Interim Results 2003 - Part 1
Old Mutual PLC
7 August 2003
Old Mutual plc
Results for the six months ended 30 June 2003
Continued solid earnings
Highlights
• Adjusted operating profit*: £395m (2002: £381m), an increase of 4% in
Sterling
R5,122m (2002: R6,059m), a decrease of 15%
in Rand
• Operating profit: £378m (2002: £212m), an increase of 78% in Sterling
R4,899m (2002: R3,376m), an increase of 45% in Rand
• Adjusted operating earnings per share*: 5.6p (2002: 5.8p), a decrease of 3%
in Sterling
73.4c (2002: 92.9c), a decrease of
21% in Rand
• Basic earnings per share: 4.7p (2002: 3.3p), an increase of 42% in Sterling
61.1c (2002: 52.9c), an increase of 16% in Rand
• Life sales of £261m annual premium equivalent (2002: £288m)
• Total banking assets £22.3bn, adjusted operating profit £101m (2002: £128m)
• Total assets under management £128bn at 30 June 2003 (£124bn at 31 December
2002)
• Adjusted embedded value: £4,059m (31 December 2002: £3,928m), an increase
of 3% in Sterling
R50,212m (31 December 2002: R54,267m), a decrease
of 7% in Rand
• Interim dividend of 1.7p (2002: 1.7p) maintained, 21.0 cents in Rand**
Jim Sutcliffe, Chief Executive, commented:
'We have produced solid earnings in the first half, although life assurance
sales and margins were lower against a background of volatile market conditions.
The impact of management action is coming through and the recent recoveries of
the US, UK and South African equity markets from their low points earlier in the
year hold out the prospect of better times ahead.'
Wherever the items asterisked in the Highlights are used, whether in the
Highlights, the Chief Executive's Statement or the Operating and Financial
Review, the following apply:
* Adjusted operating profit represents operating profit before tax and minority
interests based on a long term investment return before goodwill amortisation,
write-down of investment in Dimension Data Holdings plc, Nedcor restructuring
and integration costs and change in credit provisioning methodology. Adjusted
operating earnings per share are similarly based, but are stated after tax and
minority interests.
** Indicative only, being the Rand equivalent of 1.7p converted at the exchange
rate prevailing on 30 June 2003. The actual amount to be paid by way of interim
dividend to holders of shares on the South African branch register will be by
reference to the exchange rate prevailing at the close of business on 2 October
2003, as determined by the Company, and will be announced on 3 October 2003.
Old Mutual plc
Results for the six months ended 30 June 2003 continued
enquiries:
Old Mutual plc
James Poole, Director, Corporate Affairs Tel: +44 20 7569 0100
Nad Pillay, Head of Group Communications (SA) Tel: +27 (0) 11 217 1605
Tel: +27 (0) 82 553 7980
College Hill
Tony Friend / Gareth David (UK) Tel: +44 (0) 20 7457 2020
Notes to editors:
A webcast of the analysts presentation and Q&A will be broadcast live at 09.30am
(UK time) on our website at www.oldmutual.com.
High resolution images are available for the media to view and download free of
charge from www.vismedia.co.uk.
7 August 2003
Chief Executive's Statement
Our adjusted operating earnings for the first half of 2003 were solid at 5.6p
per share (2002: 5.8p), with results in our life and general insurance
businesses ahead of the equivalent period in 2002. We have continued to develop
our businesses in line with our declared strategy, despite being buffeted by
difficult market conditions.
Our life assurance operations in South Africa benefited from fixed
interest-related gains and positive mortality and retention experience, whilst
in the USA our life assurance company continued to see the effects of the growth
in sales in 2002 come through. Mutual & Federal once again made good progress.
Results at our asset management businesses were down somewhat because of lower
average equity market levels and as a result of disposals of businesses since 30
June 2002. Our banking result was negatively impacted by currency effects, the
higher costs of long term funding, the short term effects of the cash drain
arising from the purchase of BoE and a reduction in earnings from investment
banking. In the UK, Gerrard was again able to make a small profit despite the
low equity markets as a result of its cost cutting efforts.
Life sales reduced to £261 million on an annual premium equivalent basis (2002:
£288m).
Poor equity markets and the absence of a sufficiently competitive range of
absolute return products had an adverse impact on our individual business sales
in South Africa. Group business premiums were also held back by market
conditions, which deterred our clients from purchasing with-profit annuities,
and by uncertainty in the pensions arena as a result of recent legislation.
Lower volumes also hurt our margins. Our group business sales were focused on
low capital, low margin multi-manager products resulting in further downward
pressure on average margins.
We had intended to rein in our US life sales, but in the event the very low and
declining interest rate environment rapidly curtailed the market for our type of
life assurance products. Both sales and margins at our US life business were
lower as a result.
To address these issues, we shall be launching a range of funds targeting
absolute returns in South Africa in the third quarter and in the USA we have
expanded our distribution channels and index tracking product range.
Total funds under management increased from £124 billion at 31 December 2002 to
£128 billion at 30 June 2003. We continued to achieve positive net fund inflows
at our US asset management operations. Our teams of specialist fund managers and
distributors attracted net new funds of $1.9 billion, although with lower
average fee levels due to the increased proportion of fixed interest business.
The portfolio effect of our mix of different investment styles and investment
sectors continued to mute the impacts of volatile markets. Elsewhere around the
Group funds under management were broadly stable, but encouraging results were
achieved in the UK in our developing businesses, OMAM(UK) and Selestia. We
continue to focus heavily on building our distribution muscle in all three of
our main territories.
Investment performance has been good in all three regions, although absolute
levels of return remain a concern for many customers.
