10th Aug 2005 07:02
Old Mutual PLC10 August 2005 OLD MUTUAL PLC ISIN: GB0007389926 JSE Share code: OML NSX share code: OLM Issuer code: OLOML RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2005 Delivering organic growth HIGHLIGHTS # Adjusted operating profit* up 29% to GBP554 million (30 June 2004: GBP428 million) and (IFRS** basis): up 24% to R6,445 million (30 June 2004: R5,194 million) # Adjusted operating profit (European up 28% to GBP638 million embedded value (EEV) basis): (30 June 2004: GBP497 million) and up 23% to R7,420 million (30 June 2004: R6,032 million) # Profit for the period attributable to equity holders GBP387 million (30 June 2004: GBP141 million) R4,509 million (30 June 2004: R1,712 million) # Adjusted operating earnings per share* up 22% to 8.4p (30 June 2004: 6.9p) and (IFRS basis): up 18% to 98.2c (30 June 2004: 83.1c) # Adjusted operating earnings per share up 25% to 10.1p (30 June 2004: 8.1p) and (EEV basis): up 20% to 117.7c (30 June 2004: 97.7c) # Basic earnings per share: 11.2p (30 June 2004: 4.1p), 130.2c (30 June 2004: 50.1c) # Total life assurance sales, on an Annual Premium Equivalent (APE) basis, of GBP318 million, an increase of 12% # Funds under management GBP158 billion (30 June 2004: GBP130 billion) an increase of 22%, R1,896 billion (30 June 2004: R1,469 billion) with record $20 billion fund inflows in the USA.Selestia funds under management exceed GBP1 billion # Adjusted embedded value per share 137.5p, R16.45 at 30 June 2005 (30 June 2004: 114.0p, (EEV basis): R12.88) # Return on equity 17.8% (30 June 2004: 18.7%) # Interim dividend increased by 5.7% to 1.85p (22.13 cents***) Commenting on the results, Jim Sutcliffe, Chief Executive, said: "All of our businesses have shown strong organic growth during the first half of 2005, and returns on rising assets and embedded value are encouraging. We have completed our BEE deals in South Africa, produced strong cash flows in the USA and increased market recognition in the UK. Our strategy has delivered good earnings growth and we are well placed to take market opportunities as they arise." Wherever the items asterisked in the Highlights are used, whether in the Highlights, the Chief Executive's Statement or the Group Finance Director's Review, the following apply: * Adjusted operating profit represents the directors' view of the underlying performance of the Group. For life assurance and general insurance businesses, adjusted operating profit is based on a long term investment return and includes investment returns on life funds' investments in Group equity and debt instruments. For all businesses, adjusted operating profit excludes goodwill impairments, fines and penalties, and profit/(loss) on disposal of investments in subsidiaries. Adjusted operating profit also excludes income from hedging activities that do not qualify for hedge accounting. Adjusted operating earnings per share is calculated on the same basis as adjusted operating profit, but is stated after tax and minority interests, with the calculation of the weighted average number of shares including own shares held in policyholders' funds. ** The financial information has been prepared on the basis of the recognition and measurement requirements of International Financial Reporting Standards as set out in the basis of preparation note on page 28 of this document. *** Indicative only, being the Rand equivalent of 1.85p converted at the exchange rate prevailing on 30 June 2005. The actual amount to be paid by way of interim dividend to holders of shares on the South African branch register will be calculated by reference to the exchange rate prevailing at the close of business on 6 October 2005, as determined by the Company, and will be announced on 7 October 2005. Old Mutual plc Results for the six months ended 30 June 2005 continued ENQUIRIES: Old Mutual plc UK James Poole Tel: +44 (0) 20 7002 7000 Miranda Bellord Tel: +44 (0) 20 7002 7133 College Hill, Tony Friend Tel: +44 (0) 20 7457 2020 Old Mutual plc SA Nad Pillay Tel: +27 (0) 21 504 8026 Notes to Editors: A webcast of the analysts presentation and Q&A will be broadcast live at 9.30 a.m. (UK time), 10.30 a.m.(South African time), today on our website, www.oldmutual.com. High-resolution images of Jim Sutcliffe and Julian Roberts are available at www.2.oldmutual.com/Media/media_resources/photo_library/js_jr.jsp. Copies of these results and the associated analysts presentation, together with photographs 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. 10 August 2005 Chief Executive's Statement The first half of 2005 has been a period of strong organic growth, with the achievement of a number of significant milestones in the Group's development. Our three main business platforms - in South Africa, the US and the UK - have all established a momentum which their management teams are confident of being able to sustain. Particular highlights in the period have been significantly improved life assurance and unit trust sales in South Africa, substantial progress in the recovery programme at Nedbank, and record cash flows from our US Asset Management business. All our earnings measures showed good progress. Our adjusted operating earnings per share for the first half of 2005 improved to 8.4p/98.2c (2004: 6.9p/83.1c) Basic earnings per share were 11.2p/130.2c (2004:4.1p/50.1c). Adjusted operating earnings per share (EEV basis) for the period were also up at 10.1p/117.7c (2004: 8.1p/97.7c). As a result, the directors have declared an increased interim dividend of 1.85p (2004:1.75p) per share, which will be paid on 30 November 2005. In South Africa, our life business produced a return on capital of 24%, despite profits having been struck after making a provision of R225 million for the improved terms offered to customers following the Pension Fund Adjudicator's rulings on paid-up retirement annuities. We have also reduced the rate at which the Long Term Investment Return accrues, which gave rise to a R250 million negative impact on earnings. Adjusted embedded value stood at a similar level to