Preliminary Results Part 1

RNS Number : 4108I

Old Mutual PLC

11 March 2010

 



 

11 March 2010

Old Mutual plc Preliminary Results for the year ended 31 December 2009 and Strategy Update

Focus on Long-Term Value Creation

Financial Summary	2009	2008
Adjusted operating profit before tax (IFRS basis)*	£1,170m	£1,136m
Adjusted operating earnings per share (IFRS basis)**	12.1p	14.9p
Adjusted MCEV per share	171.0p	117.6p
IFRS book value per share	147p	134p
Funds under management	£285bn	£265bn
Final dividend	1.5p	-

Strong performance in challenging year

- Substantial progress in delivering against the five strategic priorities set last year

- Positive second half sales momentum with fourth quarter life APE sales up 29%, strongest quarter for the LTS business for at least 2 years

- Long-Term Savings (LTS): IFRS pre-tax AOP up 52% to £685 million (2008: £452 million) reflecting turnaround in US Life

- Nedbank: resilient performance in tough market and improved capital strength

- US Asset Management: funds under management at 31 December 2009 up 9% to $261 billion

- FGD surplus at 31 December 2009 increased to £1.5 billion (31 December 2008: £0.7 billion)

- Increase in IFRS book value and MCEV per share during the year

- Return to dividend payments - Board recommending 1.5p final dividend for 2009 with scrip alternative

Clear strategy focused on building a long-term savings, protection and investment group

- Anticipated partial IPO of US Asset Management to fund growth, enhance market profile and provide valuation visibility

- Group-wide cost saving target of £100 million per annum by the end of 2012; further cost and revenue synergies identified

- Specific cost saving and return on equity targets for LTS businesses; overall LTS return on equity target of 16%-18% by the end of 2012

- Further rationalisation planned, including exiting markets with sub-scale operations or no prospect of meeting 15% RoE hurdle

- Reducing exposure to US by exploring disposal of US Life business following completion of turnaround

- Proceeds from the rationalisation and from retained earnings expected to be used to reduce Group debt by at least £1.5 billion

Julian Roberts, Group Chief Executive, commented:

"Our operating results for 2009 are ahead of the previous year despite the highly volatile markets over the period.  We benefited from improved market conditions in the second half, which resulted in greater demand for equity-based products from our clients, but the improvement also reflects our aggressive expense management as part of our drive to improve business performance.  In the fourth quarter we saw especially good sales growth, with the strongest LTS quarterly sales performance for two years.

"During 2009 our priority was to stabilise the business by addressing the issues in US Life and Bermuda and restoring the Group's capital and liquidity positions, while implementing more effective governance and controls.  With substantial improvements in place, we started the process of simplifying our portfolio of businesses and improving our operational performance, while further examining the Group to determine its optimal future shape.  We are today setting out a clear strategy to build a cohesive long-term savings, protection and investment group by leveraging the strength of our capabilities in South Africa and around the world.

"We will rigorously drive performance improvement across all of our businesses and have introduced challenging three-year cost saving and return on equity targets.  We have also identified specific synergy opportunities from our businesses working together.  We anticipate further rationalisation of our activities and will exit markets where we do not have scale or our operations are not capable of achieving a return on equity of 15% over the next three years.  We are exploring the disposal of US Life and anticipate a partial IPO of US Asset Management.  However, we will only execute transactions when markets allow us to maximise value for shareholders.

"We are determined that over the medium to long-term these measured and fully-funded actions will provide considerable value for shareholders.  Together with further growth in assets under management as market conditions continue to improve, these actions are expected to have a significantly positive impact on underlying operating profitability and return on equity.  Accordingly, the Board has every confidence in the Group's prospects, as reflected by the resumption of a dividend."

 

Enquiries

Investor Relations
Patrick Bowes	UK	[phone]
Deward Serfontein	SA	[phone]
Media
Matthew Gregorowski	UK/SA	[phone]
		[phone]
Don Hunter (Finsbury)	UK	[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:

UK (toll-free)	0500 5510 77
US (toll-free)	[phone]
Sweden (toll-free)	0200 8876 51
South Africa (toll-free)	0800 9914 68
International	[phone]

Playback (available until midnight on 25 March 2010), using pass-code 859189:

UK (toll-free)	0800 3581 860
US (toll-free)	[phone]
International	[phone]

Copies of these Preliminary 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 2009 and 2008.

Group Chief Executive's Review

Review of Operations

Introduction

Our operating results for 2009 are ahead of the previous year despite the highly volatile markets over the period. This is largely due to the improvement in market conditions during the second half, which resulted in greater demand for equity-based products from our clients and our drive to improve business performance, including the aggressive expense management programme completed in the US. We had especially good sales growth during the fourth quarter, the strongest quarterly sales performance for the LTS business for at least two years.

During 2009 our priority was to address the issues facing the Group, exacerbated by the global financial crisis. The turnaround in US Life is complete, the business in Bermuda is in run-off, we have built a strong capital and liquidity base and implemented strong central governance and controls. Despite previously announced expectations, we did not need to make any further capital injection in US Life in the early part of this year and do not anticipate any capital injection will be required during 2010.

We have made good progress in the process of simplifying our portfolio of businesses and improving operational performance, with a particular focus on our long-term savings, protection and investment businesses. These represent the heart of the Group and building them is central to our future strategy, which is set out in my Strategy Update below. We are confident that by leveraging our core capabilities and applying them consistently across the Group we will deliver sustainable long-term value for all our stakeholders.

One of the strategic priorities announced in March last year was to strengthen and maintain our capital and liquidity position. I am pleased to report that we now have good balance sheet stability, as demonstrated by a doubling of our FGD surplus to £1.5 billion as at 31 December 2009, from £0.7 billion at the end of 2008, and total liquidity of £1.2 billion. With the Group now in good financial health, we are able to turn our attention to the future.

Long-Term Savings (LTS)

Our LTS division delivered strong results for the year with operating profits up 52% from 2008, largely driven by the turnaround in US Life. Sales were down just 6% for the year and were up 5% in the second half compared to the same period in 2008. Margins improved, and net client cash flows and funds under management grew considerably during the year.

Two further strategic priorities that were announced in March last year were to leverage scale in our long-term savings businesses and to streamline our portfolio of businesses. During the year we integrated our long-term savings businesses into a single division under Paul Hanratty, Chief Executive of LTS. The division was restructured around geographic and customer-related market segments, with a focus on identifying where we could extract costs and generate profitable organic growth through enhancing the customer value proposition.

We sold a number of businesses and exited a number of markets where we lacked scale and where the cost of building scale would not deliver sufficient returns, including Australia, Portugal, Hungary, the Czech Republic and Chile. We also sold Bankhall in the UK and closed our Asia Pacific regional office and our ELAM head office as part of the restructuring.

LTS: Emerging Markets

In South Africa, we have shown good resilience with strong profitability and a continuing high return on equity in very difficult economic conditions. Like-for-like sales on an APE basis were up marginally compared to the prior year. We continued to invest in our distribution capability and, as a result, we grew market share in our core product ranges and are well positioned to benefit from the recovery in consumer confidence.

In Latin America, profits were up 133% in very difficult market conditions and we have developed a new retail mass product in Mexico which will be launched this year. In India, sales were down by 19%, which was better than the industry average and in China, sales were up 19%. Drawing on our South African expertise, we are developing several new products which we believe are highly suitable for these markets, some of which we have already begun selling in India.

Despite South Africa emerging from recession in the third quarter, consumer confidence remains low. However, the outlook for the long-term savings, protection and investment environment is positive given South Africa's low dependence on credit, prudent economic policies, growing emerging black middle class and affluent markets, and improving regulatory frameworks and transparency of financial products. During 2010 we will continue our transition from a traditional life insurer to a modern savings, protection and investment business, while focusing on growing distribution, improving investment performance and service levels, and reducing cost.

LTS: Nordic

Life APE sales were up 8% on 2008 as our retail market continued to demonstrate resilience to the adverse economic environment, partly buoyed by increased direct sales of certain products through Skandiabanken. The recession did have an adverse impact on occupational pension sales in the corporate sector although we saw lower outflows from maturities and surrenders. Mutual fund sales were strong, up 47% on 2008 in line with wider market trends.

All of this contributed to very strong positive net client cash flows representing 13% of opening funds under management. Along with the improvement in equity markets, this helped to boost overall funds under management by 38% to a record level from the position at the end of 2008. Skandia Link in Sweden generated excellent investment returns during 2009 as clients' risk appetite improved, as demonstrated by their increased weighting in equities. Our relationship with Skandia Liv is improving, although normalising the corporate and economic linkages will take time to come to fruition.

We are focused on protecting our improving margins through continued expense management, further growth in sales and new product development, including products designed for direct distribution. We are increasingly focused on our clients' needs and business profitability, while our strong brand, broad product mix and good market position give us excellent competitive advantage. Although the financial markets continue to be volatile, the outlook for the Nordic markets is favourable.

LTS: Retail Europe

The difficult economic environment had a much more marked impact in our Retail Europe countries. Unit-linked markets were considerably weaker as demand for guarantee products increased, resulting in lower than anticipated new business in the second half. Life APE sales were down 34% compared to the prior year, and IFRS profit was adversely affected by a substantial one-off charge in respect of policyholder profit sharing agreement with the regulatory authorities in Germany between 2005 and 2007. The performance of the business improved dramatically in the fourth quarter, with sales up 57% compared to the previous three months, driven particularly by the German and Polish markets.

Overall net client cash flows for the year remained strong compared to 2008, remaining flat against 2008 levels and representing 15% of opening funds under management, driven by improved surrender experience. Funds under management were up 27% on the 2008 year-end position, supported by our asset mix and improved client investment appetite during the second half.

After the change in structure in LTS, we focused on laying the foundations for business improvement and growth. We are developing single premium products in line with growing customer demand and through improved distribution of regular premium products have good prospects for over two-thirds of anticipated sales for 2010. With further product expansion out of South Africa, from which lower cost administration will also be provided for the business, we will now seek to grow market share and sustainable profitability.

LTS: Wealth Management

Again, the volatile markets during 2009 had a considerable impact on customer confidence, although sentiment improved in the second half which helped to grow sales, net client cash inflows and assets under management. Despite the tough first half, net client cash inflows for the year were up 25% and funds under management were up 21% as at 31 December 2009.

In the UK, the transition to our platform-enabled model was evidenced by the 22% increase in non-covered mutual fund business over 2008 versus a 6% decline in covered business, as clients' investment preferences shifted from more traditional life products into mutual funds. On the back of our strong distributor relationships, APE sales in Italy increased significantly as we grew our share of the unit-linked market from 4% to 12%, while in France sales remained steady with good growth in the fourth quarter. Total Wealth Management APE sales for the fourth quarter increased 38% over the previous quarter.

We remain the leading UK platform provider with a market share of 33% of total assets as at the end of 2009. We have launched a significant operational efficiency drive as well as seeking to enhance our new product offerings using the skill base in South Africa, where we develop our own technology. This is a distinct advantage over our competitors and when marketing to new customers. We are well positioned to capture the strong anticipated inflows as a result of increased customer demand for low cost and transparent products, and as they look to exit maturing traditional products such as with-profits bonds and endowments.

LTS: US Life

2009 was a transformation year for US Life. Having reduced the product profile, scaled back distribution and reduced the overhead base by 33%, the business returned to profitability on an AOP basis. As planned, Life APE sales were down 57% but despite this decrease in sales volume, we maintained strong relationships with the top-tier producing agents through whom we are now selling more profitable, capital light products. Margins for the year were strong at 20%.

The business did not need additional capital from the Group in the early part of this year and we believe we will not need to inject any further capital during 2010. The business is now self sustaining and is well positioned to deliver improved returns during 2010 on higher sales levels and a lower cost base, with new FIA and Universal Life products due to be introduced in the second quarter.

Bermuda

Our Bermuda business is now closed to new business, is in run-off and is treated as non-core. During 2009 the focus has been on de-risking, maintaining a stable operating environment, reducing costs, and managing capital and liquidity. We have continued to improve our understanding of the liabilities, with all positions monitored and marked to market on a daily basis. Most guarantees remain 'in the money' and the level of redemptions has remained low. However, if markets continue to rise and the value of customers' contracts move above the guarantee level, we anticipate a pronounced increase in the level of redemptions, which will accelerate the run-off.

Nedbank

The South African banking industry experienced an exceptionally tough and volatile year in 2009. Demand for credit grew at historically low rates and retail impairments increased dramatically as consumers came under severe pressure from falling income, job losses, declining asset prices and record high debt burdens. Despite the negative economic trends, underlying trading conditions showed early signs of improvement from the third quarter, when South Africa emerged from recession.

Nedbank's net interest income grew 0.8% to R16.3 billion and non-interest revenue, including the consolidation of the Bancassurance & Wealth joint ventures, grew by 11% to R11.9 billion. However, in line with expectations and with the other South African banks, earnings were impacted by rising bad debts. Although Nedbank's credit loss ratio declined to 1.47% for 2009, its liquidity position remains sound and its capital ratios remain above target levels. The Tier 1 capital adequacy ratio improved from 9.6% at the end of 2008 to 11.5% at the year-end, and the total capital adequacy ratio increased from 12.4% to 14.9%.

The rebound in the South African economy is likely to be slower than in previous cycles given weak consumer and business confidence and tighter lending criteria. However, retail trading conditions are expected to improve and interest rates are likely to remain steady at current levels, leading to lower impairments. The strength of Nedbank's balance sheet positions it well to capitalise on growth opportunities and to benefit from the expected turnaround in economic conditions.

US Asset Management

Although market conditions in 2009 were challenging, we took a number of actions to drive more profitable growth in this business. We have reorganised our central distribution structure, and strengthened our shared services offer to our affiliates and key aspects of our successful multi-boutique model. We reduced operating expenses by 22% and carried out a reorganisation of Old Mutual Capital, our retail mutual fund business, which will deliver $15 million to $20 million of annual expense savings from 2010.

Our track record of investment performance has positioned us well relative to competitors, and our diversified asset mix between equities, fixed income and alternatives helped us weather market volatility. While net client cash flows were down, they were broadly in line with the average of our peer group for the year. This partially offset a 16% rise in asset values resulting in funds under management for the year increasing by 9% to $261 billion.

Non-US clients already represent 25% of total funds under management as at the end of the period, and a key objective is to grow and diversify by expanding our international distribution capability. Prior to the recent market turmoil, clients were migrating asset allocation decisions toward international, global and alternative strategies. We believe these trends will continue in 2010, and our track record of investment performance and global business focus positions us well to capture these asset flows. Churn of underperforming managers in traditional domestic equity and fixed income mandates will also present opportunities to win new mandates.

Dividend

The Board has carefully considered the position in respect of a final ordinary dividend for 2009, and is recommending the payment of a final 2009 dividend of 1.5p per share (or its equivalent in other currencies).

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

Strategy Update

During 2009 our priority was to stabilise the business by addressing the issues in US Life and Bermuda and restoring the capital and liquidity positions of the Group, whilst at the same time implementing more effective governance and controls. With substantial improvements in place, we also started the process of simplifying our portfolio of businesses and improving our operational performance, while further examining the Group to determine its optimal future shape. We now have a clear strategy to build a cohesive long-term savings, protection and investment group by leveraging the strength of our capabilities in South Africa and around the world.

The strategy is designed to focus, drive and optimise our businesses to enhance value for both our customers and shareholders. It will increase our international cash earnings and overall return on equity. It will result in a rationalisation of our activities over time, reducing substantially the complexity of the Group, and optimise our structure as we manage our businesses with a disciplined approach to risk management, governance and allocation of capital.

We will reduce our exposure to the US by exploring the disposal of US Life. We anticipate the listing of a minority shareholding in US Asset Management. We will continue to sell or exit markets where we do not have scale, have no prospect of achieving satisfactory returns or where the operations are outside of our risk tolerance. We expect the proceeds from this rationalisation and from retained earnings will be used to reduce debt by at least £1.5 billion and improve the quality of the Group's balance sheet.

We will retain businesses which meet our capital and risk requirements, can achieve a 15% return on equity, add value to other parts of the Group, have scope for sustainable future growth and are capable of creating future shareholder value. We will be ruthless in our application of these criteria and our businesses will be subject to continual review. By leveraging our core capabilities and maximising available synergies, we will deliver a good blend of profit growth, improved cash returns and generation of long-term embedded value. We will transfer technology and intellectual capital through shared skills and infrastructure, based on utilising our strong capabilities in South Africa and around the world to drive revenue and cost improvements.

We will focus on developing our customer proposition which is relevant to their needs, backed up by good distribution, support and service. We aim to deliver high performance in each of our businesses by driving profitable growth and operational efficiency, optimising risk and return and aligning reward schemes to activities that deliver value, with strengthened governance and control from the centre.

We have set specific targets of reducing costs by £100 million by the end of 2012, including £15 million of Group-wide corporate cost savings as the Group structure evolves. We have also set specific performance targets for our individual LTS businesses and for LTS as a whole, as set out below.

Long-Term Savings

Our LTS businesses can be categorised into three groups: those in mature markets which have scale and deliver high cash returns, such as Old Mutual South Africa (OMSA) within Emerging Markets; those that are established and growing but where profitability can be improved, such as Wealth Management and Nordic; and those that are sub-scale but have strong prospects for growing embedded value and delivering good return on, such as Retail Europe and, within Emerging Markets, India and China.