Whilst overall the results of our banking businesses were disappointing, the
integration of BoE with Nedcor is proceeding satisfactorily and we continue to
expect synergy benefits of R905 million per annum to be achieved by 2006. There
has been a significant turnaround in Old Mutual Bank's results now that it is
part of Nedcor's operations.
Our South African businesses have been heavily involved in developing industry
proposals to address Black Economic Empowerment (BEE) in the context of the
proposed Financial Services Charter. Major programmes
Chief Executive's Statement continued
have been initiated in the areas of procurement, employment equity and
investment, and our businesses are committed to playing a full part in this
important aspect of the evolution of the new South Africa.
Cost control is a key focus at present in all of our businesses as we seek to
deliver increased value for our customers and shareholders.
Our capital position remains strong, bolstered by the issue of $750 million of
Guaranteed Cumulative Perpetual Preferred Securities during the first half of
the year.
Currency translation effects, particularly the comparative strength of the Rand
in the first half of 2003, affected the overall picture as shown in our two
reporting currencies. Whilst Rand strength boosted Sterling operating earnings
at our South African businesses, it had the reverse effect for those
shareholders who consider our results in Rand. It led to significant unrealised
translation losses at Nedcor's overseas operations and also contributed to
volatility in South African equity market levels, with effects on our life
profit as indicated above. In the long run, a strong Rand helps the Group and
has a positive effect on our embedded value.
Adjusted embedded value at the end of the period rose in Sterling terms by 3% to
£4,059 million or 106p per share, but declined in Rand by 7% to R50,212 million
or R13.10 per share, again reflecting the impact of the Rand's strength.
The Board has declared an unchanged interim dividend of 1.7p per share.
OUTLOOK
We remain committed to the development of our three-region (USA/UK/South Africa)
business. Our first priority remains the continuing improvement of our existing
portfolio of businesses. Our management will continue to use the Group's
strengths as an investment manager and product designer to respond to the
various challenges that we face and to extend our distribution capability.
The improved investment climate in our three key geographies since April, if
maintained, is expected to provide a better background for the Group's
businesses in the second half of the year.
Jim Sutcliffe
Chief Executive
7 August 2003
Operating and Financial Review
BUSINESS REVIEW
SOUTH AFRICA
LIFE ASSURANCE
Financial performance
The South African life business operating profit, before long term investment
return, of R1,592 million, was 3% up on the R1,541 million recorded in the same
period last year, although it was adversely affected by lower levels of average
assets. However, this result was helped by favourable investment experience in
bond portfolios backing annuities and risk products, as well as favourable
mortality and retention experience variances.
The total annual premium equivalent (APE) of the Group's South African life
sales for the period was
R1,576 million, 3% lower than the corresponding period last year, while the
after tax value of new business at R285 million was 29% lower. The average
margin on new business after tax reduced from 25% to 18% of APE. This was due to
both lower new business volumes affecting the funding of new business expenses
and lower sales of equity-based savings products as consumers remained averse to
risk.
Funds under management at the Group's South African life business totalled R221
billion at 30 June 2003, which represented a decrease of 3% over the position at
31 December 2002. Lower equity markets and a stronger Rand contributed to this
decline.
The life company's capital on the relevant local basis decreased by R2.7 billion
to R29 billion at 30 June 2003, but the business remains well capitalised at 2.2
times the required statutory capital.
Outlook
Client expectations are being actively managed through various marketing
campaigns on the merits of long term investment and absolute and relative
investment performance. Management is focused on customer segmentation, a broad
range of new generation products and a productive distribution force. Cost
containment, particularly extracting efficiencies through cross-business
synergies, remains a key focus for management.
Individual Business
Financial performance
Operating profit, before long term investment return, of R1,152 million was 5%
higher than the same period last year. The fall in interest rates resulted in
favourable investment experience in bond portfolios, which back certain annuity
and risk products. Favourable mortality and retention experience variances also
contributed to the improved result.
New business volumes were lower than in the previous year. New business APE of
R1,196 million was 6% lower than the R1,270 million reported in the first half
of 2002. Recurring premium business was up 9%, driven primarily by sales of the
market leading Greenlight risk product. However, single premium business was
down 32% due to customers purchasing less equity-based savings products at a
time of market volatility.
The value of new business after tax of R177 million, was 32% lower as a
consequence of reduced new business volumes, the movement out of equity-based
products into lower margin, interest-bearing products, and continued investment
in distribution.
Operating and Financial Review continued
Business development
In an industry first, an internal ombudsman was appointed to resolve
claims-related and service disputes in a fair, equitable and speedy manner.
The reorganisation of bancassurance arrangements with Nedcor has now been
completed. The rebranding of Permanent Bank branches as Old Mutual Bank was
successfully concluded with minimal attrition of customers. In the first six
months of 2003, deposits of R458 million were attracted by Old Mutual Bank.
Following the merger of Nedcor and BoE, an integrated full service offering
which includes wealth management advice, stockbroking and private banking is now
available to our high net worth customers.
The size of the distribution force remained stable, with further improvements in
its productivity, and the infrastructure in Gauteng was strengthened during the
first half.
Group Business
Financial performance
Operating profit, before long term investment return, of R440 million was 1%
lower than in the same period last year. Favourable investment experience in the
bond portfolio backing risk products was offset by the decrease in average
policyholder funds following poor equity performance.
New business APE of R380 million was up 7% from R354 million in the first half
of 2002. Group single premium sales were positively impacted as clients switched
multi-manager new business from Nedcor.
The value of new business after tax of R108 million was 24% lower than the
equivalent period last year due to the greater proportion of lower margin, less
capital intensive multi-manager business. The proportion of high margin
with-profit annuity business declined accordingly.
Business development
The Symmetry multi-manager offering was extended after the closure of NIB
Investments and Edge Investments. New structured and preferred risk products
were launched and investment in new administration systems continued in the
first half of 2003.
