Preliminary Results - Part 1

RNS Number : 4949C

Old Mutual PLC

08 March 2011

 



8 March 2011

Old Mutual plc

Preliminary results for the year ended 31 December 2010

Strong underlying results, one year into our three-year strategy

Financial Summary1	2010	2009 (constant currency)	2009 (as reported)
Adjusted operating profit before tax (IFRS basis)*	£1,481m	£1,300m	£1,133m
Adjusted operating earnings per share (IFRS basis)**	16.0p	13.3p	11.6p
Net client cash flows	(£5.7bn)	(£2.0bn)	(£1.8bn)
Funds under management	£309.3bn	£291.1bn	£275.4bn
Group ROE	12.2%		9.1%
Adjusted MCEV per share	202.2p		171.0p
Total dividend for the year	4.0p		1.5p
1 All numbers refer to core continuing businesses and 2009 comparatives have been restated accordingly. Percentage movements below are shown on a constant currency basis.

Profits up in each business unit¹

·      Adjusted operating profit before tax (IFRS basis) up 14%:

-  Strong growth in new business; continued focus on cost control

·      EPS growth of 20%

·      Long-Term Savings NCCF doubled during the year to £5 billion:

-  Emerging Markets positive overall; lower outflows from SA

-  Wealth Management NCCF up 56%

·      APE sales up 7% to £1,491 million:

-  Continued momentum in sales on the UK platform, UK APE sales up 28%

-  South Africa APE sales up 7%, savings products up 10% with strong regular premiums growth in Retail Affluent

·      Unit trust sales up 28% to £10.3 billion

·      Headline earnings growth in Nedbank of 15%

·      Funds under management up 6% from 31 December 2009

Robust financial position

·      FGD of £2.1 billion at 31 December 2010 (£1.5 billion at 31 December 2009)

·      Adjusted MCEV 202.2p per share at 31 December 2010, up 18% (IFRS NAV: 151p per share)

·      Board recommending a 2.9p final dividend for 2010 with a scrip alternative, making a total dividend for the year of 4.0p

Committed to delivering the strategy

·      Sale of US Life progressing with an anticipated close at or around the end of the first quarter of 2011.

·      Good progress in delivering 2012 financial targets

·      Run-rate cost savings of £59 million delivered to date against target of £100 million by 2012

Julian Roberts, Group Chief Executive, commented:

"This has been a substantially improved performance by Old Mutual in 2010, with operating profits significantly higher than last year. All our businesses have delivered increased underlying earnings and profits from our key Long-Term Savings division were up 26%.

"We have an attractive mix of businesses, with a strong franchise in high growth emerging markets and innovative business models in both developed and highly cash generative markets.

"We have made some significant operational progress and we expect 2011 to be a year of further delivery. We are committed to our three year strategy and meeting our stated operation targets"

Old Mutual plc

Preliminary Results for the year ended 31 December 2010

Enquiries

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

Notes

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

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

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

Cautionary statement

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

This announcement contains forward-looking statements with respect to certain of Old Mutual plc's plans and its current goals and expectations relating to its future financial condition, performance and results. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances that are beyond Old Mutual plc's control, including, among other things, UK domestic and global economic and business conditions, market-related risks such as fluctuations in interest rates and exchange rates, policies and actions of regulatory authorities, the impact of competition, inflation, deflation, the timing and impact of other uncertainties or of future acquisitions or combinations within relevant industries, as well as the impact of tax and other legislation and other regulations in territories where Old Mutual plc or its affiliates operate.

As a result, Old Mutual plc's actual future financial condition, performance and results may differ materially from the plans, goals and expectations set forth in Old Mutual plc's forward-looking statements. Old Mutual plc undertakes no obligation to update any forward-looking statements contained in this announcement or any other forward-looking statements that it may make.

Notes to Editors:

A webcast of the presentation and Q&A will be broadcast live at 9:00am (GMT), (10:00am (CET)/11:00am (South African time)) today on the Company's website www.oldmutual.com. Analysts and investors who wish to participate in the call should dial the following numbers and quote the passcode 4868538:

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

Playback (available for 14 days from 8 March), using pass-code 4868538#:

UK/International	[phone]
US	[phone]

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

A Financial Disclosure Supplement relating to the Company's Preliminary Results can be found on the website. This contains key financial data for 2010 and 2009.

Foreign exchange rates

	GBP/ZAR exchange rates		GBP/SEK exchange rates		GBP/EUR exchange rates		GBP/USD exchange rates
	Average exchange rate	Closing exchange rate	Average exchange rate	Closing exchange rate	Average exchange rate	Closing exchange rate	Average exchange rate	Closing exchange rate
FY2010	11.31	10.28	11.14	10.42	1.16	1.16	1.55	1.55
FY2009	13.17	11.92	11.97	11.56	1.12	1.13	1.57	1.61

Group Chief Executive's Review

Review of Operations

Introduction

Our operating results for 2010 are significantly ahead of the prior year results as reported with profits up in each of our businesses. This excellent performance was largely due to strong growth in new business sales, our continued focus on cost control, improved persistency and favourable exchange rates.

In addition to strong financial performance, we also focused on delivering our strategy and have made good progress in 2010. We have agreed to sell US Life, a business that was outside our Group risk and return profile, for $350 million, resulting in an IFRS charge of £713 million. We are awaiting regulatory approval, and expect the transaction to close at or around the end of the first quarter of 2011. The next two years will see a continued single-minded focus to meet our strategic objectives.

The Group is in sound financial shape. At 31 December 2010 our FGD surplus was £2.1 billion and we had total liquidity headroom of £1.4 billion.

Strategy Update

In 2010, we set out a new strategy for the Group. Our strategy is to build a long-term savings, protection and investment group by leveraging the strength of our people and capabilities in South Africa and around the world. Through the delivery of this strategy, we will drive our businesses to enhance value for both our customers and shareholders, increasing our international cash earnings and overall return on equity. During the year, we entered into exclusive negotiations to sell our shareholding in Nedbank, but these discussions did not conclude with a formal offer being made. In 2011, we will continue to work with Nedbank to build shareholder value.

We are now one year into a three-year process to deliver this strategy and are making significant operational progress. We are rationalising our activities over time, reducing the complexity of the Group and improving our structure as we manage our business with a disciplined approach to risk management, governance and allocation of capital.  We have taken steps to simplify our Group by selling the US Life business, subject to regulatory clearance, and will continue to maintain our strict criteria for keeping businesses within the Group: they must meet our capital and risk targets; be capable of achieving a 15% return on equity; add value to other parts of the Group; and be capable of creating future value for shareholders.

We have previously said that we will explore the possibility of listing a minority of the US Asset Management business and this remains our intention. The timing of the IPO will be dependent on margin progression, investment performance and growth.

We have set challenging Group-wide performance targets for the end of 2012: reducing costs by £100 million; improving return on equity for our Long-Term Savings business to between 16% - 18%; and reducing debt by £1.5 billion through proceeds of rationalisation and retained earnings. We have already delivered £59 million of run-rate savings and are committed to deliver our debt reduction target. Return on equity for the LTS business was 18.5% at the year-end, as we benefited from positive, non-recurring items in both the Nordic and Wealth Management businesses. Plans are in place to ensure this performance is sustained within the target range.

We have implemented a new, more effective, governance and control system giving our businesses local autonomy but ensuring that they work within Group structures and disciplines, particularly on risk and product underwriting standards. This new approach has been implemented effectively and has resulted in the level of one-off operational losses reducing significantly across the Group in 2010. We continue to manage risk effectively and have tightly managed the US Life bond portfolio and our business in Bermuda.

We continue to assemble a strong management team, and recently appointed Peter Bain as CEO of US Asset Management, and Peter Todd as Managing Director of Mutual & Federal. These are key roles for the Group as we look to drive the growth of these businesses.

We are clear on our strategy and are committed to delivering it.

Long-Term Savings (LTS)

Our LTS division delivered very strong results for the year with operating profits up 26% on a constant currency basis. This was driven by strong profit performance by all of the businesses within LTS. Life sales for the year were up 7% and unit trust sales were up 28% on a constant currency basis. Funds under management ("FUM") increased and margins improved.

We continued to strengthen the LTS management team and we appointed new CEOs to the Nordic business and the investment business in South Africa ("OMIGSA") as well as new heads of Product and IT, roles which are critical to leveraging our capability and delivering the strategy.

We made significant strides in implementing the LTS strategy in 2010. The business delivered run-rate savings of £44 million, against the targeted cost reduction of £75 million. This was primarily driven by Wealth Management which removed £35 million of costs in 2010 against its stated target of £45 million by 2012. We are seeking to leverage our IT and administration capabilities in South Africa to drive economies of scale and in December we opened a new office in Cape Town to provide customer service processing and IT support for Retail Europe's customers in Germany, Poland and Austria. Launching new and innovative products through easily accessible distribution channels is key to our aim of becoming our customers' most trusted partner. Whilst this work is still at an early stage, we introduced a number of new initiatives in 2010. OMSA and Mutual & Federal jointly developed a new short-term insurance product iWYZE for the retail mass market in South Africa. This product is distributed through traditional mass market models but also through digital channels and in the nine months since it launched, has already attracted nearly 5,000 customers. To date, iWYZE has also created approximately 150 new jobs in South Africa, primarily for young people.

Through our joint venture in India, Kotak Mahindra Old Mutual Life Insurance, we launched an online portal allowing customers to buy term insurance at a cheaper rate than through normal distribution channels. In Mexico, a unit-linked product was redesigned in conjunction with our team in South Africa and has since proved a key driver of our increased sales in the country. We also introduced a new Mass Retail distribution team into Mexico in December.

LTS: Emerging Markets

In South Africa, our business delivered a strong performance with life sales up 7% and unit trust sales up 17%. There was a noticeable improvement in sales in the second half as interest rates were cut and as the economic environment in South Africa stabilised. We saw good sales growth in both the Retail Affluent and Mass Foundation segments, with a particular focus on savings products. The latest economic data is encouraging for the performance of the business in 2011.

We launched the Futuregrowth Agri-Fund focusing on responsible equity investments in agricultural land, agri-businesses and farming infrastructure. OMIGSA attracted more than R8 billion into social infrastructure investment. Responsible funds are an important part of our commitment to helping build South African infrastructure and increase jobs for all parts of society. 

Mexico saw growth of 36% due to the introduction of a regular premium savings product in the first half of the year. In China, our joint venture with Guodian had a strong year with APE sales up 77% to CNY163 million in 2010, following a new channel diversification strategy.

We have set a target for our profits from our African insurance operations to be the equivalent of 10% of our South African profits by 2012, and 15% by 2015. To do this, we will leverage our experience and knowledge of the mass market sector in South Africa to grow our distribution channels through tied-agents and bancassurance and drive product development. We will also look to exploit new channels as they are established. For example, in Kenya we have seen initial success in distribution through mobile phones.

We see other opportunities for growth in Africa, but remain mindful of our strict criteria for investment and any expansion must be within appropriate risk-adjusted returns.

We have a solid foundation in South Africa from which we can drive growth in other emerging markets, and we are adapting our senior management structures, roles and responsibilities to achieve this. Our priorities for 2011 include growing our sales force; designing and adapting products for a wide range of customers; making it easier for our customers to access financial services and promoting a savings culture in the markets in which operate. We have confidence in the underlying business and are well-positioned to exploit business opportunities as the economies of the Emerging Markets grow.

LTS: Nordic

The Nordic economies experienced positive GDP growth in 2010 and our Nordic business also had a good year, delivering a 66% uplift in profit. Life sales were down 21% on the prior year, in line with management expectations, following the closure of an unprofitable business line in 2009. Our Danish business grew strongly. FUM was up 14% on the prior year, mainly due to improved equity markets, which also contributed to strong growth in mutual funds, up 37%.

During 2010, the Nordic business focused on building distribution and product offerings, increasing efficiency and optimising its structures and risk frameworks. The management team was strengthened and a new CEO appointed.

2011 is a critical year for Nordic as it focuses on delivering its cost savings target of £10 million per annum. The cost of delivering these savings is likely to have a negative impact on the profitability of the business in the coming year. The management will continue to focus on driving sales, increasing margins and delivering an improved distribution and product offering for the future development of the businesses in a rapidly changing marketplace. The economic outlook for the year is positive across all the geographies and we expect the Nordic savings markets to grow, albeit in a more competitive and fragmented market environment.

