Old Mutual Limited Interim Results 2018 - Part 1

RNS Number : 3334Z

Old Mutual Limited

31 August 2018

 

NEWS RELEASE

Old Mutual Limited

Incorporated in the Republic of South Africa

Registration number: 2017/235138/06

ISIN: ZAE000255360

LEI: 213800MON84ZWWPQCN47

JSE Share Code: OMU

NSX Share Code: OMM

("Old Mutual")

31 August 2018

Ref: 38/18

Old Mutual Limited Unaudited Condensed Group Interim Results for the six months ended 30 June 2018

Peter Moyo, Old Mutual Limited Chief Executive, said:

'With our debut results as Old Mutual Limited, I am pleased to report that we are on track to deliver on the commitments we have made to investors. We delivered solid financial results in a tough environment and have made good progress against most of our 8 battlegrounds driven through deliberate management action. There is renewed momentum and excitement in the Group following our listing and this is captured in our new, vibrant branding launched recently. Whilst we continue to see economic headwinds in the near term, our Group is resilient and we are on track with our financial targets.'

Strong financial results¹:

·      Results from operations (RFO) of R4,848 million, up 7% (HY 2017: R4,530 million)

·      Adjusted headline earnings (AHE) of R5,393 million, marginally up on prior year (HY 2017: R5,359 million)

·      AHE per share of 112.3 cents per share, in line with prior year

·      IFRS profit after tax attributable to equity holders of the parent of R10,648 million up 42% (HY 2017: R7,503 million) mainly due to the accounting effects of the sale and distribution of Quilter shares

·      Declaring first interim dividend of 45 cents per share, representing  40% of AHE, in line with our dividend policy

·      Declaring special dividend of 100 cents per share

·      Funds under management (FUM) up 2%² to R1,097 billion

·      Net client cash flow (NCCF) of R9.4 billion, an increase of R7.8 billion (HY 2017: R1.6 billion)

·      RoNAV of 17.5%, down from 19.4%² reflecting lower investment returns.

·      Group solvency ratio of 164%, reflecting capital resilience of the Group

Strategic delivery:

·      Good progress against the majority of our 8 battlegrounds with positive progress in the turnaround of Old Mutual Insure as well as strong sales in Corporate and Mass and Foundation Cluster

·      Successful listing of Old Mutual Limited on five stock exchanges on 26 June 2018, delivering the material completion of Managed Separation

·      Further steps have been taken to simplify the Group's balance sheet with the execution of a debt tender offer in July which reduced the nominal value of our international debt in Residual plc by R5 billion

·      We achieved approximately R270 million of recurring cost savings in the first half of 2018, incurring one off costs of R70 million. We remain on track to achieve our cost efficiency target of R1 billion of run rate savings by the end of 2019.

·      Due to complete the Nedbank unbundling as planned in Q4 2018. This will mark the completion of the Managed Separation announced in March 2016

·      The distribution of Quilter delivered the majority of Quilter shares to Old Mutual plc shareholders and the successful sale of a portion of Quilter shares realised R4.2 billion of cash on the Residual plc balance sheet.

Footnotes:

1. Comparatives or variances quoted against comparatives are consistent with or have been calculated based on the comparative data published by Old Mutual Limited on 7 August 2018

JSE Sponsor:	Merrill Lynch South Africa (Pty) Limited
Namibia Sponsor:	PSG Wealth Management (Namibia) (Proprietary) Limited
Enquiries
Investor Relations:	E: [e-mail]
Patrick Bowes	T: [phone]
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Mamosa Dlothi	T: [phone]
	E: [e-mail]
Communications:
Tabby Tsengiwe	T: [phone]
	M: [phone]
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Forward-looking statement

This presentation may contain certain forward-looking statements with respect to certain of Old Mutual Limited plans and its current goals and expectations relating to its future financial condition, performance and results and, in particular, estimates of future cash flows and costs. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances which are beyond Old Mutual Limited control including amongst other things, South African domestic and global economic and business conditions, market related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory authorities, the impact of competition, inflation, deflation, the timing and impact of other uncertainties of future acquisitions or combinations within relevant industries, as well as the impact of tax and other legislation and other regulations in the jurisdictions in which Old Mutual Limited and its affiliates operate. As a result, Old Mutual Limited actual future financial condition, performance and results may differ materially from the plans, goals and expectations set forth in Old Mutual Limited forward looking statements. Old Mutual Limited undertakes no obligation to update the forward-looking statements contained in this presentation or any other forward-looking statements it may make. The financial figures and metrics included within this results booklet have not been audited or reported upon by the Group's auditors. Nothing in this presentation shall constitute an offer to sell or the solicitation of an offer to buy securities.

Notes to Editors

A webcast of the presentation on the Interim 2018 Results and Q&A will be broadcast live at 11am South African time today on the Company's website www.oldmutual.com. Analysts and investors who wish to participate in the call can do so using the numbers below:

South Africa Neotel:                           [phone]

South Africa Telkom:                          [phone]

International:                                      [phone]

UK:                                                        [phone]

USA and Canada:                              [phone]

Pre-registration to participate in the call is available at the following link - https://bit.ly/2PKqncx

About Old Mutual Limited

Old Mutual is a premium African financial services group that offers a broad spectrum of financial solutions to retail and corporate customers across key market segments in 17 countries. Old Mutual's primary operations are in South Africa and the rest of Africa, and we have niche businesses in Latin America and Asia. With over 173 years of heritage across sub-Saharan Africa, we are a crucial part of the communities we serve and broader society on the continent.

For further information on Old Mutual Limited, and its underlying businesses, please visit the corporate website at www.oldmutual.com.

overview

On 26 June 2018, Old Mutual Limited listed on the Johannesburg Stock Exchange (JSE), with secondary listings also taking place on the same day in the United Kingdom, Namibia, Malawi and Zimbabwe. This momentous occasion marked the material completion of Managed Separation and the start of a new journey for Old Mutual Limited. We are making strides towards shaping our balance sheet through the acceleration of converting net asset value to cash in Residual plc and we are on track to complete the unbundling of 32% of Nedbank during the fourth quarter.

Operating environment

The first six months of 2018 were characterised by volatility in global equity, currency and bond markets due to escalating global trade tensions and the revived United States (US) economy. US Federal Reserve rate hikes and sporadic geopolitical issues adversely affected emerging markets. These global dynamics, in addition to weak local economic data, negatively affected the South African economic landscape, with GDP contracting by 2.2% in the first quarter.

Persistently high unemployment rates, a Value Added Tax (VAT) rate increase, and fuel hikes have contributed to lower real disposable incomes for local consumers. This adversely affected our customer acquisition and persistency, especially in the middle income market. The economic outlook has however improved relative to a year ago, when political uncertainty prevailed and credit downgrades led to an even weaker operating environment. The election of Cyril Ramaphosa as President of South Africa, a return to fiscal consolidation in the 2018 budget, and improvements in governance and accountability taking place at State Owned Entities (SOEs) have resulted in an increase in business and consumer confidence, although weighed-down by concerns around land expropriation without compensation.

The South African equity market declined with the JSE SWIX down 6.3% since the start of the year, but 8.4% up on H1 2017 driven by improved investor sentiment in the second half of 2017. The rand weakened to R13.73 against the US dollar at the end of June 2018, a decline of 10.8% since the end of December 2017. This reflected US dollar strength and the emerging market sell-off. The average exchange rate however strengthened by 7% when compared to the prior year. This has had an adverse impact on the reported profits from the Rest of Africa, particularly Zimbabwe.

Inflation continued to remain within the South African Reserve Bank (SARB) target range at a 12-month average of 4.5% in June 2018, lower than the average of 5.1% in the prior year. The inflation outlook is benign and expected to be closer to the upper end of the target range in the short to medium term due to upward pressures from effects such as rising utility, transport costs and oil prices. 

In Zimbabwe, the economy continues to recover from weak investor confidence, policy instability and a liquidity crisis. Political uncertainty remains a concern and contributed to the volatility experienced in the Zimbabwean Stock Exchange which has affected our investment returns. Zimbabwe's National Election took place on 30 July 2018 with Emmerson Mnangagwa being elected as President by a narrow margin. It is too early to tell whether the new government can implement the structural and political reforms that are required to improve the economic and social conditions of the country.

Kenya's economy reflects a more stable political landscape though our investment returns are still negatively affected by the volatility experienced towards the end of 2017.

Nigeria and Ghana benefited from rising oil prices, which led to a moderate economic recovery in the West African region.