ASSET MANAGEMENT
Financial performance
The South African asset management adjusted operating profit was R233 million
compared to R207 million in the same period last year. Total funds managed in
South Africa were unchanged from 31 December 2002 at R215 billion, despite
market volatility.
Adjusted operating profit was negatively impacted by lower levels of funds under
management, offset by a movement to higher margin products, tight expense
control and one-off costs in Old Mutual Unit Trusts in the prior year.
Total net fund inflows into the asset management businesses (Old Mutual Asset
Managers (South Africa) (OMAM(SA)), Old Mutual Unit Trusts and Fairbairn
Capital) were R1.4 billion over the period.
OMAM(SA)'s performance continued to sustain the good relative investment results
apparent at the end of 2002. Specialist equity mandates continued to perform
well, with most being ahead of benchmarks for the twelve-month period to the end
of June 2003.
Operating and Financial Review continued
Old Mutual Unit Trusts' new 4 Plus range of products, targeting the
middle-income investor, was favourably received by the market.
BANKING
NEDCOR
The results of Nedcor Limited (Nedcor), the Group's 53% owned banking
subsidiary, have been incorporated into the Group accounts in accordance with UK
GAAP. Nedcor has adopted a new accounting standard on the recognition and
measurement of financial instruments (AC133) for local reporting requirements.
Under UK GAAP, the AC133 adjustments have been excluded, with the exception
being in relation to changes in credit provisioning methodology. This has
resulted in a one-off increase of R963 million in opening specific provisions,
which has been taken to the profit and loss account, but excluded from adjusted
operating profit. The results of BoE are excluded from the 30 June 2002
comparatives, as it was acquired with effect from 2 July 2002.
Financial performance
Nedcor experienced a challenging first six months in 2003, with earnings for the
period lower than for the comparable period in 2002. Adjusted operating profit
of R1,308 million is stated before goodwill amortisation (R161 million),
write-down of investment in Dimension Data Holdings plc (R136 million),
restructuring and integration costs (R134 million) and change in credit
provisioning methodology (R963 million). This compares with R2,035 million for
the first half of 2002, a decrease of 36%. Adjusted operating profit includes
translation losses of R658 million (2002: R436 million).
A challenging operating climate, weaker financial markets and the stronger Rand
held back Nedcor's earnings in the first half of 2003. Banking business and
advances growth benefited from the BoE acquisition. Interest margins were under
pressure, while investment banking and wealth management revenues were below
target. In addition, the stronger average value of the Rand compared to the same
period last year diminished the Rand value of international earnings. However,
there was a significant turnaround in Old Mutual Bank's results, which
experienced a successful half year largely as a result of corrective action
taken by management under the new ownership structure.
Excluding BoE, advances grew over the comparable period in 2002, with net
interest income growing at a lower rate reflecting the increased pressure on
margins. The interest margin declined due to changes in funding requirements,
but was flat when compared to the second half of 2002. The Group's market share
increased marginally over the previous year with high client retention figures.
Credit quality, including unsecured micro-loans, was satisfactory despite the
high interest rate environment. The high level of non-performing loans, which
include the legacy of some acquired businesses, continues to receive management
attention.
Operating expenses of R5,217 million over the period, including translation
losses of R658 million, increased by 73% from R3,017 million in the equivalent
period in 2002.
As calculated locally, the cost to income ratio increased to 67.2% from 53.4% in
the equivalent period in 2002 as a result of lower revenue growth. Management
has put stringent cost control measures in place to reduce this ratio to former
levels, particularly focusing on cost containment and aligning costs with
relevant income streams.
Again as calculated locally, Nedcor's capital adequacy at 30 June 2003 was
10.1%, which compares to 11.2% at 30 June 2002, and has been affected by the BoE
integration. This is being carefully monitored by management to ensure
compliance with the statutory requirement of 10%.
Operating and Financial Review continued
Business development and outlook
The merger and reorganisation activities undertaken during the reporting period
included the legal consolidation of banking licences on 1 January 2003, the
integration of the four treasuries of Nedbank, Cape of Good Hope Bank, NIB and
BoE and the establishment of a private client wealth management joint venture
with Old Mutual South Africa.
The integration of BoE into the Nedcor group is on track and on target to
achieve total merger benefits of
R905 million by 2006, with 2003 being a year of transition and real synergy
benefits expected to come through in 2004 and 2005. Restructuring and
integration costs of R134 million were incurred more quickly than anticipated
because the merger is being implemented ahead of plan. Management is focused on
fast tracking the integration for substantial operational synergies,
particularly client service and retention, cost containment and addressing
underperforming areas. Priorities are to realise these synergies, bed down the
merger, lower funding costs and continue to deliver good service to clients.
Nedcor is working with the Banking Council and the rest of the industry to
develop an empowerment charter for the banking sector. Prior to this process,
Nedcor had undertaken a major transaction with the sale of an empowerment stake
in Peoples Bank and has subsequently undertaken a number of other initiatives.
GENERAL INSURANCE
MUTUAL & FEDERAL
Financial performance
Mutual & Federal Insurance Company Limited (Mutual & Federal), the Group's 51%
owned general insurance subsidiary, generated an adjusted operating profit of
R368 million in the first six months of 2003, 19% higher than the R308 million
earned in the first half of 2002. The solvency margin, being the ratio of net
assets to net premiums, remained satisfactory and was in excess of 50% at 30
June 2003.