LTS: Retail Europe

Retail Europe delivered a very positive performance in 2010, in the context of GDP growth in all its markets. Equity markets were up, with the DAX showing a 16% gain for the year. Profits for Retail Europe were up 140% on the prior year, with APE sales up 7% and mutual funds flat. FUM was up 23%.

Retail Europe continued to focus on building an integrated organisation and reducing operating costs. As part of the focus on costs, IT and client administration services for Retail Europe are being transferred to South Africa. One-off costs associated with the transfer will impact profitability in 2011, before the benefits start to come through in 2012.

The uplift in sales was driven by new product launches in Germany, Poland and Switzerland. We also improved our marketing and sales drives to customers and built strong, more fruitful relationships with our distributors in 2010 and these proved to be significant drivers of the business' improved profits.

Macro-economic factors will continue to influence the business in 2011. Positive equity and bond market performances will raise consumer confidence although we expect there to be continued concern over unemployment levels. We have a programme of product innovation for the markets in Germany and Poland which should underpin growth in these attractive markets.

LTS: Wealth Management

This has been a significant year for Wealth Management. APE sales were up 19%, and it delivered an 86% growth in profit, driven by delivery of £35 million of run-rate savings, against its 2012 target of £45 million.

Investor confidence was boosted by the return to growth in equity markets which led to increased funds under management in all of our businesses. In the UK, we saw a continuation of the trend of IFAs converting to platform sales, for both wrapped and unwrapped sales. This was particularly noticeable in the first half as IFAs moved large blocks of business onto our platform ahead of the tax year-end. Skandia's market share in the UK continued to grow, and at the end of the third quarter we had captured 7.4% of all industry channels, versus 6.4% in the fourth quarter in 2009. Skandia Investment Group's Spectrum risk-targeted funds had a successful year with funds under management at more than £750 million with the funds now available on all the major IFA platforms in the UK. SIG also provided the technical expertise to allow the Nordic business to launch its own risk-targeted funds, based on the Spectrum concept, into Sweden.

During 2011, Wealth Management will continue to focus on cost reduction, improving efficiency and meeting its 2012 targets, increasing risk controls and improving the functionality of the platform and the richness of the product offering. We are seeing an increasing demand from customers for products and services that are focused on their needs, are easy to understand and do not rely on heavy up-front commission to drive sales and with the forthcoming Retail Distribution Review, governments having to roll-back state retirement provision and the corresponding need for personal retirement savings, our Wealth Management business is well-placed to meet customer demand. We plan for the Platform to add to the profits of the Wealth Management business in 2012.

Nedbank

Household finances improved in South Africa as debt started to reduce and interest rates eased to the lowest levels in 36 years. The recovery in the credit cycle has proved to be more modest compared to previous cycles. The ratio of household debt to disposable income reduced marginally and at the same time debt service levels decreased to 7.5% and are now at a level that is more conducive to improving economic growth in the consumer sector. In the corporate sector, excess capacity and uncertainty over the sustainability of the local and global recovery limited spending.

Nedbank showed solid earnings growth in a challenging economic environment. Headline earnings increased by 15% to R4,900 million, which was marginally ahead of the range guided at the third quarter trading statement, and non-interest revenue increased 11% to R13.2 billion. Net interest income increased 2% to R16.6 billion.

Nedbank's credit loss ratio improved to 1.36% for 2010, its liquidity position remains sound and its capital ratios remain above target levels. The Tier 1 capital adequacy ratio of 11.7% marginally improved from that at 31 December 2009, and the total capital adequacy ratio ended the period at 15.0%.

Nedbank is a strongly performing business and a significant contributor to the Group. We have a clear strategy for growth with the key thrusts being the repositioning of Nedbank retail, growing non-interest revenue, focusing on areas that yield higher economic profit and increased focus on the rest of Africa.

Mutual & Federal

2010 was a good year for Mutual & Federal with profits up 27% and a strong underwriting performance following the cancellation of unprofitable business, a relatively benign claims environment and a greater focus on claims cost control.

During 2010, we introduced the step-change programme at M&F.  Peter Todd has been appointed as Managing Director of M&F and will drive the delivery of the step-change programme over the next three years. The objectives of the programme are to embed profitable and sound underwriting; to develop better products; to be more customer-focused; grow our customer base by offering the right distribution models; and improve efficiency. As part of the step-change programme, we aim to improve profitability through growth in the direct and broker channels and through the reduction of claims costs and expenses. During the year, we entered the direct insurance channel via iWYZE, the joint initiative with OMSA. This is the first step in extracting greater value from M&F's position within the Old Mutual Group following the buy-out of minorities.

With its strong balance sheet and increased focus on alternative distribution channels, we are confident that we can grow revenue while improving our expense ratios.

US Asset Management

USAM profits improved 4% over 2009 due primarily to higher average FUM. We saw net inflows into fixed income products, which were offset by outflows from equity, alternative and stable value products leading to an overall negative NCCF of $18.0 billion. During the recent market dislocation, a number of our affiliates underperformed in certain of their strategies, but we are confident that they will deliver outperformance in time. Echo Point began operating as a USAM affiliate in October launching with $1.7 billion funds under management in international growth equities.

Non-US clients represented more than a quarter of total funds under management and a key objective for us is to grow and diversify this base. We have expanded our global distribution through the hiring of new staff and we are expanding our distribution presence in the Middle East, resulting in US Asset Management now operating out of 13 countries. Growing the international element for US Asset Management is a priority for the business and we continue to work toward improving our margin with a target of 25-30% by the end of 2012 and improving investment performance.

Peter Bain has been appointed CEO of US Asset Management. Peter has a proven track record in growing a boutique asset management company and his appointment is a key milestone for the US Asset Management business as we look to grow the business.

We believe in our boutique model, with its 18 affiliates and 160 investment strategies. As investor confidence improves, and with our extensive diversified product portfolio including non-US equity exposure, we believe we have the opportunity to capture a share of these flows.

We continue to explore the possibility of a partial IPO by the end of 2012.

Board changes

On 5 August 2010, Roger Marshall became a non-executive director. Mr Marshall replaced Richard Pym as Chairman of the Group Audit Committee. Mr Pym stepped down in August at the end of his three-year term.

On 3 November 2010, Alan Gillespie joined the Board as a non-executive director. Mr Gillespie will succeed Rudi Bogni as the Senior Independent Director when Mr Bogni retires at the Company's AGM in May 2011.

On 4 February 2011, Eva Castillo was appointed as a non-executive director of Old Mutual plc.

Dividend

The Board has considered the position in respect of a final dividend for year ended 31 December 2010, and is recommending a final dividend of 2.9p per share (or its equivalent in other currencies). This makes a total dividend payment for the year of 4.0p compared to 1.5p in the previous year. A scrip alternative will be offered to eligible shareholders.

South African Empowerment

In South Africa in 2010, OMSA achieved and Nedbank maintained a Level 2 rating status and Mutual & Federal a Level 3 rating status as BBBEE contributors.

Outlook

We have made some significant operational progress and we expect 2011 to be a year of further delivery. We are committed to our three-year strategy and meeting our stated operational targets.

Julian Roberts
Group Chief Executive
8 March 2011

Group Finance Director's Review

 

GROUP RESULTS

 

Overview of FY 2010 results

Group Highlights (£m)1		FY 2010	FY 2009 (constant currency)	% Change	FY 2009 (as reported)	% Change
Adjusted operating profit (IFRS basis, pre-tax)		1,481	1,300	14%	1,133	31%
Adjusted operating earnings per share (IFRS basis)		16.0p	13.3p	20%	11.6p	38%
Life assurance sales - APE basis		1,491	1,392	7%	1,312	14%
Unit trust/mutual fund sales		10,305	8,068	28%	7,567	36%
Return on equity*		12.2%			9.1%	310bps
Net client cash flows (£bn)		(5.7)	(2.0)	(185%)	(1.8)	(217%)
Funds under management (£bn)		309.3	291.1	6%	275.4	12%
Total dividend for the year		4.0p	1.5p	167%	1.5p	167%

¹           The balances in the above table are in respect of core continuing businesses only and the 2009 comparatives have been restated accordingly.

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

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

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

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

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

Management Discussion and Analysis of Results for FY 2010

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

 

Summary adjusted operating profit statement

£m	12 months ended 31 December 2010	12 months ended 31 December 2009*	% Change
Revenue
Net earned premiums	3,278	2,746	19%
Investment return (non-banking)	10,585	10,903	(3%)
Banking interest and similar income	4,082	3,989	2%
Fee & commissions	3,160	2,538	25%
Other revenue	298	311	(4%)
Total revenues	21,403	20,487	4%
Expenses
Net claims and benefits incurred	(4,564)	(3,126)	46%
Change in investment contract liabilities	(6,899)	(8,341)	(17%)
Bank interest	(2,500)	(2,627)	(5%)
Other expenses	(5,966)	(5,262)	13%
Total expenses	(19,929)	(19,356)	3%
Share of associated undertakings profit/(loss) after tax	7	2	250%
Adjusted operating profit/(loss) before tax and non-controlling interests	1,481	1,133	31%

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

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

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

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

Operating profit analysis

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

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

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

Long-term investment return (LTIR)

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

Reconciliation of Group AOP and IFRS profits

£m
				Year ended 31 December 2010	Year ended 31 December 2009*
Adjusted operating profit				1,481	1,133
Adjusting items				(482)	(973)
Non-core operations - Bermuda				(3)	1
Profit before tax (net of policyholder tax)				996	161
Income tax attributable to policyholder returns				149	192
Profit before tax				1,145	353
Total income tax				(456)	(400)
Profit/(loss) from continuing operations after tax				689	(47)
Profit/(loss) from discontinued operations after tax				(713)	(71)
Profit/(loss) after tax for the financial year				(24)	(118)
Other comprehensive income for the financial period				1,151	1,228
Total comprehensive income for the financial period				1,127	1,110
Attributable to
Equity holders of the parent				594	709
Non-controlling interests
Ordinary shares				428	334
Preferred securities				105	67
Total comprehensive income for the financial period				1,127	1,110

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

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

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

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

Long-Term Savings

Key performance statistics for the LTS division are as follows:

					£m
FY 2010	Emerging Markets	Nordic	Retail Europe	Wealth Management	Total
Life assurance sales (APE)	487	201	69	734	1,491
PVNBP	3,269	1,104	513	6,380	11,266
Value of new business	86	41	7	66	200
Unit trust/mutual fund sales	3,668	581	23	4,507	8,779
NCCF (£bn)	-	0.7	0.4	3.9	5.0
FUM (£bn)	57	14	5	56	132
Adjusted operating profit (IFRS basis) (pre-tax)	539	110	51	197	897
Operating MCEV earnings (covered business) (post tax)	344	45	66	112	567
VNB + Exp Var/MCEV (covered business)	4.7%	4.7%	2.2%	3.1%	4.1%

					£m
FY 2009 (as reported*)	Emerging Markets	Nordic	Retail Europe	Wealth Management	Total
Life assurance sales (APE)	393	235	67	617	1,312
PVNBP	2,834	1,150	537	5,042	9,563
Value of new business	65	44	(5)	49	153
Unit trust/mutual fund sales	2,765	393	24	3,210	6,392
NCCF (£bn)	(1.6)	1.0	0.5	2.5	2.4
FUM (£bn)	44	11	4	47	106
Adjusted operating profit (IFRS basis) (pre-tax)	446	62	22	106	636
Operating MCEV earnings (covered business) (post tax)	212	81	(44)	(4)	245
VNB + Exp Var/MCEV (covered business)	0.5%	7.5%	(5.1%)	0.6%	1.3%

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

LTS AOP earnings benefited from higher fees generated from positive net client cash flows particularly in Wealth Management, rising funds under management and the strengthening of the rand and Swedish krona against sterling. On a constant currency basis, earnings were up 26%.

The Emerging Markets business accounts for 60% of the LTS IFRS AOP earnings, 43% of LTS FUM, and 33% of LTS APE sales. This compares to 70% of restated AOP, 41% of FUM, and 30% of APE sales in 2009.

APE Sales increased by 14% for the LTS division as a whole, with the growth coming largely from the regular premium products in the Retail businesses of Emerging Markets, and Wealth Management single premium products, notably in the UK and Italy. A managed shift in business mix in Nordic was executed with sales decreasing from prior year levels. There was encouraging growth in both single and recurring premiums in Retail Europe. Sales for the second half of 2010 were ahead of the first half for Emerging Markets and Retail Europe, and evenly spread across the year in Nordic. Wealth Management sales were slightly higher in the first half of the year than the second given the usual seasonal weighting to the first quarter of the year, and the benefit of the short-term Italian tax shield.