Financial performance                                          

We delivered a solid set of overall financial results during this half year despite tough market conditions. Our top line growth was strong with excellent Net Client Cash Flow (NCCF) of R9.4 billion mainly reflecting good flows and significantly improved retention. Funds Under Management (FUM) of R1.1 trillion grew 2% from the end of December 2017, reflecting the impact of the strong NCCF, largely offset by lower asset values.

Results from Operations (RFO) of R4,848 million increased by 7% over the period reflecting good operational performance. We delivered Adjusted Headline Earnings (AHE) of R5,393 million, a marginal increase of 1% above the prior period. On a per share basis AHE was 112.3 cents, flat relative to the prior period as a result of a small quantum of shares issued during the period that increased the weighted average number of shares.

Return on Net Asset Value (RoNAV) of 17.5% was down from 19.4% reflecting an increase in average Adjusted IFRS equity.

The Group SAM solvency ratio decreased marginally to 164% (FY 2017: 167%), largely as a result of the special dividend declared.

Our battleground scorecard

We remain committed to delivering value in the medium term through our strategic priorities which are defined through our eight battlegrounds.

Defend South African market share in mass  and corporate markets	Mass and Foundation Cluster ü Maintained strong sales in the mass market despite growing competition from existing and new entrants ü Growth in branch footprint, number of ATMs and increased activity and volume of active Money Accounts Old Mutual Corporate ü Umbrella life APE sales almost doubled compared to the prior period and we continue to build our pipeline of umbrella deals ü Continued traction on actions taken to restore Group risk underwriting experience
Defend and grow in the South African personal finance market	ü Improved pricing for certain product solutions to drive sales in the tough economic environment ü Digital sales increased by more than 80% ü Channels have contributed to strong sales in Wealth and Investments, Old Mutual Corporate and Old Mutual Insure û Sales below expectations , a number of initiatives have been launched to drive sales which include the launch of the Old Mutual Rewards programme û Worse mortality and morbidity experience in H1 2018
Improve the competitiveness of Wealth and Investments	ü Sustained investment performance - flagship retail Balanced Funds are now top quartile over one and five years ü Higher NCCF and strong deal origination activity
Continued turnaround of Old Mutual Insure	ü Improved underwriting margin - above the top end of the target range ü Substantial completion of remediation and claims management processes ü iWYZE delivered strong growth
Turnaround East African business and improve returns across the Rest of Africa	ü Staff reorganisation completed in H1 2018 to optimise staffing levels and eliminate duplication and is expected to drive savings going forward.  ü Continued progress on turnaround in East Africa with property & casualty and life showing improvement, after allowing for the cost of the staff reorganisation ü SADC continues to generate strong profit growth, particularly in Zimbabwe, Namibia and Malawi and this region is the main contributor to returns in rest of Africa
Win the war for talent	ü We are attracting top talent into our business and continue to look at different ways of retaining talent ü Progress has been made in improving the underwriting talent at Old Mutual Insure, reinforcing our investment capability at Wealth and Investments and finalising the operating model in East Africa
Refresh the technology offering	ü The primary focus of recent initiatives has been on building protection solutions in the Mass and Foundation Cluster and Personal Finance segments which are expected to be activated during 2019 ü The digital transformation journey is progressing, focusing on driving digital engagements, sales and servicing for our customers and intermediaries
Cost efficiency leadership	ü To date we have saved approximately R270 million of recurring cost, incurring one off costs of R70 million ü On track to meet R1 billion cost target with many savings initiatives identified

Nedbank unbundling

We remain on track to complete the final step of Managed Separation through the distribution of 32% of Nedbank to our shareholders. We plan to do this in the fourth quarter of 2018. For every one hundred Old Mutual Limited shares at the point of distribution, shareholders will receive approximately three Nedbank shares. Further details will be communicated in due course. After the completion of the Nedbank unbunding we will own 19.9% of Nedbank in our shareholder funds. We view this as a long term investment and this ownership underpins significant commercial benefits we derive from the continuation of this relationship.

 

Dividend

We have declared an interim dividend of 45 cents per share. In accordance with our stated dividend policy, consideration has been given to the Group's underlying local cash generation, fungibility of earnings, targeted liquidity and solvency levels, business strategic requirements and market conditions. The interim dividend represents 40% of Adjusted Headline Earnings per share, in line with our dividend target.

We are also pleased to declare a special dividend of 100 cents per share.  Following a review of all capital available at 30 June 2018, and taking into account capital and liquidity projections to the end of the financial year we have identified excess capital available to pay a special dividend. In setting the quantum of the special dividend we have balanced the need to be efficient at the operating subsidiary level against remaining within the desired range for our Group Solvency ratio.  

These dividends will be paid on 16 October 2018. Further details of the timetable for the exchange rate conversion for dividends payable in currencies other than rand will be communicated in due course.

Outlook

In July, the SARB revised their 2018 GDP forecast for South Africa down to 1.2% from 1.7%, a reflection of a deteriorating outlook in SA. Recent announcements of foreign investments into SA as well as progress in improving the management of SOEs show potential for an economic turnaround, however this is likely to only take place in the medium to long term.

The International Monetary Fund (IMF) forecast 3.4% growth for sub-Saharan Africa, with a revised forecast for Zimbabwe at 2.4% (up from less than 1%), and more than 2% growth in the East and West African countries we operate in. This presents the opportunity for our operations in those regions to grow their consumer base and product lines.

Global growth is still expected to rise, assuming trade tensions and market risks do not result in a downturn that will affect global and local markets. 

In spite of the deteriorating SA growth outlook, the above macroeconomic risks and strong competitive pressures, we remain confident in delivering solid 2018 results mostly aligned with our previously communicated medium term targets.  AHE will continue to be influenced by investment returns in South Africa and Zimbabwe.

Peter Moyo

CEO of Old Mutual Limited

Review of financial performance

Group highlights

Rm (unless otherwise indicated)	H1 2018	H1 2017	% change (H1 18 vs. H1 17)	FY 2017
Key financial indicators
Gross flows1	91,563	83,342	10%	173,317
Life APE sales1	5,810	5,139	13%	11,512
NCCF (Rbn)1	9.4	1.6	>100%	5.6
FUM (Rbn)1,2	1,097.0	1,033.6	2%	1,072.3
Results from Operations (RFO)1	4,848	4,530	7%	10,367
Adjusted Headline Earnings (AHE)1	5,393	5,359	1%	12,947
Return on net asset value (RoNAV)1 (%)	17.5%	19.4%	(190 bps)	22.9%
Free Surplus Generated from Operations1	3,471	3,306	5%	7,842
% of AHE converted to Free Surplus Generated	64%	62%	200 bps	61%
Group Solvency ratio (%)2,3	164%	n/a	(300 bps)	167%
IFRS profit after tax attributable to equity holders of the parent	10,648	7,503	42%	14,372
Headline earnings (HE)	7,800	7,026	11%	13,144
Basic earnings per share (cents)	229.4	154.7	48%	304.7
Earnings per share (cents)4	112.3	112.3	0%	271.1
Interim Dividend per share (cents)	45	n/a	n/a	n/a
Special Dividend per share (cents)	100	n/a	n/a	n/a

¹  Comparatives have been restated to exclude Latin America and India (sold in October 2017) as these businesses have been classified as discontinued operations.

²  The % change has been calculated with reference to FY2017.

³  The Group solvency ratio includes Nedbank at 19.9% on a post unbundling basis.

⁴  WANS used in the calculation of Earnings per share is 4,801 million in H1 2018 (H1 2017: 4,771 million and FY 2017: 4,776 million)

We delivered a solid set of financial results during this half year despite tough economic and consumer conditions. Our top line growth was strong with Life APE sales up by 13% and NCCF of R9.4 billion (HY 2017: R1.6 billion) mainly reflecting good gross flows from Wealth and Investments and Old Mutual Corporate and improved investment performance in Wealth and Investments resulting in significant improvement in the retention of client money. FUM of R1.1 trillion grew 2% from the end of December 2017, reflecting the impact of the strong NCCF, offset by lower investment returns.

RFO of R4,848 million increased by 7% over the period reflecting good operational performance, particularly in Mass and Foundation Cluster, Old Mutual Insure and Rest of Africa. This was partially offset by worse mortality and morbidity experience in Personal Finance.

We delivered AHE of R5,393 million, a marginal increase of 1% above the prior period. The growth in RFO and higher associate earnings in respect of the 19.9% stake in Nedbank were offset by lower investment returns in South Africa and Zimbabwe. On a per share basis AHE was 112.3 cents, flat compared to the prior period as a result of a small quantum of shares issued during the period impacting the weighted average number of shares (WANS).