Management's increased emphasis on appropriate product pricing resulted in a 14%
growth in premiums, at
R3.0 billion for the first six months of 2003, compared to R2.6 billion in the
first half of 2002. This was accompanied by corrective action taken on risk
selection, which resulted in a further improvement in the underwriting result to
R93 million for this reporting period. Trading results during the period were
favourable with claims activity remaining stable, particularly an absence of
severe weather-related losses. In addition, improved levels of crime awareness
and a number of motor claim handling initiatives assisted in controlling claims
costs.
Interest income grew strongly during the first six months of the year due to
increased levels of funds on deposit and continued high interest rates. Dividend
income declined as a result of lower levels of equity holdings. The net asset
value per share reduced following a fall in the value of listed equities.
Business development and outlook
Mutual & Federal continued to develop business opportunities through strong
relationships with intermediaries, including the implementation of the 'Vehicle
Accident Management Process', which provides a comprehensive roadside service to
clients involved in motor accidents.
Management's focus remains on identifying and implementing additional cost
saving opportunities, with a view to improving the long term profitability of
the organisation. This includes striving to become the lowest cost service
provider with projects underway to automate routine processes and provide
quicker access to financial information.
Operating and Financial Review continued
USA
US LIFE
Financial performance
Benefiting from the strong sales in 2002, our US life business's adjusted
operating profit of $62 million was 29% up on the $48 million recorded in the
same period last year. Total APE for the period, at $207 million, was 18% lower
than the corresponding period last year, which was a record year in its history.
Whilst the life assurance business continues to grow strongly, the
macro-economic environment is presenting a number of challenges to its annuity
business. Interest rates at their lowest level in forty years, combined with a
flattening yield curve, reduced the relative attractiveness of interest-related
products, which provided much of the premium growth in 2002 and have led to a
growing market in equity-indexed products. The market has favourably received a
range of new equity-indexed products that were launched by Fidelity & Guaranty
Life at the end of 2002. A number of new life assurance products were launched
that are attracting significant premiums. The average margin on new business
after tax reduced from 18% to 11% of APE, reflecting the interest rate squeeze.
The value of new business after tax at $22 million was 51% lower than in the
equivalent period last year.
The launch in 2003 of the OMNIA Life (Bermuda) operations allows US life to
offer US style products to an international customer base. This new channel
gives the business direct exposure to variable annuity products and an important
new conduit to large US banks.
The value of in-force life business of $652 million increased by 19% from $549
million at the beginning of the year. Funds under management totalled $12.5
billion at 30 June 2003, an increase of 19% over the year end. $63 million of
capital was injected into the company during the first six months of 2003 to
support new business written.
Business development and outlook
US life has enhanced retail sales volume through its multiple distribution
channel strategy, which now includes sales offshore and a competitive
multi-brand product range.
The continuing capital support from the Group enabled US life to take advantage
of profitable wholesale opportunities in the marketplace. Fidelity & Guaranty
Life also continued to strengthen its relationships with Managing General
Agencies.
As trading conditions are expected to remain challenging for the rest of 2003,
US life will continue to adapt by designing and selling products, which allow
competitive positioning in the retail market. A lower level of overall sales is
anticipated in 2003, but nevertheless for Fidelity & Guaranty Life considerably
higher than in any year prior to its acquisition by Old Mutual.
US ASSET MANAGEMENT
Financial performance
Adjusted operating profit of $61 million for the Group's US asset management
business increased 13% from $54 million in the second half of 2002. After
allowance for the impact of affiliates disposed of during the period, the
increase in adjusted operating profit was 22% above the results of the second
half of 2002. When compared to the equivalent period in 2002, adjusted operating
profit decreased by 31% from $88 million, or 21% after allowance for sold firms,
being adversely affected by lower average market levels.
Operating and Financial Review continued
The well-balanced composition of the business and positive equity markets in the
second quarter helped to mitigate the negative impact of the first quarter's
decline. Operating costs were actively managed against this background to ensure
that operating margins were maintained.
Funds under management grew 7% to $136 billion, compared to $127 billion at the
beginning of the year. After allowing for year to date divestitures of $3.3
billion of funds, the increase was 11% from $123 billion. Net cash inflows of
$1.9 billion included $0.8 billion from US life. Market impact boosted assets by
an additional $10.5 billion.
While cash flows were biased towards fixed income products, the primary driver
for the increase in funds under management was the result of strong performance
within domestic equity portfolios. Major domestic equity indices recovered from
first quarter losses to double digit returns in the second quarter, resulting in
overall positive performance for the six months.
Superior long term fund performance was sustained throughout volatile market
conditions. On an asset-weighted basis, the four and five-star rated funds
managed by the Group's US asset management firms represented 65% of total funds
rated by Morningstar.
Business development and outlook
The rationalisation of the group is largely complete following the divestiture
of a further three firms in 2003. The organisation now comprises a stable core
of twenty-one affiliates and is well positioned to lead the business forward
under an integrated 'one firm' strategy.
Management strategy continues to focus on leveraging the diverse product and
distribution capabilities of the various firms, both externally and within the
wider Group.
The capability of the centralised marketing entity established in 2002 continues
to evolve. Sales and services resources at an affiliate level were also
strengthened. The PBHG platform, which was expanded in 2002 to provide access to
other affiliates' products in the mutual fund marketplace, attracted new funds
of $460 million to these affiliates since the beginning of the year. Two new
funds are planned to join the platform later this year. The synergistic
relationship with US life is being further consolidated, with Dwight and
Analytic continuing to manage key components of its portfolio and eSecLending
managing its bond lending programme.
Management remains committed to driving organic growth from a core group of
entrepreneurial investment firms. The business will continue to exploit its
current strength in the institutional market, while investing in selected
managed account and retail growth opportunities. This includes the strengthening
of the suite of investment products, investment in the retail distribution
platform, affiliate and central sales forces, and continued focus on client
retention.