We have set targets to deliver cost savings of £75 million per annum and to improve overall return on equity from 14.9% (excluding US Life and reflecting the LTIR rate for Emerging Markets for 2010) as at 31 December 2009 to between 16%-18%, both by the end of 2012. To achieve this, we have set specific return on equity and cost savings targets for each of our LTS businesses.

Over and above this, we have identified opportunities for further cost and revenue synergies in three principal areas: in IT, by extending outsourcing to a global level, rationalising technology platforms and sharing applications; in administration by taking advantage of the efficient cost base in South Africa; and in product development, through sharing products and investment funds across our businesses.

In Emerging Markets, we are already distributing products designed in South Africa into India and expect to do the same into the other large and under-penetrated markets such as China and Mexico. South Africa has a well regulated long-term savings industry and a growing middle income and affluent market, which we are penetrating through our strong brand and powerful distribution platforms. We are therefore coordinating our Emerging Markets business, which includes our Africa operations, from OMSA. Having acquired the minorities in Mutual & Federal, we are also developing Old Mutual branded short-term insurance products for the South African middle income market. We have set a cost reduction target for Emerging Markets of £5 million per annum and a return on equity target of between 20%-25% by the end of 2012.

In Sweden, we already have a strong market share and are now broadening our product and service offering to the direct market through Skandiabanken, the region's most successful internet bank. For example, through Skandia Investment Group (SIG) we have exported the highly successful Spectrum concept of risk-targeted funds from the UK to Sweden, and Skandia Nordic has developed its own supporting web-based advisory tools for its direct customers. For the Nordic business we have set a cost reduction target of £10 million per annum and a return on equity target of between 12%-15% by the end of 2012.

In Retail Europe, we are already making good progress in transferring IT and back office functions to South Africa, which will significantly improve margins. We will also broaden its product set, including introducing protection products. We have set a cost reduction target for Retail Europe of £15 million per annum and return on equity target of 15%-18% by the end of 2012.

We have commenced an expense reduction exercise in Wealth Management which is intended to deliver cost savings across the business of £45 million per annum by 2012, with associated one-off restructuring costs at approximately the same level. The bulk of this is in Skandia UK, which is aiming to reduce its cost base in order to operate profitably and sustainably in the new low-margin environment. We already have an excellent platform capability and will be developing increased functionality and new products, sourced in South Africa, which are capital-light but provide good downside protection. We have also set a Wealth Management return on equity target of between 12%-15% by the end of 2012.

We have made a number of new appointments in LTS to help ensure delivery against these targets. We have appointed a new head of product development from within OMSA, and expanded the roles of other senior OMSA executives to enhance operational efficiency and distribution across our LTS businesses. We are also in the process of appointing a new head of IT. They will all report directly to Paul Hanratty, Chief Executive of LTS.

Following the completion of the expense management programme in US Life, the business is now profitable on an AOP basis and is able to grow without further support from the Group. However, it lacks scale, has little overlap with the rest of our LTS businesses and, given its capital intensive nature, the risk-adjusted return on further investment does not meet our hurdle rate. As a result, with market conditions improving, we are exploring the disposal of US Life to allow the business to achieve its potential under different ownership. We remain firmly committed to supporting the business at an RBC ratio of 300%.

Asset Management

We have excellent, well established asset management businesses which are highly profitable and generate good cash flow. In South Africa, we are already the market leader and with investment performance improving we are confident of driving future net client inflows. In Europe, we expect guided architecture to complement our open architecture platform, allowing us to capture significant inflows within SIG, our manager-of-managers business.

In the US, there are considerable opportunities for growing the business and expanding our existing franchises into international markets. We have already completed an expense management programme which reduced costs by 22%. The resulting margin improvement, together with anticipated growth in performance fees in line with the recovery in markets, will drive strong profitability and cash flows to the centre. We have also set a new cost reduction target of £10 million per annum and margin target of 25%-30% by the end of 2012.

We believe this will position the business well for a future listing and anticipate a partial IPO for the business within the next three years. The timing is dependent on margin progression, investment performance and market conditions. The IPO will allow it to benefit from an enhanced market profile and more visible valuation. It will provide access to capital markets and a mechanism for growth, and allow us to continue to improve the alignment of management.

Banking

In line with the South African banking industry, Nedbank's result was affected by the cyclical credit stress in the domestic economy. Despite the increased level of retail impairments, Nedbank has continued to strengthen its capital base. The sophisticated and well regulated South African banking system has ensured that the banks in South Africa were well insulated from the worst of the global financial crisis, while Nedbank's strong management team has continued to drive world-class risk management practices and outstanding performance in nearly all areas of the business. Despite the negative economic trends in 2009, underlying trading conditions showed early signs of improvement around the third quarter.

I am pleased to welcome the new Nedbank Chief Executive, Mike Brown and look forward to his contributions to our Group Executive Committee. As Mike and his team develop their future banking strategy, I look forward to discussing any changes Mike would like to make to the Nedbank strategy to continue its growth. We thank Tom Boardman for his tremendous success in the rehabilitation of Nedbank after we led its refinancing in 2004.

Outlook

We are determined that over the medium to long-term these measured and fully-funded actions will provide considerable value for shareholders. Together with further growth in assets under management as market conditions continue to improve, these actions will have a significantly positive impact on underlying operating profitability and return on equity. Accordingly, the Board has every confidence in the Group's prospects, as reflected by the resumption of a dividend.

Julian Roberts
Group Chief Executive
11 March 2010

Group Finance Director's Review

Group Results

Overview of 2009 results

		£m	£m
Group Highlights (£m)		2009	2008	% Change
IFRS results
Adjusted operating profit (IFRS basis)(pre-tax)*		1,170	1,136	3%
Adjusted operating earnings per share (IFRS basis)*		12.1	14.9	(19%)
Basic earnings per share		(7.8p)	8.6p	(191%)
(Loss)/profit after tax		(118)	683	(117%)
Sales statistics
Life assurance sales - APE basis*		1,380	1,466	(6%)
Life assurance sales - PVNBP basis*		10,202	10,814	(6%)
Value of new business*		167	158	6%
Unit trust/mutual fund sales		7,567	6,600	15%
MCEV results
Adjusted Group MCEV (£bn)		9.0	6.2	45%
Adjusted Group MCEV per share		171.0p	117.6p	45%
Adjusted operating Group MCEV earnings (post-tax)		562	575	(2%)
Adjusted operating Group MCEV earnings per share		10.7p	11.0p	(3%)
Financial metrics
Return on equity*		9.1%	11.3%
Return on Group MCEV		10.7%	7.8%
Net client cash flows (£bn)		(3.1)	(1.2)	(158%)
Funds under management		285	265	8%
Dividend		1.5p	2.45p
FGD (£bn)		1.5	0.7	114%

*     Treating Bermuda as a non-core business

The Group has delivered a solid performance in 2009, which is particularly satisfying given the volatile market and weak operating conditions seen during the year, particularly during the first half. Our performance improved significantly in the second half of the year, when strong sales performance in the third and fourth quarters and recovering markets helped deliver good earnings growth. Across the Group as a whole, we have seen sales return to similar levels as in the first half of 2008. The decline in profitability in Europe and Nedbank was more than offset by the increase in profitability of the US Life business, following reserve strengthening and impairment losses in 2008.

IFRS adjusted operating profit (AOP) for 2009 of £1,170 million was £34 million higher than the comparable 2008 profit. Adjusted operating profit in the second half of 2009 was £636 million compared to £316 million for the second half of 2008. Adjusted Operating Profit earnings per share were 12.1p for 2009 compared to 14.9p for 2008. The AOP eps for the second half of 2009 was 6.8p compared to 6.2p for the second half of 2008. In 2008, results had been significantly affected by the need to strengthen reserves in the US Life and Bermuda business: these businesses both made a profit in 2009. Bermuda is now treated as a non-core business and its profit is therefore excluded from the IFRS adjusted operating profit, and the 2008 IFRS adjusted operating profit has been restated on the same basis.

In particular the performance of our LTS business showed the benefits of the geographic split of the business between Europe and Emerging Markets. While the profits from our Emerging Markets business were broadly evenly spread across the two halves of the year, both Nordic and Wealth Management showed significant improvements in the second half. Lower earnings on shareholder funds, increased levels of credit impairment in the banking businesses, and lower asset management profits in South Africa and the US, restricted profits despite a creditable sales performance for the year overall.

Net client cash flows were £1.9 billion positive in LTS as a whole, although Group net client cash flows were negative £3.1 billion, as a result of the net £4.5 billion outflow in US Asset Management, of which £4.1 billion occurred in the fourth quarter.

Adjusted Group MCEV per share for 2009 increased to 171.0p from 117.6p at the year end 2008, and from 143.8p for the first half of 2009. The increase in the Adjusted Group MCEV per share over the period was largely driven by the substantial reduction over the period in corporate bond credit spreads in US Life, an increase in equity markets, positive exchange rate movements, operating earnings from covered business, and an amendment arising from an allocation of assets between covered and non-covered businesses at the beginning of the year. This was partially offset by a lower result in operations in Europe, and by an increase in the market value of listed debt and fair value of non-listed debt (where applicable). As anticipated, Wealth Management benefited from a tax gain in aggregate of £205 million following the changes made to the corporation tax treatment of dividends received from overseas subsidiaries by the Finance Act 2009. MCEV data still includes Bermuda as covered business for both 2008 and 2009.

Adjusted operating Group MCEV earnings per share for 2009 of 10.7p were 3% lower than the 2008 year end results. Adjusted MCEV operating earnings in US Life and Bermuda increased significantly, mainly resulting from higher expected returns in 2009 from the corporate bond portfolio. This was offset by lower operating earnings from the other long-term insurance businesses (in particular, Wealth Management) due to lower short-term swap rates, adverse operating assumption changes in relation to persistency and capitalisation of planned development and project expenditure, and lower earnings in both the asset management and banking businesses. These fell on a pre-tax basis from £97 million to £83 million, and from £575 million to £470 million respectively.

The ROEV of 10.7% has increased significantly from 2008 largely as a result of the lower opening MCEV for 2009.

Reconciliation of IFRS and AOP profits

The IFRS after tax result for 2009 was a loss of £118 million, compared to a profit of £683 million in 2008. This movement was largely driven by the impact of marking-to-market of Group debt, as the improvement in the external valuation of Group debt in 2009 negatively impacted profit after tax by £263 million for the year, reversing the positive impact of £503 million of marking-to-market our own debt instruments in 2008. The movement was also driven by the unusually high effective tax rate on the IFRS results. In accordance with our AOP policy, a charge relating to acquisition accounting of £443 million and negative short-term fluctuations in investment return of £316 million represent the other significant deductions from the adjusted operating profit (pre-tax) to arrive at the 2009 loss after tax. As usual at the year-end, we have reviewed our goodwill balances, and we have recognised a goodwill impairment (included within the acquisition accounting charge noted above) of £187 million in respect of Retail Europe business and £79 million in respect of Wealth Management which arose specifically in continental Europe. This impairment reflects a downgrading of our view of the value of these businesses since the time of acquisition given the changed economic circumstances in Europe and market readjustments. We continue to recognise goodwill of around £200 million for Retail Europe which we believe is supportable going forward, and the goodwill for the continental Europe part of Wealth Management has been written off. There was also a release of other provisions relating to long-standing litigation matters of £61 million.

Management Discussion and Analysis of Results for 2009

The principal businesses of the group are the Long-Term Savings division, Nedbank, Mutual & Federal and US Asset Management. During the year, Old Mutual owned on average 55% of Nedbank and 74% of Mutual & Federal. At 31 December 2009, the market capitalisation of Nedbank was £5.2 billion and of Mutual & Federal was £610 million. Since 31 December 2009, Old Mutual has completed the purchase of the remaining minorities of Mutual & Federal.

Long-Term Savings

The key financial metrics for the Long-Term Savings division are:

	£m
2009	Emerging Markets	Nordic	Retail Europe	Wealth Management	US Life	Total
Life assurance sales (APE)	393	235	67	617	68	1,380
PVNBP	2,834	1,150	537	5,042	639	10,202
Value of new business	65	44	(5)	49	14	167
Unit trust/mutual fund sales	2,765	393	24	3,210	-	6,392
NCCF (£bn)	(1.6)	1.0	0.5	2.5	(0.5)	1.9
FUM (£bn)	43.5	11.0	4.1	46.9	6.7	112.2
Adjusted operating profit (IFRS basis) (pre-tax)	446	62	22	106	49	685
Operating MCEV earnings (covered business) (post tax)	212	81	(44)	(4)	266	511

	£m
2008	Emerging Markets	Nordic	Retail Europe	Wealth Management	US Life	Total
Life assurance sales (APE)	362*	213	91	664	136	1,466
PVNBP	2,482*	991	555	5,540	1,246	10,814
Value of new business	61*	32	10	67	(12)	158
Unit trust/mutual fund sales	2,708	262	47	2,561	-	5,578
NCCF (£bn)	(1.8)	0.6	0.5	2.0	-	1.3
FUM (£bn)	40.3	8.0	3.5	38.9	0.3	91.0
Adjusted operating profit (IFRS basis) (pre-tax)	415	88	29	150	(230)	452
Operating MCEV earnings (covered business) (post tax)	343	149	14	229	(364)	371

*     Includes Nedgroup Life sales. The comparative figures excluding Nedgroup Life are as follows: APE: £334m; PVNBP: £2,399m; VNB: £53m

LTS reported strong results with IFRS operating profits up 52%, margins improved, and there was strong growth in funds under management, with positive net client cash flows. Sales for the whole of LTS were down only 6% for the full year but up 5% for the second half compared to the same period in 2008. Emerging Markets sales in the first half were strong relative to those of other parts of LTS reflecting the later entry of South Africa into recession. Wealth Management sales performance in the second half was particularly strong, as was Nordic with very good NCCF and funds under management. Sales in Europe accounted for 67% of the APE and 53% of the value of new business. US Life sales were as planned, and the turnaround in the US Life business, which has delivered a small AOP profit, as compared to a significant loss in 2008, led to the increase in IFRS operating profits.

The APE margin of 12% for the year has held up well relative to the comparative period (2008: 11%) despite the lower sales, and given the greater focus on product pricing. The PVNBP margin has also remained steady.

Further discussion on the drivers for the movements within the individual units of LTS, namely Emerging Markets, Nordic, Retail Europe, Wealth Management and US Life is given in the Business Review which follows.

Shareholder allocation and long-term investment return

The AOP result includes the long-term investment return (LTIR) result. The most significant portion of this return arises in the Emerging Markets unit, and in 2009 we have separated the return into those assets supporting OMLAC(SA)'s Capital Adequacy Requirement (CAR) and the excess shareholder assets. OMLAC(SA) is our principal legal entity in the South African part of the Emerging Markets Business Unit. The analysis of the investment return for this business is shown in the table below:

			£m
	31 December 2009 as currently reported	31 December 2008 restated	31 December 2008 as previously reported
OMLAC(SA) LTIR	126	133	241
Other operating segments	91	108	0
Total	217	241	241

In 2009, the OMLAC(SA) LTIR fell from £133 million to £126 million and reflects a lower expected return of 13.3% (2008: 16.6%) combined with a lower average asset base. In 2010, the LTIR rate for OMLAC(SA) and M&F is 9.4% reflecting the expected asset mix of 25% equities and 75% cash. OMLAC(SA)'s investible asset base at the year end was £1.2 billion, with £1 billion being the assets supporting their capital requirement. The LTIR rates for the European Business Units reflect the shift towards a higher proportion of cash investment and the LTIR rates for the other businesses have not changed materially in 2009, and are expected to remain stable in 2010.

Currency development

The South African rand strengthened this year by 14% against sterling and the US dollar strengthened against sterling by 15% on an average basis over the year. This had the effect of improving rand-denominated and dollar earnings whilst decreasing the sterling value of dollar-denominated debt at the year-end rates.

Return on Equity

Return on Equity for the Group declined to 9.1% in 2009 from 11.3% in 2008, primarily due to the lower profits from Nedbank, a return to a normalised tax rate and lower European profits, partially offset by improvements in US earnings.

Funds under management and net client cash flow

Funds under management at 31 December 2009 were £285 billion compared to £265 billion at the end of 2008. During 2009, Old Mutual delivered robust investment performance in challenging markets. Group net client cash flows were negative £3.1 billion, as a result of the net £4.5 billion outflow (net of Group transfers) in US Asset Management, although net client cash flows were £1.9 billion positive in LTS as a whole. We produced positive flows of £4.0 billion in our Wealth Management, Nordic and Retail Europe businesses combined, offset by outflows of £1.6 billion in our Emerging Markets business and £0.5 billion in our US Life business. The USAM negative net client cash flow was a result of outflows from several of our US Asset Management affiliates.

The overall FUM and NCCF result is pleasing, considering the challenges of delivering on absolute investment performance in the extremely volatile markets of the past two years. While over the course of 2009, the FTSE-100, the JSE Africa All Share Index and S&P 500 all grew more than 15%, within the period there has been significant fluctuation in many asset classes. The US and South African equity portfolios showed the greatest volatility. Given the movement in monthly funds under management during the period, there were adverse impacts on both management fees and performance fees in the first half of 2009, and these reversed in the second half of 2009. Our large fixed income assets under management performed well. Investment performance in South Africa improved on prior years. Benchmark performance of the US Asset Management business was mixed with 'quant' underperforming and 'credit' out-performing.

