Results year ended 31 Dec 07

27th Feb 2008 07:02

Old Mutual PLC27 February 2008 OLD MUTUAL plcIssuer code: OLOMLJSE Share code: OMLNSX share code: OLMISIN: GB0007389926 Results for the year ended 31 December 2007 Year of investment establishes strong platform for future growth • Net client cash flows (NCCF) of GBP23.4 billion, 9.9% of opening funds undermanagement (FUM) • FUM up 18% to GBP278.9 billion despite unsettled market conditions • Life APE sales up 12% to GBP1,760 million (up 16% at constant exchange rates) • Mutual fund sales of GBP8,268 million: strong US and ELAM growth offset bymarket declines in UK • Value of new business up 5% to GBP266 million • Profit before tax (IFRS) up 2% to GBP1,750 million • Adjusted operating profit* on an IFRS basis up 11% to GBP1,624 million (2006:GBP1,459 million) • Adjusted operating earnings per share** up 12% to 16.9p on an IFRS basis (31 December 2006: 15.1p) • Adjusted Embedded Value per share 173.3p at 31 December 2007 (31 December2006: 161.1p***) • Recommended final dividend up 10% to 4.55p (68.92 cents****) per share, inline with underlying growth rates Jim Sutcliffe, Chief Executive, commented: "In 2007, in conditions which became very challenging during the second half ofthe year, we focused on building our capabilities across our internationalportfolio. I am delighted that during this period of investment we were able toproduce strong earnings growth. Particularly pleasing was the continueddelivery of excellent investment performance across the Group, which stimulatedgood growth in net client cash flows and funds under management which willstand us in good stead going forward. Looking ahead, while currency movements and the continued turbulent state ofglobal markets will have an impact on earnings, diversity in product mix andgeography, coupled with our robust capital position and operating momentum inour businesses, give me confidence that we will deliver a resilient performancein 2008." Enquiries Investor RelationsAleida White UK +44 (0)20 7002 7287Deward Serfontein SA +27 (0)21 509 8709 MediaJames Crampton UK +44 (0)20 7002 7133Nad Pillay SA +27 (0)21 504 8026 College Hill (UK)Tony Friend UK +44 (0)20 7457 2020 Notes Wherever the terms asterisked in the Financial Highlights are used, whether inthe Financial Highlights, the Chief Executive's Statement, the Group FinanceDirector's Review or the Business Review, the following definitions apply: * For long-term business and general insurance businesses, adjusted operatingprofit is based on a long-term investment return, includes investment returnson life funds' investments in Group equity and debt instruments, and is statednet of income tax attributable to policyholder returns. For the US AssetManagement business it includes compensation costs in respect of certainlong-term incentive schemes defined as minority interests in accordance withIFRS. For all businesses, adjusted operating profit excludes goodwillimpairment, the impact of acquisition accounting, put revaluations related tolong-term incentive schemes, the impact of closure of unclaimed shares trusts,profit/(loss) on disposal of subsidiaries, associated undertakings andstrategic investments, dividends declared to holders of perpetual preferredcallable securities, and fair value (profits)/losses on certain Group debtmovements. ** Adjusted operating earnings per ordinary share is calculated on the samebasis as adjusted operating profit. It is stated after tax attributable toadjusted operating profit and minority interests. It excludes incomeattributable to Black Economic Empowerment (BEE) trusts of listed subsidiaries.The calculation of the adjusted weighted average number of shares includes ownshares held in policyholders' funds and BEE trusts. *** The 2006 comparative has been restated from that previously published toreflect the value of own shares held by the Group's Employee Share OwnershipPlans (ESOP). **** Indicative only, being the Rand equivalent of 4.55p converted at theexchange rate prevailing on 25 February 2008. The actual amount to be paid byway of final 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 17 April 2008, as determined by the Company, and will be announced on 18 April 2008. Forward-looking statements This announcement contains forward-looking statements with respect to certainof Old Mutual plc's plans and its current goals and expectations relating toits future financial condition, performance and results. By their nature, allforward-looking statements involve risk and uncertainty because they relate tofuture events and circumstances that are beyond Old Mutual plc's control,including, among other things, UK domestic and global economic and businessconditions, market-related risks such as fluctuations in interest rates andexchange rates, policies and actions of regulatory authorities, the impact ofcompetition, inflation, deflation, the timing and impact of other uncertaintiesor of future acquisitions or combinations within relevant industries, as wellas the impact of tax and other legislation and other regulations in territorieswhere Old Mutual plc or its affiliates operate. As a result, Old Mutual plc's actual future financial condition, performanceand results may differ materially from the plans, goals and expectations setforth in Old Mutual plc's forward-looking statements. Old Mutual plc undertakesno obligation to update any forward-looking statements contained in thisannouncement or any other forward-looking statements that it may make. Notes to Editors: A webcast of the presentation and Q&A will be broadcast live at 9.00 