Mutual fund sales were up by £2,387 million, with strong performance in Wealth Management and Emerging Markets particularly in the second half of the year.

Across LTS as a whole, new business APE margins have improved to 13% for 2010 (2009: 12%). This reflects the focus on selling more profitable products with better margins, notably in Nordic, and increased sales of a higher margin product in the first half of the year in Emerging Markets. The APE margin in Emerging Markets increased from 16% to 18%. In Nordic, the APE margin has increased from 19% to 21%, benefiting from the managed reduction of low margin product sales such as Link regular. In Retail Europe, the APE margin has improved considerably to 11% from a negative position in the comparative period. Across Wealth Management, the APE margin increased from 8% to 9%, with the UK increasing from 2% to 3%, and International from 18% to 19%. The most significant increase in APE margin was in respect of the Continental European markets, which increased from 3% to 8% as result of the increase in volumes in Italy. Sales of mutual funds, which make up the bulk of Wealth Management's sales, are not included in the APE margin. The IFRS operating margin rose to 38bps from 25bps for Wealth Management as a whole. For LTS as a whole the PVNBP margin improved to 1.8% (2009: 1.6%).

The market-consistent value of new business (VNB) improved for all of our LTS businesses, with the exception of Nordic, where although the underlying margins of the business improved, the absolute value of new business fell as a result of the decline in new business volumes (due to the cessation of sales of an unprofitable recurring premium product) and changes in assumptions.

The LTS net client cash flows more than doubled as improvements in Wealth Management and Emerging Markets more than outweighed the lower net flows in Nordic given lower sales volumes. Funds under management for LTS at 31 December 2010 increased by 25% to £131.8 billion (31 December 2009: £105.5 billion) although there were periods of substantial market movements during the year, with notable falls in the second quarter and increases towards the end of the year.

The rand started the year at 11.92 against sterling, strengthening to 11.45 at 30 June 2010, and to 10.28 by 31 December 2010. The US dollar and Swedish krona also strengthened, although to a lesser degree, appreciating 4% and 10% respectively in the year.  The average exchange rates to sterling over the year were 11.31 (2009: 13.17), 1.55 (2009: 1.57) and 11.14 (2009: 11.97) for the rand, US dollar and Swedish krona respectively.  The cumulative effect of foreign exchange movements for LTS was an increase of £77 million on IFRS profitability.

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

Group cost savings and ROE and margin targets

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

ROE and margin targets	FY 2010	FY 2009	External Target
Long Term Savings1
Emerging Markets	25%	23%2	20%-25%
Nordic	11%	12%	12%-15%
Retail Europe	20%	9%	15%-18%
Wealth Management	14%	8%	12%-15%
LTS3 Total	18.5%	14.8%	16%-18%
USAM Operating Margin	18%	18%	25%-30%

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

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

3      Long-Term Savings 2009 restated from 14.9%.

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

Summary MCEV results

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The MCEV methodology does not capitalise returns on assets in excess of the adjusted risk-free reference rates. For the US Life business, we have estimated that the present value of credit spreads not valued at December 2010 amounted to £593 million, compared to £571 million at December 2009. Taking this into account, we estimate that the value of US Life including an appropriate allowance for additional credit spreads (a proxy to the European Embedded Value basis) was £404 million at December 2010 compared to £253 million at December 2009.

Risk management using Economic Capital and Market Consistent Embedded Value

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

Free surplus generation

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

Sources and uses of free surplus

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

Capital, liquidity and leverage

Capital

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

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

						£m
			FY 2010	%	FY 2009*	%
Ordinary Equity			5,168	77	4,171	71
Other Tier 1 Equity			653	10	611	10
Tier 1 Capital			5,821	87	4,782	81
Tier 2			2,363	35	2,562	44
Deductions from total capital			(1,439)	(22)	(1,497)	(25)
Total Capital			6,745	100	5,848	100

*       FY 2009 restated to reflect actual FSA submission

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

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

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

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

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

*       This includes unappropriated profits.

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

Liquidity

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

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

Holding company net debt

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

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

Dividend

Dividend policy

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

Final dividend for 2010

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

Dividend timetable

The timetable for the final dividend for the year ended 31 December 2010 is set out below:

Declaration date	8 March 2011
Scrip calculation price determined	Last five dealing days on each exchange ending on 31 March 2011
Currency conversion date	31 March 2011
Exchange rates, scrip calculation price and ratio announced	1 April 2011
Last day to trade cum div for shareholders on the branch registers in Malawi, South Africa and Zimbabwe and on the Namibian section of the principal register	8 April 2011
Ex-dividend date for shareholders on the registers in Malawi, South Africa and Zimbabwe and on the Namibian section of the principal register	11 April 2011
Last day to trade cum div for shareholders on the UK register	12 April 2011
Ex-dividend date for shareholders on the UK register	13 April 2011
Scrip dividend alternative offer closes for shareholders on the branch registers in Malawi, South Africa and Zimbabwe and on the Namibian section of the principal register	12 noon on 15 April 2011
Record date for the dividend	15 April 2011
Scrip dividend alternative offer closes for shareholders on the UK principal register	12 noon on 3 May 2011
Annual General meeting, when shareholders will be asked to approve the dividend	12 May 2011
Dividend payment date and first day of dealings in new Ordinary Shares issued under the scrip dividend  alternative	31 May 2011

The entitlement to receive the scrip dividend alternative is personal and non-transferable. Shareholders should note that they will not be able to trade their entitlement to new Ordinary Shares to be issued pursuant to elections under the scrip dividend alternative until 30 May 2011. The full terms of the scrip dividend alternative are available on the Company's website.

Share certificates for shareholders on the South African register may not be dematerialised or rematerialised between 11 April and 15 April 2011, both dates inclusive, and transfers between the registers may not take place during that period.

Corporate disposals and acquisitions and related party transactions

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

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

US Life

Life sales summary

APE sales at $143 million increased by 34% relative to the comparative period. Fixed indexed annuities, which represent more than half of the total APE, increased 30% in 2010 compared to 2009. The increase was driven by product revisions and competitive annuity rates. The sales levels are within the range set for the business and reflect the approach to managing capital within the business. Our top ten annuity distribution partners who have represented an average of 60% of our total sales volume over the past five years grew sales collectively by 62% in 2010.

IFRS Results

The IFRS pre-tax profit for the year for the US Life business was $50 million (2009: loss of $195 million), with financial performance benefiting from lower impairment losses and the reversal of prior impairments, partially offset by higher deferred policy acquisition costs (DPAC) amortisation as a result of higher gross profits.

Value of new business 

The value of new business decreased by $66 million relative to the comparative period. The decrease in VNB was mainly due to the extended low yield environment and a lower assumed liquidity premium. The negative VNB position is largely the result of the MCEV basis used, where credit spreads in addition to the liquidity premium are not valued in the determination of MCEV, but shown as earnings when earned. Although we believe that the VNB is positive on an EEV basis, the negative figure on the MCEV basis quantifies the extent to which the business would rely on earning credit spreads in order to provide the guarantees underwritten. Management actions taken during the period included lowering commission rates and increasing bonus on certain products, which improved consumer value.

MCEV Results

The 2010 operating MCEV earnings after tax of $72 million decreased significantly relative to the comparative period. This was mainly due to the 2009 expected returns being based off higher asset yields, higher credit spreads and a very depressed starting position. The persistency assumption changes of Universal Life insurance plans (UL) and Return of Premium term insurance plans (ROP) also contributed to the lower MCEV operating earnings. Operating experience variances were higher than 2009. Fixed Indexed Annuity (FIA) contributed most to the favourable result in 2010. The positive variance of FIA was primarily due to higher than expected surrenders of FIA contracts that are unprofitable on an MCEV basis, while in 2009, the positive impact from higher than expected surrenders were more than offset by the negative impact from lower than expected interest margins.

MCEV increased by $220 million over the year. In addition to the effects above, other significant movements affecting the closing MCEV were the variances related to the change in economic conditions, largely due to reduced risk-free rates and lower credit spreads, partially offset by the liquidity premium reducing from 100 bps to 75 bps.   

Funds under management

Funds under management ended the year at $17.2 billion, up $0.5 billion from the opening position, primarily due to a $0.8 billion increase in the market value of the investment portfolio for the year and increased net investment income. Net client cash flows improved by 47% in 2010 compared to 2009 primarily due to lower surrender activity and higher sales in 2010. Net cash and short term holdings at 31 December 2010 were $630 million.

Investment portfolio

The net unrealised position on the fixed income security portfolio improved to a net gain of $309 million at 31 December 2010 ($497 million net unrealised loss at 31 December 2009 and $138 million net unrealised gain at 30 June 2010). Although the increase in Treasury yields during the fourth quarter of 2010 negatively affected the net unrealised position, as credit spreads were tighter overall on a year-on-year basis, the unrealised position improved compared to the prior year. In addition, management undertook selective de-risking of the investment portfolio. As at 31 December 2010, $546 million of the total $551 million of the specified securities in the stock purchase agreement with Harbinger Capital Partners had been sold at terms better than those expected on signing of the sale agreement. The remaining $5 million of specified securities have been sold since the year-end.

The quality of the investment portfolio improved throughout the year and 92% of the total portfolio had a market to book value ratio greater than 90% at the end of 2010. The market to book value ratio of the fixed income portfolio improved from 97% at the beginning of the year to 102% at 31 December 2010.

There were no defaults in 2010. Net realised gains in 2010 of $19 million include $22 million of trading gains on previously impaired securities that had recovered in fair value and $70 million of losses realised on the sale of securities in anticipation of the sale of the company. US Life also generated $64 million of net gains on de-risking trades during favourable market conditions. Expected cash flows on certain previously impaired structured securities improved significantly in 2010, resulting in $54 million of revaluation gains. These revaluation gains were partially offset by impairments.

During 2010, IFRS impairments were $50 million, generally in line with our long-term assumption of $48 million, and compared to $389 million in 2009. The 2010 impairments on 42 securities related primarily to structured securities, with the losses due to adverse changes in expected cash flows, or the likelihood of diminished loss coverage from distressed monoline insurers that guaranteed the performance of the security. The impairment losses were primarily in RMBS ($30 million), ABS ($8 million), and CMBS ($6 million).

Capital

OM Financial Life's risk-based capital ratio increased from 312% as at 31 December 2009 to 350% as at 31 December 2010. Regulatory capital grew $83 million during 2010 driven by strong statutory operating earnings. OM Financial Life's required capital decreased (at the targeted 300% level) primarily due to a lower risk investment portfolio offset by capital required for new business growth. The US Life Group distributed a total of $109 million to OM plc in 2010 comprised of $59 million from OM Financial Life Insurance Company and $50 million from OM Re.

Bermuda

As disclosed in our Announcement in March 2010, Bermuda remains a non-core business, and as such its profits are therefore excluded from the Group's IFRS adjusted operating profit. A review of the operating performance of Bermuda is set out below:

Overview

The business continued to perform well against its strategy with significant enhancements delivered in 2010 including business service improvements, further enhancements to liability management and to management information to improve the dynamic management of exposures and further de-risk the Guaranteed Minimum Accumulation Benefits (GMABs) attached to certain of the in-force variable annuities.

Surrender activity in 2010 occurred largely in respect of variable annuity contracts without GMABs, with the business instituting a focused conservation strategy supported by high customer interaction in order to retain as much of this profitable business as possible. Surrender behaviour with respect to variable annuity contracts with GMABs is directly influenced by the differential between the value of the underlying funds and the nominal level of the guarantee, as well as the financial circumstances of the policyholder. The recovery across global equity markets, particularly in the fourth-quarter in 2010, resulted in an increase in the number of contracts where the underlying fund values were greater than the level of the guarantee. This resulted in a sharp increase in the levels of contracts with GMABs surrendering in the fourth quarter of 2010, with overall surrender activity across GMAB contracts for the year at close to double 2009 levels (2010: 1,211 policies; 2009: 638 policies). Further gains across global equity markets in 2011 would be expected to result in increased levels of surrenders across variable annuity contracts with GMABs, accelerating the run-off of these contracts. Ultimately, surrender activity will determine the speed of the run-off and the extent and timing of any associated capital, or cash release for this business. In February 2011, the business launched an offer to account holders with non-Hong Kong UGO contracts permitting them to surrender their contracts without incurring penalties. The special offer increased the rate and number of surrenders across this book, further de-risking the business. The take-up rate was 6.2% at 4 March 2011. Management will continue to assess demand for similar such offers in the future.