UK & Rest of World
ASSET MANAGEMENT
Private Client (UK)
Financial performance
Despite the average level of the FTSE 100 Index falling by 25%, adjusted
operating profit of £3 million from Gerrard was unchanged from the equivalent
period in 2002. Profit levels were maintained through a combination of expense
reductions, operational efficiencies and revenue improvements.
Operating and Financial Review continued
Funds under management of £12 billion at 30 June 2003 were consistent with 31
December 2002 levels, and fund quality improved as pricing initiatives began to
take effect.
Fee income for the period declined by 19%, which compares favourably to the
reduction in average market levels. Trading activity remained relatively robust
in the face of market adversity, as fund managers pursued opportunities to
manage the effects of market conditions on client portfolios. Operating costs of
£48 million incurred in the period compared to £60 million in the first half of
2002, a reduction of 20%.
Business development and outlook
The business will continue to take advantage of trading opportunities to build
client value as markets cautiously recover, and cost levels will be carefully
managed. Revenue enhancing initiatives are gaining momentum and wider service
offerings such as financial planning are progressing well.
Fund Management
Financial performance
Adjusted operating profit from the Group's UK & Rest of World fund management
businesses of £5 million compared to an adjusted operating profit of £3 million
in the equivalent period in 2002.
Included in these results are Old Mutual Asset Managers (UK) (OMAM(UK)), Old
Mutual Asset Managers (Bermuda) and Bright Capital. The improved operating
result in 2003 reflects the impact of successful hedge fund launches by OMAM(UK)
and a more streamlined cost base in the UK.
OMAM (UK)
Strong investment performance and successful new product launches were key
highlights so far this year. Overall, 63% of OMAM(UK)'s asset-weighted retail
funds achieved top quartile ranking over one year relative to peer group
performance. Total net external fund inflows into the business were £230 million
in the first half of 2003.
Six new hedge funds were launched during the first half of 2003, attracting £173
million of new funds in the period.
Bright Capital
GNI FM, the fund of hedge funds manager, was relaunched as Bright Capital in May
2003. The Bright Capital proposition is 'Controlling Risk' and is consistent
with a distinctive hedge fund investment process designed to achieve
transparency, liquidity and good corporate governance. Significant investment
has been made in the business's risk platform, and an innovative product range
is being developed that will be marketed to institutional and private clients.
Other Financial Services
Adjusted operating losses from the Group's UK & Rest of World other financial
services businesses were
£7 million compared to a £1 million loss recorded in the same period last year.
The increased loss was due to the reclassification of Selestia from life
assurance to other financial services reflecting the mix of products sold. The
2002 comparatives also included the results of GNI, Old Mutual Securities and
King & Shaxson Bond Brokers, which were sold in the fourth quarter of 2002.
Operating and Financial Review continued
Selestia
Selestia's business continued to grow, with sales in the period increasing from
the prior year total sales figure. Management focus since launch has been to
develop strong working relationships with quality IFAs dealing with the high net
worth market. As a result several large mandates have been won.
Life assurance
Adjusted operating profit from the Group's UK & Rest of World life businesses
was £8 million in the first half of 2003 compared to a loss of £3 million for
the equivalent period in 2002. The increase was largely due to the sale of Old
Mutual International's International Personal Portfolio Bond book, which
released £4 million to profit. Selestia's adjusted operating losses of £6
million were included in the 2002 result.
Operating and Financial Review continued
GROUP FINANCIAL REVIEW
Financial performance
Operating profit on ordinary activities before tax of £378 million increased
from £212 million in the first half of 2002. Basic earnings per share were 4.7p
in 2003 compared with 3.3p in the equivalent period last year. Adjusted
operating profit grew 4% to £395 million from £381 million in the same period
last year. Adjusted operating earnings per share of 5.6p decreased 3% compared
with 5.8p in the first half of 2002; however, this represented a 2% increase
over the second half of 2002.
Achieved profits
The Group's adjusted operating profit on an achieved profits basis of £429
million decreased by 10% from
£477 million in 2002. Adjusted operating earnings per share on an achieved
profits basis of 6.0p declined from 7.7p. Embedded value (adjusted for the
market value uplift of listed subsidiaries) of £4,059 million at 30 June 2003
also increased by 3% from £3,928 million at 31 December 2002. Embedded value per
share was 106p at 30 June 2003 compared to 104p at 31 December 2002.
Capital
Shareholders' capital benefited from a stronger Rand, as well as the raising of
£37 million through a placing of new shares issued in connection with the second
fixed instalment of payments due to Harold Baxter and Gary Pilgrim as part of
the restructuring of the Pilgrim Baxter revenue sharing agreement announced in
2002.
The Group continued its strategy of diversifying its funding sources during the
first half of 2003, successfully issuing $750 million of Guaranteed Cumulative
Perpetual Preferred Securities. The Securities, which are redeemable at the
Group's election from December 2008, provide core long term funding and improve
the Group's gearing (core debt1 over core debt plus equity shareholders' funds)
to 21%, compared with 30% at 31 December 2002.
In addition, the Group's Euro Commercial Paper programme has continued to be
well supported, while committed bank facilities have been maintained, ensuring
the Group retains a high degree of financial flexibility within an efficient and
balanced capital structure.
The solvency ratios of the Group's key businesses at 30 June were as follows:
excess assets equivalent to 2.2 and 2.5 times statutory capital at the South
African and US life businesses respectively; a capital adequacy ratio of 10.1%
at Nedcor and a solvency margin in excess of 50% at Mutual & Federal. In all
cases, these are above the minimum statutory requirements.
Taxation
The Group's effective rate (based on the tax charge as a proportion of adjusted
operating profit) of 32.7% represents an increase from 27.8% in the first half
of 2002. The higher rate reflects the impact of a reduction in Nedcor's
proportion of low taxed income and additional South African Secondary Tax on
Companies.