a.m. (UKtime), 10.00 a.m. (Swedish time) and 11:00am (South African time) today on theCompany's website, www.oldmutual.com. Analysts and investors who wish toparticipate in the call should dial the following toll-free numbers: UK 0500 551 077Sweden 0200 887 651South Africa 0800 991 468North America +1 877 491 0064 Playback (available until midnight on 12 March 2008): UK 0207 031 4064UK toll-free 0800 358 1860Sweden +46 (0) 850 520 333North America toll-free +1 888 365 0240North America +1 954 334 0342 Access code: 785355 Copies of these results together with high-resolution images (athttp://www.oldmutual.com) and biographical details of the Executive Directorsof Old Mutual plc, are available in electronic format to download from theCompany's website. A Financial Disclosure Supplement relating to the Company's Preliminary resultscan be found on the website. This contains a summary of key financial data for2007 and 2006. An interview with Jim Sutcliffe, Chief Executive and Jonathan Nicholls, GroupFinance Director, in video, audio and text is available on the Company'swebsite, www.oldmutual.com, and on www.cantos.com. Photographs of management are available at the Visual Media website www.vismedia.co.uk. Chief Executive's Statement As previously outlined, Old Mutual implemented a programme of investmentthroughout 2007 to develop the Group, address specific issue areas and placethe business on a sound footing for future growth. An enormous amount has beenachieved in building scale and market share, and great steps have been taken toremain at the forefront of innovation and be competitive within our markets. Despite these investments, exchange rate headwinds and tough market conditionsin the latter part of the year, our 2007 results reflect the renewed focusGroup-wide on delivering outstanding investment performance for customers andreturns for shareholders. Net client cash flows remain excellent Strong net client cash flows, a key indicator of business performance and ameasure being increasingly adopted as a reporting value throughout theindustry, were a strong feature of each of our businesses in 2007, inparticular of US asset management. While mutual fund sales were impacted in thesecond half by unfavourable market conditions, life sales overall were good. Steady growth in IFRS profit, RoE and FUM Notwithstanding planned infrastructural investments, tight control on costelements continued, leading to an increase in IFRS-adjusted operating profit of11%. Earnings per share grew by 12% and we produced a solid return on equity of13.2%. The 2008 target of GBP300 billion in funds under management remains firmly on track with the Group increasing funds by 18% to GBP279 billion in 2007 despite the problems that beset the market towards the end of the year. Positive value creation through Skandia Skandia, in all its geographies, has shown impressive growth and 2008 will markthe conclusion of the integration programme embarked on when Old Mutualacquired the company in 2006. The platform business in the UK continues to gofrom strength to strength continuing to attract assets through itswell-established IFA network. Skandia Europe and Latin America (ELAM) is alsobenefiting from the portfolio approach introduced to share practices acrosslike-regions, which has resulted in strong unit-linked sales. While thecompetitive environment in Sweden continues to hamper margins, we are extremelypleased to report a positive turnaround in sales growth in our Skandia Nordicregion. Overall, we believe, with the synergy targets on track, that the valueour Group is able to extract from Skandia has made this a very successful,value accretive investment. South African earnings move ahead strongly Investment in the retail distribution system, the improvement in the retailoffering as well as new marketing initiatives helped drive sales at Old MutualSouth Africa (OMSA). With a strong stock market in the early part of the yearIFRS-adjusted operating profit grew by a healthy 23%. Corporate sales droppedslightly after some large single outflows relating to changing clientinvestment mandates and some hesitancy over the introduction of the newboutique asset management model. The new structure is in place, but as we havesaid, will take time to bed down, and our focus is now on boosting investmentperformance to attract inflows. 2007 was a milestone year for Nedbank. Management successfully achieved thethree-year recovery targets in the first half, and established a revitalisedworking environment through investment in people, culture and values. This hasprovided Nedbank with a competitive edge in the market and a solid foundationfrom which to sustain its business performance and its credit and expensemanagement in expected tough trading conditions in the current year. Mutual and Federal (M&F) suffered from a turn in the underwriting cycle and areduction in investment income. Although M&F is a solid business, we havestated that it is not core to our asset gathering and management strategy inSouth Africa, and toward the end of 2007 we announced that the Group was indiscussion with Royal Bafokeng Holdings to sell Old Mutual's 77% share in M&F.The discussions continue and we hope to conclude them during the course of2008. US continues to deliver solid results Strong investment performance again delivered a powerful net client cash flowresult, and asset management earnings grew strongly. Acadian led the way, butthere were also strong performances from Barrow Hanley, Dwight, and Rogge, andperformance fees were particularly good at Campbell. The life business hadexceptionally