RoNAV of 17.5% was down from 19.4% reflecting an increase in Average adjusted IFRS Equity following the strong investment performance experience in H2 2017 and positive investment returns in H1 2018 on this higher equity base.

We declared an interim dividend of 45 cents per share and a special dividend of 100 cents per share, resulting in a total of R7.1 billion being paid to our shareholders. The declaration of the special dividend has resulted in a deduction from our own funds, in line with SAM requirements to deduct the foreseeable dividend. This has resulted in a decrease in our Group solvency ratio to 164% from 167%.

Accounting implications of Managed Separation

Managed Separation resulted in the listings of Old Mutual Limited and Quilter. The majority of the shares in Quilter (86.6%) were distributed to existing Old Mutual plc shareholders alongside the sale of 9.6% to new shareholders. The listing of Old Mutual Limited was effected via a UK court scheme of arrangement which inserted Old Mutual Limited as the new holding company of the residual Old Mutual plc Group, after the Quilter distribution, by way of a share for share exchange.

From an accounting perspective the transaction was treated as a reorganisation of an existing group. The insertion of a holding company between shareholders and an existing group does not result in any change in the economic substance of the reported group. As such, the financial statements of Old Mutual Limited have been prepared on a predecessor basis. Consequently, the current period results up to listing and the comparatives presented for Old Mutual Limited reflect the values from the consolidated financial statements of the previous Old Mutual plc Group with the exception of the equity structure that has been adjusted to reflect that of the new entity, being Old Mutual Limited. Refer to Note A1 in the interim financial statements for additional information.

Other accounting impacts of Managed Separation include the recognition of a profit of R2,852 million in the consolidated results as a result of the distribution and sale of Quilter shares. Included within this profit is a loss on the recycling of foreign currency translation reserves of R394 million. The share for share exchange and the distribution of Quilter further led to an IFRS 2 accelerated vesting charge of R282 million recognised in the IFRS consolidated income statement. This is as a result of the modification of the underlying share awards subject to the existing share-based payment arrangements of Old Mutual plc Group.

Supplementary Income Statement

Rm	H1 2018	H1 2017	% change
Mass and Foundation Cluster	1,534	1,306	17%
Personal Finance	918	1,394	(34%)
Wealth and Investments	783	638	23%
Old Mutual Corporate	854	800	7%
Old Mutual Insure	370	200	85%
Rest of Africa	478	368	30%
Central expenses	(89)	(176)	49%
Results from Operations	4,848	4,530	7%
Shareholder investment return	1,177	1,869	(37%)
Finance costs	(337)	(286)	(18%)
Income from associates	1,379	1,036	33%
Adjusted Headline Earnings before tax and non-controlling interests	7,067	7,149	(1%)
Shareholder tax	(1,566)	(1,600)	2%
Non-controlling interests	(108)	(190)	43%
Adjusted Headline Earnings	5,393	5,359	1%

RFO is the primary measure of the business performance of each of the operating segments. Activities related to the Group's capital structure and central costs form part of the Other Group Activities segment, to the extent that they are not managed as part of operating segments.

Central Expenses

Central expenses of R89 million (H1 2017: R176 million) decreased by 49%. As part of an increased effort to more accurately measure the economic contribution of each segment, project costs that were previously accounted for centrally have been allocated to segments in H1 2018.  The allocation of project costs to segments to the extent that it did not relate to group activities is based on planned spend. Year to date project spend is lower than planned spend resulting in an over recovery in central expenses. This was offset by an increase in costs to establish reporting functions for Old Mutual Limited as a stand alone listed entity. 

Shareholder investment return

Rm	H1 2018	H1 2017	FY 2017	% change (H1 18 vs. H1 17)
South Africa	568	604	1,849	(6%)
Rest of Africa	609	1,265	3,071	(52%)
Shareholder investment return	1,177	1,869	4,920	(37%)

Shareholder investment return for H1 2018 was R1,177 million, a decline of R692 million, or 37%, from R1,869 million for H1 2017. The decrease is due to subdued equity returns in South Africa, impacting the protected equity holding and a normalisation of equity returns in Zimbabwe following strong equity performance in H1 2017.

Finance costs

Finance costs on long term debt that supports the capital structure of the Group increased to R337 million (H1 2017: R286 million) following the issuance of subordinated debt instruments to the nominal value of R500 million by Old Mutual Insure in November 2017. Overall higher interest rates experienced in South Africa over the last twelve months also contributed to the increase in finance cost, given OMLACSA has both fixed rate and floating rate bonds in issue.

Income from associates

Subsequent to the Nedbank unbundling, the Group will retain a minority shareholding of 19.9%, which will be managed as part of Other Group Activities and it has been included on this basis in AHE. Income from associates, as reflected in AHE, increased by 33% to R1,398 million (H1 2017: R1,049 million) as Ecobank Transnational Incorporated (ETI) returned to profitability which had a significant impact to Nedbank's headline earnings. Our investment in China is also managed as part of the Group's investment in associates.

Reconciliation of AHE to IFRS profit after tax

Rm	H1 2018	H1 2017	% change
Adjusted Headline Earnings	5,393	5,359	1%
Investment return for Group equity and debt instruments  in life funds1	620	106	>100%
Impact of restructuring2	(450)	(81)	>(100%)
Discontinued operations3	4,536	4,198	8%
Income from associates4	(1,398)	(1,049)	(33%)
Residual plc3	(901)	(1,507)	40%
Headline earnings	7,800	7,026	11%
Impairment of goodwill and other intangibles assets	(21)	(720)	97%
Profit/(loss) on disposal of fixed assets	14	(12)	>100%
Profit on disposal of subsidiaries, associated undertakings and strategic investments	2,855	956	>100%
Profit after tax for the financial period attributable to ordinary equity holders of the parent	10,648	7,250	47%
Dividends on preferred securities	-	253	(100%)
Profit after tax for the financial period attributable to equity  holders of the parent	10,648	7,503	42%

¹  IFRS does not allow the recognition of investment returns on Group debt and equity instruments held by life policyholder funds, however, these returns are recognised in the valuation of the related policyholder liabilities. This creates a mismatch in IFRS, which is eliminated in AHE. The movement is a function of the fair value movement for the period.

²  Represents the elimination of non-recurring expenses or income related to material acquisitions, disposals or a fundamental restructuring of the Group. These items are removed from AHE as they do not represent operating activities of the Group. Amounts in the current period largely reflect the accelerated vesting of the IFRS 2 charge as a result of the share for share exchange and the Quilter distribution. Current and comparative period include Managed Separation costs.

³  Comparatives as disclosed in the SENS announcement on 7 August 2018, have been represented to reclassify the results of Old Mutual Bermuda from Residual plc to discontinued operations.

⁴  AHE includes associate income in respect of 19.9% shareholding in Nedbank in order to reflect earnings from the continuing operations of the Group. This is removed as part of this reconciliation as the full earnings related to Nedbank are included in discontinued operations.

Discontinued operations

Nedbank

Nedbank reported a strong performance in a domestic macroeconomic environment that remained challenging and volatile. HE increased 27.0% to R6,696 million, boosted by associate income from ETI returning to profitability, while the managed operations (excluding ETI earnings) produced headline earnings growth of 2.0% to R6,562 million, with slow revenue growth and slightly higher impairments offset by good cost management. 

Nedbank is classified as held for distribution and presented as part of the discontinued operations, notwithstanding the Group's stated plan to hold a minority shareholding of 19.9% in the issued share capital of Nedbank in its shareholder funds after the Nedbank unbundling. Post the Nedbank unbundling, we will cease the consolidation of Nedbank into our financial results and will commence equity accounting, which will result in the initial recognition of the minority shareholding in Nedbank at fair value, in accordance with IFRS.

Latin America

Profits of our businesses in Latin America remained flat period over period. We saw continued good profits from Colombia demonstrated by an improvement in the asset management result and various initiatives to enhance sales in the AIVA business, including the consolidation of broker commitments and special offers and incentive programmes. Future growth prospects for the AIVA business remain challenging due to future loss of income from the distribution of products to Quilter following a change in product specifications.

The sale of our businesses in Latin America are subject to required regulatory approvals in the relevant jurisdictions. All required applications have been made and the approval process is underway. As at 30 June 2018 the sale of businesses in Latin America remains on track to be completed in the first half of 2019. 

Quilter

As a result of applying predecessor accounting our results for H1 2018 includes profit generated by Quilter up to its listing on 25 June 2018. Quilter's contribution to the Group's profit from discontinued operations was R743 million (H1 2017: R443 million). Refer to Note G1 in the financial statements for additional information on discontinued operations.