Key actuarial and MCEV developments in 2009

Old Mutual reports its supplementary embedded value information in accordance with the Market Consistent Embedded Value Principles (the 'Principles') issued in June 2008 by the CFO Forum and updated in October 2009 to reflect the inclusion of a liquidity premium. The risk free reference rate to be applied under MCEV should include both the swap yield curve appropriate to the currency of the cash flows and a liquidity premium where appropriate. The CFO Forum is performing further work to develop more detailed application guidance. The Principles have been fully complied with for all businesses at 31 December 2009.

For the US Life business and OMLAC(SA)'s Retail Affluent Immediate Annuity business we considered the currency, credit quality and duration of our actual corporate bond portfolios, together with a wide range of liquidity market data and literature, and derived adjusted risk free reference rates at 31 December 2009. It is the Directors' view that a significant proportion of corporate bond spreads at 31 December 2009 is attributable to a liquidity premium rather than credit and default risk and that returns in excess of swap rates can be earned on our portfolios, rather than entire corporate bond spreads being lost to worsening default experience. Liquidity premiums of 100 basis points for the US Life business (31 December 2008: 300 basis points; 30 June 2009: 175 basis points) and 50 basis points for OMLAC(SA)'s Retail Affluent Immediate Annuity business (31 December 2008: zero allowance; 30 June 2009: 50 basis points) were added to swap rates used for setting investment return and discounting assumptions. We believe that the differences between market yields on our US Life and OMLAC(SA)'s Retail Affluent bond portfolios and the adjusted risk free reference rates still provide adequate implied margins for defaults. No liquidity adjustment is applied for other regions.

When the liquidity premium adjustment was calibrated and introduced for US Life business at 31 December 2008, similar research was not yet concluded for South Africa to estimate the quantum of the liquidity premiums inherent in South African corporate bond spreads. In addition, the impact of a liquidity premium adjustment on US Life business was far more material than for OMLAC(SA)'s Retail Affluent Immediate Annuity business as the concentration of investments in the corporate bond market is far greater and the widening of corporate bond spreads has been more pronounced in the US compared to other regions. Hence the application of a liquidity premium adjustment was initially focused on the US and an adjustment was only introduced for OMLAC(SA) at 30 June 2009 for consistency in methodology.

The recovery of global equity markets together with the contraction of corporate bond spreads, whilst partly offset by the reduction in the liquidity premium adjustment for US Life, were the main factors driving positive economic variances of £1.0 billion for 2009. In addition there was also a strong contribution from foreign exchange movements mainly caused by strong rand appreciation against sterling.

Adverse persistency was experienced across a number of operations and the organisational restructure led to negative expense variances, although this was partly offset by positive mortality variances across all operations.

Persistency assumptions were strengthened, partly to allow for temporary worsening in persistency, and planned development and project expenditure has been capitalised in the value of in-force (VIF). This was partly offset by positive mortality assumption changes, in particular because of a weakening of mortality assumptions in OMSA's Retail Mass business following positive experience for assured lives.

The MCEV of Wealth Management was boosted by the removal of dividend tax in the International business.

Following the purchase of the minority interests in respect of Mutual & Federal on 8 February 2010 in exchange for 147 million Old Mutual plc shares, Mutual & Federal has been delisted and will be incorporated in the adjusted Group MCEV at its IFRS equity amount from 2010 onwards. If the transaction had completed on 31 December 2009, it would have diluted the 2009 adjusted Group MCEV per share by approximately 6p.

The anticipated expected existing business contributions (or expected 'unwind' of the MCEV) at the 'reference rate' of £262 million as well as 'in excess of the reference rate' of £189 million for the twelve months following the year ended 31 December 2009 are provided to assist users of the MCEV supplementary information in forecasting operating MCEV earnings. Note that the exchange rates that are used for such disclosure are the same rates that are used to translate current year earnings for comparability purposes. Therefore the ultimate expected existing business contribution for the financial year ending 31 December 2010 may differ from these results.

Lapses and Surrenders

We continue to monitor and manage actively the lapse and surrender behaviour of clients and specific agents. The pattern of surrenders in the US during 2009 was more volatile than in 2008 in the fixed annuity book, similar to industry-wide trends, and terminations were above assumption levels for the first half of 2009. A moderation through the second half brought about by an active lapse and surrender management programme had the effect of reducing fixed annuity termination rates close to assumption levels. Termination experience for life products were below assumed levels and fixed annuity experience improved during the course of the year.

Emerging markets saw some indications of deteriorating persistency in certain regular premium Retail Mass products given the economic conditions in the first half of 2009, which led to increased unemployment. Lapse and surrender management programmes in the unit are well established, but we have nevertheless strengthened operating assumptions for our Emerging Markets unit, partially short-term, and this reduced MCEV by £83 million.

The experience in Wealth Management, particularly in the UK and International businesses reflected anxiety around equity-based investments, although this stabilised in the second quarter and onwards for the rest of 2009. However, given the changes in the operating model of the UK business and the migration to the platform business from the older product lines, we have also made a negative operating assumption change of £81 million in respect of persistency.

Elsewhere in LTS, trends were generally in line with assumptions.

Surrenders in Bermuda occurred mainly on the non-guaranteed book as asset values recovered. Conservation activity here focused on managing cash flow and profitability, and efforts in this regard are likely to develop further in 2010 in a way that is consistent with maximising long-term value for the Group.

Overall the financial circumstances of our customer base remain the key driver of lapse and surrender behaviour. For example, rising unemployment in a number of markets has led to what we believe to be a temporary deterioration in persistency, which should revert back to long-term assumptions as economic conditions improve.

Capital, liquidity, leverage and dividends

Capital

The Group's regulatory capital surplus, calculated under the EU Financial Groups Directive, at 31 December 2009 was £1.5 billion (31 December 2008: £0.7 billion; 30 June 2009 £1.0 billion). This represents a coverage ratio of 135%, compared to 121% at 31 December 2008 and 128% at 30 June 2009. The increase since 31 December 2008 comprises the statutory earnings in the period, rand strength and a Nedbank Tier 2 capital raising offset by modest rises in statutory bank capital requirements in South Africa. There was a positive £0.1 billion movement in FGD arising from management actions including the disposal of Australia, closure of Bermuda to new business, and a change in the investment mix of Emerging Markets' shareholder funds held to back the Capital Adequacy Requirement. The Group FGD surplus was reduced by £42 million compared to 2008, as US Life is now included at 200% of local capital required rather than 150% in prior periods.

Our Group capital is structured in the following way:

				£m
	2009	%	2008	%
Ordinary Equity	4,218	73	3,048	70
Other Tier 1 Equity	611	11	573	13
Tier 1 Capital	4,829	84	3,621	83
Tier 2	2,550	44	2,430	56
Deductions from total capital	(1,597)	(28)	(1,724)	(39)
Total Capital	5,782	100	4,327	100

Tier 1 includes £174m of the 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 Solvency II Directive was approved by the European Union in November 2009, and is scheduled to come into effect in October 2012. The Group is actively participating in the industry consultations, such as the Quantative Impacts Studies, which are taking place to develop the more detailed implementation measures which the European Union will agree over the next two years.

The Solvency II Directive is intended to align the regulatory capital regime for insurers more closely with the economic risk view of the business. However, it also changes the qualifying criteria for regulatory capital in response to the market events of the past couple of years, and in addition, has considerable implications on the governance structures and operating models for EU insurance businesses.

Although the Solvency II Directive applies to EU insurers only, it applies to the Group's businesses globally; furthermore we expect other jurisdictions, notably South Africa, to implement equivalent regimes shortly afterwards.

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

	At 31 December 2009	At H1 2009	At 31 December 2008
	Ratio	Ratio	Ratio
Statutory Entity
OMLAC(SA)	4.1x	3.9x	3.8x
Mutual & Federal	172%	141%	104%
US Life	312%	281%	305%
Nordic	10.8x	10.8x	9.9x
UK	2.9x	3.0x	2.5x
Nedbank*	Core Tier 1: 9.9% Tier 1: 11.5% Total: 14.9%	Core Tier 1: 8.6% Tier 1: 10.0% Total: 13.2%	Core Tier 1: 8.2% Tier 1: 9.6% Total: 12.4%

*     This includes unappropriated profits.

We remain committed to supporting the US Life capital ratio at a level above 300% RBC. In February 2009, $225 million of cash was injected into the US Life business. Since then, the improvement in performance has meant that the Group has not been required to provide any net additional capital to the US Life businesses. This compares favourably with our previous guidance where we stated the business could require between $200-300 million. The development for 2010 capital needs in US Life depends upon a wide range of factors including our statutory earnings, market movements, ratings migration and the implementation of possible changes to both US GAAP and NAIC accounting rules which are currently under consideration. Such developments may result in a release of statutory capital requirements in due course. Given the capital position of the business and our expected level of IFRS impairments for 2010 of $55 million, we do not anticipate a capital injection into the business during 2010.

Liquidity and Cash Flow

As a Group we concentrate on maintaining effective dialogue and strong commercial relationships with our banks and fixed income investors. In 2009 we have successfully extended two existing bank facilities of £250 million, have put in place an additional three-year bank facility of $200 million, and in October 2009, we successfully placed a £500 million seven-year 7.125% fixed rate senior bond.

At 31 December 2009, the Group holding company had total liquidity headroom of £1.2 billion (2008: £0.6 billion), comprising cash of £0.4 billion and undrawn facilities of £0.8 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.

The Group generated £434 million of free surplus in the year (2008: £83 million), of which £249 million (2008: (£158) million) was generated from covered business, and £551 million (2008: £308 million) was generated by the LTS division. Bermuda continues to be included as covered business for both 2008 and 2009.

Leverage

Our reported net debt at 31 December 2009 was 0.4% up on the 2008 year-end position at £2,273 million, but was £102 million lower than at 30 June 2009. This represented senior debt leverage of 1.8% compared to 5.4% in 2008 and total debt leverage was 20.1% in 2009, compared to 26.7% in 2008.

At 31 December 2009, our gross debt on an IFRS basis was £2,842 million, and at market value it was £2,526 million.

The movement in the net debt position is as follows:

		£m
	2009	2008
Opening Net debt	(2,263)	(2,420)
Inflows from businesses	529	822
Outflows to businesses and expenses	(339)	(440)
Debt and equity movements
Ordinary Dividends paid	-	(353)
Share repurchase	-	(175)
Equity issuance	2	5
Other non-cash movements	(202)	298
Closing Net debt	(2,273)	(2,263)
Net decrease/(increase) in debt	(10)	157

During the year, the business units contributed £529 million of inflows which were offset by £339 million of operational expenses and organic investment including the $225 million of capital injected into US Life in the first quarter. During the period, cash of £41 million was also used to exit the AA TEDA transaction and £80 million was paid in respect of the settlement of certain longstanding litigation matters.

Dividend

The Board has carefully considered the position in respect of a final ordinary dividend for 2009, and is recommending the payment of a final 2009 dividend of 1.5p per share (or its equivalent in other currencies). The Company is planning to offer, for the first time, a scrip dividend alternative for eligible shareholders subject to finalising the associated logistics and timetable. A separate announcement will be made about this when these matters have been clarified. The dividend timetable is set out below:

Currency conversion date	5 May 2010
Currency equivalents announced	6 May 2010
Last Day to Trade cum div for shareholders on the registers in Malawi, Namibia, South Africa and Zimbabwe	7 May 2010
Ex-dividend date for shareholders on the registers in Malawi, Namibia, South Africa and Zimbabwe	10 May 2010
Last Day to Trade cum div for shareholders on the UK Register	11 May 2010
Ex-dividend date for shareholders on the UK Register	12 May 2010
Record date for the dividend	14 May 2010 (Close of business)
Payment date	25 June 2010

Share certificates on the South African register may not be dematerialised or rematerialised between 10 May 2010 and 14 May 2010, both days inclusive.

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

US Life bond portfolio performance

The cash characteristics of the US Life business are very different from that of the equivalent period of 2008. We consider that the unusual market conditions have validated our decision to hold a higher than usual cash weighting in the US Life Investment portfolio. In the second half of 2009, we began to make selective purchases of new bonds. We currently hold around $0.8 billion of cash and other short-term holdings in the portfolio. The profile for maturities from the bond portfolio and new premium inflow, gives us considerable flexibility when considering actions to mitigate against having to realise losses on corporate bonds. The portfolio is well matched with assets (including cash and short-term holdings) of 5.6 years of average duration compared to 5.8 years of liabilities.

On the US Life $15.3 billion fixed income security portfolio, the unrealised loss was $0.5 billion as at the end 2009, and has continued to improve to below $0.2 billion as at the end of February 2010. This compares to $1.6 billion as at 30 June 2009 and $2.3 billion at 31 December 2008. All of the above amounts are stated net of the impact of reclassification of certain securities permitted by the amendment of IAS 39, the unrealised loss on which amounted to $45 million at 31 December 2009, $283 million at 30 June 2009 and $387 million at 31 December 2008.

Of the portfolio, 50% is rated 'A' and above, 42% is rated 'BBB' or below and 8% is not rated. The ten largest holdings account for $1.3 billion (8.1%) of the portfolio (31 December 2008: $1.1 billion and 6.1%) with an average holding of $128 million (2008: $107 million). The portfolio continues to have approximately 15.7% in residential and commercial mortgage-backed securities, with approximately 5% in preferred stock and hybrid instruments.

There have been a small number of defaults in the portfolio in the year amounting to $14 million. Total impairments amounted to $389 million in 2009 compared to $711 million in 2008. The valuation of the bonds held in the portfolio has benefited from the ongoing equity recapitalisations, mainly of financial companies. As a result, we have taken advantage of the opportunity to harvest gains so as to further improve the underlying features of the bond portfolio. The running yield of the portfolio is 5.82% (including cash and other invested assets).

Bermuda

Bermuda is in run-off and consequently is treated as a non-core entity from 2009. The effect of this is to remove its result from our AOP disclosures, but to account for the interest on the loan notes to the Group as a cost for AOP purposes of approximately £40 million annually. It continues to be consolidated for the purposes of IFRS reporting. The AOP eps for 2008 has also been restated from 12.2p to 14.9p.

During most of 2009, hedges were applied to a core number of components (interest rates, foreign exchange, equity markets), with an average hedge effectiveness of 95-96% achieved in the period to September 2009. Given the improvement in the capital position of the Group and the stabilisation of the hedge effectiveness, combined with management's improved understanding and management systems for tracking the underlying risks, a process of selective and progressive release of the external hedge position commenced in the fourth quarter of 2009, with strict oversight and within risk parameters agreed with the Group Risk and Capital Committee. By 31 December 2009, the majority of the equity market hedges had been released. The release of the hedges is subject to a stop-loss protocol, and controls are in place to ensure that effective hedges can be reinstated quickly if required.

The business remains well capitalised and able to meet all its future obligations. Surrender behaviour that is influenced by underlying fund performance will determine the speed at which the Bermudan book of business runs-off over time, and the extent and timing of any capital and cash release.

Group restructuring, corporate disposals and acquisitions and related party transactions

The Group continues to simplify its structure and reduce its spread of business to focus on areas of key competence and competitive strength, and drive operational improvements. As discussed in the Group Chief Executive's Report, we have announced a programme of corporate restructuring designed to simplify the Group and realise value for shareholders. A number of operations have been identified for potential exit. We expect proceeds from disposals and from retained earnings will be deployed to reduce debt as part of the Group Capital Management Programme. Within each business and in particular in the Wealth Management division of LTS, reorganisations and efficiency programmes are being launched, with a target of reducing costs by £100 million across the Group by the end of 2012. In aggregate, these will result in expected 2010 charges to AOP of around £50 million. While the restructuring programme is put into effect, we will be able to assess the impact on Group Head Office resources required and the progress made from iCRaFT and other risk management improvements. Head Office costs for 2009 were £65 million, and following the implementation of iCRaFT and the completion of the restructuring, we anticipate that we can maintain underlying Group Head Office costs at less than £60 million per annum.

During 2009, the Group launched an offer for remaining minorities of Mutual & Federal. This transaction closed on February 2010 with the issue of 147 million ordinary shares to the minority shareholders. We also successfully completed the acquisition of a 100% share in ACSIS, a South African asset management firm, in August. Disposals in 2009 were of the Chilean and Australian businesses, and the withdrawal from the AA TEDA acquisition in China in the first half of 2009, and Bankhall in the UK in October 2009. Following the disposal to Nedbank of several Old Mutual joint ventures, Old Mutual has sold the shares received from Nedbank in accordance with regulatory approved processes. During February 2010, Nedbank received final regulatory approvals to acquire 100% of the ordinary and preference shares in Imperial Bank.

Tax and Non-controlling interests

The effective tax rate on adjusted operating profits of 25% has returned to within its normal anticipated range, from 8% in the comparative period. Factors increasing the 2009 AOP tax rate compared to 2008 include a reduced proportion of profits being earned on low-taxed dividends and capital profits, partially offset by prior year adjustments and lower secondary tax on companies (STC) costs on reduced dividends. We anticipate a similar rate for 2010. Furthermore, the 2008 rate was anomalously low due to the unprecedented market conditions, the recognition of previously unrecognised deferred tax assets and a release of provisions following agreement of various issues with tax authorities.