the year end at 137.5p/R16.45, with the Rand having been at a significantly higher level at the start of the year. Our Black Economic Empowerment (BEE) ownership proposals at Old Mutual South Africa (OMSA), Nedbank Group and Mutual & Federal have been approved by the three companies' shareholders, confirmed by the UK High Court in terms of a related scheme of arrangement in the case of OMSA, and implemented by each company during the last few days. I am delighted to welcome our new black business partners and look forward to working with them to accelerate the transformation of each of the businesses. I am also glad that our staff in South Africa will have a major participation in the company through the employee ownership schemes that have been established. Although the financial impact of the BEE deals will only be seen in the second half of the year, the benefits of our BEE proposals on our sales have already started to come through. Life and unit trust sales at OMSA were well ahead of the equivalent period in 2004, benefiting from a marked upturn between the first and second quarters at Individual Life, while Group Business sales were up 19% on the equivalent period last year. Nedbank Group has continued to hit the required milestones on its path to recovery, with results slightly ahead of expectations. Meanwhile Mutual & Federal reported another excellent result for the half, despite the tougher pricing environment, aided by disciplined underwriting, good claims management and close control of expenses. Net cash flow at our US Asset Management business was very positive, with a record net total of $20 billion, including $5.4 billion of cash collateral assets at our securities lending business, eSecLending. Our South African asset management business experienced a net outflow of R17 billion, largely as a result of withdrawal of funds by the Public Investment Commissioners as it corporatised. This was despite OMAM(SA)'s excellent investment performance record over the past 18 months. Chief Executive's Statement continued We have continued to take steps during the six months to develop our US asset management retail channel through Old Mutual Capital and alternative investment capabilities through our new business, 2100 Capital, and anticipate that we shall continue to make further strategic investments to support our US asset management firms in achieving organic growth and meeting clients' objectives. Our US life business had very good levels of sales (up 10% to $276 million APE) during the first half, and it remains on track to achieve our stated target of paying dividends in 2007. Record sales of variable annuity products have been recorded at OMNIA Bermuda, which reached $1 billion of assets under management. In the UK, we passed another major milestone during the period at Selestia, by achieving over GBP1 billion of funds under management. OMAM(UK) continued to attract funds and to deliver excellent investment performance, particularly in its hedge funds. Outlook Over the past five years, we have made substantial strides in using our powerful South African base to build an international franchise, with over half our life sales and more than 70% of our asset management clients now in the US and UK. Our flexible, multi-brand strategy plays well in the market place, both in the US and elsewhere, as open architecture/multi-manager has become an increasingly powerful trend in life assurance and asset management industries. Conditions remain broadly favourable, particularly in South Africa, and while markets can always affect the outcome, our operational robustness is now well established. Each of our businesses is now on a positive trajectory and well placed to seize opportunities for growth in our marketplaces. I believe we are well set to maintain the strong performance of the first half during the rest of 2005. Jim Sutcliffe Chief Executive 10 August 2005 Group Finance Director's Review Business Review SOUTH AFRICA LIFE ASSURANCE & ASSET MANAGEMENT - OLD MUTUAL SOUTH AFRICA (OMSA) Earnings impacted by one-offs H1 H1 Highlights (Rm) 2005 2004 Var % Life assurance 1,758 1,811 (3%) Long term investment return (LTIR) 646 911 (29%) Asset management 361 230 57% Adjusted operating profit 2,765 2,952 (6%) Return on Capital (Life business) 24% 26% Client funds (Rbn) 316 271 17% The life assurance result reduced by 3% to R1,758 million compared to the first half of 2004.This was largely as a result of the R225 million charge, recognised as a result of management's response to Pension Funds Adjudicator determinations, together with the impact of increased new business strain. This increased strain arises particularly due to the introduction of International Financial Reporting Standards (IFRS), more competitive product pricing and the costs of increasing our distribution capability, especially Group Schemes. The LTIR of R646 million declined by 29% from R911 million in the first half of 2004. This reduction reflects lower rates applied across all asset classes, combined with an increase in the cash component of the portfolio since June 2004 and lower investible assets as a result of an increased investment of R1.4 billion in Nedbank to retain our controlling interest post BEE. Adjusted operating profit for the asset management businesses, excluding Nedbank, increased strongly by 57% to R361 million in the first half of 2005, from R230 million for the first half of 2004. Higher asset levels, driven largely by the good performance of the South African equity market, contributed positively. Further benefit came through higher income from performance fees in Old Mutual Asset Managers (South Africa) (OMAM), growth in unit trust funds, and a large one-off profit in our Specialised Finance company from a single transaction. The combination of the above has resulted in the adjusted operating profit for OMSA reducing by 6% to R2,765 million. The return on life allocated capital has, as a consequence, reduced to 24%, which remains very satisfactory. Funds under management increased slightly Client funds under