IFRS Results

The IFRS pre-tax profit for the year for the Bermuda business was $34 million (2009: $34 million), with financial performance benefiting from lower guarantee losses as a result of the improved effectiveness of the hedging programme, improved basis risk management, favourable equity markets and currency movements. The impact of the dynamic hedging programme over the course of 2010 was also beneficial in reducing losses in respect of GMABs and favourable equity markets over the course of the year further resulted in lower GMAB reserve requirements at the end of the year.

MCEV Results

The 2010 operating MCEV earnings resulted in a loss after tax of $36 million, a marginal decrease relative to the comparative period. Operating earnings include negative corrections and modelling changes in 2010 compared to significant positive corrections and modelling changes in 2009. This is however partially offset by much improved persistency experience variances in 2010 and large negative persistency assumption changes in 2009 that were not repeated.

In addition to the effects above, other significant movements affecting the closing MCEV related to the movement in GMAB reserve requirements due to market performance and changes in economic conditions, net of the effects of hedging guarantees. Performance benefited from favourable equity and currency markets, with improved basis risk management and effectiveness of the hedging programme. This was dampened by reductions in interest rates as hedges were lifted early on in the year.

Reserves

Of total insurance liabilities of $6,106 million (2009: $6,741 million), $4,495 million (2009: $4,688 million) is held in the separate account, relating to variable annuity investments where all risk is borne by policyholders. The remaining reserves amount to $1,611 million (2009: $2,053 million), which is split into $672 million (2009: $766 million) in respect of GMAB / GMDB liabilities on the variable annuity business, and $939 million (2009: $1,290 million) in respect of policyholder liabilities which are supported by the fixed income portfolio (these liabilities include deferred and fixed indexed annuity business as well as variable annuity fixed interest investments). Non-separate account reserves are calculated on a policy-by-policy basis, updated frequently and verified independently.

GMAB / GMDB reserve calculations rely on the mapping of policyholder investment funds to hedgeable indices to determine market-consistent assumptions. Fund mapping updates are performed at least quarterly, the results of which better allocate exposures to Asian and other emerging markets (which require higher levels of reserving given their higher inherent volatility) thereby improving the accuracy of the reserve calculations. Overall, this market-consistent valuation methodology is guided by the fund mapping process. Throughout the year, the business continued to maintain a very significant statutory capital surplus against its minimum required capital of $250,000, ending the year with statutory surplus capital of $625 million (2009: $586 million).

Investment portfolio

No defaults or impairments were recorded during 2010 (2009: $20 million). The net unrealised position improved to a gain of $31 million as at 31 December 2010 ($29 million loss as at 31 December 2009) as a result of de-risking efforts within the portfolio through the sale of a number of holdings offsetting gains and losses and the narrowing of corporate spreads. The book value of the portfolio reduced from $1.0 billion at the end of 2009 to $0.8 billion as at 31 December 2010, largely as investments were sold to meet surrender activity and withdrawals. The fixed income portfolio remained at an average credit quality of A2 (Moody's rating scale), with investment grade quality holdings continuing to represent more than 90% of the portfolio. As at 31 December 2010, the book value of the investment portfolio with a market value to book value ratio of 80% or less was $3 million (compared to $71 million at 31 December 2009).

Management of hedging

Over the course of 2010, the business continued to dynamically manage the underlying economics of the hedging programme in order to strike a balance between the potential changes in the income statement, available cash, liquidity and transactional costs arising from movements in market levels. A number of adjustments to the hedging programme were made over the course of 2010 as a result of turbulent market conditions, with the business ending the year approximately 57% hedged against adverse equity and foreign exchange market movements. The accumulated unrealised profit or loss, as measured by the stop-loss metric from the time the current hedge framework was implemented on 17 September 2009 was a gain of $145 million by 31 December 2010 (2009: $104 million). The hedging team evaluates the hedging strategy, including the most appropriate level of hedges on a continuing basis, with any proposed changes to the strategy subject to strict oversight. The stop-loss protocol established in September 2009 remains in place, and continues to be monitored daily by Group to ensure that a common understanding of the resultant impact on capital, cash and profit and loss on a timely basis.

Outlook

Whilst turbulent market conditions could have a material impact, the business has performed credibly over the past year, with the key priorities for 2011 focused on continuing this momentum through continued efforts to de-risk the GMAB exposure in the variable annuity book, through a range of measures. These include execution against the stated dynamic hedging strategy to contain key risk exposures; continued implementation of the conservation strategy to better retain profitable non-guaranteed business, supported by enhanced customer and service offerings; ongoing prudent management of capital and liquidity; ongoing evaluation of risk management and key business decision-making processes across the business to align with Group's Enterprise Risk Management framework; and maintenance of cost discipline, with a focus on delivering further planned expense reductions.

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

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

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

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

Tax and non-controlling interests

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

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

Risks and Uncertainties

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

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

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

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

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

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

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

Philip Broadley
Group Finance Director
8 March 2011

Summarised Financial Information

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

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

 

Business Review

Long-Term Savings: Emerging Markets

Good results combined with strong growth in regular premium sales

Highlights (Rm)	2010	2009	% Change
Adjusted operating profit (IFRS basis, pre-tax)	6,099	5,879	4%
Return on local equity	25%	25%
Return on allocated capital (OMSA only)	25%	26%
Life assurance sales (APE)	5,505	5,178	6%
Unit trust/mutual fund sales	41,488	36,421	14%
PVNBP	36,975	37,339	(1%)
Value of new business	972	853	14%
APE margin	18%	16%
PVNBP margin	2.6%	2.3%
Operating MCEV earnings (covered business, post-tax)	3,877	2,794	39%
Return on embedded value (covered business, post-tax)	13.2%	9.8%
Highlights (Rbn)	2010	2009	% Change
Net client cash flows (NCCF)	0.2	(20.5)	101%
Total funds under management	585.7	518.4	13%

Overview

Equity markets in the Emerging Markets have enjoyed a strong year, with the JSE increasing by 16%. The South African rand appreciated 13% against the US dollar and 14% against sterling. Low inflation contributed to interest rate cuts in South Africa from 10.5% to 9%.

We continue to focus on innovation and product improvements which will benefit our customers. In South Africa we developed and launched a new direct short-term insurance product, iWYZE, in conjunction with Mutual & Federal - and its success has exceeded expectations. Old Mutual Corporate launched Old Mutual SuperFund, the largest multi-employer or umbrella fund in South Africa with over 300,000 members, to provide a simple, affordable and strictly-governed platform enabling employees to save for their retirement. We launched the Futuregrowth Agri-Fund in March, focusing on responsible equity investments in agricultural land, agri-businesses and farming infrastructure. As a Socially Responsible Investment fund, it seeks long-term returns and tangible social and developmental impacts.

We have made progress towards our goal of becoming our customers' most trusted partner, evidenced by the number of awards received during the year - including our third Ask Afrika Orange Index award for service excellence in the long-term insurance business category, and the number one position in South Africa's 500 best managed companies.

We are integrating social, environmental and economic principles into our core business. Old Mutual South Africa (OMSA) achieved Level 2 Broad Based Black Economic Empowerment (BBBEE) status in October 2010. Furthermore, OMIGSA attracted more than R8 billion from institutional investors into social infrastructure investment.

Our sales improved in the year, notably in the second half. This resulted in a 6% increase in APE sales compared to 2009, and we benefited from improved persistency. Our NCCF improved significantly, and we see increasing contributions from new markets, with non-South African NCCF higher than South African NCCF (excluding PIC flows).

We made good progress towards implementation of Solvency II as part of the overall Group programme, and also in respect of the South African equivalent framework known as SAM (Solvency Assessment and Management), launched in 2010 by the South African regulator.

IFRS AOP results

IFRS AOP (pre-tax) increased by 4% from R5,879 million to R6,099 million, with strong asset management profits (up 62% to R1,550 million), partially offset by lower long-term investment return (R1,221 million compared to R1,658 million in 2009).

Rm	2010	2009	% Change
Long-term business adjusted operating profit	3,328	3,263	2%
Asset management adjusted operating profit	1,550	958	62%
Long-term investment return (LTIR)	1,221	1,658	(26%)
Adjusted operating profit (IFRS basis) (pre-tax)	6,099	5,879	4%

The growth in long-term business profits is mainly due to the significant improvement in Retail persistency in 2010 following the significant strengthening of the basis in 2009 as well as continued business effort to improve retention experience. Good investment performance in the annuity and permanent health insurance (PHI) portfolios and increased asset-based fees due to higher equity market levels also contributed to profit growth. The comparable 2009 life profits benefited from a number of large non-recurring items, including the impact of assumption changes and profits from the Nedbank joint ventures in the first five months of 2009. Excluding these items, underlying life profits increased by 37% over the comparative period.

Asset management profits grew significantly as a result of higher fees being earned from higher funds under management (FUM), stronger performance fees in OMIGSA, a first full-year contribution from ACSIS (acquired in the second half of 2009), a higher contribution from OMF due to growth in the business, and mark-to-market profits in Old Mutual Specialised Finance (OMSFIN). These were partially offset by lower transactional income.

The LTIR decreased by 26% to R1,221million in 2010 reflecting the reduced rate applied to OMLAC(SA) assets due to the implementation of a higher ratio of cash to equity in the asset portfolio backing the Capital Adequacy Requirement.

Life APE sales summary

APE sales increased by 6% from R5,178 million to R5,505 million, driven largely by strong growth in regular premium sales across the majority of our Emerging Markets businesses.

By Cluster:	Gross single premiums			Gross regular premiums			Total APE			Total PVNBP
New business (Rm)	2010	2009	+/-%	2010	2009	+/-%	2010	2009	+/-%	2010	2009	+/-%
OMSA
Mass Foundation Cluster*	14	16	(13%)	1,571	1,452	8%	1,572	1,454	8%	6,994	6,767	3%
Retail Affluent	9,620	8,751	10%	1,381	1,213	14%	2,343	2,088	12%	16,345	15,413	6%
Institutional**	7,892	9,205	(14%)	454	360	26%	1,244	1,281	(3%)	11,788	12,831	(8%)
Total OMSA	17,526	17,972	(2%)	3,406	3,025	13%	5,159	4,823	7%	35,127	35,011	0%
Rest of Africa***	475	528	(10%)	196	195	1%	244	247	(1%)	1,363	1,653	(18%)
Total New Markets****	231	432	(47%)	79	64	23%	102	108	(6%)	485	675	(28%)
Total Emerging Markets	18,232	18,932	(4%)	3,681	3,284	12%	5,505	5,178	6%	36,975	37,339	(1%)
By Product:
OMSA	2010	2009	+/-%	2010	2009	+/-%	2010	2009	+/-%	2010	2009	+/-%
Savings	14,062	13,874	1%	1,654	1,390	19%	3,060	2,773	10%	22,441	21,785	3%
Protection	6	2		1,752	1,635	7%	1,753	1,639	7%	9,228	9,132	1%
Annuity	3,458	4,096	(16%)	-	-		346	411	(16%)	3,458	4,094	(16%)
Total OMSA	17,526	17,972	(2%)	3,406	3,025	13%	5,159	4,823	7%	35,127	35,011	0%
Rest of Africa***	475	528	(10%)	196	195	1%	244	247	(1%)	1,363	1,653	(18%)
Total New Markets****	231	432	(47%)	79	64	23%	102	108	(6%)	485	675	(28%)
Total Emerging Markets	18,232	18,932	(4%)	3,681	3,284	12%	5,505	5,178	6%	36,975	37,339	(1%)

* Previously described as Retail Mass

** Institutional sales include Corporate and OMIGSA life sales

*** Rest of Africa represents Namibia only

**** New Markets represents Latin America only

OMSA

Regular premium sales

Regular premium sales grew by 13% compared to 2009 and by 25% in the second half of 2010 compared to the first half, with particularly strong growth in savings sales in the second half in the Mass Foundation Cluster which benefited from lower overall cancellation rates, higher average premiums, improved adviser productivity and significant improvement in the direct channel sales performance.