The IFRS effective tax rate for 2009 was anomalously high at 148% reflecting policyholder contribution, losses carried forward not recognised and non-deductible goodwill.

Risks and Uncertainties

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

Continued volatility in world economic conditions creates uncertainty in equity markets, currency fluctuations, credit spreads, corporate bond defaults and rating agency actions both on investments owned by the Group and the Group underlying entities. Unemployment conditions continue to deteriorate and could adversely affect termination experience in respect of the life insurance business that could result in realising losses on illiquid assets, particularly in the case of US Life, although this is likely to be less than in 2008 and 2009. Credit losses in South Africa's banking system are subject to uncertainty and volatility.

Economic uncertainty has contributed to reduced consumer confidence, which we have experienced as a consequence of changing product preferences to lower risk investment products and affecting termination experience in respect of existing and new business. These may have an impact on earnings and present both risks and opportunities for the Group.

The Group is continually monitoring these uncertainties and taking appropriate actions wherever feasible. The Group continues to meet Group and individual entity capital requirements and day to day liquidity needs.

The implementation of the new operating model will present challenges, yet reduce risk across the Group. The Group continues to strengthen and embed its risk management framework, whereby we actively monitor and manage risk through the three-lines-of-defence at both a Business Unit and Group level, where risks exceeding pre-determined thresholds are escalated to management and risk officers, who are responsible for the appropriate mitigating action. Each business regularly reviews its overall business risk exposure against risk appetite set in conjunction with Group Head Office. Further detail on risk management is provided in the Group Risk Report.

Philip Broadley
Group Finance Director
11 March 2010

 

Business Review

Long-Term Savings: Emerging Markets

 

Excellent results in a tough operating environment

Highlights (Rm)	2009	2008	% Change
Long-term business adjusted operating profit	3,263	3,398	(4%)
Asset management adjusted operating profit	958	921	4%
Long-term investment return (LTIR)	1,658	2,032	(18%)
Adjusted operating profit (IFRS basis) (pre-tax)	5,879	6,351	(7%)
Return on allocated capital (OMSA only)	26.0%	27.8%
Operating MCEV earnings (covered business) (post-tax)	2,794	5,237	(47%)
Return on embedded value (covered business) (post-tax)	9.8%	14.4%
Life assurance sales (APE)	5,178	5,105*	1%
Unit trust/mutual fund sales	36,421	41,418	(12%)
PVNBP	37,339	36,675*	2%
Value of new business	853	813*	5%
APE margin	16%	16%
PVNBP margin	2.3%	2.2%
Net client cash flows (NCCF) (Rbn)	(20.5)	(27.3)	25%
Highlights (Rbn)	2009	2008	% Change
Total funds under management	518.4	552.6	(6%)
Of which, SA client funds under management	448.7	443.0	1%

*     Excludes Nedgroup Life sales. The comparative including Nedgroup Life are as follows: APE: R5,537 million; PVNBP: R37,959 million; VNB: R934 million; APE margin: 17%; PVNBP margin: 2.5%

A summarised sterling version of above table is shown in the Group Finance Director's Review.

Overview

Emerging Markets' economies rallied strongly during the second half of 2009, benefiting from a weaker dollar and higher commodity prices after the credit crisis. South Africa experienced a comparatively modest and short recession in the first half of 2009, but returned to growth in the third quarter and ended the year with positive quarterly GDP growth. We expect this momentum to continue into 2010. The South African equity market enjoyed a very strong final quarter as local and foreign investors moved into equities. Growth also resumed in Latin America and Asia from the third quarter onwards. Markets rallied strongly during the second half of the year and emerging markets' currencies generally appreciated strongly against both the pound and dollar, with the closing rand rate rising against those currencies by 13% and 22% respectively. The impact of the economic volatility led to an increase in the share of risk product sales across our product lines relative to savings and investment products.

South Africa constitutes approximately 94% of the IFRS adjusted operating profit of our Emerging Markets Business Unit.

South Africa

In South Africa, our business has been resilient with strong profitability and high return on allocated capital in very difficult economic conditions, with our like-for-like sales on an APE basis up marginally compared to prior year (after excluding Nedgroup Life sales in 2008). We continued to invest in our distribution capability and as a result, we grew market share in our core product ranges and are well positioned to benefit from the recovery in consumer confidence. Nevertheless, the demand for our products during 2009 was adversely affected by rising unemployment and generally low consumer confidence across the economy. These factors, among others, have put pressure on disposable income, resulting in a number of customers terminating their policies. This poor persistency experience adversely affected the claims experience in the year. However, through continued investment, we improved the service levels to our customers. This is evidenced by the number of service awards we continue to win. We were awarded first place for service excellence in the long-term assurance category in the 2009 Ask Afrika Orange Index national surveys as well as the 2009 award for Best National Call Centre. We continued expanding our distribution footprint by retaining and attracting intermediaries and growing our relationships with them. Despite the economic challenges, we have expanded our tied distribution from 5,181 intermediaries in 2008 to 5,229 intermediaries in 2009, and we successfully completed the acquisition of a 100% share in ACSIS, a South African asset management firm, in August, thereby gaining access to a niche market of private and retirement fund customers. 2009 was also the first full year of trading of Old Mutual Finance (OMF), our new retail loan business, which has expanded our distribution reach by establishing 65 OMF branches in 2009.

In June 2009 we sold our shares in the Nedgroup Life and BOE Private Client joint ventures to Nedbank. As a result we now exclude Nedgroup Life sales from our life sales and embedded value for both 2009 and 2008 sales and margin numbers. However, for IFRS and AOP profit reporting, these businesses have still been included for the first 5 months to 1 June 2009 and for the full year in 2008.

Other Emerging Markets

Namibia

We achieved remarkable results in a year of immensely tough trading conditions. Sales of recurring premium products, which is core to the life company, ended 12% up on the prior year. There was a swing to investment business and we grew our Unit Trust sales by 62% from 2008. The bulk of our Unit Trust sales went into the money market fund, which is competing effectively with similar funds run by banking institutions.

We developed and rolled out an innovative lending product. In addition, we successfully implemented a new retirement fund administration system.

Rest of Africa

We continue to manage our investments in the Rest of Africa for value, although they remain small relative to our profile in South Africa in 2009.

Latin America

Whilst our businesses in Latin America are small relative to others in the Emerging Markets Business Unit, we have had an excellent profit growth of 133% (in rand terms) in very difficult economic conditions. Non-life sales were strong despite the slow start of the year following the H1N1 outbreak. We have developed a new Retail Mass product in Mexico to be launched in 2010 and we are confident that this will significantly boost sales. We also intend to tap into the expertise in South Africa to develop a range of transferable and suitable product-types such as the "smoothed bonus" and "umbrella" products.

Asia

Old Mutual's operations in Asia consist of a joint venture with the Beijing State-owned Asset Management Company in China (Skandia:BSAM) which sells unit-linked and universal life products, and a 26% share in Kotak Mahindra Old Mutual in India, a life assurance joint venture with the Indian-listed financial services company, the Kotak Mahindra Group.

India accounts for the bulk of our Asian sales, with APE of R1.8 billion (INR10.3 billion), and despite our business there growing faster than the rest of the sector during the first quarter of 2009, sales were down 26% in rand terms from the 2008 comparative (19% in local currency terms). Its strategy has subsequently changed to focus on more profitable growth, as opposed to pure revenue generation. Kotak Mahindra Old Mutual is still growing at an encouraging rate on a relative basis and now occupies 10th position in the industry for Individual business, with 1 million lives insured, and 9th position in the industry for Group business, with 1.4 million lives insured.

APE sales in sterling terms in China (Skandia:BSAM) increased by 19% in local currency terms from CNY77 million (R92 million) to CNY92 million (R113 million) for the year. The increase in APE sales, was largely a result of a strong growth in single premium sales, up 112% to CNY679 million (R836 million). Our business in China continued to experience strong competitive pressure from a number of direct competitors in the market. The industry ranking for Skandia:BSAM, measured on a gross written premiums basis, improved from 40th at H1 2009 to 38th by year-end. A number of new products are currently in the pipeline for 2010.

Life sales summary

Over the whole year, life sales improved by 1% from 2008, despite the tough environment. In South Africa, this was mainly as a result of strong growth of recurring premium sales of 8% which was partially offset by a 6% drop in single premium sales.

Recurring premium sales

Risk

Recurring premium risk sales increased primarily due to:

- promotion of the Severe Illness Benefit on the Greenlight product, where sales in the Affluent Market grew by 11%;

- 5% growth in our sales force in Retail Mass and an increased focus on risk products, which led to a 31% growth in the Retail Mass market; and

- success in securing large schemes in Corporate, leading to a 62% increase in Group Assurance sales over the 2008 level.

Savings

OMSA sales of recurring premium savings products declined 7% relative to prior year. Lower sales in our Retail segments, which were partially offset by strong sales in the Corporate segment. Sales of recurring savings products were down 23% in the Retail Affluent segment as customers were reluctant to commit to long-term savings products in light of the higher risk of job losses and lower disposable incomes. In the Retail Mass segment, recurring premium savings sales were down 5% mainly as a result of economic pressures. The new commission structure on savings products also contributed to the lower sales of recurring premium savings products in the Retail segments. However, we grew our recurring savings sales by 139% in the Corporate segment as a result of higher sales of our umbrella funds, our increased focus on building the direct sales channel and expanded distribution through retail intermediary channels.

Single premium sales

Single premium sales were down 6% on prior year due to lower annuity sales. Corporate annuity sales were affected by volatility in the market during the first half of the year which led to greater caution by trustees, as well as some pension funds being under-funded and, hence unwilling to transfer their business to us and having to make a net contribution to the fund.

Life sales in the second half of the year improved by 35% in rand terms compared to the first half and by 1% compared to 2008, as confidence began to return to the economy and markets rallied. In Retail Affluent, life sales improved by 26% in the second half after we enhanced our Investment Frontiers fixed bond and Greenlight products. In Retail Mass, we improved our life sales by 33% in the second half as a result of the increase in productivity of our sales team. We secured new customers into our umbrella scheme, called Evergreen, in the last quarter of the year, which boosted our Corporate recurring premium sales by 57% compared to the first half of the year. The strong pipeline we had in Corporate in the first half of the year materialised in the second half of the year, resulting in 45% growth in single premium sales over the first half.

A more detailed review by segment is included in the Financial Disclosure Supplement which is available at www.oldmutual.com.

Unit Trust Sales

Unit trust sales were 12% behind 2008, with lower flows through Old Mutual Investment Services (OMIS) in 2009 partially offset by good flows into money market unit trusts early in the year and inclusion of Futuregrowth unit trusts in our product range in 2009. Money market unit trusts slowed down in the second half of the year as a result of a decline in interest rates. The 2008 comparative numbers were boosted by a one-off R2bn inflow into the Money Market fund from the Galaxy platform. Sales in the second half of R19.1 billion showed an improvement on the first half levels of R17.4 billion.

IFRS AOP Results

Adjusted operating profit was down 7%, driven mainly by a reduced LTIR, and the long-term business profits declined by only 4% from prior year level. This was mainly due to: 

- impact of lower equity levels on asset-based fees and investment variances;

- mortality and disability losses on Group Permanent Health Insurance and Group Life Assurance products;

- a small charge for share-based payments this year compared to a large credit in the prior year as a result of the strong Group share price performance; and

- the loss of seven months' contribution to profit from joint ventures with Nedbank.

Excluding the contribution from Nedgroup Life in both 2008 and 2009, profit on the life business was flat compared to the prior year.

In South Africa, life business adjusted operating profit declined by 19% in the second half of 2009, mainly because the first half included higher contribution from reserve releases than the second half, as well as the absence of profits from Nedgroup Life and BOE.

Asset management operating profit in South Africa was down 16% on prior year as a result of:

- lower average asset values and a reduction in the proportion of assets held in equities (which attract higher fees) adversely impacting base fees;

- lower third-party managed funds

- lower transactional revenue in Old Mutual Properties business;

- mark-to-market losses in our Old Mutual Specialised Finance (OMSFIN) business; and

- higher share-based payment costs.

The factors above were partially offset by higher performance fees earned in the second half of the year and higher revenue on the term portfolio of OMSFIN as the interest rate cycle turned. Asset management profits increased by 68% in the second half of 2009 compared with the first half following the recovery of equities and improved OMIGSA investment performance, which resulted in higher performance fees. The Emerging Markets asset management result included an increase in asset management profits in Latin America.

LTIR was 18% lower at R1,522 million after a 330 basis point decrease in the rate of expected return (from 16.6% in 2008 to 13.3% in 2009), combined with a marginally lower average asset base. The asset class split for 2009 was 30% equities, 70% cash and bonds, compared to 48% equities and 52% cash and bonds for 2008.

Value of new business and margins

The value of new business margin (excluding Nedgroup Life) remained flat at 16% on an APE basis and improved from 2.2% in 2008 to 2.3% in 2009 on a PVNBP basis mainly due to more favourable operating assumptions changes for new business.

MCEV Results

Market Consistent Embedded Value (MCEV) operating earnings after tax declined by 47% from the 2008 level. This was mainly due to lower than expected returns which decreased by R1.7 billion (based on lower one-year swap rates and a lower opening embedded value of R28.4 billion compared to R36.4 billion in 2008), and the impact of adverse operating assumption changes (-R1.0 billion) primarily related to persistency and the capitalisation of certain project expenses.

Net Client Cash Flows

Retail net client cash flows were positive but overall net client cash flows were at R20.5 billion worse than the prior period due to the previously reported net outflow of R16.2 billion from the Public Investment Corporation (PIC). Net client cash flows in the Retail Mass and Retail Affluent channels improved on the prior year as a result of ACSIS and unit trust sales in the Affluent segment, good sales protection sales growth and better than expected mortality experience in the Mass segment. Corporate and OMIGSA experienced net outflows. This was a result of higher benefit withdrawals (especially withdrawal benefits from pension funds on the back of job losses across the economy), two large terminations in Corporate, and net outflows from Futuregrowth in OMIGSA, as well as the PIC outflow previously mentioned. We anticipate further withdrawals from PIC in 2010 as part of their planned mandate reallocation.

Investment performance

Overall OMIGSA investment performance continues to improve. Fifteen of our collective investment scheme funds ended the calendar year in the top quartile of their respective industry categories over one year, with ten and eleven funds achieving top quartile ranking over three and five years respectively. Notable performance has come from Macro Strategy, where all three of their Flexible, Balanced and Stable Growth unit trusts are positioned in the top quartile of their respective categories over the calendar year to end December. Similar recovery has come from Value Equity and Select Equity, where their High Yield Opportunity Fund, Growth Fund and Top Companies Fund are all in the top ten funds (out of 76) in the General Equity category over the year.

Funds under management

Funds under management of R518 billion decreased for Emerging Markets as a whole, mainly due to the inclusion of Skandia Australia's funds under management of approximately R25 billion in 2008. Skandia Australia was sold in March 2009. FUM in OMSA improved by 2% from 2008 as a result of acquisition of ACSIS and positive market returns partially offset by negative net client cash flow.

Outlook

The South African economy emerged from recession in the third quarter although consumer confidence remains low. Latest government predictions are for the South African economy to grow by 2.3% in 2010, and consumer confidence is expected to continue to increase. However, some concerns remain as private debt levels are still above sustainable levels and further job cuts are expected despite the economic recovery.

We believe that the outlook for the rand is favourable because of the high interest rates, a narrowing trade deficit, the global recovery and growing confidence regarding South Africa's economic policy direction, as evidenced in the recent Budget.

The long-term outlook for the savings and investment environment is positive and is supported by a combination of factors:

-      the prudent fiscal and monetary policies of the past years are expected to continue the recent trends of the economy returning to a robust growth path by the end of 2010;

-      the growing emerging black middle class and affluent markets, supported by the reduction in interest rates in 2009, the now-growing economy and Black Economic Empowerment efforts should sustain consumer spending growth;

-      the Government's continuing investment in infrastructure and public sector employment programmes;

-      Governmental policies for the formulation of a framework for mandatory retirement savings; and

-      improvements in the level of financial education and the transparency of financial products.

The short-term picture looks increasingly optimistic, but remains at risk from market volatility as well as volatility in the rand. We are monitoring the current situation with increasing vigilance and are well positioned to react quickly to any unfavourable eventualities.

In 2010 we will continue our activities to transition from a traditional life assurer to a modern savings and investment business as well as continuing to grow the business and underlying net client cash flows. We will work on growing distribution, improving investment performance and service levels as well as expense management.

We also continue our measured expansion into the Rest of Africa. Africa is an important growth market given improvements in governance and increased disposable wealth, leading to a growing demand for financial services products.

In Latin America we will continue to focus on how to grow the business by leveraging strengths and capabilities in OMSA and the rest of the Group. We will broaden our retail product offering, expanding our distribution, and developing asset management capability for our corporate business.