Long term investment return
The long term investment return assumption used in calculating the adjusted
earnings of the Group's South African life and general insurance businesses for
2003 is unchanged at 14% for equities. Changes in the composition of the South
African investment portfolios has resulted in the introduction of long term
investment returns for cash and other investible assets, resulting in a weighted
average long term investment return of 13.4%. The return earned by assets,
mainly bonds, backing the Group's US life business's liabilities has been
smoothed by reference to the actual yield earned by the portfolio, resulting in
a long term rate of return of 6.04%.
1 Core debt excludes debt from banking activities and is net of cash and short
term investments which are immediately available to repay debt.
Operating and Financial Review continued
Dividend
The Board has declared an interim dividend of 1.7p per share, which will be paid
on 28 November 2003 to shareholders recorded at the close of business on 17
October 2003. The equivalent of this dividend in the local currencies of South
Africa, Malawi, Namibia and Zimbabwe will be determined by the Company on 2
October 2003 and will be announced to the markets on 3 October 2003. The
Company's shares will trade ex dividend from the opening of business on 13
October 2003 on the JSE Securities Exchange South Africa and the Malawi,
Namibian and Zimbabwean Stock Exchanges and from the opening of business on 15
October 2003 on the London Stock Exchange. The last dates to trade cum-dividend
will therefore be 10 October 2003 (in South Africa, Malawi, Namibia and
Zimbabwe) and 14 October 2003 (in London).
No dematerialisation or rematerialisation of shares within the South African
STRATE system may take place between 13 October 2003 and 17 October 2003 (both
dates inclusive).
Julian V F Roberts
Group Finance Director
7 August 2003
Independent Review Report by KPMG Audit Plc to Old Mutual plc
Introduction
We have been engaged by the Company to review the financial information set out
on pages 16 to 42 and the supplementary financial information set out on pages
43 to 53 prepared on an achieved profits basis, and we have read the other
information contained in the interim report and considered whether it contains
any apparent misstatements or material inconsistencies with the financial
information.
This report is made solely to the Company in accordance with the terms of our
engagement to assist the Company in meeting the requirements of the Listing
Rules of the Financial Services Authority. Our review has been undertaken so
that we might state to the Company those matters we are required to state to it
in this report and for no other purpose. To the fullest extent permitted by law,
we do not accept or assume responsibility to anyone other than the Company for
our review work, for this report, or for the conclusions we have reached.
Directors' responsibilities
The interim report, including the financial information contained therein, is
the responsibility of, and has been approved by, the directors. The directors
are responsible for preparing the interim report in accordance with the Listing
Rules of the Financial Services Authority which require that the accounting
policies and presentation applied to the interim figures should be consistent
with those applied in preparing the preceding annual accounts except where they
are to be changed in the next annual accounts in which case any changes, and the
reasons for them, are to be disclosed.
Review work performed
We conducted our review in accordance with guidance contained in Bulletin 1999/
4: Review of interim financial information issued by the Auditing Practices
Board for use in the United Kingdom. A review consists principally of making
enquiries of management and applying analytical procedures to the financial
information and underlying financial data and, based thereon, assessing whether
the accounting policies and presentation have been consistently applied unless
otherwise disclosed. A review is substantially less in scope than an audit
performed in accordance with United Kingdom Auditing Standards and therefore
provides a lower level of assurance than an audit. Accordingly we do not express
an audit opinion on the financial information.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 30 June 2003.
KPMG Audit Plc
Chartered Accountants
London
7 August 2003
Consolidated Profit and Loss Account
for the six months ended 30 June 2003
£m Rm
______________________________________________________________________________________
6 months to 6 months to Year to 6 months to 6 months to Year to
30 June 30 June 31 December 30 June 30 June 31 December
Notes 2003 2002 2002 2003 2002 2002
________________________________________________________________________________________________________________________
South Africa
Technical result 123 97 208 1,592 1,541 3,283
Long term investment 83 63 135 1,075 1,000 2,131
return
______________________________________________________________________________________
Life assurance 5(b)(iii) 206 160 343 2,667 2,541 5,414
Asset management 5(c) 18 13 28 233 207 441
Banking 5(d) 74 99 165 959 1,579 2,605
General insurance 5(e) 28 19 35 368 308 556
______________________________________________________________________________________
326 291 571 4,227 4,635 9,016
United States
Life assurance 5(b)(iii) 39 33 83 505 524 1,310
Asset management 5(c) 37 60 95 479 951 1,500
______________________________________________________________________________________
76 93 178 984 1,475 2,810
UK & Rest of World
Life assurance 5(b)(iii) 8 (3) (3) 104 (47) (47)
Asset management 5(c) 1 5 2 14 80 31
Banking 5(d) 27 29 56 349 456 884
______________________________________________________________________________________
36 31 55 467 489 868
______________________________________________________________________________________
438 415 804 5,678 6,599 12,694
Other shareholders'
income / (expenses) 5(f) (13) (9) (22) (168) (143) (347)
Debt service costs (30) (25) (58) (388) (397) (916)
______________________________________________________________________________________
Adjusted operating
profit * 5(a) 395 381 724 5,122 6,059 11,431
Goodwill amortisation 9 (47) (55) (120) (608) (873) (1,895)
Write-down of investment
in Dimension Data
Holdings plc (11) (52) (68) (136) (830) (1,080)
Nedcor restructuring and
integration costs 5(d)(ii) (10) - (14) (134) - (227)
Change in credit
provisioning