Old Mutual Bermuda

By the end of H1 2018 approximately 98% of the Guaranteed Minimum Accumulations benefit (GMAB) reinsurance obligations matured. The remaining reinsurance obligations will mature during H2 2018 and the ultimate closure of the business is expected by 31 December 2018. Old Mutual Bermuda made no contribution to the Group's profit or loss in H1 2018 as the market risks on the reinsurance obligations were managed by the hedging programme and a liquidation provision was established at December 2017 to capitalise all anticipated future operational losses.

Residual plc

The loss attributable to Residual plc reduced by 40% to R901 million. Lower finance costs due to the repurchase of subordinated debt securities in 2017, and lower costs incurred to resolve pre-existing Old Mutual plc risks contributed to the decrease in losses from the prior period. This was partially offset by other income related to the release of a deferred tax provision and higher advisory costs due to heightened activity leading up to the listing of both Old Mutual Limited and Quilter in H1 2018.

IFRS profit after tax

Profit after tax increased by 42% largely due to the distribution and the sale of Quilter shares which resulted in the recognition of a profit of R2,852 million in the consolidated results. Included within this profit is a loss on the recycling of foreign currency translation reserves of R394 million. An impairment to UAP in H1 2017 was not repeated in H1 2018, which further contributed to the increase period over period.

Rm	H1 2018	H1 2017	% change
Mass and Foundation Cluster	1,051	893	18%
Personal Finance	618	1,032	(40%)
Wealth and Investments	563	472	19%
Old Mutual Corporate	603	574	5%
Old Mutual Insure	219	171	28%
Rest of Africa	790	208	>100%
Other Group Activities1	2,397	(614)	>100%
Consolidation adjustments2	(226)	(378)	40%
IFRS profit from continuing operations after tax	6,015	2,358	>100%
IFRS profit from discontinued operations after tax3	8,108	7,599	7%
IFRS profit after tax for the financial year	14,123	9,957	42%
Attributable to:
Equity holders of the parent	10,648	7,503	42%
Non-controlling interests	3,475	2,454	42%
Profit after tax for the financial year	14,123	9,957	42%
Basic earnings per share (cents)4	229.4	154.7	48%

¹  Includes central areas, Residual plc, our investment in China and the profit on sale and distribution of Quilter shares.

²  These entries relate to the elimination of inter-company transactions between continuing and discontinued operations.

³  Discontinued operations includes the results of Nedbank, Latin America, Quilter, Old Mutual Bermuda and India in the comparative period.

⁴  WANS used in the calculation of basic earnings per share is 4,641 million in H1 2018 (H1 2017: 4,687 million and FY 2017: 4,633 million)

Free surplus generation and utilisation

		H1 2018			H1 2017
Rm		Free Surplus	AHE	%	Free Surplus	AHE	%
Operating segments before capital requirements		3,987	3,995	100%	4,445	4,310	>100%
Capital requirements		(815)	-	-	(717)	-	-
Operating segments before fungibility restrictions		3,172	3,995	79%	3,728	4,310	86%
Nedbank (19.9%)		699	1,398	50%	524	1,049	50%
Free surplus generated before fungibility restrictions		3,871	5,393	72%	4,252	5,359	79%
Fungibility restriction1		(400)	-	-	(946)	-	-
Free Surplus generated from Operations		3,471	5,393	64%	3,306	5,359	62%

¹  Fungibility restriction represents the free surplus generated in Zimbabwe which cannot be remitted.

Free Surplus Generated from Operations was R3.5 billion, an increase of R0.2 billion, from R3.3 billion in H1 2017 representing 64% of the Group's AHE, compared to 62% in H1 2017. AHE increased marginally period over period, as such the increase was mainly driven by the non-fungible free surplus being a lower proportion of total surplus. This was partially offset by a change in capital requirements following a methodology change following the implementation of SAM. The methodology change included a review of the approach used to allocate required capital to different products within and across segments. As we continue to refine our capital allocation methodology it may result in further impacts on free surplus generation.

Zimbabwe delivered a positive, yet reduced, free surplus of R0.4 billion in H1 2018 (H1 2017: R0.9 billion). The free surplus generated in Zimbabwe does not contribute to the Group metric due to fungibility constraints. The abnormally high investment returns during the 2017 financial year have not been repeated to date, with equity market performance in Zimbabwe remaining volatile. In H1 2018 Zimbabwe's AHE made up a lower proportion of total Group AHE and the fungibility restriction has therefore had a less dilutive impact on total free surplus generation. 

Balance Sheet Metrics

Rbn (unless otherwise indicated)	H1 2018	H1 2017	FY 2017	% change (H1 2018 vs. FY 2017)
Operating Segments1	47.6	n/a	43.3	10%
Residual plc2	11.2	n/a	17.2	(35%)
Assets Held for sale or distribution3	48.9	n/a	78.9	(38%)
Consolidation adjustments4	(3.1)	n/a	(2.7)	(15%)
Equity attributable to the ordinary shareholders of the parent	104.6	n/a	136.7	(23%)
South Africa	34.7	31.3	31.8	9%
Rest of Africa	12.9	10	11.5	12%
Equity attributable to operating segments	47.6	41.3	43.3	10%
Nedbank at 19.9%	16.3	15.8	16.4	(1%)
Closing Adjusted IFRS Equity	63.9	57.1	59.7	7%
South Africa	49.6	45.1	45.7	9%
Rest of Africa	12.2	10.0	10.8	13%
Average Adjusted IFRS Equity	61.8	55.1	56.5	9%
South Africa	18.5%	18.1%	21.0%	40 bps
Rest of Africa	13.2%	25.4%	31.1%	(1,220 bps)
RoNAV5	17.5%	19.4%	22.9%	(190 bps)
South Africa	25.1	22.0	22.8	10%
Rest of Africa	15.2	12.1	13.3	14%
Invested Shareholder Assets	40.3	34.1	36.1	12%
Gearing ratio6	12.0%	12.6%	13.0%	(100 bps)
Interest cover5	22.0	26.0	28.3	(15%)

¹  Comprises of the net asset value of the operating segments of the Group. This net asset value forms the basis for key balance sheet metrics on which the Group is managed from a capital perspective, and is the same perimeter on which AHE is presented.

²  Comprises of the net asset value of Old Mutual plc of R10.2 billion at 30 June 2018 (R15.1 billion at 31 December 2017) and Old Mutual Bermuda of R1.0 billion at 30 June 2018 (R2.1 million at 31 December 2017).

³  Comprises of the net asset value of assets classified as held for sale which includes 54% of Nedbank and Latin America. Quilter's net asset value is included in the comparative period.

⁴  Consolidation adjustments reflect own shares held by consolidated investment funds, which are treated as treasury shares under IFRS.

⁵  The % change has been calculated with reference to H1 2017.

⁶  Gearing ratios are calculated based on the IFRS equity attributable to operating segments. As such this excludes equity related to non-core entities (Residual plc) and assets held for sale.

Residual plc

Old Mutual Bermuda

Old Mutual Bermuda has now largely run off and 98% of the reinsurance obligations have matured as at 30 June 2018.  The surplus capital in Old Mutual Bermuda of R1 billion at 30 June 2018 has reduced by R1.1 billion from December 2017 largely due to a capital repatriation of R1,078 million ($90 million) made in March 2018 following approval from the Bermuda Monetary Authority (BMA). A further capital repatriation of R660 million ($49 million) was approved by the BMA in July 2018. The remainder of the surplus capital is anticipated following the ultimate closure of the business and may be released to Old Mutual Group (UK) Limited and in turn Old Mutual plc over time, subject to regulatory approval.

Old Mutual plc

Following the listing of Old Mutual Limited, Old Mutual plc is now a wholly owned, non-operating subsidiary of Group. The decrease in net asset value of 31% to R10.2 billion at 30 June 2018 (R15.1 billion at 31 December 2017) is largely due to the net settlement of certain intercompany loans between Old Mutual plc and Quilter ahead of the listing of Quilter and costs incurred in the wind down of the head office. This decrease was offset by an increase in cash and near cash instruments reflecting the cash proceeds received by Old Mutual plc following the sale offer of Quilter shares.

On 19 July 2018, Old Mutual plc further reduced international debt by R5.2 billion through a tender offer of Tier 2 debt instruments. The formal credit ratings on Old Mutual plc were also withdrawn shortly after the date of the Tender Offer Memorandum.