Long-Term Savings: Nordic

Continued strong net client cash flows, rising FUM and strengthened relations with distributors

Highlights (SEKm)	2009	2008	% Change
Long-term business adjusted operating profit	502	754	(33%)
Banking business adjusted operating profit	193	283	(32%)
Asset management adjusted operating profit	42	39	8%
Adjusted operating profit (IFRS basis) (pre-tax)	737	1,076	(32%)
Return on equity*	11.7%	17.0%
Operating MCEV earnings (covered business) (post-tax)	965	1,839	(48%)
Return on embedded value (covered business) (post-tax)	8.1%	12.9%
Life assurance sales (APE)	2,819	2,599	8%
Unit trust/mutual fund sales	4,708	3,207	47%
PVNBP	13,774	12,108	14%
Value of new business	526	397	32%
APE margin	19%	15%
PVNBP margin	3.8%	3.3%
Net client cash flows (SEKbn)	11.6	7.0	66%
Highlights (SEKbn)	2009	2008
Funds under management	127.2	91.9	38%

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

A summarised sterling version of above table is shown in the Group Finance Director's Review.

Sales

New sales in Nordic increased by 8% compared to the prior year, driven by the very successful Skandia Depå product sold through Skandiabanken direct sales, the internal advisory channel and brokers. Retail business was strong with muted impact on our particular target markets from the recession. However, the effects of the economic downturn did have an adverse impact on occupational pension sales in the Swedish corporate sector with lower inflows as a result of less workforce mobility, lower salary increases, and higher than expected premium cessations due to layoffs. Management closed down sales of an unprofitable unit-linked product in September 2009 and this had a meaningful impact on sales growth in the final quarter of 2009.

Nordic had excellent growth in mutual fund sales, which increased by 47% compared to the prior year. The driver behind this growth was Skandia Global Hedge, one of the best performing hedge funds in Sweden, which attracted SEK950 million of inflows. In addition, during 2009 there was a material inflow of customer fund holdings from other banks as the result of a marketing campaign launched early in the year.

IFRS AOP results

IFRS AOP decreased 32% in 2009 compared to the prior year. The fall in interest rates in Sweden and specific differences in valuation basis between IFRS assets and the liabilities under Swedish regulations resulted in unrealised losses of SEK119 million in the assets backing reserves in the unit-linked and health businesses. Interest rates are now at a historical low in Sweden. The health insurance business (rebranded as Lifeline) was also negatively affected by the higher cost of claims and lower premium income. Management has re-priced the business and made changes to both products and policy conditions. In Denmark, where similar management actions were taken in early 2009, the business showed considerable improvement in the second half of 2009, and similarly the Swedish business is expected to improve in 2010.

Skandiabanken's results were weaker due to lower net interest income following the repo rate declines during the year and the impact on the margin of prudent liquidity management. Credit losses increased marginally, but the credit loss ratio is still at a low level (0.14% in 2009 compared to 0.13% in 2008), reflecting the low-risk nature of Skandiabanken's lending business, and the stability of the Nordic residential market.

IFRS AOP was positively affected by increased investment value in the private equity portfolio of SEK51 million. The second half of 2009 showed strong results in the unit-linked business due to positive growth in FUM driven by positive stock markets trends, together with a strong NCCF, thus increasing fund-based income.

We are continuing to review the expense base of the business, and will seek to cut costs in 2010 where we are able to do so.

Skandia AB and Skandia Liv have decided that for the time being there will be no changes made to the corporate form of Skandia Liv, but that they will be moving forward with the objective "One Skandia", maintaining a close cooperation between the two companies.

Value of new business and margins

The value of new business and profit margin increased substantially during the second half of 2009, due to a more profitable business mix, positive operating assumption changes and sales growth. The business mix was positively affected by the closure of the private regular premium unit-linked product referred to above, which was replaced by a much more profitable, lower commission product. The assumption changes are driven by changed mortality pricing and positive experience as well as high transfers into the unit-linked decumulation product, thereby prolonging the duration significantly. The effects came through during the second half of 2009, and PVNBP margin improved from 3.3% for 2008 to 3.8% for 2009, and APE margin from 15% for 2008 to 19% for 2009.

The price pressure in the Swedish market continues, especially in the corporate market. In the medium term, the margin is still expected to remain in the high teens, but this will require continued high new sales, product development and cost control.

MCEV results

Operating MCEV earnings were down 48% on the comparative period mainly due to lower than expected existing business contribution arising from historically low interest rates, capitalised one-off developmental project costs, and increased outward transfer assumptions during the accumulation phase of corporate business. The closing MCEV has increased substantially, especially in the second half of the year, due to the impact on non-operating earnings of strong stock market performance leading to large positive investment variances, and a release of provisions after the settlement of certain longstanding litigation matters.

NCCF

Net client cash flows for the year were an exceptional, and record high of, SEK 11.6 billion, representing 13% of opening funds under management. The positive performance was largely driven by a combination of strong Life sales, especially the Investment Portfolio product, regular premium unit-linked sales, and lower outflows related to maturities and surrenders in the occupational pension business. Positive flows in mutual funds also contributed to this performance. Net client cash flow increased 66% compared to the prior year, although it weakened in the second half as a result of the increase in the pace of corporate outflows.

Funds under management

Funds under management at 31 December 2009 were SEK127 billion, up 38% from the level at 31 December 2008, and 18% from 30 June 2009. The increase was due to strong net client cash flows and positive development on the equity markets. This is a significant improvement compared to previous periods.

Our 2009 investment performance was excellent. For the third consecutive year, Skandia Link was awarded for best performance among the unit-linked companies in the Swedish market. During 2009 Skandia Link's average client enjoyed investment performance of 29%. Average performance on a weighted index (66% MSCI AC World and 34% OMRX Total Market) during the same period was 15%. Clients are increasing their appetite for investment risk by weighting a larger proportion of their holdings in equities, and in particular emerging markets equities.

Outlook

Although the financial markets continue to be volatile, the outlook for the Nordic markets remains positive. The mass corporate market is challenging with an increasing movement towards low margin tendered business. We continue to focus on strengthening the market position by delivering first-class products and offerings to customers both on the private market, as well as the higher margin segment of the corporate market. A key part of this is the improvements to the Skandia Nordic platform, Skandia.se, which was re-launched during the second quarter of 2009. With the launch of a series of combined offerings such as the Skandia Investment Portfolio, Skandia Depå, the business has started to exploit the potential of decumulation products and increased cross-selling. We have also strengthened our ALM capacity, improved our operating model to be more customer oriented, and announced changes in the commission structure to improve future profitability. With increased focus on client needs and profitability, we remain convinced that we can turn this period of disruption into a lasting opportunity. The broad product mix and market position of our business gives us a competitive advantage in a challenging market.

We are disposing of further private equity assets and expect a pre-tax profit of approximately SEK126 million from this source in 2010.

Long-Term Savings: Retail Europe

Key foundations laid for the future development of the business

Highlights (€m)	2009	2008	% Change
Adjusted operating profit (IFRS basis) (pre-tax)	25	36	(31%)
Return on equity	9.0%	18.6%
Operating MCEV earnings (covered business) (post-tax)	(49)	18	(372%)
Return on embedded value (covered business) (post-tax)	(7.9%)	2.6%
Life assurance sales (APE)	75	114	(34%)
Unit trust/mutual fund sales	27	59	(54%)
PVNBP	603	699	(14%)
Value of new business	(6)	13	(146%)
APE margin	(8%)	11%
PVNBP margin	(1.0%)	1.8%
Net client cash flows (€bn)	0.6	0.6	0%
Highlights (€bn)	2009	2008	% Change
Funds under management	4.7	3.7	27%

A summarised sterling version of above table is shown in the Group Finance Director's Review.

Sales

The Retail Europe countries were impacted by the difficult economic environment, which affected the consumer confidence in our products. Unit-linked markets decreased materially in premium size during 2009, whilst the relative attraction of guaranteed products increased. This impacted the normal increase in new business towards the year-end which did not materialise to the same degree as in previous years. Overall APE sales in Retail Europe decreased by 34% compared to the prior year.

2009 was a critical year for Retail Europe during which key foundations have been laid for the future development of the business. In particular an integrated senior management team has been established and functional heads have been appointed for key cross-European functions, such as finance and risk. The business is now working as a cross-border team whilst at the same time maintaining focus on the distributor requirements in each market.

In the second half of the year, efforts to tackle new sales development were increased within all Retail Europe businesses. The objective is to grow to achieve critical mass in all our chosen niche markets. Examples include intensifying the relationship with special distribution partners in Germany, the initiation of cooperation agreements with Deutsche Bank in Poland, and the development of the new Safety Plan product in Switzerland.

The combined impact of these initiatives and the recovery of the stock market meant that in the fourth quarter new sales rose by 57% compared to the previous three months, driven particularly by the German and Polish markets. The variance against the fourth quarter of 2008 was reduced to 10%. This impact was most marked in Poland where in the final quarter sales were 145% above the same period in 2008 and 73% above the previous quarter. Similarly, German sales in the final three months of the year exceeded the previous quarter by 76%. Overall, the rally in sales, underpinned by the rally in equity markets, positioned the business well at the end of the year after a very weak first half of 2009.

IFRS AOP Results

The IFRS AOP for 2009 was €25 million, 31% lower than in 2008, mainly affected by reduced fees, a lower investment result and a policyholder profit sharing agreement with the regulatory authorities for the German business. The main contribution to the IFRS AOP in 2009 has been made by the Austrian business, exceeding the prior year result, driven by lower administration costs and reduced commission expense. All markets achieved positive IFRS results.

All businesses realised substantial cost savings in administration and staff costs in 2009, aligning the cost base to the reduced sales environment. However these savings were partially offset by the investment to integrate the new management structure, and the one-off costs from closing the businesses in both Hungary and Czech Republic, and our contribution towards the now-closed ELAM office.

Value of new business and margins

The VNB in 2009 was negative €6 million, significantly below 2008 which was €13 million.

The negative VNB and negative profit margin were mainly driven by the decrease in new sales which caused sales volume acquisition expense overruns that could not be entirely compensated for by savings in expenses. A reduction in higher margin single premium business also added to the shortfall. Despite the lower new sales, Poland, maintained a positive profit margin in 2009.

MCEV Results

The decrease in 2009 MCEV operating earnings is mainly driven by the lower new business contribution, adverse experience variances and changes in operating assumptions.

In comparison to the 2008 results, experience and assumption changes had a negative impact of €24 million. This is as a result of the one-off experience variances and a further assumption change for profit-sharing in Germany, as well as expenses overruns, other minor methodology changes, and the recognition of one-off developmental project costs. This was offset by positive persistency assumption changes and less adverse persistency experience than in 2008.

The management action taken in 2009 and the rebound in the markets provide a positive backdrop to the MCEV prospects for 2010.

NCCF

The NCCF in 2009 remained robust at €551 million due to stable regular premiums, and was flat relative to 2008. The continued strong performance of the NCCF represented 15% of the opening funds under management.

The strong result is driven by the positive development of surrender experience, which was 20% below 2008 in the unit-linked business. Management action to increase client and broker communication led to this positive result despite the ongoing volatility in financial markets.

Funds under management

Funds under management ended the year 27% above the position at 31 December 2008, heavily benefiting from market performance and stable NCCF. This includes positive market movements on portfolio values of 19% of opening FUM, reflecting the rise in financial markets seen across the globe in the second half of 2009. In the German business the €2 billion mark was exceeded for the first time.

Equity funds particularly benefited from the capital market developments in 2009. Actively managed portfolios as well as guarantee funds rose in line with total client funds (31% and 27% compared to 30% in total client funds). This was close to leading market indices such as the MSCI World (in EUR) which rose by 23%.

FUM was supported by the effective asset mix of the portfolio and reflects the investment appetite of our clients. While client funds were impacted by the fall in equity markets during the financial crisis, they have benefited from the recovery that started in the second half of the year, and this trend is expected to continue throughout 2010.

Outlook

Retail Europe faces another challenging year, but we are confident of increasing market share and strengthening our position. Our core strength is the flexibility of our unit-linked concept with embedded guaranteed funds and our strong investment expertise. The senior management team has established a systematic change management approach to steer and successfully implement the ongoing transformation of the business in the challenging international environment. We continue to explore opportunities to create efficiencies by utilising the skills, and capacity available in the South African business.

Despite the ongoing uncertainty in our markets, we expect improved performance and profit growth in 2010.

Long-Term Savings: Wealth Management

Improved sales performance in Old Mutual's largest market

Highlights (£m)	2009	2008	% Change
Adjusted operating profit (IFRS basis) (pre-tax)	106	150	(29%)
Return on equity*	7.9%	9.7%
Operating MCEV earnings (covered business) (post-tax)	(4)	229	(102%)
Return on embedded value (covered business) (post-tax)	(0.3%)	14.3%
Life assurance sales (APE)	617	664	(7%)
Unit trust/mutual fund sales	3,210	2,561	25%
PVNBP	5,042	5,540	(9%)
Value of new business (post-tax)	49	67	(27%)
APE margin	8%	10%
PVNBP margin	1.0%	1.2%
Net client cash flows (£bn)	2.5	2.0	25%
Highlights (£bn)	2009	2008	% Change
Client funds under management	46.9	38.9	21%

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

A summarised version of above table is shown in the Group Finance Director's Review.

Overview

Wealth Management has been operating in volatile markets during 2009. The UK has experienced a severe recession, while France and Italy have also been impacted to a lesser degree. While stock markets have now recovered somewhat, customer confidence in savings has been significantly affected by uncertainty. During the second half of the year, sentiment improved and as our customer proposition became sharper, we have seen good growth in our sales, strong net client cash flows and a marked uplift in funds under management. The fourth quarter was particularly strong, contributing £203 million of the total £617 million APE sales for the year, and £1,066 million of the £3,210 million unit trust/mutual fund sales for the year.

Sales

UK market

In the UK, our platform proposition is working well. This was particularly evident in the second half of the year, when sales reached record levels and we adjusted our product offering to sustain its relevance in the changing market environment. The degree to which business is transitioning to our platform-enabled model is highlighted by the material increase in contribution from non-covered mutual fund business in the UK, which recorded a 22% increase in sales when compared to 2008. By contrast, our covered business sales in the UK declined by 6% year-on-year as client investment preference continued to shift towards mutual funds, and away from the more traditional life product offerings. We remained the leader in the UK platform market, with 33% market share (in assets) (source: Lipper) at the end of the fourth quarter, well ahead of our competitors. Our strong performance in the UK platform market is aligned with our focus on delivering transparent, convenient and efficient services. We are pleased with the momentum in this business, and this has been recognised in the positive responses from a syndicated study conducted among pensions and investment providers by ORC, a UK market research company, in the third quarter.

International markets

In the markets in which Skandia International operates (primarily UK offshore, the Far East, Latin America and the Middle East), the negative impact of the global recession has had a lagged effect compared to 2008 when new sales were relatively unaffected, with 2009 showing falls in inflow levels compared to 2008. However, sales in the second half of 2009 showed some improvement on the first half. Single premium business represents 44% of our International business. In the UK single premium offshore market, we have overtaken two competitors and are now ranked second with a 14% market share based on statistics for the third quarter of the year (source: MSE), a 4% increase on previous periods. The UK offshore market represents 26% of our total business.

Following a change in government pension legislation, we have decided to cease writing new pension business in Finland and are reviewing our other products. Pensions were a significant profit generator for Skandia International in the past, and the curtailing of that activity there will result in changes to the emphasis of the business and reduce the cost base.

Continental Europe

In continental Europe (France and Italy), we have benefited from close and positive relationships with distributors, resulting in sustained inflows throughout the year. We continue to explore mechanisms to improve traction in these markets, both in terms of the efficiency of our operational structure and the nature of our relationships with distribution channels. Our continental European business overall delivered covered business APE sales 54% higher than in 2008 (on sterling basis), as both new and existing distributor relationships generated improved sales. In Italy, our market share (assessed as new sales in the unit-linked segment) grew from approximately 4% at the end of 2008 to 12% at the end of 2009 (source: Ania). In France, the market remains oriented towards guarantee products but sales in the last quarter showed some recovery, rising by 33% over the previous quarter of 2009 in sterling terms. We have decided to reduce our activity with financial planners in Spain given the lack of business, and we will adjust our headcount accordingly.

IFRS AOP results

IFRS adjusted operating profit was 29% below prior year levels on a pre-tax basis. This reflects the operating leverage of the business, with lower year-on-year net sales, and lower average levels of funds under management over the course of the year, resulting in reduced management fee revenues. Lower interest rates have negatively impacted shareholder investment return and profit levels on the protection business in the UK. These negative movements were partially offset by increased policyholder contribution profit recognition in accordance with the three-year smoothing policy. The large contribution to profits of the fourth quarter of 2008 following the market weakness are smoothed over twelve quarters and so the full-year impact is only felt during 2009.

The IFRS AOP pre-tax result was negatively impacted by one-off items in 2009. As previously announced, there were a number of write-offs in the first half of the year, relating to unit allocation errors in International (£19 million) and France (£4 million), a £6 million provision in the UK for legacy product valuation and a write-down of £6 million on a property unit trust investment relating to the Glanmore fund.

On a post-tax basis, the IFRS AOP result is 8% below 2008, due to a large reduction in the AOP effective tax rate. The effective tax rate for 2008 was unusually high at 38%, compared to 19% in the current year.