management for the business increased slightly from R312 billion as at 31 December 2004 to R316 billion at 30 June 2005. The uplift from market movements was largely offset by negative net client cash flows. These have been disappointing, with total net client cash flow being negative R17 billion. Within the Life business, Group Business flows were a negative R4 billion as a result of normal fund benefit payments and higher terminations. Within OMAM, the largest single factor was a withdrawal by the Public Investment Corporation of R10 billion. In addition, OMAM saw outflows as a result of clients rebalancing their portfolios, shifting from balanced mandates to specialised mandates, fragmenting portfolios into smaller pieces, and some smaller funds switching into balanced multi-manager offerings. Group Finance Director's Review Business Review continued OMAM continued to deliver strong investment performance, being ranked second out of the eleven institutional asset managers in the Alexander Forbes Global Manager Watch (Large) Survey over the year to the end of June 2005. Over three years OMAM was ranked fourth. In addition, 80% of the funds managed by OMAM (weighted by value) outperformed their benchmarks over the one-year period to 30 June 2005. Over 3 years, 94% of funds outperformed their benchmarks. Both life and non-life sales increase Total life sales for the period on an Annual Premium Equivalent (APE) basis, including Old Mutual International (OMI) sales out of South Africa, were R1,900 million, 13% higher than the comparative period in 2004. Both Individual Life and Group Business sales were higher, the latter showing particularly strong growth from a low base in 2004. Non-life sales in both our broker and agency channels grew strongly and contributed towards the increase in unit trust sales of 81% from R2,027 million in the first six months of 2004 to a record R3,666 million for this period. Individual Life Business sales up 10% Individual APE (Rm) H1 H1 2005 2004 Var % Savings 574 520 10% Protection 305 267 14% Immediate annuity 82 76 8% Group Schemes 310 295 5% Total excl. OMI 1,271 1,158 10% OMI 67 54 24% Total incl. OMI 1,338 1,212 10% Single 399 358 11% Recurring 940 856 10% Individual Life Business sales increased by 10% over the comparative period in 2004. Within this, recurring premiums were up 10%, single premiums were up 11%, and good growth was seen across all product groupings. Group Schemes sales, whilst only 5% higher for the period in total, recorded strong growth in the second quarter as the strengthening of their distribution gathered pace (with a 16% growth in sales force headcount since the end of 2004). Within single premium sales, bancassurance saw particularly strong growth, with total Old Mutual life sales through the Nedbank channel being up 52% on an APE basis for the first six months compared to the same period last year. Within recurring premiums, sales through brokers were slightly down, whereas sales through our agency channel grew strongly, reflecting our continuing investment in growing our advisor headcount. Our advisor force totalled 3,112 at the end of June 2005 - some 440 higher than a year earlier and 150 higher than at the start of the year. Group Business sales recovering H1 H1 Group APE (Rm) 2005 2004 Var % Savings 148 115 29% Protection 81 67 21% Annuity 54 16 238% Healthcare 278 275 1% Total 561 473 19% Single 182 105 73% Recurring 379 368 3% Total Group Business sales increased by 19% over the comparative period in 2004. Note that this total includes for the first time Healthcare sales, which have been brought in following our move to EEV methodology. Healthcare sales maintained the high level achieved in 2004. Excluding Healthcare business, Group business sales grew by 43% to R283 million over the comparative period in 2004. Group Finance Director's Review Business Review continued This reflects our efforts in restructuring our sales management, processes and capability. The result was underpinned by growth in single premium sales, with recurring premium sales being slower to pick up. Annuity sales showed particularly strong growth, albeit off a low base, with solid growth rates also being achieved in savings and protection product sales. In 2004 there was very little activity in pension fund outsourcing. This year has seen a general increase in outsourcing (especially for post-retirement medical aid liabilities), leading to higher annuity sales. The increase in protection sales is attributable to the securing of two large Group Life Assurance schemes.Increased opportunities in the post-retirement medical aid market resulted in customised products being offered for the first time, which was also a significant driver of savings product sales. Margins reduced reflecting investment in growth New business margins have reduced from 19% on an APE basis for the first half of 2004 to 15% for the first half of 2005, reflecting our efforts to grow the business and improve value for customers. The Individual business margin has reduced from 17% to 12% reflecting more competitive product pricing, as well as the initial expense strains relating to re-building the Group Schemes sales force. The Group business margin reduced marginally from 22% to 20%, reflecting some changes in the mix of new business. Solid capital position The South African life company remains strongly capitalised, as is demonstrated by the 2.4 times coverage of the Statutory Capital Adequacy Requirement (SCAR), after allowing for statutory limitations on the value of certain assets. This compares to coverage of 2.6 times at 31 December 2004 and 2.1 times at 30 June 2004. The decrease since December 2004 is primarily due to the full phasing in of the Financial Services Board's regulations relating to limits on Group undertakings, which result in R7.5 billion of our investment in Nedbank and M&F being disallowed for the purposes of SCAR coverage. Uncertainty around Pension Funds Adjudicator determinations The Pension Funds Adjudicator has made several determinations in recent months