Retail Affluent sales growth was driven by Max Investments savings products, experiencing 21% and 31% growth for Life and LISP wrappers respectively in 2010, following the stabilisation of the economic outlook. Greenlight experienced a lower than expected growth of 6% over 2009 in some measure due to increased turnover of the Retail Affluent sales force. Corporate sales increased by 26% in 2010 - driven primarily by savings sales in the umbrella market, where the Evergreen umbrella fund grew its membership by two thirds to just over 56,000. Corporate risk sales grew strongly due to our success in selling a number of new policies to large schemes in this highly competitive market. Corporate sales have more than doubled since 2008 due to innovative product introductions.

Single premium sales

Single premium sales decreased by 2% relative to 2009, due mainly to lower institutional flows. Retail Affluent achieved strong Investment Frontiers Fixed Bond sales in the first half and an increase in new contracts issued to clients with unclaimed maturities. Annuity sales declined by 16%, driven by lower CPI-linked annuity sales in the Corporate segment as very few annuity tenders floated in 2010 were concluded. With-profit annuity sales did show a marked improvement, increasing by 48% as we continued to lead in this market segment. Retail Affluent annuity sales stabilised in the fourth quarter, following improvements in annuity rates, to end marginally below the 2009 level.

Rest of Emerging Markets

Namibian regular premium sales in the Retail Mass and Retail Affluent segments increased by 6% and 5% respectively, mainly as a result of solid sales growth from tied agents despite difficult economic conditions. Corporate segment regular premium sales decreased by 14% due to lower Orion sales volumes. Single premium sales decreased by 10%, with lower new business inflows from both Retail Affluent and Corporate businesses.

Sales growth of 36% in Mexico was largely driven by the introduction of a minimum premium for the regular premium savings product in the first half of 2010, implemented as a consequence of working closely with South Africa. We introduced a Retail Mass distribution team in December. We will continue to grow this team in the coming months and its pipeline is very promising. Included in the 2009 comparative is R28 million APE relating to the Chilean business which was sold in 2009.

APE sales in China increased by 77% from CNY92 million in 2009 to CNY163 million in 2010, despite poor sales during the first half. The significant improvement in the second half is mainly due to increased management focus on sales, supported by execution of our joint venture's product and channel diversification strategy (new bank, broker and telemarketing products were launched during the second half). The reopening of the Bank of China distribution channel in Beijing (with the assistance of our JV partner), following a three-month suspension of sales during the first half of 2010, further contributed to this improvement. Sales at our Indian Joint Venture, Kotak Mahindra Old Mutual Life Insurance, increased by 6% compared to 2009.

A more detailed analysis of sales by segment is included in the Financial Disclosure Supplement, available at www.oldmutual.com. 

Unit Trust Sales

Unit trust / mutual fund sales summary

New business (Rm)	2010	2009	+/-%
OMSA	21,452	18,384	17%
Rest of Africa	5,360	4,546	18%
New Markets	14,676	13,491	9%
Total Emerging Markets	41,488	36,421	14%

In South Africa, unit trust sales recovered in the second half of 2010 following a weak first half. We achieved growth of 17% from the 2009 level, mainly due to significant flows into Old Mutual Unit Trust money market funds during the third quarter and improved flows into OMIGSA's Marriott affiliate following revised asset allocations.

In the rest of Emerging Markets, unit trust sales also performed well. Namibian sales increased by 18% to R5.4 billion following strong inflows from institutional and corporate clients as a result of more competitive investment returns. Unit trust sales in Mexico and Colombia (COLMEX) were 9% ahead of the prior year in rand (25% in US$), with strong growth in Colombia resulting from a successful marketing campaign and stronger relationships with corporate and institutional customers. We increased productivity, with greater sales from fewer advisers. Mexico benefited from a large scheme acquired in September 2010 and improved performance in both fixed income and equity portfolios.

Value of new business and margins

The value of new business increased by 14% to R972 million, with a strengthening performance during the course of the year. The APE margin increased from 16% to 18% due to a higher proportion of sales of higher-margin smoothed-bonus and with-profit annuities in OMSA's Corporate business and Investment Frontier Fixed Bonds in Retail Affluent.

MCEV results

Operating MCEV earnings (post-tax) increased by 39% from the 2009 level. This was mainly due to positive experience variances and operating assumption changes in 2010, compared to negative variances in 2009. The improvement in experience variances is mainly due to an improvement in persistency, partly due to the 2009 assumption changes, and partly because management actions improved persistency. These were partially offset by a significant decrease in the expected existing business contribution due to the reduction in 1 year swap yields during 2009.

In addition to the effects above, other significant movements affecting the closing MCEV include a large positive impact from economic variances due to a combination of better than assumed equity returns and the effect of the changes in the shape of the swap yield curve. This was partially offset by modelling enhancements to the economic scenario generator used to calculate the investment guarantee reserve, which caused a decrease in the margin (buffer) held to protect against future market volatility, resulting in less value being released as profits in the future. The net impact of these resulted in a growth in MCEV of 16% over 2010.

Net client cash flow

NCCF for the year was R0.2 billion, a significant improvement on 2009 outflows of R20.5 billion.

South African NCCF benefited from significantly lower PIC outflows of R5.1 billion (R16.2 billion in 2009), improved inflows across a number of OMIGSA boutiques (mainly Electus and Futuregrowth), improved net flows in retail businesses and lower outflows in Corporate. Excluding PIC outflows, OMSA's NCCF for the second half of 2010 was positive R1.8 billion compared to negative R6.3 billion in the second half of 2009. Further PIC outflows are expected in 2011.

Overall, OMIGSA investment performance (over three years) was average, with satisfactory performance in specialist areas contrasted against mixed performance in our balanced capabilities.

The rest of our Emerging Markets business delivered R7.6 billion in NCCF. NCCF in Colombia and Mexico increased by 12% from R4.3 billion in 2009 to R4.8 billion in 2010. The Colombian business attracted new customers within targeted segments, experiencing lower surrenders on core products and improved sales of Retail voluntary products. In Namibia, NCCF increased by R1.0 billion to R1.4 billion due to improved unit trust inflows and R672 million inflows from the rebalancing of the Government Institutions Pension Fund portfolios.

Funds under management

FUM increased by 13% to R586 billion as a result of higher market levels and overall neutral NCCF for the year. Of the total, R498 billion (2009: R449 billion) is in South Africa.

Outlook

We have confidence in the underlying performance of the business, despite the low investment return assumptions in 2011 and mark-to-market gains recorded in the asset management results in 2010. We will continue to strive for a balance that combines strong risk management and governance with a culture that encourages innovation, across our four main strategic themes:

·      Continuing to invest in our Emerging Market business

·      Improving OMIGSA's investment performance and value creation for customers

·      Putting the customer at the centre of our business

·      Enhancing our high-performance culture and further developing our Emerging Markets management team

Growing our sales force remains a priority, as does promoting a savings culture in Emerging Markets, designing and adapting products that are relevant to a wide range of customers, and providing easier access to financial services for our customers across our businesses.

With these strategies in place we are well positioned to optimise business opportunities in 2011 and further strengthen a highly successful Emerging Markets business.

Long-Term Savings: Nordic

Improved profitability, higher funds under management and strong APE margin

Highlights (SEKm)	2010	2009	% Change
Adjusted operating profit (IFRS basis, pre-tax)	1,227	737	66%
Return on local equity*	11%	12%
Life assurance sales (APE)	2,238	2,819	(21%)
Unit trust/mutual fund sales	6,466	4,708	37%
PVNBP	12,292	13,774	(11%)
Value of new business	460	526	(13%)
APE margin	21%	19%
PVNBP margin	3.7%	3.8%
Operating MCEV earnings (covered business, post-tax)	503	965	(48%)
Return on embedded value (covered business, post-tax)	3.3%	8.1%
Highlights (SEKbn)	2010	2009
Net client cash flows (SEKbn)	7.4	11.6	(36%)
Funds under management	145.4	127.2	14%

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

Overview

The economies in the Nordic countries experienced a strong recovery in 2010, with positive GDP growth (estimated at 5.6% in Sweden, 2.0% in Denmark and 2.2% in Norway). The Swedish equity market grew by 23% in 2010.

The Nordic business delivered a strong IFRS AOP result in 2010. With changes in the management team, including a new CEO Mårten Andersson, we are delivering on our key priorities of strengthening distribution power and product offerings, stimulating future NCCF growth, increasing operational efficiency to secure profitable growth, and optimising structures and risk frameworks to unlock value. However, we face a challenging year of change for the business in delivering our 2011 operating sales, efficiency and profitability targets in a rapidly changing business environment.

The Nordic business is making good progress towards the implementation of Solvency II, as a component of the overall Group Solvency II initiative.

Life sales summary

APE sales at SEK2,238 million were down by 21% compared to 2009, following management action in the Swedish Retail segment to close the unprofitable Link Regular product in late 2009. The APE of the Corporate business decreased by 14%, mainly due to slower sales of the highly competitive TPS Regular product. Denmark performed strongly, with product success in the unit-linked and healthcare markets. APE grew by 22% to SEK514 million.

	Gross single premiums			Gross regular premiums			Total APE			Total PVNBP
New business (SEKm)	2010	2009	+/-%	2010	2009	+/-%	2010	2009	+/-%	2010	2009	+/-%
Sweden
Corporate	1,429	1,471	(3%)	1,033	1,221	(15%)	1,176	1,368	(14%)
Retail	3,672	4,288	(14%)	181	601	(70%)	548	1,030	(47%)
Total Sweden	5,101	5,759	(11%)	1,214	1,822	(33%)	1,724	2,398	(28%)	9,001	11,260	(20%)
Denmark
Total Denmark	1,280	547	134%	386	366	5%	514	421	22%	3,291	2,514	31%
Total Nordic	6,381	6,306	1%	1,600	2,188	(27%)	2,238	2,819	(21%)	12,292	13,774	(11%)

Unit trust / mutual fund sales summary

Mutual fund sales of SEK6,466 million were up 37% on 2009. This was driven by improved retail investment activity spurred by rising global equity markets. However, fourth quarter sales showed a decrease compared to the same period in 2009 due to changing product demand and customer behaviour in Skandiabanken.

New business (SEKm)	2010	2009	+/-%
Skandiafonder	2,431	1,510	61%
Skandiabanken	4,035	3,198	26%
Total Nordic	6,466	4,708	37%

IFRS AOP results

The IFRS AOP (pre-tax) increased by 66% to SEK1,227 million compared to 2009. The key driver behind the improvement was higher client funds, which increased fund-based fees and rebates in the long-term business. In particular the unit-linked business performed strongly in the second half. A gain realised from divestment of a private equity holding in the first half contributed profit of SEK126 million.

SEKm	2010	2009	% Change
Long-term business adjusted operating profit	1,016	502	102%
Banking business adjusted operating profit	181	193	(6%)
Asset management adjusted operating profit	30	42	(29%)
Adjusted operating profit (IFRS basis, pre-tax)	1,227	737	66%

The Healthcare business showed a strong turnaround in 2010 as pricing and product changes and underwriting discipline helped stabilise claims costs in the Lifeline business - which delivered AOP of SEK26 million compared to a negative SEK42 million in 2009. The 2010 figure includes divestment costs of SEK20 million for the Lifeline branch in Norway.

Skandiabanken results were below 2009 levels, due mainly to lower net interest income and increased development costs. Skandiabanken Sweden suffered from the exceptionally low base interest rate during the first half, although this increased towards the end of the year. Credit losses remain very low (0.09% in 2010 compared to 0.14% in 2009), reflecting the traditionally low-risk nature of our lending business. Skandiabanken Norway grew its profits, due mainly to higher net interest income.

Value of new business and margins

The value of new business decreased compared to 2009 - driven by lower new sales, negative operating assumption changes for anticipated price pressure in the Corporate segment, and expectations of more adverse persistency in the future. The APE margin increased from 19% to 21% due to a more profitable business mix resulting from a higher proportion of TPS business sales in Sweden and Match product sales in Denmark.

MCEV results

Operating MCEV earnings after tax declined to SEK503 million, due to the negative assumption changes driving the decline in the value of new business. However, total MCEV increased over the year, due mainly to positive client fund performance.

Net client cash flow

NCCF for the year was SEK7.4 billion, a decrease of 36% compared to 2009. This was driven by a combination of higher surrenders (because of higher fund value and an increase in partial surrenders), lower single premium sales and higher paid-ups in the occupational pension business.

Funds under management

FUM were SEK145.4 billion at 31 December 2010, up 14% from the previous year. The increase is mainly due to the positive movement of equity markets.