A significant portion of the UK AOP result, in both 2008 and 2009, arises from gains in respect of policyholder contribution. These gains fluctuate over time, although we would expect a normalised level of gains to be £30-£35 million per annum. In 2008 and 2009, the gains recognised within the adjusted operating result amounted to £59 million (pre-tax) and £96 million (pre-tax) respectively, reflecting the market volatility experienced. In accordance with industry practice and our stated accounting policy, these gains have been smoothed through our results over a three-year period, rather than recognised immediately in AOP. In 2010 we would expect the gain to be approximately £100 million (pre-tax), falling to £60 million (pre-tax) in 2011, before it reverts to normalised levels in 2012.

Under the revised management structure of the Wealth Management unit, a robust programme is underway to adjust how we serve the market, particularly in the UK, and to restructure the operational infrastructure supporting the business. Besides ensuring that our market offering is oriented towards servicing the needs of our distributors, the programme is expected to deliver cost savings across the business of £45 million on a run-rate basis by 2012, with associated one-off restructuring cost at approximately the same level. £13 million of costs have been already incurred in the 2009 AOP results, with the majority of the balance anticipated to be incurred during 2010, and an associated run-rate saving of £11 million already achieved. We have also streamlined the operations of Skandia Investment Group (SIG), appointing a new head and announcing the closure of the US sales office, which has resulted in £1 million in restructuring costs in 2009.

Value of new business and margins

Compared with 2008, the value of new business and profit margins were influenced by three main factors:

-      Lower sales volumes across all markets, with APE down 7% year-on-year, which had a negative impact of £5 million on VNB and a 10 basis point reduction in the PVNBP margin.

-     This was offset by the positive impact of the reduction in the effective tax rate on business value created on new sales in our offshore markets, delivering £11 million of VNB and 22 basis points of PVNBP margin.

-      The internal expense base did not scale down in line with reduced sales production. Rather the internal acquisition expense base grew year-on-year leading to a £15 million reduction in VNB and a 30 basis point reduction in PVNBP margin. The increase in expenses reflects investments in the platform business, but highlights the opportunity for further operational efficiencies in the future.

MCEV results

The Market Consistent Embedded Value (MCEV) operating earnings after tax declined from £229 million in 2008 to a loss of £4 million in 2009. The change was mainly due to a lower than expected existing business contribution (based on lower one-year swap rates), a lower new business contribution, adverse experience and operating assumption changes partially offset by the removal of dividend tax in International. For the latter effect, the impact on adjusted net worth was recognised within the operating earnings, while the impact on VIF was recognised in non-operating earnings.

In 2009 the adverse operating assumption changes of £99 million were the net impact of:

-      strengthening persistency assumptions in both the UK and International businesses (-£81million), of which -£24 million was in response to the new regulation in Finland,

-      capitalisation of planned development and project spend together with a strengthening of maintenance expenses (-£66 million), 

-      a higher fee income assumption (£36 million)'

-      changing a morbidity risk assumption in the UK to align with positive experience (£12 million)' and

The fall in operating MCEV earnings is the driver of the 14.6% year-on-year fall in RoEV.

NCCF

Net client cash flows showed a 25% improvement on the prior year, driven by good new sales inflows and improving persistency.

On the UK platform, annualised surrender rates improved from approximately 14% of average funds under management at the beginning of the year to 12% by the end of 2009. As we migrate business to the platform, the UK legacy business has seen lower inflows coupled with higher surrender rates, which has resulted in negative net client cash flow for the year from this part of the business. Surrender rates on the legacy book appear to be stabilising, and a retention team has been mobilised locally to improve persistency, including assessing options for controlled transfers to the platform where this would serve client investment objectives. However, we do anticipate that the traditional book of business will gradually decline as more investors move away from the legacy products towards the platform-enabled investment propositions.

Net client cash flows in our offshore business were impacted mainly by lower sales levels, with surrender levels remaining relatively high as a result of market conditions. 2009 surrender experience, influenced by broker-specific surrenders and changed regulations in Finland, have prompted us to review and strengthen our persistency assumptions, the effect of which can be seen in the MCEV indicators. With recent improvements in surrender rates, our outlook for persistency in the coming periods is cautiously positive.

Strong inflows and maintained focus on persistency have resulted in good net client cash flows in continental Europe, which were significantly higher than in 2008, and reached 19% of opening funds under management on a sterling basis.

Funds under management

Funds under management recovered strongly in 2009 as global equity markets lifted from their low levels at the start of the year and as a result of strong net client cash flows. 2009 full-year funds under management were 21% above 2008 closing position. Net client cash flow contributed 6% in asset growth, while market movements on the portfolio added a further 15% to total funds under management. Throughout the year, we have witnessed gradual changes in the asset mix, as clients started shifting from conservative portfolios with high fixed income weightings into relatively more risky asset classes as equity markets recovered. This has a positive impact on the run-rate of our revenue streams, which are substantially driven by fund rebates.

Investment performance on funds selected and managed by SIG showed a marked improvement in 2009, with both our core range of researched third party funds and our proprietary funds performing well, particularly since the restructure of the UK fund range during 2009. In addition, SIG's Asset Allocation Model Portfolios have consistently outperformed benchmark since launch, with significantly lower levels of volatility relative to benchmark. 2009 was an excellent year for SIG, with overall fund range performance in the top quartile in the industry, having 64% of funds ahead of benchmarks.

The improvements in investment performance in 2009 were aided by the establishment of a dedicated portfolio management team, while the UK fund range restructuring concentrated effort and scale into funds, cut total expense ratios and enabled the use of tactical asset allocation for the first time. In addition, improving economic and market conditions boosted risk appetite, with active managers being rewarded for taking risk.

Outlook

Over the last quarter of the year, we attracted markedly better new business inflows on the back of sustained financial market performance during 2009. While the recovery in the global economy is still fragile and individuals' economic situations remain constrained, we believe that investor appetite for long-term investment is returning, while the gap between the need to save and actual savings levels is increasing. The sustainability, speed and strength of the economic recovery are difficult to predict; however, we are cautiously optimistic. We expect that competition will be tough in 2010, as providers race to capture the returning market. We believe that those providers with market-relevant product offers and high levels of service quality and responsiveness will be the winners.

The aftermath of the recession and its long-term impacts on customer behaviour, trust and risk appetites is likely to be significant for the industry over the next few years. However, we believe we are well-positioned to respond to these changes as we build out our product proposition and offers with continued focus on transparent, advice-led business.

Our market share has grown over 2009, which demonstrates that our products and service quality remain relevant in the market. As the market recovers, we expect this to position us strongly for further growth in funds under management. The development of product spread and depth in the UK platform market is critical to the success of the business and we will be accelerating our focus on this in the period to 2012.

Our efficiency programme is intended to align the cost base of the business with the nature of the lower margin platform business. We expect that this, coupled with improving volumes and revenue, will have a positive effect on IFRS and MCEV results in future years. Further restructuring costs are expected in 2010 as we implement these programmes. We have set ourselves goals for 2012 of delivering a return on equity of 12-15%, net client cash flow of at least 5% of opening funds under management, as well as £45 million of cost savings referred to earlier.

 

Long-Term Savings: US Life

Continued progress to improve profitability and enhance risk management

Highlights ($m)	2009	2008	% Change
Adjusted operating profit (IFRS basis) (pre-tax)	76	(425)	118%
Return on equity	10.5%	(25.3%)
Operating MCEV earnings (covered business) (post-tax)	417	(676)	162%
Return on embedded value (covered business) (post-tax)	22.7%**	(97.6%)
Life assurance sales (APE)	107	251	(57%)
PVNBP	1,000	2,307	(57%)
Value of new business	22	(21)	205%
APE margin	20%	(8%)
PVNBP margin	2.2%	(0.9%)
Net client cash flows ($bn)*	(1.5)	(0.4)	(275%)
Highlights ($bn)	2009	2008
Funds under management*	16.7	15.2	10%

*     Stated on a start manager basis as USAM manages $6bn of the funds on behalf of US Life

**    Calculated as the operating MCEV earnings (post-tax) divided by the absolute value of the opening MCEV

A summarised sterling version of above table is shown in the Group Finance Director's Review.

Overview

During 2009 we successfully transformed and scaled back the business. The major actions of reducing the product profile, scaling back distribution with a focus on top-tier producing agents, lowering staff numbers, and carrying out a full review of the company's outsourcing model are now complete. As a result of these actions, the company made significant strides in addressing the three core focus areas in the business, which are operational efficiency and cost control, product and assumption risk, and the ongoing effort to de-risk the company's fixed income investment portfolio.

Sales

Total US Life sales (APE basis) were down 57% over the comparative period as a result of a planned reduction in the number of products offered as well as focusing on top-tier producing agents and conserving capital. As planned, total gross sales declined from $1,950 million in 2008 to $860 million in 2009. Elsewhere, the wider life insurance industry suffered a decline in sales not seen since the end of World War II.

The product profile was streamlined to focus on more profitable sales and products with lower new business capital strain. Fixed indexed annuity (FIA) sales were down 47% to $60 million on an APE basis. This product line is the company's key offering, contributing 56% of total APE for 2009 and currently offers attractive margins. It meets the needs of customers who seek principal protection, as well as fixed interest guarantees or a guaranteed fixed income. Immediate annuity sales represent 18% of total 2009 APE and remain an important offering as they contribute to capital in the year of sale.

APE for the Universal Life product suite was down 57% to $22 million on an APE basis and our core life product, Indexed Universal Life, fared the best out of all life product segments, partially due to the elimination of Universal Life products other than Indexed Universal Life. Indexed Universal Life continues to offer attractive sales potential in the life market due to indexed crediting options, and tax-advantaged growth and income options. Term Life sales were suspended in 2009 due in part to their capital inefficiency as a product.

Although volumes were managed down by design, key distributors that drive the company's sales remain largely intact year on year. In the annuity distribution channel, four of the top five and eight of the top ten distributors are the same in 2009 as in 2008. In the life distribution channel, three of the top five and seven of the top ten distributors are the same in 2009 as in 2008. Having recently concluded the company's annual distributor conference, general consensus was that US Life exceeded expectations in dealing with difficult economic conditions in 2009 through a transparent communications plan, creating a new foundation for future growth. Confidence from this group remains high and key distributor relationships are strong.

IFRS AOP results

Pre-tax adjusted operating profit (IFRS basis) was $76 million for 2009 compared to a loss of $425 million for 2008. Gross margins (prior to DAC amortisation) of $430 million in 2009 compared to a loss of $54 million in 2008. The prior year was impacted by a $436 million mortality assumption change for the Immediate Annuity line. The underlying additional $48 million of margin earned in 2009 is primarily driven by the annuity product lines which showed better underwriting experience. Mortality on the Immediate Annuity line improved over 2008 while 2009 includes a gain arising from commutation of 17 large cases. The FIA line generated higher surrender charges as a result of increased surrender activity. Offsetting the better underwriting experience was lower net investment income due to holding cash at the low interest rates of the period and the increased level of surrender activity. DAC amortisation was $354 million and $368 million respectively for 2009 and 2008. Unlocking in 2008 was due to prospective annuity assumption changes while that of 2009 was due to the retrospective amortisation impact of surrenders and the decline in premiums from Universal Life sales.

IFRS operating expenses were $58 million or 33% lower over the comparative period resulting from tight expense management and cost renegotiations of three key service providers.

Value of new business and margins

Value of new business increased by $43 million over the comparative period, with the margin for the year at 20%. The increase in margin was mainly due to higher swap rates and the focus on selling more profitable business. Management actions to improve margins on fixed indexed annuities have also increased the value of the in-force. The traditional life business has been shrunk given its capital inefficiency.

MCEV results

Operating MCEV earnings improved significantly up $1,093 million from the prior year loss of $676 million. This was mainly due to increased expected existing business contributions, which accounted for $363 million of earnings in this reporting period compared to $44 million in the comparative period, and the large negative experience variances and assumption changes in 2008 which were not repeated in 2009 (experience variances were negative $2 million in 2009 compared to negative $280 million in 2008, and assumption changes had a positive impact of $47 million in 2009, compared to negative $619 million in 2008). MCEV does not capitalise investment spreads in excess of the adjusted risk free reference rate up-front, as was the case under EEV. Were these spreads to be capitalised, the increase in embedded value from the 2008 level would be in excess of $900 million. Unlike for 2008, guarantees on the policies in force in 2009 although above the low reference risk free rates prevalent for the period, were generally less than the actual yield earned on the portfolio.

During the period we commuted a block of our SPIA contracts to the owners through their third party advisors at a value less than the reserve established for this block after the recent reserve strengthening, giving a positive variance. Although the experience from the total SPIA annuity block can be expected to be volatile, since it is a small book with some large individual contracts, we are confident that the reserve adjustments made in previous periods are adequate to cover the future expected outcomes in respect of this business and the transaction described above supports this view. Changes in lapse assumptions due to improved experience resulted in a small gain, while amendments to the opening TVOG (time value of options and guarantees) balance and the lapse methodology also gave a small net gain. We consider that the anticipation of attractive crediting rates available from the rise in equity markets during 2009 had a progressively beneficial impact on surrenders.

The large movements in non-operating earnings demonstrate the sensitivity of the US Life MCEV to changes in the economic environment, as market consistent methodology means that results move more directly in line with the movements in the market in general. Since assets are marked to market the high unrealised losses in the bond portfolio have a large impact on the MCEV. The $1.8 billion decrease in unrealised losses in 2009, partially offset by a significantly lowered liquidity premium assumption (100 basis points in 2009 from 300 basis points in 2008), was the key driver of a net positive $681 million and 8.30p per share impact on non-operating earnings, to the Group MCEV earnings per share respectively, at 31 December 2009.

NCCF

Net client cash flows were negative compared to the prior year due to the decision to reduce new business volumes and due to an increase in surrender activity during the first half. We believe that this was driven by policyholder liquidity needs and the adverse effect that the equity markets had on our fixed index annuity returns. During the second quarter of 2009, a conservation programme was introduced to focus on the reduction of full surrender activity. The programme delivered benefits and surrender experience trended downwards in the second half of 2009. By the end of 2009, the four-week average for full surrender activity was nearly half the level seen at the peak in second quarter of 2009 and was in line with long-term expectations.

Funds under management

Funds under management ended the period at $16.7 billion, up 10% from the opening position primarily due to a $1.3 billion (10%) increase in the market value of the investment portfolio and investment income for the period. This was partially offset by negative net client cash flows of $1.5 billion, or 10% of opening funds under management.

Investment portfolio

The fixed income portfolio continued to be affected by poor economic and volatile financial market conditions, however the fair value of the portfolio increased $1.3 billion from year-end 2008. The yield on the book value of the fixed income portfolio was 5.82% (including cash and other invested assets), and has not changed significantly from that of 2008, as reinvestment of cash has not materially changed the overall yield. The company ended the year with $0.8 billion (5% of holdings) in cash and short term holdings, reflecting purchases of assets from cash inflows, as well as with cash proceeds from de-risking and gain-harvesting transactions. Purchase activity has targeted NAIC 1 to 2 rated securities including selectively into the financial services sector. The net unrealised loss position on the fixed income security portfolio improved to $0.5billion at 31 December 2009 ($2.3 billion at 31 December 2008), reflecting a broad recovery in financial markets in general, and narrowing corporate credit spreads in particular and selective de-risking. It has continued to improve to below $0.2 billion as at the end of February 2010. Continued Government purchases in the residential mortgage bond markets, and increased support to the commercial mortgage market through programmes such as the Term Asset-Backed Securities Loan (TALF) and Public-Private Investment Program (PPIP) have also led to narrowing spreads across structured securities, which have also been favourable to the portfolio's unrealised loss position. As the Federal Reserve's support of the Agency market through explicit purchase of such securities comes to an end in the first quarter of 2010, it is likely that Agencies could retreat from current valuations. As such, despite excellent collateral quality, we view Agencies as posing potential spread-widening risk. Similarly, very highly-rated, long maturity securities are at risk of underperformance or negative price action as long-dated Treasury yields move higher on the back of mounting Federal deficits and the need to fund ongoing stimulus programmes.

Approximately $1.5 billion of the fixed income portfolio is classified as Loans and Receivables, which are carried at amortised cost. As a result, $45 million of unrealised losses on a mark-to-market basis are not reflected in the balance sheet in accordance with IAS 39.

During the last three quarters of the year, the financial services sector securities were generally the largest contributors to the improvement in the net unrealised loss position for the fixed income portfolio. With increased access to capital and the prospect of stabilising and improving earnings quality, the likelihood of coupon deferrals for weaker financial hybrids, such as those of US regional banks, appears to be diminishing. Against the backdrop of improved liquidity in the capital markets and a recovery in economic activity, high yield default rates are expected to decline by around 50 to 75% from prior year levels and investment grade downgrades are expected to return towards historic norms. This implies that the worst of corporate defaults and ratings downgrades has passed.

The fair value of the US fixed income investment portfolio at 31 December 2009, after recognition of the impairments, totalled $15.3 billion compared to $14.0 billion at 31 December 2008.

Impairments

During 2009, there were three defaults in the corporate bond portfolio of $14 million included in the total $389 million of IFRS impairment losses on 82 securities. These were partially offset by $35 million of net investment trading gains. As of 31 December 2009 compared to 31 December 2008, $807 million of investment grade securities were downgraded to non-investment grade and $35 million of non-investment grade securities have been downgraded further. Impairment losses included $235 million related to structured securities, with the losses being due to adverse changes in expected future cash flows. The impairment losses were primarily in residential mortgage-backed securities ($138 million), commercial mortgage-backed securities ($80 million), preferred stocks and hybrid securities ($43 million net) and 13 corporate holdings ($111 million), the most significant of which were related to financial sector issuers.