methodology 5(d)(iii) (74) - - (963) - -
Short term fluctuations
in investment return 6 125 (62) (91) 1,618 (980) (1,439)
______________________________________________________________________________________
Operating profit on
ordinary activities 378 212 431 4,899 3,376 6,790
before tax
Non-operating items 8 (13) 38 (6) (168) 603 (88)
______________________________________________________________________________________
Profit on ordinary
activities before tax 365 250 425 4,731 3,979 6,702
Tax on profit on
ordinary activities 7 (191) (97) (224) (2,472) (1,540) (3,535)
______________________________________________________________________________________
Profit on ordinary
activities after tax 174 153 201 2,259 2,439 3,167
Minority interests -
equity 10(a) 15 (32) (44) 194 (508) (695)
Minority interests -
non-equity (14) - - (181) - -
_____________________________________________________________________________________
Profit for the financial
period 175 121 157 2,272 1,931 2,472
Dividends paid and
proposed 4 (64) (63) (176) (792) (998) (2,556)
____________________________________________________________________________________
Retained profit / (loss)
for the financial
period 111 58 (19) 1,480 933 (84)
____________________________________________________________________________________
Earnings per share p c
________________________________________________________________________________________________________________________
Adjusted operating earnings
per share * 3 5.6 5.8 11.3 73.4 92.9 179.0
Basic earnings per share 3 4.7 3.3 4.3 61.1 52.9 67.4
Diluted earnings per
share 3 4.6 3.2 4.3 60.0 51.0 67.4
Dividend per share 4 1.7 1.7 4.8 21.0** 27.3 69.6
________________________________________________________________________________________________________________________
Weighted average number of
shares - millions 3,717 3,652 3,670 3,717 3,652 3,670
* Adjusted operating profit represents operating profit before tax and minority
interests based on a long term investment return before goodwill amortisation,
write-down of investment in Dimension Data Holdings plc, Nedcor restructuring
and integration costs and change in credit provisioning methodology. Adjusted
operating earnings per share are similarly based, but are stated after tax and
minority interests.
** Indicative only - the actual amount of the dividend per share in Rand will be
determined by reference to the exchange rate prevailing on
2 October 2003 and announced by the Company on 3 October 2003.
Consolidated Statement of Total Recognised Gains and Losses
for the six months ended 30 June 2003
£m Rm
_______________________________________________________________________________________________
6 months to 6 months to Year to 6 months to 6 months to Year to
30 June 30 June 31 December 30 June 30 June 31 December
2003 2002 2002 2003 2002 2002
________________________________________________________________________________________________________________________
Profit for the financial
period 175 121 157 2,272 1,931 2,472
Foreign exchange
movements 174 117 295 (2,001) (2,069) (5,110)
_______________________________________________________________________________________________
Total recognised gains
and losses for the
period 349 238 452 271 (138) (2,638)
_______________________________________________________________________________________________
Reconciliation of Movements in Consolidated Equity Shareholders' Funds
for the six months ended 30 June 2003
£m Rm
________________________________________________________________________________________________________________________
6 months to 6 months to Year to 6 months to 6 months to Year to
30 June 30 June 31 December 30 June 30 June 31 December
Notes 2003 2002 2002 2003 2002 2002
________________________________________________________________________________________________________________________
Total recognised gains
and losses for the
period 349 238 452 271 (138) (2,638)
Dividends paid and
proposed 4 (64) (63) (176) (792) (998) (2,556)
________________________________________________________________________________________________________________________
285 175 276 (521) (1,136) (5,194)
Issue of new capital 37 39 39 479 619 619
Shares issued under
option schemes - - 1 - - 16
________________________________________________________________________________________________________________________
Net addition /
(reduction) to equity
shareholders' funds 322 214 316 (42) (517) (4,559)
Equity shareholders'
funds at the beginning
of the period 2,786 2,470 2,470 38,486 43,045 43,045
________________________________________________________________________________________________________________________
Equity shareholders'
funds at the end of
the period 3,108 2,684 2,786 38,444 42,528 38,486
________________________________________________________________________________________________________________________
Consolidated Balance Sheet
at 30 June 2003
Notes £m Rm
________________________________________________________________________
At At At At At At
30 June 31 December 30 June 30 June 31 December 30 June
2003 2002 2002 2003 2002 2002
________________________________________________________________________________________________________________________
Intangible assets
Goodwill 9 1,552 1,598 1,561 19,198 22,075 24,734
Insurance and other
assets
Investments 21,682 19,502 17,729 268,189 269,402 280,918
Assets held to cover
linked liabilities 4,716 4,317 4,337 58,333 59,635 68,720
________________________________________________________________________
5(g) 26,398 23,819 22,066 326,522 329,037 349,638
Reinsurers' share of
technical provisions 385 370 351 4,762 5,111 5,562
Debtors 1,177 429 9,186 14,557 5,925 145,553
Other assets 888 845 1,011 10,984 11,674 16,019
Cash at bank and in
hand 614 565 635 7,595 7,805 10,062
Prepayments and accrued
income 683 565 226 8,448 7,806 3,581
________________________________________________________________________
Total insurance and
other assets 30,145 26,593 33,475 372,868 367,358 530,415
________________________________________________________________________
Banking assets
Cash and balances at
central banks 760 1,202 961 9,401 16,607 15,227
Treasury bills and
other eligible bills 1,566 1,085 581 19,370 14,987 9,210
Loans and advances to
banks 1,467 1,228 468 18,146 16,963 7,416
Loans and advances to
customers 14,679 12,854 8,920 181,567 177,566 141,338
Debt securities 886 1,061 724 10,959 14,647 11,472
Equity securities 411 965 209 5,084 13,331 3,312