The investment performance in the Swedish unit-linked portfolio was good in the fourth quarter, and our average client enjoyed investment performance of 6.2% for the quarter and 10.9% for the year. Clients have generally increased their risk exposure, with the majority of all net investments being allocated to Swedish, Asian and Emerging Markets equity funds. Fund performance has been strong over the 12-month period, with 63% of our funds performing above average compared to their peers.

Outlook

The economic outlook for 2011 is positive, with forecast GDP growth of over 3% in Sweden and Norway and around 2% in Denmark, and public spending is under control. We believe household incomes will increase, that the debate over credit expansion is turning the emphasis towards savings, and increased activity in the equity market is attracting inflows. As a result of this, the Nordic savings market is expected to grow despite some ongoing concerns around the continued high level of unemployment. The competitive environment will continue to be challenging, with competition pushing down fee levels. The market is heading towards further fragmentation into two main segments: the advised market, with high levels of added value from financial advisers, and the 'self-service' market.

Management action continues to focus on improved sales, healthy margins over the long-term, reductions in the cost base, and improvement of the distribution and product offerings to enhance NCCF. We delivered cost savings of £2.5 million in 2010.  In 2011, cost reduction activity will increase and we estimate restructuring costs of £30 million in the year.

Long-Term Savings: Retail Europe

Foundations laid for further development of the business

Highlights (€m)	2010	2009	% Change
Adjusted operating profit (IFRS basis) (pre-tax)	60	25	140%
Return on local equity*	20%	9%
Life assurance sales (APE)	80	75	7%
Unit trust/mutual fund sales	27	27	-
PVNBP	597	603	(1%)
Value of new business	9	(6)	150%
APE margin	11%	(8%)	-
PVNBP margin	1.4%	(1.0%)
Operating MCEV earnings (covered business, post-tax)	77	(49)	157%
Return on embedded value (covered business, post-tax)	12.8%	(7.9%)
Highlights (€bn)	2010	2009	% Change
Net client cash flows	0.5	0.6	(17%)
Funds under management	5.8	4.7	23%

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

Overview

GDP growth improved in all our markets throughout 2010 following government stimulus packages and better conditions in export markets. Although labour markets improved in Germany and Switzerland, unemployment in Austria and Poland increased slightly. Equity markets rebounded from their 2009 lows, with the German DAX index posting a 2010 gain of 16%. Our customers continued to demand primarily guaranteed products and IFAs still view unit-linked policies with caution, preferring traditional life policies.

In the light of these challenges, Retail Europe's performance in 2010 has been very positive. Our sales improved on 2009 levels, primarily driven by Germany and Poland, we continued the formation of the Retail Europe organisation, and we reduced operating costs.

In addition to our sales and marketing activities, which were focused on the end customer, we also developed initiatives to maintain and grow relationships with our existing distribution partners. These initiatives, underpinned by strong cost containment, ensured significant improvement in our IFRS, MCEV and value of new business, with IFRS profits more than doubling. The transfer of our IT and client administration functions to South Africa continues, and our office in South Africa was officially opened in December 2010.

Although the Retail Europe business expects to be a Standard Formula entity under Solvency II, we have made excellent progress as part of the Group iCRaFT programme in ensuring that all of our processes and governance structures will be Solvency II compliant.

Life sales summary

APE sales reached €80 million, an increase of 7% compared to 2009. Sales in Poland increased markedly, while Austria and Switzerland showed a slight decline. Although the unit-linked market in Germany has declined slightly, we increased our share of this market from 1.9% in the fourth quarter of 2009 to 2.2% in the fourth quarter of 2010.

	Gross Single Premiums			Gross Regular Premiums			Total APE			Total PVNBP
New business (€m)	2010	2009	+/-%	2010	2009	+/-%	2010	2009	+/-%	2010	2009	+/-%
Germany	31	24	29%	29	27	7%	32	30	7%	278	260	7%
Poland	21	14	50%	18	12	50%	20	14	43%	114	87	31%
Austria	7	6	17%	17	19	(11%)	18	19	(5%)	109	142	(23%)
Switzerland	14	15	(7%)	9	11	(18%)	10	12	(17%)	96	114	(16%)
Total Retail Europe	73	59	24%	73	69	6%	80	75	7%	597	603	(1%)

The main driver of increased sales was new product launches. In Germany we launched the new single premium Investmentpolice product towards the end of the year, combining the tax benefits of a unit-linked contract with the transparency of a pure investment contract. In Poland we launched a new regular premium product, and in Switzerland we launched Easy Combi. All these launches were successful and we expect their impact to continue in 2011. We also made concerted efforts to improve our distributor relationships through marketing campaigns designed to support our partners during these difficult times.

IFRS AOP results

IFRS AOP has increased significantly to €60 million, due to improved results in all countries. The main factors were lower administration expenses and higher fees - driven by higher fund-based fees resulting from improved equity markets.

Net client cash flow

NCCF was €465 million for the year. The decline of €86 million on 2009 reflected the increase in fund values of surrenders due to positive equity markets, although persistency levels were broadly stable year-on-year.

Funds under management

FUM of €5.8 billion at 31 December 2010 reflected a rise of 23% compared to 2009, largely driven by positive stock market performance.

Value of new business and margins

The value of new business increased by €15 million to €9 million, with a PVNBP margin for the year of 1.4% and an APE margin of 11%. The main reasons for the improvement were higher new sales and successful expense management.

MCEV results

The operating MCEV earnings after tax increased by over €100 million to €77 million compared to 2009, driven by positive experience variances and positive assumption changes for rebates and persistency.

Outlook

We anticipate that macro-economic factors will continue to have a significant impact on our markets in 2011. The development of equity and bond markets will continue to be the key to restoring consumer confidence after the financial crisis. Our customers will also be impacted by unemployment levels and their own sense of job security. Ongoing Solvency II developments and the low interest rate environment will also provide challenges for traditional insurers. While this should be positive for the unit-linked market, it may intensify competition.

Our focus in 2011 is to extend our product range and distribution through growth initiatives in Germany and Poland. At the same time we will maintain our focus on capital efficiency and cost containment through our consolidated base in Berlin and our operations in South Africa. We will incur further implementation costs for outsourcing the administration and IT support teams to South Africa but will gain scope for operational leverage in due course.

Long-Term Savings: Wealth Management

A very positive year for Wealth Management

Highlights (£m)	2010	2009	% Change
Adjusted operating profit (IFRS basis, pre-tax)	197	106	86%
Return on local equity*	14%	8%
Life assurance sales (APE)	734	617	19%
Unit trust/mutual fund sales	4,507	3,210	40%
PVNBP	6,380	5,042	27%
Value of new business (post-tax)	66	49	35%
APE margin	9%	8%
PVNBP margin	1.0%	1.0%
Operating MCEV earnings (covered business, post-tax)	112	(4)
Return on embedded value (covered business, post-tax)	6.1%	(0.3%)
Highlights (£bn)	2010	2009	% Change
Net client cash flows (£bn)	3.9	2.5	56%
Funds under management	55.9	46.9	19%

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

Overview

Wealth Management enjoyed a very positive year in 2010. We achieved significant year-on-year sales growth, margins improved and the cost reduction programme delivered £35 million of run-rate savings which contributed to improved profitability. The FTSE100 grew by 9% during the year, contributing to continued positive investor sentiment which in turn led to strong growth in FUM across our markets.

Sales grew across the business, particularly in the UK and Continental Europe. We continue to see a rapid shift in the UK towards both platform business with an insurance wrapper and mutual fund products. Although we do not target growth in market share as a KPI, Skandia UK's market share continued to grow in the third quarter of 2010, to 7.4% across all industry channels compared to 6.4% in the fourth quarter of 2009, suggesting the increased importance of the platform model. This is a record for Skandia in the UK and compares to a range of 3.5% to 5.5% over 2001-2007. The scale of our UK Platform, and our investment to deliver reliability and flexibility, position us ideally to lead and benefit from this industry shift; we are actively looking at how to further enhance our platform offering and rationalise our suite of products over the coming year. We are making good progress in building the Wealth Management operations and systems on a single operating model. We have also made excellent progress in implementing our Solvency II readiness programme, in conjunction with the Group-led iCRaFT initiative.

Throughout 2010, SIG's highly successful Spectrum range of risk-targeted funds has been launched on all the UK's major financial adviser platforms. The FUM of Spectrum exceeded the £750 million mark, and this range has now been successfully exported to Sweden as the Skala range.

Life covered sales summary

APE sales were £734 million, a 19% increase on 2009. This is mainly attributable to sales on the UK and in Continental Europe, which improved by 28% (£76 million) and 50% (£52 million) respectively compared to 2009.

	Gross single premiums			Gross regular premiums			Total APE			Total PVNBP
New business (£m)	2010	2009	+/-%	2010	2009	+/-%	2010	2009	+/-%	2010	2009	+/-%
UK
Pensions	2,021	1,452	39%	71	70	1%	273	216	26%
Bonds	597	473	26%	-	-		60	47	28%
Protection	-	-		10	8	25%	10	8	25%
Savings	-	-		9	5	80%	9	5	80%
Total UK	2,618	1,925	36%	90	83	8%	352	276	28%	3,023	2,289	32%
International
Unit-linked	324	190	71%	44	63	(30%)	77	83	(7%)
Bonds	1,253	1,154	9%	23	39	(41%)	148	153	(3%)
Total International	1,577	1,344	17%	67	102	(34%)	225	236	(5%)	1,826	1,741	5%
Continental Europe
Unit-linked	1,490	971	53%	9	6	50%	157	105	50%	1,531	1,012	51%
Total Wealth Management	5,685	4,240	34%	166	191	(13%)	734	617	19%	6,380	5,042	27%

Unit trust / mutual fund sales summary

New business (£m)	2010	2009	+/-%
UK	3,256	2,090	56%
International	1,228	1,100	12%
Continental Europe	23	20	15%
Total Wealth Management	4,507	3,210	40%

The strong UK Platform performance reflects the continued conversion of IFAs to platform business and particularly strong sales during the first half in the lead-up to the end of the tax year. APE sales of £239 million were up £100 million on 2009. Second half volume growth decreased, with re-registering activity slowing and a greater impact from the UK holiday season. The majority of the mutual fund sales growth is from the platform, where buoyant markets and increased ISA allowances made positive contributions in 2010 and late 2009. Gross inflows onto the platform were £5.2 billion in 2010 (2009:£3.3 billion) - an indicator of our proposition's success.

Continental Europe APE sales volumes of £157 million were strongly ahead of 2009's £105 million. Italy has been the main contributor to increased Europe sales, with very high sales earlier in the year partially driven by changes in tax legislation. The period covered by these tax changes has now expired, and volume growth has returned to normal levels as we continue to make progress through good distributor relationships.

APE sales volumes of £225 million in the offshore International market were 5% lower than the £236 million achieved in 2009, impacted by a managed decline in regular premium sales in Finland as a result of legislation changes in 2009.

The UK Legacy business APE sales volumes of £113 million were down by £24 million compared to 2009, due to a shift in market sentiment towards platform offers. Following a review of the legacy products, we decided to close some legacy products to new business.

IFRS AOP results

IFRS AOP (pre-tax) increased by 86% to £197 million - primarily due to higher FUM, which provided a healthy boost to returns on equity because of the operating leverage in the business. FUM growth remains strongly positive, driven by NCCF and market growth.

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

With continued equity and bond market growth, the UK Life Companies have moved into a full XSI tax position. This raises the effective tax rate because it means that only a relatively small proportion of the Life dividend income is treated as belonging to the shareholder. This has increased the overall effective tax rate for Wealth Management to 22% in 2010 (2009: 19%)

Value of new business and margins

The value of new business increased by £17 million to £66 million due to strong sales in UK Platform and Continental Europe combined with operating assumption changes at year-end 2010 across all markets in Wealth Management. This was partially offset by economic assumption changes in UK and Continental Europe (as a result of decreased assumed growth rates and increased future inflation) and the shift from UK Legacy to UK Platform offerings. 

2010 PVNBP margin was level with 2009 at 1.0%, as growth in volumes and cost reductions were fully offset by the shift to the UK Platform offering, the decline in regular premium business sales and higher acquisition expenses in International.

MCEV results

Covered business adjusted operating MCEV post-tax earnings increased by £116 million to £112 million. 2009 was significantly impacted by operating assumption changes reflecting surrender experience in International and UK Legacy. In 2010 VNB was higher and overall we saw a significant improvement in experience effects, especially persistency and rebates. However, persistency has worsened on the UK Legacy pension business as the market anticipates the implementation of the Retail Distribution Review. This has resulted in some product closures and consequently the MCEV assumptions have been strengthened. Planned return on MCEV was lower than in 2009 as a result of the reduction in the one-year yield on risk-free investments.