strong Variable Annuity sales results in the second half from theBermuda business and earnings were a pleasing increase on the underlying trendin the first half. No further adjustments were required for the immediateannuity portfolio. The US business was cash generative as planned. Asia Pacific sales continue to grow Our Asia Pacific businesses continue to reflect the impressive growth of theregion. Sales, the value of new business and the level of funds undermanagement have grown strongly, and our increased focus on the region,including the recent establishment of a regional headquarters in Hong Kong,stands us in good stead for the medium term. Summary and outlook In 2007, in conditions which became very challenging during the second half ofthe year, we focused on building our capabilities across our internationalportfolio. I am delighted that during this period of investment we were able toproduce strong earnings growth. Particularly pleasing was the continueddelivery of excellent investment performance across the Group, which stimulatedgood growth in net client cash flows and funds under management which willstand us in good stead going forward. Looking ahead, while currency movements and the continued turbulent state ofglobal markets will have an impact on earnings, diversity in product mix andgeography, coupled with our robust capital position and operating momentum inour businesses, give me confidence that we will deliver a resilient performancein 2008. Jim SutcliffeChief Executive 27 February 2008 Group Finance Director's Review GROUP RESULTS Group Highlights (GBPm) 2007 2006 % ChangeAdjusted operating profit (IFRS basis) (pre-tax) 1,624 1,459 11%Profit before tax (IFRS) 1,750 1,714 2%Adjusted operating earnings per share (IFRS basis) 16.9p 15.1p 12%Basic earnings per share (IFRS basis) 19.2p 17.0p 13%Adjusted operating profit (EEV basis) (pre-tax) 1,532 1,605 (5%)Adjusted operating earnings per share (EEV basis) 17.2p 17.8p (3%)Basic earnings per ordinary share from continuing operations 18.3p 15.8p 16%Basic earnings per ordinary share from discontinued operations# 0.9p 1.2p (25%)Adjusted Group embedded Value (GBPbn) 9.4 8.9 6%Adjusted Group embedded Value per share 173.3p 161.1p## 8%Value of new business 266 253### 5%PVNBP 13,878 12,185###,+ 14%Life assurance sales (APE) 1,760 1,576###,+ 12%Unit trust/mutual funds sales 8,268 8,408### (2%)Net client cash flows (GBPbn) 23.4 22.3 5%Funds under management (GBPbn) 278.9 237.1 18%Return on equity (%)++ 13.2% 12.0% Return on Embedded Value (%) 13.2% 13.8% Full dividend in respect of the financial year 2007 6.85p 6.25p 10% Net client cash flows delivered through sustained investment performance During 2007, the Group's net client cash flows were a very healthy GBP23.4 billion representing 9.9% of opening funds under management with goodcontributions resulting from business unit investment performance. Our US assetmanagement business delivered excellent net inflows of GBP17.6 billion, whilethe Skandia businesses achieved GBP5.3 billion of net inflows. For OMSA, netclient cash flows remained a challenge. Solid sales In Europe we continued to benefit from being the open architecture leader inthe UK with strong life assurance sales, whilst growth continued in ELAM withexcellent unit trust sales. In Nordic, investment in the sales channel led to aturnaround from the decline in APE sales experienced during the first half ofthe year. In the second half, sales in that region recovered resulting in a 3%year-on-year increase overall. In the US, APE sales were up by 47% in US Dollarterms, driven by exceptional growth in Bermuda. South African life sales were7% higher in Rand terms although 5% lower in Sterling. # The results of the Group's South Africa general insurance business, Mutual &Federal, are shown as a discontinued operation in these financial statements.The Group is currently in discussions with the investment group, Royal BafokengHoldings (Proprietary) Limited ('RBH') which is expected to result in the saleto RBH of a controlling interest in Mutual & Federal. ## The 2006 comparative has been restated from that previously published toreflect the value of own shares held in Employee Share Ownership Plans (ESOP). ### 2006 comparatives restated to include acquired Skandia businesses on a proforma 12 month basis. + Restated due to change in the calculation of US Life APE calculation to alignwith the value of new business calculation. ++ Return on equity is calculated using adjusted operating profit after tax andminority interests on an IFRS basis with allowance for accrued coupon paymentson the Group's hybrid capital. The average shareholders' equity used in thecalculation excludes hybrid capital. Value of new business up 5% The value of new business (VNB) grew to GBP266 million, driven by excellent sales in US Life and strong sales in the UK. The APE profit margin increased to 21% for the US Life business, compared with 18% in 2006. The UK APE margin of 10% was sustained during the period and it is expected that this business will meet its 11-12% target in 2008. In Nordic, the APE margin declined mainly due toincreased costs from the new Liv-Link agreement, strengthened lapse assumption,lowered changes and a different business mix, whereas in ELAM we exceeded themargin target. In OMSA, the margin declined slightly from the 2006 resultlargely due to operating assumptions and the VNB decreased slightly in localcurrency terms. IFRS-adjusted operating earnings per share 16.9p In spite of the significant impact of Rand and US Dollar currency depreciation,and the full impact of additional shares issued in relation to the acquisitionof Skandia, the Group produced a 12% increase over 2006 in its overall earningsper share. 