Old Mutual plc will continue to incur corporate costs in 2018 until the head office wind down is completed. These costs remain in line with previous guidance and our current best estimate of the realisable economic value of Residual plc is in line with the approximately R7,170 million (£400 million) previously indicated when the Second UK court scheme of arrangement became effective on 26 June 2018. The repurchase of the Tier 2 debt instruments resulted in a benefit to the economic value of approximately R264 million (£15 million) but this is was largely offset by the transfer of Old Mutual (Netherlands) B.V. with a net asset value of R290 million (£16 million) to Old Mutual Limited on 29 June 2018.

Old Mutual Limited will remain subject, inter alia, to the undertaking to the UK Court as described in the announcement dated 20 June 2018 in respect of Old Mutual plc. The UK court scheme allows for reviews of the surplus assets on a quarterly basis commencing 1 October 2018. Any potential transfer by Old Mutual plc will need to take into account the developments and future assessments by the Board of Old Mutual plc, at such a point in time, of liabilities and contingent liabilities and in line with its fiduciary duties. The final development of economic value and surplus assets is subject to changes in estimates and uncertainty.

RoNAV

RoNAV decreased by 1.9% to 17.5% (H1 2017: 19.4%). RoNAV in South Africa increased by 0.4% to 18.5% (H1 2017: 18.1%). The increase was primarily due to higher operating results and underlying profit growth in Nedbank as ETI returned to profitability. This contributed to an increase in AHE of 12% versus an increase in average Adjusted IFRS Equity of 9%. The increase in equity was mainly due to higher accumulation of profits than in comparative periods and the impact of the translation of foreign operations with the rand weakening against foreign currencies, partially offset by the impact of IFRS 9 - Financial Instruments effective 1 January 2018.

RoNAV in Rest of Africa decreased by 12.2% to 13.2% (H1 2017: 25.4%). Strong operational performance that led to an increase in RFO of R110 million or 30%, was offset by a decrease in shareholder investment returns of R656 million or 52%, due to normalisation of equity returns in Zimbabwe following strong equity performance in 2017. This contributed to a decrease in AHE of 37% versus an increase in average Adjusted IFRS Equity of 13%. The significant increase in average Adjusted IFRS Equity is largely driven by strong investment returns in H2 2017 that contributed to a higher opening equity base in H1 2018 and was further enhanced by the weakening of the rand against the US dollar and Kenyan shilling in H1 2018. 

Invested Shareholder Assets

Invested shareholder assets increased by 12% to R40.3 billion (FY 2017: R36.1 billion). The asset base in South Africa saw a R2.3 billion or 10% increase period over period, following the investment of profits generated during H1 2018. An increase of R1.9 billion or 14% in Rest of Africa is driven by positive investment returns, albeit lower than in H1 2017, off a high asset base created by strong investment returns in Zimbabwe in H2 2017. The weakening of the rand against the US dollar and Kenyan shilling in H1 2018 further contributed to the increase of our asset base in East Africa.

For the listed equities backing our capital in South Africa we aim to limit capital losses through the use of hedges. We aim to reduce the cost of our hedges by sacrificing a portion of our return upside. Downside protection is structured to limit capital losses to between 5% and 15% on an annual basis. The market did not reach the strike levels on any of our hedges during the period.

Gearing

Gearing ratios are marginally down following the issuance of subordinated debt instruments to the nominal value of R500 million by Old Mutual Insure in November 2017, offset by an increase in equity attributable to operating segments. The increase in equity was due to higher accumulation of profits, driven by strong operational results in South Africa. Positive investment returns, albeit lower than in H1 2017, and the weakening of the rand against the US dollar and Kenyan shilling resulted in an increase in equity in Rest of Africa. Interest cover decreased to 22 times (H1 2017: 26 times) reflecting an increase in finance costs of 18% due to higher interest rates and the fresh issuance in H2 2017, whilst growth in AHE remained relatively flat period over period.

Embedded value

Rm	H1 2018	H1 2017	FY 2017	% change (H1 2018 vs. FY 2017)
Adjusted net worth (ANW)	33,677	29,575	29,966	12%
Value in force (VIF)	33,652	32,245	33,695	-
Embedded value	67,329	61,820	63,661	6%
Return on embedded value (%)	11.7%	12.8%	14.1%	(2.4%)

The Return on embedded value remained strong at 11.7%, despite a decrease of 2.4% from 14.1% for FY 2017. MCEV operating earnings (post-tax) increased by 4.2% to R3,874 million (H1 2017: R3,717 million), mainly due to the increase in new business and dividend withholding tax excluded from MCEV earnings in H1 2018. This is a function of externalised dividends no longer flowing through Old Mutual (Netherlands) B.V. following the Managed Separation.

Experience variances decreased earnings by R216 million, driven by poor persistency, and materially lower positive claims variances in Mass and Foundation Cluster and Personal Finance compared to H1 2017. The macro environment continued to put strain on persistency experience. Overall claims experience remained satisfactory relative to long-term assumptions, despite unfavourable experience in Personal Finance and poor group disability experience in Old Mutual Corporate persisting despite management actions.  Recurring expenses remained lower than assumed, supported by ongoing tight expense management across the business. Investment returns were significantly lower than in H1 2017, particularly equity returns and resulted in negative variances 

Solvency

Rbn	H1 2018	FY 2017	% change (H1 2018 vs. FY 2017)	Optimal target range
OMLACSA
Eligible own funds	76.4	77.8	(2%)
Solvency capital requirement (SCR)	31.8	31.9	-
Solvency ratio (%)	240%	243%	(300 bps)	>200%
Group - Post Nedbank unbundling1
Eligible own funds	102.3	98.3	4%
Solvency capital requirement (SCR)	62.2	58.8	6%
Solvency ratio (%)1	164%	167%	(300 bps)	155% to 175%

¹  The capital position in accordance with the SAM regime can change materially if the quantum of the Nedbank unbundling or fungibility restrictions change. To the extent that some of the surplus is deemed fungible, this will contribute positively to the overall Group ratio.

Key components of the estimated Group solvency position at 30 June 2018:

Rm	OMLACSA1	Nedbank2	Residual  plc3	Other4	Consolidation Adjustments5	Group
Own Funds6	76.4	17.9	3.8	33.4	(29.2)	102.3
SCR	31.8	12.4	3.8	23.4	(9.2)	62.2
Ratio (%)	240%	144%	100%	143%		164%

¹  The standard formula under SAM is used for OMLACSA.

²  Nedbank is included on a Basel III basis in Group solvency. This is different to the treatment in the OMLACSA calculation where the holding is included in the Own Funds at the market value of the shares, with an equity stress applied to calculate the SCR.

³  To the extent that some of the surplus is deemed fungible it will contribute positively to the overall Group surplus.

⁴  This category includes the balance of the Group, including holding companies, Old Mutual Insure, asset managers and Rest of Africa,

⁵  Represents the elimination of intercompany assets between entities e.g. the investment of a holding company in a subsidiary and diversification of risks within entities subject to accounting consolidation, most importantly between OMLACSA and Old Mutual Insure.

⁶  Includes fungibility restrictions where the own funds for certain entities are restricted to the solvency capital requirement of that entity (calculated on a SAM basis). The most material non-fungible surplus relates to Zimbabwe and Residual plc.

The Insurance Act came into effect on 1 July 2018. The Group is in the process of applying for regulatory approval of methodologies applied in the calculation of solvency ratios presented. The OMLACSA solvency ratio decreased marginally when compared to FY 2017. Emerging profits were more than offset by a provision for dividends expected to be paid in H2 2018. A portion of the special dividend will be funded by OMLACSA and this results in lower own funds.

The Group solvency ratio decreased marginally by 3% to 164% in H1 2018 (H1 2017: 167%) largely as a result of the inclusion of foreseeable dividends in own funds. The foreseeable dividend includes the special dividend and the ratio before allowing for the special dividend, would have increased to 169%.

Outlook

	KPI	Financial Target	Performance H1 2018	Outlook for FY 2018
Returns	RoNAV	Average COE + 4% (weighted average COE of 13.4%1)	17.5%	On track
Growth	Results from Operations	CAGR of Nominal GDP + 2% over the three years to 2020 (average nominal GDP growth for H1 2018: c. 6%)	Up by 7%	On track
Efficiency	Cost efficiencies	R1 billion by the end of 2019 Pre-tax run-rate cost savings, net of costs to achieve it. Based off 2017 IFRS administrative cost base.	Approximately R270 million of recurring cost savings, incurring one off costs of R70 million	On track
	Underwriting result	OM Insure underwriting margin of 4% - 6% in near term	6.4%	Within the target range
Capital	Solvency ratio	§ Old Mutual Limited: 155% - 175% (post Nedbank Unbundling) § OMLACSA: Greater than 200%	164% 240%	Within the target range Above target range
Cash returns	Dividend cover	Target full year ordinary dividends covered by AHE between 1.75 to 2.25 times. Target an interim dividend at 40% of the interim AHE.	45 cents	On track

¹     Cost of equity calculated on 1 January 2018 and will be revised on an annual basis.