Interest in associated
undertakings 132 124 122 1,633 1,713 1,933
Other assets 1,858 2,384 299 22,981 32,929 4,734
Prepayments and accrued
income 539 474 341 6,667 6,548 5,403
________________________________________________________________________
Total banking assets 22,298 21,377 12,625 275,808 295,291 200,045
________________________________________________________________________
Total assets 53,995 49,568 47,661 667,874 684,724 755,194
________________________________________________________________________
Consolidated Balance Sheet continued
at 30 June 2003
£m Rm
______________________________________________________________________________
At At At At At At
30 June 31 December 30 June 30 June 31 December 30 June
Notes 2003 2002 2002 2003 2002 2002
______________________________________________________________________________________________________________
Capital and
reserves
Called up share
capital 383 378 378 4,737 5,222 5,989
Share premium
account 584 552 551 7,224 7,625 8,731
Merger reserve 184 184 184 2,276 2,542 2,915
Profit and loss
account 1,957 1,672 1,571 24,207 23,097 24,893
________________________________________________________________________________
Equity shareholders'
funds 3,108 2,786 2,684 38,444 38,486 42,528
________________________________________________________________________________
Minority interests
Equity 10(a) 795 783 617 9,834 10,816 9,776
Non-equity 10(b) 606 144 - 7,492 1,992 -
________________________________________________________________________________
1,401 927 617 17,326 12,808 9,776
________________________________________________________________________________
Subordinated 17 18 21 210 249 333
liabilities
Insurance and other
liabilities
Technical
provisions 19,381 17,655 16,023 239,727 243,888 253,886
Technical provisions
for linked
liabilities 4,716 4,317 4,337 58,333 59,635 68,720
Provisions for other
risks and charges 575 486 428 7,112 6,714 6,782
Creditors 2,607 1,789 10,456 32,250 24,710 165,676
Amounts owed to
credit institutions 11 497 767 857 6,147 10,596 13,580
Convertible loan
stock 12(a) 385 404 420 4,762 5,581 6,655
Accruals and deferred
income 140 184 170 1,732 2,542 2,694
________________________________________________________________________________
Total insurance and
other liabilities 28,301 25,602 32,691 350,063 353,666 517,993
________________________________________________________________________________
Banking liabilities
Deposits by banks 3,348 2,110 1,144 41,412 29,148 18,133
Customer accounts 14,057 12,070 8,668 173,874 166,735 137,345
Debt securities in
issue 1,111 2,266 1,060 13,742 31,303 16,790
Other liabilities 1,947 3,149 476 24,083 43,487 7,548
Provision for
liabilities and
charges 103 105 104 1,274 1,450 1,648
Subordinated
liabilities 588 521 196 7,273 7,197 3,100
Convertible loan
stock 12(b) 14 14 - 173 195 -
________________________________________________________________________________
Total banking
liabilities 21,168 20,235 11,648 261,831 279,515 184,564
________________________________________________________________________________
Total liabilities 53,995 49,568 47,661 667,874 684,724 755,194
________________________________________________________________________________
Consolidated Cash Flow Statement
for the six months ended 30 June 2003
£m Rm
________________________________________________________________________________________
6 months to 6 months to Year to 6 months to 6 months to Year to
30 June 30 June 31 December 30 June 30 June 31 December
2003 2002 2002 2003 2002 2002
________________________________________________________________________________________
Net cash (outflow) / (631) 608 1,207 (8,164) 9,664 19,047
inflow from operating
activities
Net cash outflow from (61) (41) (93) (790) (651) (1,468)
returns on investments
and servicing of finance
including dividends paid
to minority interests
Total tax paid (90) (129) (132) (1,165) (2,049) (2,084)
Net cash inflow / 64 (39) (26) 829 (619) (411)
(outflow) from capital
expenditure and financial
investment
Net cash (outflow) / (23) 80 (160) (298) 1,270 (2,526)
inflow from acquisitions
and disposals
Equity dividends paid (114) (110) (175) (1,476) (1,747) (2,763)
Net cash inflow from 165 5 260 2,136 79 4,108
financing activities
________________________________________________________________________________________
Net cash (outflow) /
inflow of the Group
excluding long term
business (690) 374 881 (8,928) 5,947 13,903
________________________________________________________________________________________
Cash flows relating to
insurance activities were
invested as follows:
Increase in cash 102 106 41 1,320 1,677 647
holdings
(Decrease) / increase in
net portfolio
investments (233) 1 483 (3,016) 23 7,631
________________________________________________________________________________________
(131) 107 524 (1,696) 1,700 8,278
Cash flows relating to
banking activities were
invested as follows:
(Decrease) / increase in
cash and balances at
central banks (559) 267 357 (7,232) 4,247 5,625
________________________________________________________________________________________
Net cash (outflow) /
inflow of the Group
excluding long term
business (690) 374 881 (8,928) 5,947 13,903
________________________________________________________________________________________
Reconciliation of
operating profit to
operating cash flow
Operating profit from 384 143 326 4,978 2,282 5,145
insurance and other
activities
Operating (loss) / profit
from banking activities (6) 69 105 (79) 1,094 1,645
________________________________________________________________________________________
Operating profit on 378 212 431 4,899 3,376 6,790
ordinary activities
before tax
Write-down of investment 11 52 68 142 830 1,080
in Dimension Data
Holdings plc
Change in credit 74 - - 958 - -
provisioning
methodology
Unrealised investment (185) 35 68 (2,395) 552 1,074
losses / (gains)
Other insurance and other (246) 120 464 (3,185) 1,905 7,318
activities non cash flow
items
Other banking non cash
flow items (663) 189 176 (8,583) 3,001 2,785
________________________________________________________________________________________
Net cash (outflow) / (631) 608 1,207 (8,164) 9,664 19,047
inflow from operating
activities
________________________________________________________________________________________
The cash flows presented in this statement exclude all cash flows relating to
policyholders' funds for the long term business.
Part 2 to follow
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