2006 restatedGroup Highlights (GBPm) 2007 2006 at 2007 ratesAdjusted operating profit Africa 1,254 1,118 988United States 260 264 244Europe 268 239 239Other 2 1 1 1,784 1,622 1,472Other shareholders' expenses (41) (33) (33)Finance costs (119) (130) (130)Adjusted operating profit before tax and minority interests 1,624 1,459 1,309Tax (418) (395) (354)Minority interest (292) (274) (247)Adjusted operating profit after tax and minority interests 914 790 708Adjusted operating EPS (pence) 16.9 15.1 13.1 Assuming constant exchange rates, 2006 adjusted operating EPS would have been13.1p with the currency impact being 1.5p and the impact of the increase inissued shares being 0.5p. 2007 EPS increased on this basis by 29%. Adjusted embedded value per share 173.3p The adjusted Group embedded value (EV) per share was 173.3p and adjusted Group EV was GBP9.4 billion at 31 December 2007 (31 December 2006: GBP8.9 billion). This represents an increase from 161.1p (restated from 157.2p+++) as at 31 December 2006. The movement in EV per share has largely been driven by the net impact of profit flows particularly from non-covered business, strong investment market movements and a slight impact of currency appreciation. The EV per share is after dividend payments and has also been affected by a reduction in the share price of the listed subsidiaries. The share buyback programme to 31 December 2007 has increased the EV per share by 0.2p. +++ Note that after allowing for the opening adjustment calculated now as part of the fair value balance sheet exercise and including the adjustment for thevalue of ESOP shares, the adjusted Group EV at 1 January 2007 is GBP8.8 billionand the EV per share at 1 January 2007 is 159.9p. Return on equity continued to improve Return on equity for the Group improved to 13% from 12%, reflecting theimprovement in the earnings run rate compared to 2006 particularly for OMSA,Nedbank, US asset management and UK. In addition, the long-term investmentreturn improved partially due to the strong investment performance of theshareholders equity in South Africa. Long-term Group Highlights 2007 (GBPm) business Asset management BankingAdjusted operating profit (IFRS basis) (pre-tax) 771 288 636Adjusted operating profit (EEV basis) (pre-tax) 758 288 636Profit before tax (IFRS) 862 299 650Value of new business 266 - -Life assurance sales (APE) 1,760 - -Unit trust/mutual funds sales - 8,268 -Net client cash flows (GBPbn) 4.4 19 -Funds under management (GBPbn) 82.0 193.3 - General Group Highlights 2007 (GBPm) insurance OtherAdjusted operating profit (IFRS basis) (pre-tax) 89 (160)Adjusted operating profit (EEV basis) (pre-tax) 89 (150)Profit before tax (IFRS) 82 (103)Value of new business - -Life assurance sales (APE) - -Unit trust/mutual funds sales - -Net client cash flows (GBPbn) - -Funds under management (GBPbn) - 3.6 Long-term business Group Highlights 2006 (GBPm) Asset management BankingAdjusted operating profit (IFRS basis) (pre-tax) 759 236 545Adjusted operating profit (EEV basis) (pre-tax) 981 236 545Profit before tax (IFRS) 742 294 555Value of new business 244 - -Life assurance sales (APE) 1,520 - -Unit trust/mutual funds sales - 8,408 -Net client cash flows (GBPbn) 5.3 17.0 -Funds under management (GBPbn) 72.8 163.1 - General Insurance Group Highlights 2006 (GBPm) OtherAdjusted operating profit (IFRS basis) (pre-tax) 82 (163)Adjusted operating profit (EEV basis) (pre-tax) 82 (157)Profit before tax (IFRS) 132 (9)Value of new business - -Life assurance sales (APE) - -Unit trust/mutual funds sales - -Net client cash flows (GBPbn) - -Funds under management (GBPbn) - 3.5 Robust capital position The Group's gearing level remains comfortably within our target range, withsenior debt gearing at 31 December 2007 of 1.9% (5.9% at 31 December 2006) andtotal gearing, including hybrid capital, of 20.5% (21.4% at 31 December 2006). In January 2007, the Group issued Eur750 million of Lower Tier 2 PreferredCallable Securities, the proceeds of which were used, in part, to finance therepayment of a Eur400 million senior Eurobond that matured in April 2007. The Group has continued to develop its Economic Capital programme and acomfortable surplus exists within each of our South African, US and Europeanregions, meaning that the Group is not reliant for its economic solvency on theneed to transfer capital between geographies. The Group is in compliance with the Financial Groups Directive capitalrequirements, which apply to all EU-based financial conglomerates. Our FGDsurplus was GBP1.7 billion at 31 December 2007 and we seek to maintain a FGDsurplus of around GBP750 million to GBP1 billion. Capital requirements are set by the Board whilst recognising the need tomaintain appropriate credit ratings and to meet regulatory requirements at boththe Group and local business level. Other Our GBP350 million share buyback programme was announced at the beginning ofOctober 2007 and we have so far repurchased approximately 184 million sharesthrough the London and Johannesburg markets at a total sterling equivalent costof GBP282 million. Holding company cash generation The table below shows the cash flows of the Old Mutual plc holding company andits satellite holding companies. We believe this provides a clear picture ofthe cash receipts and payments of the holding companies. 