The fixed income portfolio has exposure to approximately $0.8 billion of preferred stock/hybrid instruments amounting to approximately 5% of the portfolio at 31 December 2009 compared to $0.6 billion (5% of the portfolio) at 31 December 2008, with the bulk of this exposure concentrated in the financial services sector. During the first half of 2009, these holdings came under pressure as concerns about financial institutions continued to mount In the second half of 2009, however, the fair value of these securities have recovered sharply, as results from the Federal Reserve's "stress test" of banks were released, and banks and other financial institutions successfully raised capital to bolster their balance sheets.

We monitored closely and reduced our exposure to hybrid preferred securities and other assets in advance of adverse rating migration (e.g. Dubai Ports in 2009) through trading activity. We also selectively harvested gains to offset realised losses. We are encouraged with the progress we have been able to make with better understanding and anticipating the dynamics of the portfolio through our own processes and close co-operation with our expanded investment management roster.

OM Financial Life Insurance Company regulatory capital, including capital contributions, increased slightly compared to statutory 2008 levels as strong statutory operating earnings offset investment impairments. OM Financial Life's required capital was essentially unchanged (at the targeted 300% level). In the end, higher risk-based capital charges resulting from credit rating migration of the portfolio due to investment downgrades and did not have a significant impact in 2009. As expected, credit rating migration took place within the corporate bond portfolio but this was offset by improved charges on the structured security portfolio. The main reason for this was the NAIC RMBS rating initiative that adjusted the asset risk required capital to account for loss severity in the structured security portfolio. As yet no adjustment to the CMBS ratings requirement has been agreed although this and other relief measures are likely to be discussed by the regulators and the Industry.

The risk-based capital ratio increased from 305% at year end 2008 to 312% at 31 December 2009 based on the small movement in both capital and required capital. The US Life business in aggregate did not need additional capital from the Group in 2009, although capital was repositioned between companies within the US Life Group through the transfer of $30 million from OM Re to achieve the 312% year end result. Given our anticipated level of impairments for 2010 of $55 million, and the net capital consumption of our sales plans, we do not consider it likely at this stage that we will require further new capital for this business.

Outlook

By leveraging the business transformation successes accomplished in 2009, the company is well positioned to generate modest, quality returns in the coming year. Sales levels in 2010 are expected to increase over 2009 levels, but within the capital utilisation parameters set for the business and with a targeted focus on profitable products. New FIA and Universal Life products are expected to be introduced in the second quarter of 2010. Expense actions taken in 2009 will provide a lower expense base in 2010. Capital self sufficiency is again the goal of the business for 2010 and the balance sheet, including invested assets, is more conservatively positioned than prior quarter-ends. In 2010, we are assuming a long-run rate of impairments at 30 basis points of our bond portfolio for IFRS AOP.

The economic backdrop in the US continues to be quite muddled, with financial market returns reflecting a sense of optimism and confidence that at times appears at odds with core economic metrics. The impact of the government's extraordinary stimulus efforts has had a direct effect on the narrowing of risk spreads across the board, and credit is flowing again to corporate America. However, the labour market remains challenging, with the unemployment rate hovering at around 10%, and companies still reluctant to materially expand payrolls. The backdrop of high unemployment and below-average economic growth continues to weigh on sentiment in the housing market and this gives rise to risks to surrender levels. The exposure of the US bond market to real estate impairments represents a further source of uncertainty as does the potential price impact on higher quality bonds if rates rise.

Nedbank Group (Nedbank)

Resilient performance in a challenging environment

The full text of Nedbank's results for the year ended 31 December 2009, released on 25 February 2010, can be accessed on Nedbank's website http://www.nedbankgroup.co.za

Highlights (Rm)	2009	2008	% Change
Adjusted operating profit (IFRS basis) (pre-tax)*	6,192	8,800	(30%)
Headline earnings**	4,277	5,765	(26%)
Net interest income**	16,306	16,170	1%
Non-interest revenue**	11,906	10,729	11%
Net interest margin**	3.39%	3.66%
Credit loss ratio**	1.47%	1.17%
Cost to income ratio**	53.5%	51.1%
ROE**	11.5%	17.7%
ROE (excluding goodwill)**	13.0%	20.1%
Highlights (£m)	2009	2008	% Change
Adjusted operating profit (IFRS basis) (pre-tax)	470	575	(18%)

*     Prior year AOP included an amount of R726 million in respect of the sale of Visa shares.

**    As reported by Nedbank in their report to shareholders as at 31 December 2009

Banking environment

The local banking industry experienced an exceptionally tough and volatile year as a result of the impact of the global recession combined with cyclical credit stress in the domestic economy.

Demand for credit slowed dramatically and retail impairments increased significantly as consumers came under severe pressure from falling income, job losses, declining asset prices and record high debt burdens. By the end of 2009 growth in asset-based finance had slowed to 1.0% year-on-year. Interest rates were reduced by 450 basis points to cushion the effects of a rapidly slowing economy and increasing unemployment.

Corporate demand for credit lost momentum due to weak global and local demand, which eroded corporate profits through weaker pricing power, lower commodity prices and a strong rand. Support came from construction projects and increased government spending, boosted primarily by the public sector's infrastructure drive and preparations for the 2010 FIFA World Cup.

Despite the negative economic trends dominating much of 2009, underlying trading conditions showed early signs of improvement around the third quarter. This was led by a rebound in growth in emerging markets, especially China and India, and was followed by initial indications of recovery in most industrialised countries, chiefly brought about by unprecedented government intervention and massive fiscal and monetary stimulation. Improved commodity prices and global demand brought an element of relief to domestic export manufacturers, lifting South Africa out of 'official' recession in the third quarter. There are early signs that the sharp drop in interest rates is starting to revive household credit demand as house prices showed modest signs of a slow recovery towards the end of the year.

Key to the outlook for 2010 will be employment growth. After job losses of nearly one million during the downturn, employment showed early signs of stabilising in the fourth quarter of 2009. Job creation in the formal sector is likely to be slow, with an overall 2% employment gain for the year being expected. This will support household income and lead to some improvement in consumer finances and therefore spending. The rebound is likely to be slower than in previous cycles given weak consumer and business confidence and tighter lending criteria.

Review of results

For Old Mutual reporting purposes, IFRS AOP (pre-tax) profits fell by 30% to R6,192 million.

Headline earnings decreased by 25.8% from R5,765 million to R4,277 million. Basic earnings reduced by 24.7% to R4,826 million (2008: R6,410 million).

Diluted headline earnings per share (EPS) decreased by 29.8% from 1,401 cents to 983 cents. Diluted basic EPS declined by 28.8% from 1,558 cents to 1,109 cents. These results are in line with the guidance given in the third-quarter trading update.

Nedbank's return on average ordinary shareholders' equity (ROE), excluding goodwill, decreased from 20.1% to 13.0%. ROE decreased from 17.7% to 11.5% for the year. These declines were driven primarily by increasing retail impairment levels and the negative impact from lower endowment earnings that reduced headline earnings, together with strengthened capital levels as shareholders' equity growth far exceeded growth in total assets.

Nedbank Retail's credit quality deteriorated in 2009, with impairments worsening significantly, although the rate of new defaults slowed in the second half of the year. Business banking and wholesale banking impairments ended the year at better levels than originally anticipated.

Nedbank's funding and liquidity levels have remained sound as a result of ongoing focus on increasing and strengthening liquidity buffers, lengthening the funding profile, maintaining a low reliance on interbank, foreign and capital markets, as well as robust balance sheet management. A strong, broad-based deposit franchise also provides Nedbank with diverse funding sources.

Financial performance

Net interest income (NII)

NII grew 0.8% to R16,306 million. Following a 450 basis point interest rate cut during 2009 and the resulting effect of lower endowment income, Nedbank's net interest margin decreased in line with expectations to 3.39% from 3.66% in 2008. The primary drivers of margin compression were: liability margin compression reflecting the higher cost of term funding; lower endowment on capital and non-repricing of transactional deposit accounts that are not rate-sensitive; and quicker downward repricing of interest-earning assets compared with interest-earning liabilities. These were partially offset by the repricing of asset margins in line with Nedbank's risk-based pricing policies.

Impairments charge on loans and advances

The credit loss ratio of 1.47% for 2009 (2008: 1.17%) showed signs of improvement after having peaked at 1.67% at 31 March 2009.

The credit cycle has to date largely impacted consumers and the smaller businesses, as reflected in the continued deterioration of retail credit loss ratios. High levels of unemployment, lower collateral values due to weak housing and vehicle markets, and delays in recoveries resulting from debt counselling have all played a part in the increase in defaulted advances in retail secured loans.

Wholesale banking credit loss ratios have improved since June 2009 and remained better than anticipated for this part of the economic cycle. On the whole credit quality in the Capital, Corporate and Business Banking books has remained within acceptable levels, although in this volatile economic environment the risk of corporate default remains high.

Defaulted advances increased by 56.3% from R17,301 million to R27,045 million and represent 6.0% of total advances. Total impairment provisions increased by 24.7% from R7,859 million to R9,798 million. Although early arrears have improved for the last seven consecutive months in the year, defaulted advances have continued increasing albeit at a slower rate.

Non-interest revenue (NIR)

NIR, including the consolidation of the Bancassurance and Wealth joint ventures, grew by 11.0% to R11,906 million (2008: R10,729 million). Like-for-like NIR increased by 6.1%, driven by good growth in commission and fee income and trading income offset to an extent by fair-value gains, which dropped from R368 million in 2008 to R44 million. The drop in fair-value gains is mainly the result of Nedbank reporting, in 2008, fair-value gains of R207 million from the mark-to-market of its own debt, which we mentioned was unlikely to be repeated and was highlighted as poor-quality income that was not attributed to capital. In 2009 fair-value gains on Nedbank's debt amounted to R6 million.

Commission and fee income was 12.4% higher, largely from volume growth in retail transactional banking and increases in fees charged across the bank.

Trading income increased by 18.6% from R1,553 million in 2008 to R1,841 million in 2009, reflecting robust trading activity in treasury, investment banking and the global market businesses.

Bancassurance and Wealth NIR increased by 61.7% to R1,518 million for the year, driven primarily from the consolidation of the joint ventures for seven months and with good performances from the asset management, financial planning and life insurance businesses. On a like-for-like basis NIR for Bancassurance and Wealth increased by 4.7%, with good growth in the SA businesses.

Expenses

Nedbank Group continued to maintain tight control on discretionary spending while investing in strategic areas of the business. Expenses increased by 9.9% to R15,100 million (2008: R13,741 million). This increase was impacted by the consolidation of the Bancassurance and Wealth joint-venture acquisitions with effect from June 2009. On a like-for-like basis, excluding the joint-venture acquisitions, expenses increased by 7.7%.

Associate income

Associate income decreased to R55 million in 2009 (2008: R154 million) as a result of the BoE Private Clients and Nedgroup Life Assurance Company joint-venture acquisitions that were previously accounted for as joint ventures under the equity method.

Taxation

The taxation charge (excluding taxation on non-trading and capital items) decreased by 29.9% from R1,757 million in 2008 to R1,232 million.

Non-trading and capital items

Income after taxation from non-trading and capital items decreased to R549 million for the year (2008: R645 million). The main contribution in 2009 came from the accounting revaluation of the Bancassurance and Wealth joint ventures immediately prior to their acquisition, while in the previous year the main contributor was R622 million after-tax profit from the sale of Visa shares.

Capital

Nedbank Group remains focused on optimising and strengthening its capital ratios. During 2009 these ratios have increased significantly and continue to be maintained above Nedbank's target ratios. Nedbank holds a surplus of R13.5 billion above its minimum total regulatory capital adequacy requirements.

Capital adequacy	2009 ratio	2008 ratio	Target range	Regulatory minimum
Core Tier 1 ratio	9.9%	8.2%	7.5% to 9.0%	5.25%
Tier 1 ratio	11.5%	9.6%	8.5% to 10.0%	7.00%
Total capital ratio	14.9%	12.4%	11.5% to 13.0%	9.75%

*     Capital adequacy ratios include unappropriated profit at year-end.

Regulatory capital adequacy ratios increased mainly due to the retention of earnings and a key focus on the optimisation of capital and risk-weighted assets, enabled by enhancing data quality and more selective asset growth using our economic-profit-based 'managing for value' philosophy. This resulted in risk-weighted assets decreasing by 8.1%, which is well below overall balance sheet growth of 0.6%. Nedbank was also able to maintain its dividend cover at 2.3 times while increasing capital.

To increase conservatism, Nedbank increased its target debt rating (solvency standard) from A- to A for internal economic capital requirements in line with the higher target ratios for regulatory capital announced early in 2009. A more conservative definition of available financial resources to cover the economic capital requirements was also introduced.

Nedbank currently holds a surplus of R11.8 billion against its economic capital requirements. This is calibrated to the new A debt rating including a 10% buffer, which is assessed against comprehensive stress and scenario testing.

Nedbank's leverage ratio (total assets to ordinary shareholders' equity) at 14.4 times (2008: 16.2 times) is conservative by international standards and in line with the local peer group.

Liquidity

Nedbank's liquidity position remains sound, with a loan-to-deposit ratio of 95.9%. Management continues to focus on diversifying the funding base, lengthening the funding profile and further strengthening and increasing the liquidity buffers.

In addition to the strong deposit franchise across Nedbank Retail, Nedbank Business Banking and Nedbank Corporate providing a diverse funding mix, Nedbank successfully increased the size of its liquidity buffer in 2009 and lengthened the overall funding profile in order to achieved improved asset-to-liability matching. Increased focus on capital market issuance under the domestic medium-term note programme, the introduction of innovative fixed-deposit products for retail clients and a broader offering of money market products were the primary drivers behind the lengthening of the funding profile.

During the year the following programmes were undertaken to diversify the funding base and lengthen the bank's existing funding profile: the issuing of R5.6 billion of senior unsecured debt, which was five times oversubscribed; the raising of R153 million in perpetual preference shares; obtaining a $100 million credit line from a foreign development bank; and focusing on the retail deposit base through innovative products.

Nedbank maintains a low reliance on interbank, capital market and foreign funding. Its small proportion of foreign funding at just over 1.0% is driven by its regional focus where 91.4% of its asset base is in South Africa. Low historic reliance in the abovementioned markets creates diversification opportunities subject to pricing.

Nedbank continues to adopt a strategy of applying best international practice, with the Basel principles on sound liquidity management having been further embedded during this financial period.

Total assets

Total assets increased by 0.6% to R571 billion (2008: R567 billion). During the year: cash and securities declined by 8.2% mainly from the maturing of R10 billion of additional liquid assets. This was offset by the purchase of replacement government bonds of R4 billion to hedge long-term debt instruments; and Nedbank showed lower trading and derivative balances mainly arising from foreign exchange movements.

This was balanced by: growth in intangible assets related to the Bancassurance and Wealth joint-venture acquisitions; growth in investments from the first-time consolidation of Nedgroup Life; and an increase in advances.

Advances and Deposits

Advances increased by 3.7% to R450 billion, reflecting: ongoing growth in Nedbank Capital and Imperial Bank; slower growth in Nedbank Corporate and Nedbank Retail; and reduced advances in Nedbank Business Banking due to a slowdown in client demand for credit and a reduction of single-product loans in line with the drive to reduce higher risk exposures and focus on primary clients.

Growth in advances took place across a number of categories, including personal loans, mortgage loans, preference shares, deposits placed under reverse repurchase agreements and other loans, offset by a decrease in low-margin overnight loans. Overall market share increased by 1.4%.

Nedbank has focused on managing for value and selective asset growth while improving margins, resulting in bank advances growth and lower levels of advances in the trading portfolio.

Nedbank retained a strong ratio of advances to deposits of 96%. It grew deposits in line with its requirement to fund the growth in balance sheet assets, with deposits increasing by 0.5% to R469.4 billion (2008: R466.9 billion). In the retail deposit market current and savings account balances remain at low levels as consumers reduce debt levels. In the wholesale deposit market current and savings accounts as well as fixed deposits have increased, partially offset by a reduction in other term deposits.

Optimising and diversifying the funding mix and lengthening the profile continued to be a key management focus. Despite intense competition in the local deposit market, Nedbank has maintained its strong deposit franchise and continues to hold the second largest share of household deposits at 24.2%. During the year a number of innovative retail deposit products were successfully introduced, including Nedbank's Equity-linked Deposit, EasyAccess Deposit and Platinum Park-It.

Outlook

Nedbank currently anticipates gross domestic product (GDP) growth of around 2.2% in 2010, indicating slightly better prospects for the banking sector. The global environment and the 2010 FIFA World Cup are primary factors influencing domestic recovery, although the global recovery remains fragile and reliant on continued government support.

Locally retail trading conditions are expected to improve as disposable income stabilises, retrenchments ease, general labour conditions start improving, debt burdens moderate and house prices start to recover. Interest rates are likely to remain steady at current levels and lead to lower impairment levels. The 2010 FIFA World Cup is expected to lift confidence and encourage an increase in household credit demand and transactional banking volumes.