Net client cash flow

NCCF for the year was £3.9 billion - up 56% on 2009, driven by strong contributions from the UK Platform and Italy, which outweighed surrenders in the UK Legacy book.

Funds under management

FUM grew 19% to £55.9 billion, driven by strong NCCF and the positive market movements.

Outlook

Our outlook for 2011 is optimistic, based on continuing positive investor sentiment. So far 2011 sales are in line with our expectations but below those of the prior year which included the one-off positive impact of the Italian tax shield and particularly significant UK Platform sales in the build up to the 2010 tax year-end. These were helped by April 2010 changes in pension rules coupled with rising investor confidence at the time of the 2010 ISA season.

We anticipate continued strong support for the platform model in all our markets and the shift in the UK market towards a simplified investment and pension product suite. Following the closure of a number of our UK Legacy products during 2010, we have put retention strategies in place for this part of the business - anticipating that we will continue to see net client outflows from this book of business in the build-up to implementation in 2013 of the changes resulting from the Retail Distribution Review. We expect final clarification of the review in a Policy Statement during the first half of 2011. We believe that we are well-placed for the RDR changes since a large proportion of our new business is already written on the basis of client-agreed adviser remuneration. In addition, we are considering plans to introduce a fully unbundled charging structure, under which we will pass on rebates to the customer in advance of December 2012.

Our focus on cost reduction will continue and we remain confident that we will meet our 2012 expense and ROE targets.

Nedbank Group (Nedbank)

Solid earnings growth

Highlights (Rm)	2010	2009	% Change
Adjusted operating profit (IFRS basis, pre-tax)	6,799	6,192	10%
Headline earnings**	4,900	4,277	15%
Net interest income**	16,608	16,306	2%
Non-interest revenue**	13,215	11,906	11%
Net interest margin**	3.35%	3.39%
Credit loss ratio**	1.36%	1.52%
Cost to income ratio**	55.7%	53.5%
ROE**	11.8%	11.8%
ROE (excluding goodwill)**	13.4%	13.4%
Core Tier 1 ratio	10.1%	9.9%
As reported (£m)	2010	2009	% Change
Adjusted operating profit (IFRS basis) (pre-tax)	601	470	28%

**     As reported by Nedbank in its report to shareholders as at 31 December 2010

        Certain of the Nedbank's reporting ratio calculations have been adjusted. The ratios for ROE have been restated with the denominator changing from simple average to daily average for equity and total asset values, respectively. The calculation of the credit loss ratio has been changed from simple -average advances to daily-average banking advances (thereby excluding trading advances from the calculation). Comparatives have been restated accordingly.

The full text of Nedbank's results for the year ended 31 December 2010, released on 28 February 2011, can be accessed on Nedbank's website http://www.nedbankgroup.co.za/financial/2010AnnualResults/downloads/NedbankGroup.pdf. The following is an extract:

Banking environment

"Real gross domestic product (GDP) in South Africa grew by 2.8% in 2010 compared with a decline of 1.7% in 2009. The local economy had a strong start to the year, primarily driven by improved global demand for commodities and a rebound in manufacturing production off the depressed levels of 2009.

Economic activity was also boosted by strong infrastructural spending ahead of the FIFA 2010 World Cup and by the event itself, with consumer spending rising steadily for most of the year. However, fixed investment by the private sector contracted for the second year off the elevated levels seen in 2008.

Growth in both the emerging and some parts of the developed world surprised on the upside, underpinned by China's economic strength and continued demand for commodities and capital goods. Massive liquidity injections by major central banks and historically low interest rates helped to stimulate economic growth further, particularly in emerging economies. In contrast, the underlying economic and financial environment remained fragile in the developed world, with fiscal difficulties in parts of Europe and America, continued weakness in credit markets, limited employment growth and inflationary concerns returning in emerging economies.

Household finances improved in South Africa as debt started to decrease and interest rates eased to the lowest levels in 36 years. The recovery in the credit cycle has proved to be more modest compared with previous cycles. Household demand for credit was contained by the consumer debt burden remaining relatively high, increased regulatory requirements, policy uncertainty and employment growth only resuming late in the year. Against this background the ratio of household debt to disposable income declined marginally to 78.2% from just over 80% at the end of 2009. At the same time debt service costs decreased to 7.5%, the lowest level since June 2006, and are now at a level that is more conducive to improving economic growth in the consumer sector.

In the corporate sector excess capacity and uncertainty over the sustainability of the local and global recovery limited spending. Government fixed-investment spending, although continuing to contract, emerged as the main foundation for growth.

Review of results

Nedbank showed solid earnings growth in a challenging economic environment. After a strong fourth quarter Nedbank finished the year with earnings marginally ahead of management's expectations set out in the third- quarter trading update. Headline earnings increased by 14.6% from R4,277 million to R4,900 million. Diluted headline earnings per share increased by 8.7% from 983 cents to 1,069 cents, slightly above the forecast range of 0% to 8% provided in the third-quarter trading update. Diluted earnings per share (DEPS) decreased by 5.3% from 1,109 cents to 1,050 cents. As previously reported, 2009 DEPS included a once-off International Financial Reporting Standards (IFRS) revaluation gain of R547 million (after taxation) from the acquisition and consolidation of the Nedbank Wealth joint ventures.

Nedbank recorded a return on average ordinary shareholders' equity (ROE), excluding goodwill, of 13.4% and a ROE of 11.8%.

Nedbank maintained its well-capitalised balance sheet with core Tier 1 capital at 10.1% (2009: 9.9%), while advances grew by 5.5%, with market share gains in most lending classes aside from home loans.

The net asset value per share grew by 8.0% from 9,100 cents in December 2009 to 9,831 cents in December 2010. This is a pleasing result given the increase in the average number of shares in issue following the acquisition of the joint ventures from Old Mutual and scrip dividend distributions last year.

Financial performance

Net interest income (NII)

NII increased by 1.9% to R16,608 million (2009: R16,306 million) and Nedbank's net interest margin held up well at 3.35% (2009: 3.39%), despite the impact of lower interest rates. Average interest-earning banking assets increased by 3.0% (2009 growth: 9.0%).

Margin compression was less than expected. Margin pressure primarily resulted from a smaller endowment from lower average interest rates and the cost of lengthening the funding profile. This was partially offset by the widening of margins from asset pricing and a change in asset mix, including strong growth in Nedbank's retail motor finance and personal loans businesses, a relative prime/Johannesburg Interbank Agreed Rate (JIBAR) reset benefit as a result of less aggressive interest rate cuts during 2010 compared with 2009, and a decline in the market cost of term liquidity during the last quarter of the year.

Impairments charge on loans and advances

The credit loss ratio on the banking book improved to 1.36% for the period (2009: 1.52% (restated)).

The reduction in the impairments charge was driven mostly by Nedbank Retail, particularly in the secured portfolios that had lagged the recovery in the unsecured portfolios. Lower interest rates and the stabilising of job losses contributed to the retail credit loss ratio improving significantly from 3.17% in 2009 to 2.67%. Nedbank further strengthened its provisioning by reducing certain security assumptions in specific impairments, increasing levels of portfolio provisioning on debt restructures of R97 million and lengthening the bad debt emergence period assumptions within Nedbank Retail home loans at an additional cost of R114 million within portfolio impairments.

The credit portfolios in Nedbank Corporate, Nedbank Business Banking and Nedbank Wealth are of high quality and credit loss ratios remained within or below the respective clusters' through-the-cycle levels. Nedbank Capital impairments increased in the higher-risk private equity portfolio.

Defaulted advances declined by 1.04% to R26,765 million (2009: R27,045 million). Defaulted advances to total advances decreased from its peak of 6.01% in June 2010 to 5.63%. Total impairment provisions increased by 14.6% to R11,226 million (2009: R9,798 million) resulting in strengthened coverage ratios.

Non-interest revenue (NIR)

Nedbank's focus on NIR generated growth across all the clusters. NIR increased 11.0% to R13,215 million (2009: R11,906 million). On a comparable basis NIR growth was 10.5% after adjusting for the acquisitions in 2009 of the Nedbank Wealth joint ventures and before fair-value adjustments. The ratio of NIR to expenses improved to 79.6% (2009: 78.8%).

Core fee and commission income grew strongly by 13.7% (like-for-like growth of 11.2%, adjusting for the Nedbank Wealth joint ventures) through volume growth, new products and new client acquisitions. Nedbank reduced its retail transactional banking charges in 2006 and 2007. Since then price increases have been modest, with 2010 increases in line with inflation, resulting in current banking charges being similar to 2005 levels.

Insurance income grew 39.8% (18.4% on a like-for-like basis, adjusting for the Nedbank Wealth joint ventures) primarily as a result of the provision of insurance on a fast-growing personal loans book as well as the introduction of new products and improved levels of cross-selling.

Trading income increased by 13.9% to R2,096 million (2009: R1,841 million). In 2009 interest rates decreased at a rapid pace and created favourable trading conditions. Low volatility in the first half of 2010 resulted in difficult conditions for global markets and continued pressure on foreign exchange volumes and margins. This was offset by improved equity trading in the second half of the year.

Private equity markets remained constrained throughout the year. Listed- property private equity investments showed some modest gains. Overall NIR from the private equity portfolios decreased by 25.0%.

NIR was negatively impacted by R213 million (2009: R6 million profit) over the period as a result of the adverse fair-value adjustments of Nedbank's subordinated debt resulting from the narrowing of credit spreads. Nedbank Corporate also reflected a negative fair-value adjustment of R55 million (2009: R72 million profit) due to a downward movement in the yield curve and related convexity in the fixed-rate advances book and associated interest rate swaps.

Expenses

Nedbank has maintained a strong cost discipline over an extended period, resulting in the increase in expenses remaining below the market guidance given at the beginning of 2010. Expenses grew by 9.9% to R16,598 million (2009: R15,100 million). The increase was partly due to the acquisition of the Nedbank Wealth joint ventures and the consolidation of Merchant Bank of Central Africa. Expenses increased by 8.5% on a comparable basis.

Taxation

The taxation charge (excluding taxation on non-trading and capital items) increased by 10.9% to R1,366 million (2009: R1,232 million) arising from profit growth adjusted for dividend income as a proportion of total income being lower than in 2009, the lower provision for secondary tax on companies, owing to an increase of shareholders (81.5%) who elected to take scrip for the 2009 final dividend distribution (2008 final dividend distribution: 32.0%), and the reduced accounting effect from structured finance transactions that continued to unwind.

The effective tax rate increased marginally from 20.2% to 20.7%.

Non-trading income

Income after taxation from non-trading and capital items decreased to a R89 million loss from a R549 million profit in 2009. The main component of this was an anticipated R34 million writedown on Imperial Bank computer software following the acquisition. The 2009 profit arose from the accounting-related revaluation of BoE (Pty) Limited and Nedgroup Life Assurance Company Limited on the acquisition of the remaining shares in the joint ventures.

Capital

Nedbank's capital adequacy ratios remain well above its internal targets and marginally ahead of December 2009. This resulted from ongoing capital and risk-weighted asset optimisation, a strategic focus on 'managing for value' and a 0.6% increase in capital from higher levels of scrip takeup and other share issues for staff incentives and black economic empowerment (BEE) structures. This growth was offset by the approximately 1.3% negative impact on Nedbank's capital adequacy ratios from the cash acquisition of 49.9% of Imperial Bank and the treatment of capitalised software as an intangible asset rather than as a fixed asset for capital adequacy purposes.

Capital adequacy	FY 2010 ratio	FY 2009 ratio	Target range	Regulatory minimum
Core Tier 1 ratio	10.1%	9.9%	7.5% to 9.0%	5.25%
Tier 1 ratio	11.7%	11.5%	8.5% to 10.0%	7.00%
Total capital ratio	15.0%	14.9%	11.5% to 13.0%	9.75%

*       Capital adequacy ratios include unappropriated profit.

Liquidity

Nedbank' s liquidity position remains sound. Nedbank continues to focus on diversifying its funding base, lengthening its funding profile and maintaining appropriate liquidity buffers. Nedbank increased its long-term funding ratio from increased capital market issuances under the domestic medium-term note programme (R6.23 billion) and also increased the duration in the money market book.  Nedbank's liquidity position is further supported by a strong loan-to-deposit ratio of 97% and a low reliance on interbank and foreign currency funding. Nedbank is able to leverage off its favourable retail, commercial and wholesale deposit mix, which compares well with domestic industry averages.