2007 2006 GBPm GBPmTotal net debt at start of period 2,407 1,278Operational flowsOperational receipts 868 535Operational expenses (152) (156)Other expenses (71) 645 379Capital flowsCapital receipts 69 356Acquisitions (66) (1,287)Organic investment (220) (217) (214) (1,145)Debt and equity movementsOld Mutual plc dividend paid (333) (281)Share repurchase (177) New equity issuance 12 14Other movements 54 (441) (96) (363)Total net debt at end of period 2,420 2,407 Total net debt within the holding company at the end of 2006 was GBP2,407 million. A total of GBP937 million of operational and capital receiptswere received from business units during 2007. GBP220 million was invested in the businesses and GBP333 million was used to paythe 2006 final and 2007 interim dividends. In 2007, GBP177 million was spent onrepurchasing shares. Total net debt at the end of the year was GBP2,420 million. Taxation The Group's effective IFRS AOP tax rate has decreased to 26% from 27% in 2006.This reflects M&F paying a lower special dividend in 2007 and reductions in thetax rates in the UK and Germany, partially offset by a changed profit mix inSouth Africa. Dividend The directors of Old Mutual plc are recommending a final dividend of 4.55p pershare#### for the year ended 31 December 2007, to be paid on 30 May 2008.Together with the interim dividend of 2.3p per share paid in November 2007,this makes a total of 6.85p per share for the year, which represents anincrease of 10% over 2006. The indicative Rand equivalent of this finaldividend++++ is 68.92c, making a total of 103.75c, an increase of 17%. The Board's policy on dividends is to seek to achieve steadily increasing returns toshareholders over time, reflecting the underlying rate of progress and cashflow requirements of Old Mutual's businesses. Jonathan NichollsGroup Finance Director 27 February 2008 COMPARATIVE INFORMATION The reporting format for Old Mutual plc for the 2007 reporting period is asfollows: • All Group comparative reporting information on earnings include Skandia fromthe date of acquisition of 1 February 2006 (unless indicated otherwise). • Within the financial statements the Europe division comparative informationis from the date of acquisition of 1 February 2006. • Where Europe information is shown within the business review, this has beenadjusted on a pro forma basis to reflect ownership from 1 January 2006. #### The record date for this dividend payment is the close of business on Friday, 9 May 2008 for all the Exchanges where the Company's shares are listed.The last day to trade cum-dividend on the JSE and on the Namibian, Zimbabwe andMalawi Stock Exchanges will be Friday, 2 May 2008 and on the London StockExchange, Tuesday, 6 May 2008. The shares will trade ex-dividend from theopening of business on Monday, 5 May 2008 on the JSE and the Namibian, Zimbabweand Malawi Stock Exchanges, and from the opening of business on Wednesday, 7May 2008 on the London Stock Exchange. Shareholders on the South African,Zimbabwe and Malawi branch registers and the Namibian section of the principalregister will be paid the local currency equivalents of the dividend under thedividend access trust arrangements established in each country. Shareholderswho hold their shares through VPC AB, the Swedish nominee, will be paid theequivalent of the dividend in Swedish Kronor (SEK). Local currency equivalentsof the dividend for all five territories will be determined by the Companyusing exchange rates prevailing at close of business on Thursday, 17 April 2008and will be announced by the Company on Friday, 18 April 2008. Sharecertificates may not be dematerialised or rematerialised on the South Africanbranch register between Monday, 5 May and Friday, 9 May 2008, both datesinclusive, and transfers between the registers may not take place during thatperiod. ++++ Based on rates at 25 February 2008 (R15.1467 = GBP1) Business Review UNITED KINGDOM AND OFFSHORE Pro forma* 2006 % ChangeHighlights (GBPm) 2007 IFRS-adjusted operating profit (pre-tax) ** 173 134 29%EV-adjusted operating profit (covered business) (pre-tax) 266 226 18%Life assurance sales (APE) 740 646 15%UK life assurance sales (APE) 468 396 18%Unit trust sales 2,275 3,227 (30%)Value of new business (post-tax) 77 65 18%New business margin (post-tax) 10% 10% PVNBP 6,297 5,350 18%Net client cash flows (GBPbn) 3.9 4.9 (20%)Funds under management (GBPbn) 41.9 36.0 16% * The 2006 numbers are stated on a pro forma basis assuming ownership for 12months rather than 11 months and have been restated to include the results ofOld Mutual International. ** From 2007 the treatment of Selestia deferred fee income has been harmonisedwith Skandia MultiFUNDS reducing the 2007 result. The impact of policyholdertax has been smoothed from 2007. Positive net client cash flows and strong growth in funds under management Net client cash flows were GBP3.9 billion for the year, representing 11% ofopening funds under management. Whilst net client cash flows are down on 2006,they remain strongly positive, with 2006 being inflated by the post "A-Day"effect and the exceptional institutional mutual fund business mentioned below.Good inflows, combined with favourable market movements during the first halfof the year, have driven an increase in funds under management during 2007 as awhole. In the second half, growth was constrained by volatile markets whichaffected investment performance and investor sentiment. This was partiallyoffset by continued positive net client cash flows. Pension sales higher The increase in life assurance sales APE for 2007 is largely driven by UKpensions. Single premiums were the key driver, with sales of both Selestia'sCollective Retirement Account and Skandia's Monocharge