against retirement annuity funds, including Old Mutual's retirement annuity fund. While these determinations only apply to the particular client and fund to which each determination relates, they do set a precedent for subsequent determinations. The Adjudicator's rulings are subject to appeal to the High Court which decides a matter anew and may replace the Adjudicator's ruling with its own judgement. Considering the changing needs of investors that have developed over recent years, in the second half of 2004 Old Mutual introduced its new Max Investments product, which features greater flexibility to accommodate the changing needs of clients, as well as lower policy charges. In April 2005 Old Mutual announced its intention to offer existing clients with paid-up retirement annuities the option to have their premiums managed in the style of the Max Investments product. This option will result in enhanced retirement values for certain clients who have ceased or reduced their contributions. The value of policyholder liabilities has been increased by R225 million at 30 June 2005 to reflect the estimated cost of providing this option to policyholders. We believe that this is a significant step aimed at strengthening our customer franchise, and ensuring we provide good value for money. Discussions are currently being held between the industry and the regulator about these issues. Since at this stage it is not possible to foresee the outcome of these discussions, no further provision has been made for subsequent developments that may occur. Group Finance Director's Review Business Review continued BANKING - NEDBANK GROUP (NEDBANK) Recovery on track Nedbank's financial performance for the first six months of 2005 is in line with management's expectations, with the benefits of the recovery programme gaining momentum. Highlights (Rm) H1 2005 H1 2004 Var % Adjusted operating profit 2,112 898 135% Net interest income* 4,024 3,319 21% Non-interest revenue* 3,716 3,771 (1%) NII margin* 3.45% 2.99% Cost to income ratio* 68.6% 77.9% * As reported by Nedbank Group Nedbank's adjusted operating profit, for both its banking and asset management operations, of R2,112 million increased by 135% compared to the same period last year, outperforming the previous two half year performances. Nedbank continues to deliver on its commitments made to shareholders since the inception of the recovery programme in late 2003 with the resultant benefits being increasingly reflected in its financial performance. This has manifested itself with both growth in operating income and the containment of expenses, improving the efficiency ratio from a high of 77.9% for the first half of 2004 to 68.6% for the first half of 2005. Net interest income (NII) increased by 21% to R4,024 million compared to the same period last year. The margin has improved from 2.99% to 3.45% for the six months ended 30 June 2005, having benefited from 2004 initiatives undertaken. These included the uplift created from the rights offer cash received in May 2004, reduced funding drag following the revised hedging strategy, income from the sale of non-core investments and the repatriation of certain foreign capital. The settlement of expensive empowerment funding for Peoples Bank in April 2005 has also contributed to the increase. Margins were negatively impacted by the 1% reduction in the taxation rate and were slightly compressed from the impact of the lower interest environment and the resultant drop in endowment income. Non-interest revenue (NIR) growth was negatively impacted by the sale of subsidiaries during 2004. NIR decreased by 1% from R3,771 million to R3,716 million for the six months ended 30 June 2005. Deal flow has continued to improve and the pipeline remains strong with core business of commissions and fees showing good growth. In order to more accurately reflect the banking margin on banking assets by excluding trading activities and to facilitate easier peer group comparison, Nedbank has reclassified certain trading revenue from NII to NIR. Retail earnings more than doubled in the period, and the rate of market share loss reduced. Bancassurance premiums rose both through Nedbank and Old Mutual branded products. Cost to income ratio drops to 68.6% Total expenses for the period totalled R5,311 million, 3.9% lower than in the first half of 2004, contributing to an improvement in the cost to income ratio to 68.6% from 77.9% for the first six months of 2004. Income growth was 13.2% higher than expense growth for the period, which exceeded the target of 9%. This improvement can be attributed to improved efficiencies across the business, as well as a reduction in one-off strategic recovery programme and BoE merger costs. Group Finance Director's Review Business Review continued Return on equity (ROE) on track Nedbank has achieved ROE (excluding foreign exchange) of 12.9% for the period ended 30 June 2005, compared to 13.2% in the equivalent period in 2004, with the decline due to the impact of the 2004 rights issue. Nedbank remains committed to meeting 20% ROE and 55% cost to income ratio target by 2007 despite the dilutive aspects of BEE and impacts of IFRS. Capital Nedbank continues to be well capitalised, with tier 1 capital being above 8.5% at 30 June 2005 (December 2004: 8.1%). Nedbank's capital adequacy ratio has remained stable at 12.2% (31 December 2004: 12.1%). GENERAL INSURANCE - MUTUAL & FEDERAL Continued strong performance, but pressure on margins Mutual & Federal continued to perform strongly during the first six months in 2005 in a softening insurance market, with an adjusted operating profit of R573 million, although this is down on the comparable period last year. Highlights (Rm) H1 2005 H1 2004 Var % Adjusted operating profit 573 639 (10%) Underwriting ratio 8.6% 10.7% Gross premiums 3,962 3,592 10% This excellent performance was largely attributable to a favourable underwriting cycle, which continued into the first quarter of 2005, and the inclusion for the first time of the results of Credit Guarantee Insurance Corporation (CGIC). Strong