Fixed-investment activity is expected to remain modest as a result of excess capacity in the private sector and some loss of momentum in the government's infrastructure spending programme as several large projects around the hosting of the FIFA World Cup are completed. These developments are likely to contain corporate demand for credit, while strong competition will place pressure on margins.

Interest rate cuts from the previous year will continue to have a negative endowment effect on banking interest margins, but should be partially offset by a gradual decrease in impairments as recoveries and arrears levels improve. The reversal of provisions in the balance sheet is expected to take longer as defaulted advances continue to increase, albeit at a slower rate. Nedbank remains cautious about impairments as, although corporate impairments have been benign, there can be large once-off charges that are difficult to predict, and it is uncertain how the current economic challenges could further impact consumers.

Nedbank Group's performance in 2010 is likely to reflect: advances growth in the mid-single digits; pressure on interest margins remaining as a result of a continued negative endowment effect and anticipated to be compressed by a further 10 to 20 basis points; continued improvement of Nedbank credit loss ratio, but remaining above our target range; mid double-digit NIR growth, the increase being impacted by the consolidation of the Bancassurance and Wealth joint-venture acquisitions for the full period in 2010, compared with the seven months in 2009; lower double-digit expense growth, the increase being impacted by the consolidation of the Bancassurance and Wealth joint-venture acquisitions; a further strengthening of capital adequacy ratios and focus on funding and liquidity; and a focus on extracting value from acquisitions made in 2009.

The economic environment remains fragile, presenting forecast risk. The short-term outlook for 2010 assumes that interest rates will remain unchanged for the year.

Mutual & Federal (M & F)

Return to stability

Highlights (Rm)	FY 2009	FY 2008	% Change
Underwriting result	140	299
Long-term investment return (LTIR)	791	925
Restructuring costs	(13)	(55)
Adjusted operating profit (IFRS basis) (pre-tax)	918	1,169	(21%)
Gross premiums	8,456	9,159	(8%)
Earned premiums	6,874	7,669	(10%)
Claims ratio	69.4%	67.1%
Combined ratio	98.0%	96.1%
Solvency ratio	55.9%	41.0%
Return on equity* (1 year average)	21.2%	29.0%
Highlights (£m)	FY 2009	FY 2008	% Change
Adjusted operating profit (IFRS basis) (pre-tax)	70	76	(8%)

*     The ROE is now shown over a 1 year average equity base (previously 3 years average) to achieve consistency with the rest of the Group.

IFRS AOP results

Following adverse investment conditions and high levels of claims in early 2009, the company recovered well in the later parts of 2009. Management action on profitability led to the cancellation of some personal scheme business in 2009. This contributed to a fall in premiums for 2009 as whole.

Despite the underwriting loss recorded in the first half, there was a significant improvement in underwriting results during the second half and an overall underwriting surplus of 2% was achieved. This followed the implementation of various corrective measures and a generally improved trading environment.

Investment returns were strongly higher in 2009 with a return to greater stability in world financial markets. Total actual investment return for the year amounted to R660 million compared to a loss of R146 million in 2008.

During the year, the company completed the implementation of a sophisticated state-of-the-art system for processing a large portion of the personal portfolio. Whilst this caused unfortunate declines in service levels in the first half, these were largely remedied by the year-end and have resulted in substantial improvements in processing opportunities for clients and intermediaries.

Solvency margin

Following improvements in investment return and underwriting stability during the second half, the solvency margin (being the ratio of net assets to net premiums) improved to 56% at year-end (2008: 41%). This is well within management's target level range.

Acquisition of minorities shares by Old Mutual

The acquisition of the minority shares in M & F was successfully concluded in early February 2010. Whilst the finalisation was delayed by certain outstanding approvals, the overall process was completed with limited disruption to staff and customers. Management can look forward to closer working relationships with Old Mutual and increased opportunities for growth and profitability through joint ventures and other cooperation.

Outlook for 2010

Despite the unusually heavy rains in the Johannesburg area of South Africa, which have led to some higher than usual personal lines claims in the early months of 2010, management remain confident with regard to underwriting prospects in 2010.

M & F has been through a significant period of restructuring and systems implementation over the last two years. While difficult, this was an important and necessary step towards creating a sound base for the company on which to grow revenue over the coming years. The strategy will be supported by the following priorities:

- developing new products;

- process enhancements and optimisation through continuous improvements and bedding down of the business model;

- completing the IT strategy of moving to state of the art technology platforms; and

- maintaining a tight control over capital and solvency.

M & F has a strong brand in the Southern Africa market and good relationships with its intermediary partners. The next few years promises much for the company as it looks to leverage these relationships, as well as good systems and processes, for profitable and sustainable growth.

US Asset Management

Earnings grew strongly in the second half of the year as markets recovered

Highlights ($m)	FY 2009	FY 2008	% Change
Adjusted operating profit (IFRS basis) (pre-tax)	130	181	(28%)
Return on Capital	4.1%	7.2%
Operating margin	18%	20%
Net client cash flows ($bn)	(7.1)	(5.2)	(37%)
Funds under management ($bn)	261	240	9%
Highlights (£m)	2009	2008	% Change
Adjusted operating profit (IFRS basis) (pre-tax)	83	97	(14%)

Overview

While market conditions during 2009 were challenging, it was a year in which management successfully completed a number of long-term strategic actions to reposition the business. Those actions included realigning our retail platform to focus on the professionally-sold marketplace, integrating a cash management team at Dwight, reorganising our central distribution structure and optimising our shared services model to deliver further economies of scale. Provision of central services to our affiliates is a key aspect of the multi-boutique model, delivering operational leverage across the business, supporting lift-outs and incubation of new teams, and allowing investment professionals to maximise their focus on managing money for clients.

As a result of these actions, our business is well positioned strategically to take advantage of market, demographic and related trends as we continue to develop innovative product solutions, deliver strong investment performance and grow our business. Our track record of investment performance has positioned us well relative to competitors, and our diversified asset mix between equities, fixed income and alternatives will continue to help us weather market volatility.

Investment Performance

Long-term investment performance from our member firms remains strong. At 31 December 2009, 58% of assets had outperformed their benchmarks over the trailing three-year period and 50% of assets were ranked above the median of their peer group over the trailing three year period. As of the trailing five-year period, 61% of assets outperformed their respective benchmarks and 52% of assets were ranked above the median of their peer group. Value equity and global fixed income continue to rank among our top performing asset classes. Recent challenges among our quantitative managers are showing signs of improvement as markets return to historical patterns of performance with a bias toward higher-quality investments.

IFRS AOP results

Strong market growth and a reduction in the expense base of the business drove significant earnings growth during the second half of the year, with IFRS adjusted operating profit of $84 million increasing 83% ($38 million) over the first half result. IFRS adjusted operating profit of $130 million for the full year was down $51 million (28%), due largely a decrease in management fees, driven by lower average funds under management as a result of market weakness in the first quarter and cyclical lows in performance fees. However the impact of lower revenues was offset in part by continued success in managing expenses. The result also includes $12 million in significant one-time restructuring costs related primarily to our retail business.

Operating margin and cost management

Operating expenses for 2009 were down 22% compared to the prior year, enabling us to experience significant leverage in 2010 from the recent and ongoing recovery in market levels. The full year operating margin of 18% was down 2% from 2008, driven by the pace and severity of market declines and lower revenues late in 2008 and early in 2009. The margin for the second half of 2009 of 21% was an improvement on our 2008 full year margin of 20%, and reflects the success of expense management actions taken by management in response to declining revenues. As previously indicated, expense reductions in our retail business will deliver $15 million to $20 million of annual expense savings from 2010.

Net client cash flows

Net client cash flows of ($7.1 billion) or (3%) of opening funds under management was broadly in line with the average of our peer group for the year. The result was primarily driven by outflows at Acadian, Barrow Hanley and Dwight, partially offset by strong inflows at Heitman, Campbell and Thompson, Siegel and Walmsley. Despite the challenging environment, nearly half of our managers experienced net cash inflows for the year.

Funds under management

Funds under management increased 9% or $21 billion during 2009, with a 16% market uplift offset in part by asset outflows. Growth and diversification through international distribution remains a key element of our strategy, with non-US clients comprising 25% of total funds under management at the end of the period.

Affiliate Developments

As previously announced, equity plans were implemented at five affiliates during 2009, and we will complete the rollout for the remaining firms during 2010. Alignment of the interests of affiliate management was a key factor in the success of our cost management initiatives during 2009, and remains a vital component of our long-term strategy, critical to talent retention and positioning the business for sustainable long-term growth.

Retail Developments

Efforts to reposition Old Mutual's US retail platform in 2009 were successful. A strategic assessment of the business was completed and resulting recommendations executed by the end of 2009. Actions taken during the second half of 2009 provided a refreshed and more focused product offering aligned with the best of Old Mutual's institutional investment capabilities. Retail distribution will more specifically target Registered Investment Advisors (RIAs), Family Offices, and Bank Trust channels which are among the fastest growing segment of the financial service industry. The traditional and alternative investment expertise of Old Mutual's distinct institutional boutiques aligns well with the needs of the professional buyer market. Overall, retail efforts provided a reduction in spending and increased margins for the business while preserving a valuable retail shareholder base with significant opportunity for growth in an important distribution channel for the future.

Outlook

We remain cautiously optimistic on the recovery of global markets in 2010. However, there may be a wider dispersion of growth rates between regions and historically high volatility throughout the year. Difficulties within financial institutions have created significant opportunities for investment businesses with strong balance sheets to position for the next growth cycle and win the war for investment talent within the US. Market volatility has widened the gap between top quartile and bottom quartile performers with an expectation that clients will continue to increase the rate of replacement for underperforming managers and asset classes. While we have a number of accounts at risk at certain affiliates, our overall new business pipeline is robust and we expect to remain in the top half of our peer group in terms of net client cash flows.

Prior to the current market troubles, clients were migrating asset allocation decisions toward international, global and alternative strategies. We believe these trends will continue in 2010, however churn of underperforming managers in traditional domestic equity and fixed income mandates will present opportunities to gain new client funds to manage. Search activity has steadily increased in the second half of 2009 with the winners being those investment firms that are truly institutional quality and offer risk management, continuity of firm personnel, strong ownership structures and transparency of investment process with longevity of performance.

Our efforts to reposition the business and the recovery in capital markets in 2009 position us well for growth in 2010. In the absence of this continued recovery in global equity markets, future earnings growth for our US Asset Management business will be restricted. However, our track record of investment performance and global business focus has positioned us well relative to our competitors, and our diversified asset/client mix will continue to help us weather market volatility.

Bermuda

 

Business transformed and delivering on run-off plan

Highlights ($m)	2009	2008	% Change
IFRS profit (pre-tax)	34	(675)	105%
Insurance reserves (excluding those held in the separate account)	2,053	3,084	(33%)
Operating MCEV earnings (covered business) (post-tax)	(29)	(436)	93%
Highlights ($bn)	2009	2008	% Change
Funds under management*	5.8	5.8	0%
Highlights (£m)	2009	2008	% Change
IFRS profit (pre-tax)	22	(365)	106%

*     Stated on a start manager basis as USAM manages $1.1 billion of funds on behalf of Old Mutual Bermuda.

Overview

The business performed credibly against its core objectives, with all written policies passing their first anniversary date meaning no further policyholder premiums have been permitted since August 2009.

Old Mutual Bermuda (OMB)'s core focus in 2009 was to retain the key staff necessary to execute against the agreed run-off plan, reduce business expense levels by half over a three-year period, improve operational efficiencies, strengthen the governance structure, manage capital and liquidity, significantly improve management information analytics and to continue de-risking the in-force variable annuity book through a range of measures.

In 2009, management implemented a soft-close strategy to restrict fund choices and continued to improve hedge effectiveness by reducing basis fund mismatches. The business has been transformed with a significantly improved understanding of liabilities and associated management information systems developed, with robust financial metrics and a return to profitability.

Significant reductions in the business expense base were delivered during 2009 (over 40% expense reduction year-on-year), with further expense savings and operational improvement initiatives targeted for 2010. Overall a leaner business operating model has been adopted, with ongoing cost efficiencies anticipated to drive costs down by a further 5-10% annually.

Aggregate surrender activity remains in line with expectations. Ultimately, surrender activity will determine the speed of run-off and the extent and timing of any associated capital, or cash, release. The business remains well capitalised and able to meet all its future obligations, with the knowledge that retention packages are in place for key employees needed to execute on the run-off plan.

IFRS results

As stated in the Group Finance Director's Report, Bermuda is now treated as a non-core business and its profit is therefore excluded from the Group's IFRS adjusted operating profit, and the 2008 IFRS adjusted operating profit has been restated on the same basis.

IFRS pre-tax profit of $34 million for 2009 was significantly better than 2008 ($675 million IFRS pre-tax loss for 2008) benefiting from expense reductions, lower DAC expense (mainly due to reduced unlocking) and lower guarantee losses, primarily as a result of improved effectiveness of the hedging programme, favourable equity markets and currency movements, higher interest rates, lower volatility and improved fund basis development. The impact of selective releases of hedge positions instituted in the fourth quarter of 2009 were also beneficial in reducing guarantee losses, in conjunction with reduced overall reserve requirements as a result of favourable markets.

MCEV results

The post-tax loss on the MCEV operating earnings of $29 million for 2009 was significantly better than prior year mainly due to the large negative assumption changes made in 2008 for the GMAB strengthening and lower interest rates. Surrender development also led to persistency experience variances.

Reserves

Of total insurance liabilities of $6,741 million (2008: $7,018 million), $4,688 million (2008: $3,934 million) is held in the separate account, relating to Variable Annuity investments, where risk is borne by policyholders. The remaining reserves amount to $2,053 million (2008: $3,084 million). Of this, $763 million (2008: $1,428 million) is in respect of GMAB/GMDB liabilities on the Variable Annuity business, and $1,290 million (2008: $1,656 million) for 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). These non-separate account reserves represent the discounted future expected account balance needed to meet policy obligations. OMB reserves are calculated on a policy-by-policy basis and are updated frequently and verified independently through both internal and external actuarial review, as well as subject to internal and external audit, as part of the normal statutory audit.

New fund mappings developed in 2009 better allocated exposures to Asian and other emerging markets (which require higher levels of reserving given their inherent higher volatility), thereby improving the accuracy of the reserves. OMB maintains a very significant surplus to its minimum capital requirement, and no further cash or capital injections are anticipated.

Investment Portfolio

No defaults were recorded in the year, with reported impairments of $20 million (2008: $56 million) for 2009. The net unrealised loss position improved to $29 million as at 31 December 2009 ($277 million as at 31 December 2008) as spreads continued to narrow across key sectors.

The book value of the portfolio fell from $1.3 billion at the end of 2008 to $1.0 billion at the end of 2009, primarily to meet surrenders and withdrawals. The fixed income portfolio remains at an A2 average quality, with an improvement to 95% investment grade compared to 2008 of 93%.

As at 31 December 2009, the book value, fair value and unrealised loss of the investment portfolio with a market value to book value ratio of 80% or less was $71 million, $50 million and $21 million respectively (compared to $521 million, $324 million and $197 million, respectively, at 31 December 2008).

Management of Hedging

The hedge policy originally adopted by OMB focused on hedging the underlying economic risk of the guarantees. Generally, this strategy reduces the income statement exposure, but can result in substantial cash flow movements as the realised changes in value of the underlying derivatives are offset by an unrealised movement reflected in the reserves. In a falling market, this will result in large cash inflows, while in a rising market, there will be cash outflows. During most of 2009, hedges were applied to a core number of components (interest rates, foreign exchange, equity markets), with an average hedge effectiveness of 95-96% achieved in the period to September 2009.

Given the improvement in the capital position of the Group, combined with management's improved understanding and management systems for tracking the underlying risks, a process of selective and progressive release of the hedge position commenced in the fourth quarter of 2009. This has been subject to strict oversight and is operated within risk parameters agreed with the Group Risk and Capital Committee. The control systems in place mean that the reinstatement of effective hedges could be made in very short order if required. The new approach continues to manage the underlying economics, but is more dynamic in nature, striking a balance between the potential changes in the income statement, cash flow movements and the transactional costs. Where considered appropriate, the level of hedging activity may be adjusted, subject to a strict stop-loss policy.

The OMB hedge team evaluates the hedging strategy on a continuing basis, with any proposed changes to the strategy subject to strict oversight. A stop-loss protection protocol, and daily management and reporting of Value at Risk cash and profit & loss are used by the Group to monitor business exposures.

Outlook

OMB aims to continue to aggressively execute against its run-off strategy, whilst maintaining high levels of customer service through continued operational and service improvements. A return to more normal market conditions will further underpin the continued recovery in profitability, although the business expects increased volatility in earnings in the medium term, particularly as the peak of the crystallisation of guarantees approaches in 2012 and then 2017.

With the business transformed in 2009, the key priorities for 2010 will be to:

- further improve expense and operational efficiencies delivered in 2009, maintaining cost focus/discipline to deliver further planned expense reductions;

- effective management of capital and liquidity;

- further embed risk management into key business decision making processes;

- continue to de-risk the in-force variable annuity book, with the appropriate execution of a dynamic hedging program on key risks; and

- implement of conservation efforts to better retain profitable non-guaranteed assets.

 

END

 

 

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