pension up by over 25%. International business increased in the year, benefiting from strong portfoliobond sales into the UK in the first half and single premium business in LatinAmerica and the Far East. A tail-off in offshore institutional short-termbusiness following a tax change in the UK Budget has been offset by higherregular premium business in the latter part of the year. Although this businesshas experienced increased competition we believe the offshore market has good potential for growth. Unit trust performance impacted by revised business mix Although the year started very positively, the latter part of 2007 reflectedthe influence of increased uncertainty and volatility in equity markets. Unittrust sales were 30% down on 2006. This is largely accounted for by the lowmargin institutional mutual fund business being significantly down in the year,with no recurrence of the exceptional business volumes experienced in the thirdquarter of 2006. The year concluded with our new Selestia Investment Solutions,our market-leading open architecture platform experiencing increasing volumes,providing a solid base for future growth. Strong growth in IFRS adjusted operating profit IFRS AOP increased by 29% to GBP173 million for the year. The improvement hasbeen driven by significantly higher level of funds under management throughoutthe year as a result of positive net client cash flows being sustained wellinto 2007 as well as improved rebate terms. The effect of both of these factorsis a rise in asset-based fees. In addition, there has been a positive impactfrom the growth in investment income. Both revenue and cost benefits continueto be derived from increased scale and synergies. Higher EV-adjusted operating profit (covered business) EV-adjusted operating profit before tax increased by 18% to GBP266 million. Thevalue of new business improved 18% to GBP77 million. Expense synergies andimproved mix across the business helped sustain the new business margin of 10%,with sales of single premium pensions being especially strong. The EV-adjusted operating profits include GBP43 million post-tax of positiveimpact from operating assumption changes largely due to a reduction incorporation tax assumption from 30% to 28%. Operating experience forpersistency and expenditure continued in line with expectations. Modestoffsetting revisions were required with positive impacts arising fromimprovement in the allowance for fee income following continuous commercialnegotiations and increasing purchasing power. Further innovative investment solutions Skandia Investment Management Ltd's (SIML) unconstrained Best Ideas range wasexpanded with the launch of UK Strategic Best Ideas in September 2007. UKStrategic Best Ideas is the first multi-manager UK UCITS III fund to use longand short equity positions, and has gathered over GBP90 million in assets sinceits launch, despite the difficult market environment. Skandia's risk-focused multi-manager funds have delivered strong absolutereturns, typically with volatility far lower than that of our peers and,consequently, the majority of these funds have delivered better risk-adjustedreturns. During the recent volatile market conditions these funds haveperformed ahead of our peers, showing the benefits of their specific mandates. Continued progress with integration activity Integration activities remain on target to deliver the committed savings aswell as providing significant revenue potential. The Selestia InvestmentSolutions platform was launched in August 2007, the full benefits of which willflow through following migration of Skandia MultiFUNDS investors on to the newplatform in the second half of 2008. We launched the Skandia Investment Groupduring the course of the year. This brings sharper focus and energy toinvestment product manufacturing and strengthens our multi-manager business ina rapidly growing industry. It also improves revenue for divisions andshareholders through broadened and strengthened investment products and greaterleverage of buying power with fund groups. Changes in the UK market Skandia responded positively to the FSA's review of the retail distributionmarket, supporting the proposal that there should be two types of distribution:an "advice channel" and a "no advice channel". Skandia has also supported theconcept of "customer agreed remuneration" and has suggested that individualsinterfacing with consumers should have appropriate qualifications and be amember of appropriate professional bodies that require commitment to a code ofethics. The pre-Budget report of October 2007 proposed a change in capital gains tax(CGT) to 18% for unit trust investments, without a similar change in CGT forinsurance bonds. Investment bonds will continue to be tax advantageous forcertain consumer segments and there will continue to be demand for suchsolutions. However, total bond demand is likely to soften and we have alreadyseen a material reduction in bond sales since November 2007. It is likely thatsuch demand will switch towards collective investments, outside of an insurancetax wrapper, where it should be noted that Skandia UK has a market-leadingposition, albeit with lower margins than for investment bonds. NORDIC Pro forma* 2006 Highlights (SEKm) 2007 % ChangeIFRS-adjusted operating profit (pre-tax) 874 1,075 (19%)EV-adjusted operating profit (covered business) (pre-tax) 700 1,589 (56%)Life assurance sales (APE) 1,992 1,942 3%Mutual funds sales 3,474 2,940 18%Value of new business (post-tax) 254 529 (52%)New business margin (post-tax) 13% 27% PVNBP 8,700 9,675 (10%)Net client cash flows (SEK