Risk Management

We continue to monitor and manage the risks our Group face. Our assessment of the key risks are set out below.

Macro-Economic and Socio-Political Risk

The South African Reserve Bank has recently revised the gross domestic product growth forecast for 2018, from 1.7% to 1.2%. South Africa's unemployment rate has increased to 27.2% in the second quarter. The first half of 2018 also saw a Value Added Tax (VAT) increase and fuel hikes. These all contribute to increased financial pressure on consumers, the result of which impacts our business risk in the form of reduced demand for our products and services and increases in lapses and credit default risk. In addition to the lower growth outlook, policy statements from Government on land expropriation without compensation may negatively affect investment sentiment.

The Zimbabwe economy remains weak and uncertain, and although our business has proved to be resilient, our ability to remit earnings out of Zimbabwe is constrained due to the foreign currency shortage, which also creates currency translation uncertainty.

Market, Liquidity and Credit risks are actively managed and monitored by both management and specialist line 2 assurance functions.

Technology and Systems Risk

The organisation has a high dependency on IT as a true enabler for innovation and therefore future growth and sustainability. The stability and maintenance of the current IT infrastructure is largely being addressed through the SA Transformation program. Although positive progress has been made, the scale and complexity contributes to increased execution risk, and creates opportunity cost to other development. There are nevertheless promising signs of innovation in different areas of the business, complemented by the enterprise-wide digital transformation and focus.

Cyber Risk

There is evidence of increased frequency and sophistication of attacks on financial service organisations. Cyber-attacks could result in operational losses, business interruptions, loss of critical company or customer data and consequently reputational damage. The organisation has updated its Information Security Strategy, aimed at achieving a higher level of resilience, and actions to achieve this are being implemented.

Conduct Risk

Due to our large tied adviser forces in the SA Life Retail businesses, the organisation has a high degree of exposure to advice risk.  Consistency and robustness of advice processes is a key focus area of the management within the businesses.

Life Insurance Risk

There is a risk that adverse mortality rates experienced in 2017 and in 2018 to date is resistant to management actions being taken.  An extensive experience investigation has been undertaken to assess whether the negative experience is due to normal volatility or an underlying deterioration, and actions are in progress to improve the underwriting result.

Governance and Control of Subsidiaries

Governance and control in some of our subsidiary businesses in East and West Africa has fallen short of Group requirements.  We have made management changes and taken actions to strengthen controls over core processes to reduce the risk of operational losses.

Interim and special dividend declarations

The Board of directors has approved and declared an interim dividend of 45 cents per ordinary share and a special dividend of 100 cents per ordinary share.

The interim dividend targeting 40% of interim Adjusted Headline Earnings is in line with Old Mutual Limited's dividend policy. The interim dividend will be paid out of distributable reserves and is payable on 16 October 2018 to all ordinary shareholders recorded on the record date. The dividend of 45 cents per ordinary share will be subject to a local dividend tax rate of 20% which will result in a net interim dividend, to those shareholders who are not exempt from paying dividend tax, of 36 cents per ordinary share. International shareholders who are not exempt or are not subject to a reduced rate in terms of a double taxation agreement will be subject to dividend withholding tax at a rate of 20%.

The special dividend of 100 cents per ordinary share is in line with our capital management policy of returning excess capital to shareholders and will be paid from distributable reserves on 16 October 2018 to all ordinary shareholders recorded on the record date, subject to the requisite South African Reserve Bank approval required for special dividends. The special dividend of 100 cents per ordinary share will be subject to a local dividend tax rate of 20% which will result in a net special dividend, to those shareholders who are not exempt from paying dividend tax, of 80 cents per ordinary share. International shareholders who are not exempt or are not subject to a reduced rate in terms of a double taxation agreement will be subject to dividend withholding tax at a rate of 20%. 

Shareholders on the London, Malawian, Namibian and Zimbabwean registers will be paid in the local currency equivalents of the interim and special dividends.  In Malawi, Namibia and Zimbabwe these payments will be made through dividend access trust or similar arrangements established in each country. 

Old Mutual Limited's income tax number is 9267358233. The number of ordinary shares in issue in the company's share register at the date of declaration is 4,942,048,355.

The timetable pertaining to the Interim & Special dividend is as follows:

Transfers suspended between registers	Close of business on Monday, 10 September 2018
Finalisation announcement and exchange rates announced	Tuesday, 11 September 2018
Last day to trade cum dividend for shareholders on the South African Register and Malawi, Namibia and Zimbabwe branch registers	Tuesday, 18 September 2018
Ex-dividend date for shareholders on the South African Register and Malawi, Namibia and Zimbabwe branch registers	Wednesday, 19 September 2018
Last day to trade cum dividend for shareholders on the UK register	Wednesday, 19 September 2018
Ex-dividend date for shareholders on the UK register	Thursday, 20 September 2018
Record date (all registers)	Close of business on Friday, 21 September 2018
Transfers between registers restart	Opening of business on Tuesday, 25 September 2018
Interim and Special Dividend payment date	Tuesday, 16 October 2018

Share certificates for shareholders on the South African register may not be dematerialised or rematerialised between Wednesday, 19 September and Friday, 21 September 2018, both dates inclusive. Transfers between the registers may not take place between Tuesday, 11 September and Friday, 21 September 2018, both dates inclusive.  Trading in shares held on the Namibian section of the principal register through Old Mutual (Namibia) Nominees (Pty) Limited will not be permitted between Tuesday, 18 September and Thursday, 20 September 2018, both dates inclusive.

Key Performance Indicators ("KPIs")

KPIs are not defined by the relevant IFRS financial reporting framework, but we use them to provide greater insight to the financial performance, financial positions and cash flows of the Group and the way it is managed.

The table below sets out the definitions of KPIs used by the Group.

KPIs	Definition
Results from Operations	The primary measure of the business performance of the operating segments. Calculated as Adjusted Headline Earnings before shareholder tax and non-controlling interest, excluding net investment return on shareholder assets and finance costs and income from associates.
Adjusted Headline Earnings	The Group profit measure that adjusts headline earnings, as defined by SAICA Circular 2/2015, for the impact of material transactions, non-core operations and any IFRS accounting treatments that don't fairly reflect the economic performance of the business.
Return on Net Asset Value	Adjusted Headline Earnings divided by average Adjusted IFRS Equity. Adjusted IFRS Equity is calculated as equity attributable to operating segments before adjustments related to consolidation of funds. It excludes equity related to Residual plc and discontinued operations and is further adjusted to recognise the equity attributable to the retained 19.9% interest in Nedbank.
Free Surplus Generated from Operations	Free Surplus Generated from Operations represents the net cash generated from the operations that contribute to AHE after allowing for normal course investment in the business and the impact of any fungibility constraints.
Gross flows	The gross cash flows received from customers during the period by Group businesses engaged in Life and Savings and Asset Management.
Life APE sales	A standardised measure of the volume of new life insurance business written. It is calculated as the sum of new business recurring premiums (annualised) and 10% of the new single premiums written in an annual reporting period.
NCCF	The difference between gross flows and cash returned to customers (e.g. claims, surrenders, maturities) during the period.
FUM	The total market value of funds managed by the Group, at the point at which funds flow into the Group.
VNB	The discounted value of expected future profits arising from new life insurance business sold in the reporting period.
VNB margin	VNB divided by PVNBP, where PVNBP is the discounted value of expected future life insurance premiums from new recurring premium business, plus 100% of new single premiums. The VNB margin reflects how much future profit is expected from each future life insurance premium and therefore measures the profitability of new business sold.
GWP	The value of premiums that a property and casualty insurer is entitled to receive from its insurance business in a period, before adjustments for reinsurance premiums. It is a measure of sales performance in Group businesses engaged in Property and Casualty.
Underwriting margin	Underwriting result as a percentage of net premiums earned. It is calculated for the Property and Casualty businesses across the Group.
Loans and advances	The balance of gross loans and advances for Group businesses engaged in Banking and Lending. The amounts are gross of impairments on all performing, arrears and default loans.
Net lending margin	Net interest income plus non-interest revenue minus credit losses, as a percentage of average loans and advances over the period.