premium growth up 10% Gross premiums for the period ended 30 June 2005 increased to R3,962 million, an increase of 10% from the comparable period last year. This result was substantially impacted by the inclusion of CGIC. Excluding CGIC, the growth would have been 5%, which reflects the intense levels of competition being experienced in the market. Claims Trading conditions for the short term insurance industry remained favourable for the first six months of 2005. The general level of commercial and industrial claims remained relatively low and this positively influenced the commercial portfolio. However, the personal division has been impacted by adverse weather conditions and a noticeable decline in the profitability of the motor account, which continued to be affected by an increase in motor vehicle accidents. Healthy underwriting surplus maintained - 8.6% The underwriting surplus for the period ended 30 June 2005 was R301 million, a decrease of R34 million from the underwriting surplus of R335 million for the period ended 30 June 2004. This reduction reflects the exceptionally strong general insurance cycle of 2004, which we believe has now peaked. Nevertheless, the 2005 surplus continues to reflect good claims management and close control of expenses. The underwriting ratio was 8.6% for the first half of 2005, down from 10.7% in the equivalent period last year. Group Finance Director's Review Business Review continued UNITED STATES US LIFE Strong profits continue, up 27% Highlights ($m) H1 2005 H1 2004 Var % Adjusted operating profit 93 73 27% Funds under management ($bn) 19.8 15.3 29% APE sales 276 251 10% Value of New Business 55 38 45% New Business margin 20% 15% Our US life business's adjusted operating profit of $93 million for the period ended 30 June 2005 was 27% up on the comparable period in 2004. This reflects the continued growth in assets and in-force business, the benefits of which have more than offset the strain from increasing volumes of new business. We continue to manage growth in profitable product areas and to drive towards capital self-sufficiency in 2007. Funds under management have increased by 29% to $19.8 billion - an increase of $4.5 billion since the first half last year and $2.5 billion since the start of the year. This increase reflects strong sales inflows, and we are now only just below our $20 - $25 billion critical mass. Sales up 10% Total sales on an APE basis for the first six months of 2005 were $276 million, an increase of 10% from $251 million in first six months of 2004. This growth was driven by particularly strong sales of life products as well as offshore annuity products through OMNIA Bermuda (soon to be rebranded Old Mutual Bermuda). Life sales grew by 51% and OMNIA Bermuda sales grew by 102% over the equivalent period in 2004. The continued growth in life sales reflects strengthening relationships and increases to the number of distributors, as well as strong market growth in the middle income sector on which we focus. We also benefit from our efficient use of outsourcing of underwriting and administration services. We are now ranked 18 overall for sales in the life market, and remain the market leader for mortgage protection term insurance. OMNIA Bermuda sales continue to reflect the benefits of the stability we have provided the business since we purchased it in May 2003. Our product offering has been expanded beyond the original variable annuity to include a fixed annuity and an equity indexed product modeled closely on our onshore products. The strong growth in sales reflects these product extensions, as well as growth in our bank distribution network. Our US retail annuity businesses also continue to grow as our distribution broadens and our product offerings are expanded. Corporate sales have been kept at low levels due to the strength of retail sales. Group Finance Director's Review Business Review continued Margins healthy The average margin on new business after tax increased from 15% at 30 June 2004 to 20% of APE for the period ended 30 June 2005. The value of new business after tax increased sharply from $38 million last year to $55 million this year. The achieved margin of 20% of APE is at the upper end of our expected range of results for new business margin under EEV methodology, reflecting strengthening of our pricing disciplines, strong stock selection by our asset managers and favourable product mix. US ASSET MANAGEMENT H1 H1 Highlights ($m) 2005 2004 Var % Adjusted operating profit 94 85 11% Funds under management ($bn) 209 163 28% Net client cashflow ($bn) 20 5 300% The Group's US Asset Management business achieved adjusted operating profit of $94 million in the first half of 2005, which was an increase of 11% on the comparative period in 2004. The combined effects of improving equity markets last year and record net cash inflows of $20 billion led to a 28% increase in funds under management to $209 billion. The net cash inflows were achieved across a broad range of asset classes, with fixed income, value equity and quantitative strategies particularly attracting new funds. Profitability improved although we continue to spend money building the retail channel through Old Mutual Capital, and into the alternative investments market through our interest in 2100 Capital. Funds under management benefit from record net fund inflows of $20bn Funds under management increased 13% to $209 billion, from $185 billion at 31 December 2004. Cashflows for the first half of 2005 achieved a record $20 billion net inflow, including cash collateral assets of $5.4 billion, accounting for 11% of the increase. The remaining 2% increase resulted from market action and fund investment performance. Our retail initiative continues to gather momentum, with gross sales of $497 million in the first half of 2005. Managing the portfolio In addition to our strategic partnership with Copper Rock Capital Partners and the launch of 2100 Capital announced earlier this year, US Asset Management has actively worked to manage its portfolio of businesses by