bn) 2.7 3.5 (23%)Funds under management (SEK bn) 116.7 107.1 9% * The 2006 numbers are a pro forma result assuming ownership for 12 monthsrather than 11 months. Strong market performance contributed to funds under management Funds under management increased to SEK116.7 billion due to solid investmentperformance and continued positive net client cash flows. Volatile equitymarkets during the latter part of 2007 slowed asset growth, but closing fundsunder management were still up 9% over 2006. Sales performance improving Life sales on an APE basis exceeded the prior year by 3%. The negative salestrend experienced in the first half of 2007 was finally reversed in the thirdquarter and continued to improve significantly during the fourth quarter withthe subsequent turnaround in market share. The unit-linked business in Denmarkalso contributed to this turnaround with a strong sales performance. Theturnaround in Sweden was the result of broadening the product and fund rangesand a refocus of our sales initiatives through our tied sales force (up 47%comparing the fourth quarter of 2007 to the fourth quarter of 2006) and thebroker channel (up 15% comparing the fourth quarter of 2007 to the fourthquarter of 2006). The tied sales force performance was driven by a greaterfocus on unit-linked products. From 1 February 2007 the tax advantages of theSwedish Kapitalpension product were removed following a change in regulations.This negatively impacted sales as Kapitalpension products accounted for 10% ofsales in 2006. Margins under pressure in the short term Life new business margin was down from an exceptional 27% in 2006 to 13% in2007. The decline can be attributed to a change in arrangements between SkandiaAB and Skandia Liv (the Liv-Link agreement), the strengthened lapseassumptions, lowered charges (due to market competition), and a change inbusiness mix in Sweden, particularly since Kapitalpension product taxadvantages were removed. In the medium term, the new business margin is expected to improve to reachhigh teens. This will be achieved through continued growth in sales leading toeconomies of scale, product development and the introduction of a new morecost-efficient IT platform and other expense led initiatives. During 2007,investment in IT commenced with the development of the new Investment Portfoliosystem which enables an enhanced product offering. Underlying IFRS AOP profit solid IFRS AOP decreased by 19% for the year primarily due to the introduction of theLiv-Link agreement, which deals with the administration and distribution costsassociated with the jointly marketed products. EV-adjusted operating profit impacted by market pressure EV AOP is down 56% on 2006 mainly driven by a net negative effect fromassumption changes and recalibration of risk margin of SEK735 million in 2007.There is strong price pressure in the Swedish marketand in order to adapt to market conditions fees have been reduced for the"tick-the-box" collective agreements and the tendered corporate business during2007. Persistency assumptions have also been strengthened which is offset bycapitalisation of future waiver of premium business profits which waspreviously not valued. The drop in value of new business is another driver forthe lower EV AOP in 2007 compared to 2006. Continued growth in banking business and increased focus Both deposit and loan books at SkandiaBanken continued to increase in 2007. Thegrowth in loans has slowed down, but the net interest margin was maintained atprior year levels, despite stiff competition. Lending increased to SEK52.7billion, up 20% on 2006, mainly due to good growth in Norway in both mortgagelending and car financing. The number of customers increased 3% over 2006.SkandiaBanken's operating profit for 2007 was SEK191 million, 31% higher than2006. During 2007, SkandiaBanken started a major shift in strategic direction to abank focused on a broader long-term savings and client offerings. In October weannounced the sale of SkandiaBanken Bilfinans, the vehicle finance business, toDnB NOR. The total book profit expected to be realised is SEK1 billion. TheDanish banking operations were also divested in the third quarter of 2007 tostrengthen profitability and to bring focus to the remaining businesses. Putting the business on a sound footing for the future The focus during the year has been on improving operational efficiency andaggressive marketing activities and these are continuing in 2008. Theinvestment programme and restructuring activities within Nordic reduced IFRS-adjusted operating profit for the year by SEK81 million, however, we havestrengthened the savings offering during 2007 by widening the fund range inboth Skandia AB and SkandiaBanken. The unit-linked products have been improvedwith several new product offerings during 2007 and further improvement isunderway. One example of the latter is the new Investment Portfolio productlaunched during February 2008. Positive outlook In future years, the Nordic savings market is likely to be affected by a numberof legislative changes impacting tax neutrality between savings with andwithout insurance wrap, transfer rights, market competition and changes tocollective pensions agreements. However, with a full range of product offerings traditional life, unit-linked, banking, financial advisory, mutual funds andhealthcare Skandia Nordic is well positioned in a growing savings market. The key focus going forward is building an offering which provides bothend-customers and distributors with advisory tools and top quality advice,innovative products, top-quartile returns and the