13.5% 17.0% 18.5% For the non-South African operations, appropriate economic assumptions were chosen on bases consistent with those adopted in South Africa. * Rates of future bonuses have been set at levels consistent with the economic assumptions. * For the in-force business, projected company taxation is based on the current tax basis that applies to the life companies, and includes full allowance for Secondary Tax on Companies that may be payable in South Africa. Full account has been taken of the impact of capital gains tax to be introduced in South Africa with effect from 1 October 2001. For the purpose of determining the capital gains tax impact, it has been assumed that 10% of the equity portfolio is traded each year. * The assumed future mortality, morbidity and voluntary discontinuance rates have been based as far as possible on analyses of recent operating experience. Allowance has been made where appropriate for the effect of expected AIDS-related claims. * The management expenses attributable to life assurance business have been analysed between expenses relating to the acquisition of new business and the maintenance of business in force. All acquisition expenses have been allowed for in the calculation of the value of new business. Assumed future expenses were based on levels experienced up to 31 December 2000, and increased with assumed inflation to 30 June 2001. The future expenses attributable to life assurance business do not include Group holding company expenses. * Future investment expenses were based on the current scales of fees payable by the life insurance companies to the asset management subsidiaries. To the extent that these fees include profit margins for the asset management subsidiaries, these margins have not been included in the value of in-force business or the value of new business. * The effect of increases in premiums over the period for policies in-force as at 30 June 2001, 31 December 2000 and 30 June 2000 has been included in the value of in-force business only where such increases are associated with indexation arrangements. Other increases in premiums of existing policies are included in the value of new business. * Conversions between Rand and Sterling were carried out at the following exchange rates: Exchange rates Rand per £1 At 30 June 2001 11.3634 At 30 June 2000 10.2767 At 31 December 2000 11.3148 6 months to 30 June 2001 (average) 11.4211 6 months to 30 June 2000 (average) 10.3330 Year to 31 December 2000 (average) 10.5213 5. Alternative Assumptions The discount rate appropriate to an investor will depend on the investor's own requirements, tax position and perception of the risks associated with the realisation of the future profits. To illustrate the effect of using different discount rates, the table below shows the embedded value of Old Mutual plc at 30 June 2001 at alternative discount rates. In determining the values at different discount rates, all other assumptions have been left unchanged. £m Rm Value at Value at Value at Value at Value at Value at central central central central central central discount discount discount discount discount discount rate rate - 1% rate rate +1% rate - 1% rate + 1% Adjusted 4,815 4,815 4,815 54,723 54,723 54,723 net worth Value of 1,002 880 769 11,382 9,999 8,737 in-force business Value 1,024 968 916 11,634 10,998 10,404 before cost of capital Cost of (22) (88) (147) (252) (999) (1,667) solvency capital Embedded 5,817 5,695 5,584 66,105 64,722 63,460 value The table below sets out the value of new life assurance business for the 6 months to 30 June 2001 at alternative discount rates. £m Rm Value at Value at Value at Value at Value at Value at central central central central central central discount discount discount discount discount discount rate rate - 1% rate rate +1% rate - 1% rate + 1% Value 31 29 28 359 334 315 before cost of capital Cost of (1) (2) (4) (6) (24) (40) solvency capital Value of 30 27 24 353 310 275 new business 6. External Review These results have been reviewed by Tillinghast-Towers Perrin, who have confirmed to the Directors that the methodology and assumptions used to determine the embedded value are reasonable and that the embedded value profits are reasonable in the context of the operating performance and experience of the life assurance business during the six months to 30 June 2001.

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