enhancing the diversification of asset management capabilities and through divestiture of non-core operations. We sold our business based in Japan at the end of the first quarter of 2005. Going forward, we will continue to make strategic investments in order to support our firms in achieving organic growth and meeting the objectives of our clients. Group Finance Director's Review Business Review continued UK & REST OF WORLD H1 H1 Highlights (GBPm) 2005 2004 Var % Adjusted operating profit 9 0 Fund under management(GBPbn) 4.9 4.0 23% Selestia sales 305 197 55% Adjusted operating profit from the Group's UK and Rest of World asset management and life assurance businesses, excluding Nedbank, was GBP9 million in 2005. This result includes the adjusted operating profit from the UK, Old Mutual International (OMI) and the Far East. The success of the organic growth strategy of the UK businesses is reflected in the growth in adjusted operating profit during this year, with Old Mutual Asset Managers (UK) (OMAM(UK)) in particular producing a good result as a consequence of excellent hedge fund performance. The UK businesses contributed GBP3 million of adjusted operating profit in the first half of 2005, compared to a break even position for the comparable period in 2004. Total funds under management in the UK grew by 17% from GBP4.2 billion at 31 December 2004 to GBP4.9 billion at 30 June 2005. OMAM(UK)'s hedge fund products continued to attract strong inflows and generate strong fund performance. Selestia funds under management exceed GBP1 billion New business sales at Selestia continued to grow, with sales of GBP305 million achieved in the first half of 2005, an increase of 55% on the comparative period in 2004. Funds under management increased from GBP730 million at 31 December 2004 to GBP1,051 million at 30 June 2005. GROUP RESULTS H1 2005 Adjusted EPS up by 22% to 8.4p The Old Mutual Group has had a positive start to 2005, with a 29% increase in adjusted operating profit before tax to GBP554 million. Adjusted operating profit after tax and minority interests increased by 24% from GBP256 million for the period ending 30 June 2004 to GBP317 million for the first six months of 2005, leading to an increase in adjusted operating earnings per share to 8.4p for the period ending 30 June 2005, from 6.9p for the comparative period in 2004. The basic earnings per share is 11.2p, representing a 173% increase. Profit for the financial period attributable to equity holders increased to GBP387 million during the first half of 2005 compared to GBP141 million during the first half of 2004. Funds under management and fund flows During 2005, funds under management increased by 13% from GBP140 billion as at 31 December 2004 to GBP158 billion at 30 June 2005. Our international diversity has delivered strong net cash inflows of GBP9.6 billion, an increase of GBP5.6 billion when compared to the first half of last year, as strong performances by our US and UK businesses more than offset weak flows in South Africa. Group Finance Director's Review Business Review continued Embedded Value (EV) - profits Old Mutual published its 2004 embedded value figures restated in accordance with EEV principles on 20 June 2005. The same approach has been taken to the calculation of our June 2005 figures, and all 2004 comparatives are on the restated EEV basis. The Group's adjusted operating profit on an EEV basis of GBP638 million increased by 28% from GBP497 million at June 2004. Adjusted operating profit for life assurance of GBP345 million was up 3% from GBP334 million at June 2004, with African profit being down 7% and North American profit being up 57%. The reduction in adjusted operating profit for Africa is mainly due to lower expected return on capital and a provision for the expected cost of the offer to policyholders that has been announced in respect of paid-up retirement annuities. The increase in adjusted operating profit for North America is mainly due to a significant increase in the value of new business sold in 2005 and the consequential effect of new business sold in 2004. Adjusted embedded value per share down by 2% Adjusted embedded value (EV) (adjusted for own shares held in policyholders' funds and to bring listed Group subsidiaries to market value) of GBP5,303 million at 30 June 2005 decreased by 2% from GBP5,384 million at 31 December 2004. Good Rand growth in African life embedded value (aided by good investment returns) was partially offset by the depreciation of the Rand, good US dollar growth in North American embedded value (driven by new business growth) was enhanced by the strengthening of the US dollar, and a decline in the share prices of Nedbank and Mutual & Federal was exacerbated by the weakening of the Rand. Adjusted EV per share at 30 June 2005 was 137.5p representing a decline in EV per share of 2% over the 2004 result of 139.7p. Capital The Group's gearing level remains favourable, with senior debt gearing at 30 June 2005 of 7.9% (10.8% at 31 December 2004) and total gearing, including hybrid capital, of 19.0% (16.9% at 31 December 2004). Hybrid capital excludes hybrid debt from banking activities and includes the $750 million of Guaranteed Cumulative Perpetual Preferred Securities issued during 2003 that are reported as part of minority interests in the financial statements and the GBP350 million of Perpetual Preferred Callable Securities issued in March 2005 that are reported as part of equity holders' funds. Senior debt gearing is defined as senior debt over senior debt plus adjusted embedded value on an EEV basis. Senior debt excludes debt from banking activities and is net of cash and short-term investments, which are immediately available to repay debt, and derivative assets relating to swaps associated with senior debt, so as to reflect debt valued on effective currency and interest rate positions. Total gearing is similarly based, but includes hybrid capital instruments within debt. On 2 May 2005 the Group's $636 million of outstanding 3.625 per cent Convertible Bonds matured and were repaid in