Loans and advances

Nedbank continued to make good progress in improving asset quality, and active management of the bank's portfolios towards higher-economic-profit businesses resulted in slower asset growth in selected areas. Nedbank grew advances ahead of the industry at 5.5% to R475 billion (2009: R450 billion).

Deposits

Deposits increased by 4.5% to R490 billion (2009: R469 billion). Optimising the mix of the deposit book remains a key focus in reducing the high cost of longer-term and professional funding. This is critical as banks compete more aggressively for lower-cost deposit pools with longer behavioural duration and as they start to take cognisance of the possible Basel III liquidity ratios. Low interest rates, coupled with low domestic savings levels and the deleveraging of consumers, led to modest growth in retail deposits during 2010. Relatively higher deposit growth in the wholesale sector indicated increasing working capital and available capacity among corporates. Throughout the year demand for higher-yielding negotiable certificates of deposit remained strong within the professional funds and corporate markets.

Outlook

Lower domestic interest rates and rising levels of income should boost consumer spending. Together with improving global demand, this is expected to increase confidence levels and lead to better consumer demand and capital formation in 2011 and further momentum in 2012.

Retail banking credit growth should fare better as household credit demand improves, house prices edge higher and impairments moderate. Corporate markets are expected to show modest improvement, while the small and medium enterprise (SME) market is likely to remain under pressure until fixed-investment activity improves.

Government spending should continue to underpin growth, although this is expected to be limited by the reduction in fiscal deficits over the medium term. Government's stronger focus on job creation is also positive and much will depend on the ability to create a more enabling environment for business growth. Key to this will be improvements in the building of infrastructure and a more conducive and certain regulatory and policy environment to reduce the medium-term constraints on economic growth.

Nedbank is well-placed for earnings growth in 2011 and remains on track to meet its medium- to long-term financial targets in 2013. Nedbank will continue to invest to generate sustainable revenue growth, underpinned by ongoing cost optimisation and efficiency improvements. Growing the bank's overall franchise and maintaining momentum on the turnaround in the Retail Cluster, supported by a liquid and well-capitalised balance sheet, are key to delivering sustainable growth.

Margins should widen slightly, given that interest rates are expected to remain unchanged, and hence the negative effect of assets repricing quicker than liabilities out to three months will decrease. In addition, the cost of term liquidity is expected to decline as more expensive deposits mature and as below-trend economic growth continues, albeit at higher levels than last year. Overall advances growth is expected to be in the mid to upper single digits.

Impairments are expected to continue reducing in line with the improved quality of assets supported by asset pricing on new advances that appropriately reflects risk and the related cost of funds. The credit loss ratio is currently expected to decrease but to remain above Nedbank's target range in 2011.

Transactional volumes are expected to increase as the economy improves and Nedbank's focus on growing primary clients is maintained.

Nedbank's medium-term targets remain unchanged."

Mutual & Federal (M&F)

Strong performance following renewed focus

Highlights (Rm)	2010	2009	% Change
Underwriting result	519	140	271%
Long-term investment return (LTIR)	639	791	(19%)
Restructuring costs	(8)	(13)	38%
Income from associates	12	-	-
Adjusted operating profit (IFRS basis, pre-tax)	1,162	918	27%
Gross premiums	8,442	8,456	-
Earned premiums	6,859	6,874	-
Claims ratio	63.8%	68.7%
Combined ratio	92.4%	98.0%
Solvency ratio	73%	56%
Return on equity	19.0%	21.2%
As reported (£m)	2010	2009	% Change
Adjusted operating profit (IFRS basis, pre-tax)	103	70	47%

Overview

Mutual & Federal delivered a very strong underwriting result in 2010, with exceptional performance from the commercial, corporate and credit insurance portfolios assisted by a relatively benign claims environment. As a result of seasonal weather factors our performance in the second half is traditionally stronger than the first half, which is affected by heavy rains. This was particularly marked in 2010, when our performance steadily improved throughout the year after a weak first quarter, also helped by the absence of significant fire claims.

We were pleased to record an improvement in client service in 2010. This was confirmed when we took second place in the Ask Afrika survey on short-term insurance, which assesses customer service standards. The year also marked our first entry into the direct insurance market, with the launch of our iWYZE initiative in May. This has progressed extremely well, although it will continue to require investment in the near term. We are also making good progress in our preparation for Solvency II and its equivalent in South Africa, which is known as Solvency Assessment and Management (or SAM).

Underwriting and IFRS AOP results

Premiums remained flat on 2009 levels, largely as a result of the cancellation in late 2009 and early 2010 of some unprofitable portfolios that had consistently run at claims ratios above 80%. Our claims ratio decreased from 68.7% to 63.8% due to the favourable trading environment and focused management of claims costs.

The improving quality of our book of business, combined with a focus in 2010 on claims costs and improved pricing, allowed the business to deliver an underwriting result of 7.6%. Our operations in Namibia and Botswana continued to generate about 11% of our underwriting result between them.

Our expenses increased by 13% - primarily driven by inflation and profit-related pay, given the improved underwriting result.

Solvency margin

There has been a pleasing improvement in the solvency ratio (the ratio of net assets to net premiums) from 56% to 73%. This reflects the capital generated from the much-improved underwriting result and investment income.

Outlook

In 2011 we will be continue to see the benefits of increased collaboration with OMSA, both in further growth of the iWYZE initiative, and as we identify opportunities for capital optimisation. Under our new Managing Director, Peter Todd, we have begun delivering our three-year strategic step-change plan. This aims to enhance profitability by focusing on growth while improving operating efficiencies across the business. However, the benign local claims environment in 2010 is likely to see a softening in rates in 2011, which will put some pressure on underwriting margins.

While we will continue to maintain our focus on the broker market and look to grow our share of this channel through improved systems and service, 2011 will see a growing contribution from alternative channels. Besides the expected growth from iWYZE, we will increase our focus on niche businesses through alternative channels.

Following the successful buy-out of minorities in 2010, the business is well positioned to extract more value from full membership of the Old Mutual Group. Coupled with a strong balance sheet and a greater focus on building new distribution channels, this should see us grow revenue while improving our expense ratios.

US Asset Management

Profits up 4% on higher average FUM, improving investment performance as markets began returning to fundamentals

Highlights ($m)		2010	2009	% Change
Adjusted operating profit (IFRS basis, pre-tax)		135	130	4%
Return on Capital		4.2%	4.1%
Operating margin		18%	18%
Net client cash flows ($bn)		(18.0)	(7.1)	(254%)
Funds under management ($bn)	259		261		(1%)
As reported (£m)		2010	2009	% Change
Adjusted operating profit (IFRS basis, pre-tax)		87	83	5%

Overview

USAM's global, multi-boutique business comprises 18 distinct investment affiliates and over 160 investment strategies. FUM across all affiliates totalled $259 billion, of which $217 billion (84%) was in long-term investment products and $42 billion (16%) was in short-term products. Long-term investment products were broadly diversified across equities ($127 billion, 49%), fixed income ($60 billion, 23%) and alternative investments ($29 billion, 11%). Short-term products comprised stable value funds ($41 billion, 16%) and cash ($1 billion, <1%). The business continues to invest in growth by expanding investment capabilities and growing its global client base through international distribution capabilities.

USAM profits improved 4% over 2009 due primarily to higher average FUM, although year-end FUM were flat versus 2009. Gains from market appreciation and net inflows into fixed income products were offset by net outflows from equity, alternative and stable value products. Investment performance improved during the year, particularly in the second half, as markets showed signs of returning to more traditional, fundamental factors and rewarding disciplined investment styles accordingly.

In February 2011 we announced the appointment of Peter Bain as USAM's new Chief Executive Officer. Peter has over two decades of experience in leading and advising asset management firms, and his appointment is a key milestone in the firm's growth plans.

Investment performance

Investment performance improved during the year across global equity, non-US equity and fixed income products. US equity strategies underperformed for the year as a whole, but showed improvement in the fourth quarter as the return to fundamentals began to appear in US markets. Stable value products underperformed due to the impact of prior years' underperformance in current-year returns.

In aggregate, 51% of FUM across all strategies outperformed their respective benchmarks for the year, while 38% and 67% of FUM outperformed over three- and five-year time periods. This compared to 51%, 58% and 61% in 2009. Excluding short-term products, 60%, 45% and 60% of long-term assets outperformed over one-, three- and five-year periods. Management remains confident that its multi-boutique model, which encourages investment conviction and retention of investment talent, will deliver investment outperformance over full market cycles.

IFRS AOP results

IFRS adjusted operating profit increased 4% or $5 million to $135 million in 2010, benefiting from higher average FUM. Management fees were up $50 million or 8%, while other revenues were flat. Performance fees increased during the second half compared to the second half of 2009, reflecting recent improvements in investment performance.

Operating margin and cost management

Operating margin of 18% was consistent with 2009, although we realised annual expense savings of $23 million through restructuring actions undertaken in 2009.

Total expenses were 8% or $46 million higher than 2009. The increase was driven by higher variable compensation, in line with revenue growth, one-time charges associated with acceleration of the DAC write-off given net cash outflows in 2010, and equity plan implementations.

Net client cash flows

Net client cash outflows totalled $18 billion (2009: $7.1 billion) as net inflows into fixed income products were offset by outflows in equity, alternative and stable value products. Similar trends were observed in our US peer group. Net outflows were primarily driven by rebalancing-related withdrawals from continuing clients as both institutions and individuals continued to favour fixed income over equity investments during the year. The bulk of the net outflows were concentrated in three affiliates and were weighted towards the second half, traditionally a peak period for mandate changes. Gross inflows from new accounts exceeded $10 billion as all 18 USAM affiliates won new business during the year, with fixed income and international equity products attracting the bulk of new investment.

Funds under management

FUM were $259 billion at the year-end (2009: $261 billion). The USAM business is broadly diversified, with for example international and global equity products accounting for 22% of the FUM. Non-US clients accounted for 29% of FUM. The addition of Echo Point Investment Management in October brought $1.7 billion in FUM, while the sale of Thomson Horstmann & Bryant reduced FUM by $1.7 billion. The restructuring of the discontinued US Life business portfolio resulted in the transfer of $5.4 billion of FUM from USAM during the year.

Affiliate developments

Echo Point Investment Management began operation as a USAM affiliate on 1 October 2010, launching with $1.7 billion in FUM in international growth equities. During the fourth quarter the firm received additional investment commitments from two current clients as it demonstrated its ability to operate effectively in a multi-boutique structure.

Product and distribution developments

Barrow, Hanley, Mewhinney & Straus surpassed $1.9 billion FUM in its international value product as investors bought into this non-US equity application of the firm's proven expertise in value investing. The firm also launched a global equity product in the fourth quarter, and with a mandate from Old Mutual's South African business, the product now has $1.0 billion in FUM.

Larch Lane Advisors launched the Alpha Evolution Fund, a fund of hedge funds that leverages the firm's expertise in early-stage hedge funds by identifying and investing in smaller and/or newer funds. Target investors for Alpha Evolution are primarily institutions that are unable to commit to a long lock-up of their capital because of liquidity guidelines, but want the potential benefits of an investment in early-stage hedge funds.

USAM affiliates launched several new UCITS vehicles in 2010 to tap global investors' growing preference for registered pooled vehicles. Rogge Global Partners (Global High Yield), Acadian Asset Management (Emerging Market Equities) and Heitman (Global REIT) each introduced new UCITS products that expand the global marketability of their respective investment capabilities.

Our global distribution continued to expand, with the addition of new staff and the opening of an office in the Middle East. We continue to focus our US retail distribution efforts on professional buyer channels that value the institutional orientation of USAM affiliates.

Outlook

During the recent period of market dislocation, investors and their advisers increased their focus on macro investment performance rather than investing on a fundamentals basis. Many USAM affiliates found it challenging to deliver superior performance in these conditions, and this contributed to net cash outflows. However, 2010 saw the beginning of a return to fundamentals-based investing and our investment performance improved as a result. If US markets maintain this trend in 2011, we are well positioned to achieve further improvements in investment performance and, over time, a reversal of net client cash outflows. In an environment where investors begin to increase their risk appetite and migrate towards equities, our extensive equity product portfolio is positioned to capture its share of growing flows. The growing attractiveness of non-US equity exposure in both investment allocation and equity management should favour the USAM business model and strategy.

 

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