 

Mass and Foundation Cluster review

Defend South African market share in mass and corporate markets

Consumer confidence was high early in the year following political developments but has subsequently pulled back. This has contributed to negative pressure on disposable income following high unemployment rates, VAT and fuel increases. We have maintained strong sales despite increased competitor activity.

Enhanced sales force productivity has translated into strong life and loan sales growth. Life sales improved in H1 2018 compared to the prior year but are expected to moderate in H2 2018 should challenging market conditions persist. Money Account remains one of the most competitive transactional solutions in the South African market, with the number of active accounts increasing by 34% in H1 2018. Funeral claims process improvements resulted in better customer experience with circa 99% of funeral claims that are paid into Money Accounts within 4 hours and any other account within 8 hours.

Performance highlights

Rm (except where otherwise indicated)	H1 2018	H1 2017	% change
RFO	1,534	1,306	17%
Gross flows	6,532	5,709	14%
Life APE sales	2,142	1,766	21%
NCCF (Rbn)	3.1	2.9	7%
FUM (Rbn)1	13.1	12.4	6%
VNB	655	585	12%
VNB margin (%)	10.5%	10.2%	30 bps
Loans and advances1	13,432	12,070	11%
Net lending margin (%)	14.4%	15.3%	(90 bps)

¹The % change has been calculated with reference to FY 2017.

Life APE sales of R2,142 million showed strong growth of 21%. This was due to our continued drive to grow adviser headcount and productivity as well as positive customer experience related to the funeral claims process. The retail branch network contributed 30% of Life APE sales, consistent with H1 2017, and continues to deliver better persistency and productivity experience than other channels. Gross flows increased by 14% to R6,532 million off the back of growth in the life insurance book and customer take-up of annual premium increases, combined with good growth in Money Account take up and usage. This contributed to a R0.2 billion increase in NCCF to R3.1 billion.

Loans and Advances increased by 11% to R13,432 million since 31 December 2017, due to improved productivity as a result of process enhancements around customer take-on. Customer risk assessment has been enhanced with improved offers to low risk customers and more stringent requirements for high risk customers. The increase is muted by the transitional adjustment required as a result of the adoption of IFRS 9 - Financial Instruments effective 1 January 2018.

RFO of R1,534 million increased by 17% despite the increase in allocation of central expenses previously carried at a group level. Life profits increased by 15% due to growth in the life insurance book, higher life APE sales and customer take up of annual premium increases combined with good cost management. Non-life profits were up 26% due to a decrease in amortisation of acquired intangibles compared to H1 2017. It was further enhanced by an improved credit loss ratio of 5.4%, which was 90 bps better than H1 2017. The adoption of IFRS 9 - Financial Instruments, effective 1 January 2018, requires higher provisions on new loans and advances and is expected to create profit strain if the increase in disbursements persists.

The higher new business volumes contributed to the VNB of R655 million which increased by 12% and also improved the VNB margin of 10.5% by 30 bps, partially offset by lower margin as a result of promotions run to improve sales.

The net lending margin of 14.4% was 90 bps down due to the effect of a one off positive impact related to alignment of provisioning models to payment behaviour in the prior year. Excluding this one off item, the H1 2018 margin increased marginally on prior year primarily due to a continued positive collections experience.

Personal Finance review

Defend and grow in the South African personal finance market

Intense competition continues to be a characteristic of this market. A tough economic environment continued to place strain on consumer disposable income due to persistently high unemployment rates, VAT and fuel increases which had an adverse effect on customer acquisition especially in the middle income market.

A number of initiatives have been launched to drive sales in this tough economic environment including the re-pricing of guaranteed annuity products and tactical improvements to the pricing of disability and severe illness in the second quarter which supported income and protection sales in H1 2018.

The launch of the Old Mutual Rewards loyalty programme in July 2018 is one of the strategic initiatives to strengthen our penetration in the middle income market. Also, 22seven launched "Goals" in H1 2018 to allow customers to personalise their savings objectives. We won the Financial Intermediaries Association Risk Provider of the year award.

Despite headwinds in the macro-economic environment and higher than normal mortality and morbidity rates in H1 2018, we are taking actions to improve the profitability of the risk book although the effects of these actions are likely only to be seen in 2019.

Performance highlights

Rm (except where otherwise indicated)	H1 2018	H1 2017	% change
RFO	918	1,394	(34%)
Gross flows	12,970	12,440	4%
Life APE sales	1,221	1,241	(2%)
NCCF (Rbn)	(1.8)	(1.3)	(38%)
FUM (Rbn)1	188.5	193.7	(3%)
VNB	100	87	15%
VNB margin	1.3%	1.1%	20 bps

¹The % change has been calculated with reference to FY 2017.

Gross flows increased by 4% to R12,970 million mainly due to higher single premium sales across life and non-life savings products. Higher death and disability claims and higher disinvestments led to negative NCCF of R1.8 billion, a decrease of R0.5 billion from H1 2017. Outflows in NCCF and the decline in the South African equity markets in H1 2018 contributed to a decrease of 3% resulting in FUM of R188.5 billion at 30 June 2018.

Life APE sales reduced by 2% to R1,221 million largely due to lower recurring premium sales on savings and risk products reflecting pricing competitiveness in the market. Satisfactory growth in single premium sales for savings and income products and protection sales improved in the second quarter driven by tactical pricing initiatives.

RFO of R918 million decreased by 34% when compared to H1 2017. The decrease was a function of higher than expected death and disability claims, with a number of large death claims which fell below the reinsurance threshold. A number of management actions are underway and we continue to monitor and assess underlying mortality trends. Lower investment variances due to lower market returns and a higher allocation of central expenses further contributed to the decrease.

VNB increased by 15% to R100 million mainly due to lower distribution costs allocated to life products following a methodology change in H2 2017. Consequently, the VNB margin increased by 20bps to 1.3%, mainly due to the lower distribution cost allocation offset by the impact of lower sales volume and margin mix.

Wealth and Investments review

Improve the competitiveness of Wealth and Investments

Markets were largely negative for the first quarter of the year. Strong momentum in NCCF with high quality flows was driven by an improved Wealth proposition and sustained investment performance. Strong NCCF demonstrates traction in gaining market share and ongoing improvement in our product offerings. Higher origination activity in Specialised Finance and our participation in South Africa's renewable energy sector via investment through Alternatives are encouraging indicators of building a diversified Wealth and Investment business.

Investment performance momentum continued with retail funds performing well with 67% of core funds above median over three and five years. Multi-asset funds have continued to perform particularly well over 2018 with 7 out of 8 core retail and institutional offerings in the top quartile. Our flagship Retail Balanced and Flexible Fund is now top quartile over one and five years, while 3 out of 4 core retail Multi-asset funds have 4-star Morningstar ratings. Old Mutual Investment Group has been named the Best Managed Company in the Financial Services Sector and won the headline award for Best Managed Company of the year at the Top 500 Awards 2018.

Performance highlights

Rm (except where otherwise indicated)	H1 2018	H1 2017	% change
RFO	783	638	23%
Gross flows	45,114	42,405	6%
NCCF (Rbn)	10.9	1.8	>100%
AUM (Rbn)1,2	741.9	736.6	1%
FUM	516.6	498.1	4%
Intergroup assets	345.8	340.4	2%
AuMA3	862.4	838.5	3%
Assets under administration	(120.5)	(101.9)	(18%)
Total revenue	2,374	2,284	4%
Annuity	2,151	2,151	-
Non-annuity	223	133	68%

¹The % change has been calculated with reference to FY 2017.

²AUM comprises FUM as defined for the Group, as well as funds managed on behalf of other entities in the Group, which is reported as FUM in respect of segments. Assets under administration that are managed externally are not included in AUM.

³AuMA is AUM including Assets under Administration.

Gross flows of R45,114 million increased by 6% following proposition improvements which resulted in higher flows, as well as large flows secured in Old Mutual International. Growth in flows, good retention in the institutional asset management business resulting from improved investment performance and the non-occurrence of large client outflows in H1 2017 has resulted in a significant increase of R9.1 billion in NCCF. AUM was marginally positive from FY 2017, with the positive impact of strong NCCF offset by weak market performance in H1 2018.

Total revenue increased by 4% to R2,374 million primarily due to higher asset-based institutional fee income, offset by margin pressure in our Wealth and Specialised Finance businesses. The non-annuity revenue in our Alternatives and Specialised Finance businesses showed a strong result, with the renewable energy investment being one of the contributors, whilst reflecting the benefits of our responsible business efforts. The H1 2017 revenue has been restated to report revenue gross of external asset management fees to be on a comparable basis with H1 2018.