full at par value. Old Mutual's Group-wide Economic Capital (EC) Programme is progressing according to plan. Once completed, it will significantly improve the Group's ability to measure risk and shareholder value creation. The early results show the Group's available financial resources to be well above the EC required for our target external agency rating. The Group exceeds the minimum capital resources requirement under the Financial Groups Directive, which applies to UK-based financial conglomerates. Group Finance Director's Review Business Review continued Taxation The Group's effective tax rate (based on the tax charge excluding income tax attributable to policyholder returns as a proportion of adjusted operating profit) for the period ended 30 June 2005 of 24% decreased from 25% for the corresponding period in 2004. This was primarily as a result of the recognition of a previously unrecognised deferred tax asset in the US. Excluding the impact of this adjustment, the tax rate would have increased to 27% as a result of a decrease in the proportion of tax advantaged investment income earned in the period. BLACK ECONOMIC EMPOWERMENT Over the past few years Old Mutual plc has been actively addressing various aspects of Black Economic Empowerment (BEE). We believe that Black Economic Empowerment (BEE) is a key requirement for the promotion of sustainable economic growth and social development in South Africa and is therefore fundamental to the interests of our employees, clients and shareholders. Earlier this year we proposed three separate, but independent transactions designed under a common set of principles, which introduce new broad-based black ownership into each of our South African subsidiaries. These transactions have now been completed and have resulted in the introduction of direct black ownership worth 12.75% of the value of Old Mutual plc's South African businesses, with the total value of black shareholding being R7.1 billion. The financial impact of these proposals will be incorporated into the Group's results for the second half of 2005. Our BEE deal is very broad based and our South African employees now have share interests in our companies with the incentivisation that share ownership provides. Uniquely, many of our clients and distributors have also acquired an interest in our shares, which supports our strategy. We believe that our black business partners will add value to our businesses and are extremely pleased to have the Wiphold and Brimstone Consortia as shareholders in our businesses, as well as Mtha at Mutual & Federal. The transformation deal secures future returns for all our stakeholders. DIVIDEND The directors have declared an interim dividend of 1.85p per share for the six months ended 30 June 2005, to be paid on Wednesday, 30 November 2005. The record date for this dividend payment is the close of business on Friday, 21 October 2005, for all the Exchanges where the Company's shares are listed. The last day to trade cum-dividend on the JSE Limited ("JSE") and other African Exchanges will be Friday, 14 October 2005. The shares will trade ex-dividend from the opening of business on Monday, 17 October 2005 on the JSE and the other African Exchanges and from the opening of business on Wednesday, 19 October 2005 on the London Stock Exchange. Group Finance Director's Review Business Review continued Shareholders on the South African, Zimbabwe and Malawi branch registers and the Namibian section of the principal register will be paid the local currency equivalents of the dividend under the Dividend Access Trust arrangements established in each country. Local currency equivalents of the dividend will be determined by the Company using exchange rates prevailing at close of business on Thursday, 6 October 2005 and will be announced by the Company on Friday, 7 October 2005. Share certificates may not be dematerialised or rematerialised on the South African branch register between Monday, 17 October and Friday, 21 October 2005, both dates inclusive, and transfers between the registers may not take place during that period. Julian V F Roberts Group Finance Director 10 August 2005 Independent Review Report by KPMG Audit Plc to Old Mutual plc Introduction We have been engaged by the Company to review the financial information, including the European Embedded Value supplementary information, set out on pages 19 to 81 and supplementary financial information set out on pages 84 to 145. 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 which require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual financial statements except where any changes, and the reasons for them, are disclosed. As disclosed in note 1 to the financial information on page 28, the next annual financial statements of the Group will be prepared in accordance with IFRSs adopted for use in the European Union (EU). The accounting policies that have been adopted in preparing the financial information are consistent with those that the directors currently intend to use in the next annual financial statements. There is, however, a possibility that the directors may determine that some changes to these policies are necessary when preparing the full annual financial statements for the first time in accordance with those IFRSs adopted for use by the EU. This is because, as disclosed in note 1, the directors have anticipated that certain standards, which have yet to be formally adopted for use in the EU, will be so adopted in time to be applicable to the next annual financial statements. 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 Group 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 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 2005. KPMG Audit Plc Chartered Accountants 10 August 2005 8 Salisbury Square, London EC4Y 8BB Summary Consolidated Income Statement for the six months ended 30 June 2005 The following table summarises the Group's results in the consolidated income statement on page 19. Adjusted operating profit represents the directors' view of the underlying performance of the Group. This summary does not form part of the statutory financial statements. GBPm 6 months 6 months Year to to 30 June to 30 June 31 December Notes 2005 2004 2004 Africa Long term business 3(iv) 212 228 467 Asset management 3(vii) 37 22 54 Banking 3(vi) 162 54 203 General insurance 3(v) 49 52 101 460 356 825 North America Long term business 3(iv) 50 40 97 Asset management 3(vii) 51 47 87 101 87 184 United Kingdom & Rest of World Long term business 3(iv) 2 - 6 Asset management 3(vii) 7 7 (5) Banking 3(vi) 14 11 23 23 18 24 Debt service costs (19) (24) (49) Other shareholders' income / (expenses) 3(viii) (11) (9) (30) Adjusted operating profit* 554 428 954 Goodwill impairments 9 (2) (33) (33) (Loss) / profit on disposal of investments in subsidiaries (4) 12 (27) Short term fluctuations in investment returns 4 133 (48) 197 Income from hedging activities that do not qualify for hedge accounting - 5 31 Investment return adjustment for Group equity and debt instruments held in life funds 3(iv) (28) (26) (99) Fines and penalties 5 - (49) (49) Profit before tax (net of income tax attributable to policyholder returns) 653 289 974 Total income tax expense 6 (181) (120) (344) Less income tax attributable to policyholder returns 21 23 62 Income tax attributable to equity holders (160) (97) (282) Profit for the financial period 493 192 692 Minority interests - ordinary shares 11(a) (78) (24) (74) Minority interests - preferred securities (28) (27) (59) Profit for the financial period attributable to equity holders 387 141 559 * For life assurance and general insurance businesses, adjusted operating profit is based on a long term investment return and includes investment returns on life funds' investments in Group equity and debt instruments. For all businesses, adjusted operating profit excludes goodwill impairments, fines and penalties and profit/(loss) on disposal of investments in subsidiaries. Adjusted operating profit excludes income from hedging activities that do not qualify for hedge accounting. Summary Consolidated Income Statement continued for the six months ended 30 June 2005 The adjusted operating profit after tax attributable to equity holders is determined as follows: GBPm 6 months to 6 months to Year to 30 June 30 June 31 December Notes 2005 2004 2004 Adjusted operating profit 554 428 954 Tax on adjusted operating profit 6 (133) (109) (244) 421 319 710 Minority interests - ordinary shares 11 (76) (36) (94) - preferred securities (28) (27) (59) Adjusted operating profit after tax attributable to equity holders 317 256 557 The reconciliation of adjusted operating profit after tax attributable to equity holders to profit for the financial period attributable to equity holders is as follows: GBPm 6 months to 6 months to Year to 30 June 30 June 31 December 2005 2004 2004 Adjusted operating profit after tax attributable to equity holders 317 256 557 Goodwill impairments (2) (17) (17) (Loss) / profit on disposal of investments in subsidiaries (4) 6 (21) Short term fluctuations in investment returns 104 (42) 149 Income from hedging activities that do not qualify for hedge accounting - 5 31 Investment return adjustment for Group equity and debt instruments held in life funds (28) (26) (99) Fines and penalties - (41) (41) Profit for the financial period attributable to equity holders 387 141 559 p 6 months to 6 months to Year to 30 June 30 June 31 December Earnings per share attributable to equity holders Notes 2005 2004 2004 Adjusted operating earnings per share* 7 8.4 6.9 14.9 Basic earnings per share 7 11.2 4.1 16.3 Diluted earnings per share 7 11.2 4.1 16.3 Adjusted weighted average number of shares - millions 3,753 3,735 3,738 Weighted average number of shares - millions 3,467 3,419 3,422 * Adjusted operating earnings per share is calculated on the same basis as adjusted operating profit, but is stated after tax and minority interests, with the calculation of the weighted average number of shares including own shares held in policyholders' funds. Consolidated Income Statement for the six months ended 30 June 2005 GBPm 6 months 6 months Year to to 30 June to 30 June 31 December Notes 2005 2004 2004 Revenue Gross earned premiums 2,148 2,023 4,114 Outward reinsurance (80) (74) (140) Net earned premiums 2,068 1,949 3,974 Investment income (net of investment losses) 2,501 371 4,250 Banking interest and similar income 1,072 983 2,041 Fee and commission income, and income from service activities 576 582 1,230 Other income 104 67 147 Total revenues 3(ii) 6,321 3,952 11,642 Expenses Claims and benefits (including change in insurance contract provisions) (3,334) (1,737) (5,901) Reinsurance recoveries 88 55 143 Net claims incurred (3,246) (1,682) (5,758) Change in provision for investment contract liabilities (including amortisation) (448) (33) (760) Losses on loans and advances (53) (33) (104) Finance costs (including interest and similar expenses) (14) (21) (61) Banking interest expense (712) (704) (1,440) Fees, commissions and other acquisition costs (164) (167) (398) Other operating and administrative expenses (960) (981) (1,988) Third party interest in consolidated funds (50) (7) (55) Total expenses 3(ii) (5,647) (3,628) (10,564) Share of associated undertakings' profit after tax 6 9 18 Goodwill impairments 9 (2) (33) (33) (Loss) / profit on disposal of investment in subsidiaries (4) 12 (27) Profit before tax 674 312 1,036 Income tax expense 6 (181) (120) (344) Profit for the financial period 493 192 692 Minority interests Ordinary shares (78) (24) (74) Preferred securities (28) (27) (59) Total minority interests (106) (51) (133) Profit for the financial period attributable to equity holders 387 141 559 p 6 months to 6 months to Year to 30 June 30 June 31 December Earnings and dividend per share 2005 2004 2004 Basic earnings per share 11.2 4.1 16.3 Diluted earnings per share 11.2 4.1 16.3 Dividend per share 8 1.85 1.75 5.25 Weighted average number of shares - millions 3,467 3,419 3,422 Consolidated Balance Sheet at 30 June 2005 GBPm At At At 30 June 31 December 30 JuneRelated Shares:
Old Mutual PLC