RFO was R783 million, an increase of 23% from H1 2017. The increase is largely attributable to acquisition related intangibles being fully amortised in 2017. Growth in non-annuity revenue of 68% due to higher origination income in Specialised Finance and a one off fair value gain in an Alternatives fund contributed to profit delivery.

Old Mutual Corporate review

Defend South African market share in mass and corporate markets

We made good strides in defending our market share, particularly in the competitive market for multi-employer retirement funds (umbrella funds). Umbrella life APE sales almost doubled compared to H1 2017 as a result of a large single premium deal. The management actions undertaken to restore the group risk underwriting experience continue to gain good traction. These management actions included income protection re-pricing and launch of the new Well4Work range, a range of four flexible group income protection benefits that will allow clients to tailor the desired balance between benefits and price. As expected, there were a number of group risk schemes that terminated following decisions to not match uneconomically low competitor rates. We remain focused on improving underwriting margins to expected long-term levels.

Old Mutual Corporate won awards in three categories at the Imbasa Yegolide Awards earlier this year. The awards recognise service providers in the employee benefits industry who meet the needs and expectations of retirement fund members by delivering excellent service.

Performance highlights

Rm (except where otherwise indicated)	H1 2018	H1 2017	% change
RFO	854	800	7%
Gross flows	21,723	16,760	30%
Life APE sales	1,451	1,159	25%
NCCF (Rbn)	0.8	(0.3)	>100%
FUM (Rbn)1	258.2	255.6	1%
VNB	168	130	29%
VNB margin	1.2%	1.2%	-

¹The % change has been calculated with reference to FY 2017.

Strong Life APE sales of R1,451 million, an increase of 25%, was mainly due to higher single premium pre-retirement savings sales into SuperFund and Old Mutual Multi-Managers. Recurring premium sales are lower than in H1 2017 largely due to lower group risk sales that were impacted by premium rate increases to improve profitability.

Gross flows increased by 30% to R21,723 million mainly due to improved life sales. This, in addition to improved termination experience contributed to a strong NCCF uplift of R1.1 billion to R0.8 billion. FUM of R258.2 billion increased by 1% with the growth in NCCF mostly offset by downward pressure from equity markets.

RFO of R854 million delivered good growth of 7% mainly due to better group life assurance underwriting experience underpinned by lower average claims sizes. This was partially offset by higher allocation of central expenses.

At R168 million, VNB grew by 29% largely as a result of higher sales volumes and capital optimisation initiatives. The VNB margin was maintained at 1.2% due to margin pressure on the mix of business sold, despite an increase in sales volumes.

Old Mutual Insure review

Continued turnaround of Old Mutual Insure

Our capability and skills have been strengthened over the last few years by bringing in experts in specific fields which facilitated disciplined and tightened underwriting criteria. The general environment improved with low market wide losses due to a benign claims environment. No catastrophe claims reported to date however from past experience, catastrophe losses have a higher probability of occurrence in the second half of the year due to weather patterns.

Organic growth has been muted particularly in our commercial, personal and agriculture portfolios in part by ongoing remediation, tough market conditions and slower than anticipated new business volumes. Optimising the interplay between facultative reinsurance, deductible structures and treaty applicability continues to contribute to more consistent underwriting results in volatile and commoditized sectors. iWYZE delivered strong growth as a result of pursuing a profitable growth strategy that leverages operational efficiencies, strategic partnerships and focused marketing. Initiatives to increase gross written premiums are starting to gain traction.

A number of claims initiatives have been launched to improve customer experience and operational efficiencies. We continue to focus on the restoration of profitability through ongoing reviews and portfolio reconstruction, focused deployment of underwriting capacity, enhancing claims processes and optimising procurement.

Performance highlights

Rm (except where otherwise indicated)	H1 2018	H1 2017	% change
RFO	370	200	85%
Gross written premiums	6,293	6,098	3%
Underwriting margin	6.4%	2.3%	410 bps
Insurance margin	8.7%	4.8%	390 bps

The gross written premiums reported for the first half of the year were R6,293 million, an increase of 3%. The constrained growth in 2018 is due to remediation and tighter underwriting criteria in line with management actions, as well as slower than anticipated new business volumes impacted by current market conditions.

RFO was R370 million, an increase of 85% compared to H1 2017, largely due to a benign claims environment with no catastrophe losses (relative to fires in Eastern and Western Cape in H1 2017).  Improved contribution from the commercial and personal intermediated business, iWYZE growth and disciplined underwriting contributed to the increase in RFO, partially offset by lower profits in CGIC.

The strong net underwriting result led to an improved net underwriting margin of 6.4% which is above the medium term target range. Insurance margin improved by 390 bps to 8.7% as a result of underwriting performance and positive reform on free float capital flows.

 

Rest of Africa review

Turnaround East African business and improve returns across the Rest of Africa

We have made continued progress on the turnaround In East Africa. During H1 2018 we completed a staff reorganisation to optimise staffing levels and eliminate duplication. This has resulted in a reduction of staff levels and is expected to drive savings going forward. The cost of this reorganisation was approximately R70 million and has impacted reported profits and underwriting margins in H1 2018 for the region.

SADC remains the largest contributor to Rest of Africa results and continues to deliver good performance despite tough trading conditions. In Zimbabwe, CABS delivered pleasing results supported by management actions to improve margins and grow the loan book. In Malawi, management actions in anticipation of the pension reforms have yielded significant growth in the pension business.

In West Africa the bancassurance licence was obtained in May 2018 and subsequently sales agents have been mobilised across 62 Ecobank branches with good production already recorded. The Nigeria life business also received approval for its critical illness product, which was launched during Q2 2018. Our property and casualty business in Nigeria experienced significant claims from the oil and gas industry which adversely impacted underwriting results. Management is reviewing reinsurance levels to address exposure to this class of business.

Performance highlights

Rm (except where otherwise indicated)	H1 2018	H1 2017	% change
RFO	478	368	30%
Gross flows	9,986	10,356	(4%)
Life APE sales	555	542	2%
NCCF (Rbn)	0.7	1.6	(56%)
FUM (Rbn)1	116.0	104.0	12%
VNB	102	127	(20%)
VNB margin	3.3%	4.3%	(100 bps)
Loans and advances1	14,206	11,241	26%
Net lending margin	9.4%	9.5%	(10 bps)
Gross written premiums	1,783	1,919	(7%)
Underwriting margin	(6.7%)	(4.4%)	(230 bps)

¹The % change has been calculated with reference to FY 2017.

Gross flows decreased by 4% mainly due to a large one off inflow in East Africa in H1 2017 which offset good growth in life and non-life sales in SADC and East Africa. These flows, together with the appreciation in equity market values in Zimbabwe and the effects of foreign exchange movements contributed to a 12% growth in FUM to R116 billion. NCCF decreased by 56% to R0.7 billion, mainly driven by large outflows in Namibia due to a portfolio rebalancing by the Namibian government following regulatory changes.

Life APE sales were up marginally by 2% to R555 million due to higher life sales in Malawi driven by pension reform, the growing corporate book in Botswana, growth in retail sales in Zimbabwe and Malawi. This was offset by lower sales in West Africa due to lower credit life sales and regulatory changes in Nigeria and lower corporate sales in Ghana.

Gross written premiums decreased by 7% to R1,783 million. In East Africa the decline is driven by increased competition and remediation of the book through the non-renewal of loss making accounts.

Loans and advances rose to R14,206 million, up 26% mainly driven by growth in the CABS book. Net lending margin decreased marginally by 10bps mainly driven by lower margin business written in H1 2018.

RFO increased by 30% to R478 million, supported by a 24% increase in RFO for SADC due to good growth in the loan book at CABS and positive investment returns in Namibia and Zimbabwe. Strong underwriting results in Malawi's group life business further contributed to profit growth. RFO for East Africa decreased largely as a result of the costs incurred to execute the staff reorganisation and the impact of civil strife in South Sudan.

Excluding the impact of the staff reorganisation in East Africa, there is an improvement in the underlying underwriting margin as a result of management actions taken to improve claims and remediation of the book. This is partially offset by poor claims experience in the Nigeria business as the industry is facing significant claims in the oil and gas industry.  

VNB decreased by 20% to R102 million mainly due to a less profitable mix of business and methodology changes to align with the SAM capital framework. The VNB margin subsequently reduced by 100 bps.

 

END

 

 

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