market's best client service.There are strong synergies in terms of scale, brand and cross-selling andadministration. The second half of 2007 marked a watershed for Skandia Nordic,particularly in Sweden, with renewed optimism founded on a new CEO, salesincreases, product launches and much improved relations with Skandia Liv, themedia and customers. EUROPE AND LATIN AMERICA (ELAM) Pro forma* Highlights (Eurm) 2007 2006 % ChangeIFRS-adjusted operating profit (pre-tax) 43 42 2%EV-adjusted operating profit (covered business) (pre-tax) 48 121 (60%)Life assurance sales (APE) 276 252 10%Mutual fund sales 3,071 2,188 40%Value of new business (post-tax) 54 52 4%New business margin (post-tax) 20% 21% PVNBP 2,139 2,062 4%Net client cash flows (Eurbn) 1.8 1.7 6%Funds under management (Eurbn) 13.0 10.8 20% * The 2006 numbers are restated on a pro forma basis assuming ownership for 12months and excludes the Skandia Vida business sold in 2007, except EV AOP,which includes Vida Funds under management growing significantly Net client cash flows during the year represented 17% of opening funds undermanagement, or 23% of opening funds under management when adjusted for theplanned divestiture from the Spanish institutional business reflecting thecontinued growth of the business. Market movements for ELAM were positive forthe first six months of the year, but experienced a downturn in the second halfof the year following market trends across the world, to end the year broadlyflat. Despite the market volatility created by the sub-prime mortgage crisisand credit crunch, as well as the closure of the Spanish institutional assetmanagement business (resulting in a Eur0.6 billion reduction in net client cashflows against 2006), funds under management increased 20% from the start of theyear as a result of strong inflows. Continuing growth in life sales (APE) 2007 was generally a tougher year for sales than 2006 in the majority of theELAM countries. In many of the markets, unit-linked sales slowed down,recording negative net cash flows, and the tax-driven incentives whichpositively impacted some of the markets in 2006 were not repeated in 2007. Lifesales on an APE basis rose 10% over the prior year, with strong growth inregular premium sales in Central Europe, partially offset by lower singlepremium sales in Southern Europe. Overall, we are satisfied with the progressthat the business made in the ELAM territories, with increased market shareevident in the majority of instances. Mutual fund sales up strongly and margins improved Mutual fund sales were up 40% over 2006 with strong contributions from ourdiscretionary asset manager, Skandia Global Funds, and from Palladyne. OurLatin American pensions business performed well, supplemented by stronginstitutional inflows. Average margins on mutual fund business improved asfunds placed in the low margin institutional asset management business in Spainhave been replaced by funds in the higher margin discretionary asset managementand long-term businesses. This led to a significantly improved adjustedoperating result for the mutual fund portion of the business. Value of new business increasing with profit margins exceeding the target rangeat 20% VNB for the year was up slightly against the prior year. The post-tax newbusiness margin of 20% achieved for the year exceeded the medium-term targetrange of 16-18%. During 2007, we reduced our margin on key products to maintainour competitive position and we expect that pricing pressure will continue inthe future. Continued strong underlying adjusted operating profit result IFRS AOP was in line with the 2006 result, with 2007 results constrained byincurring costs of Eur7 million to realise synergies. Growth was driven by thelarger in-force book of business and by healthy net client cash flows. As aconsequence, fund-based fees are up on the prior year, while premium-based feesare at approximately the same level. Poland has grown strongly over the last 18 months and is a significantcontributor to both new sales and ELAM's overall result. This is a reflectionof the efforts put into this business over recent years, with particularemphasis on growing distribution. In our Italian business, we have renegotiatedcommercial terms with key distributor groups in order to secure the businessmodel for the future. Colombia has performed well in very difficult marketconditions, growing market share considerably, while new business sales inMexico have increased markedly on the back of the increase in the financialplanner distribution force. EV AOP impacted by assumption changes EV AOP has been impacted by three main items during the year. Firstly, netunfavourable assumption changes of Eur70 million have been recorded in2007. As reported during the year, we reassessed the operating assumptions inItaly, in particular the surrender assumptions, following unexpected surrenderexperience of products exiting the surrender penalty period during the first half of the year. This review resulted in an adjustment to EV AOP of Eur49 million, and changes to persistency assumptions in other countries were also undertaken that contributed further to a net unfavourable impact. Secondly, there have been changes to Divisional overhead capitalisation during 2007 following the changes made to the operating structures within Skandia since the acquisition. Finally, the current year EV AOP result was positively impacted by changes to the tax rate in Germany. Well positioned ELAM continues to be well placed to achieve further growth, as evidenced byrising market shares in most of the countries in which we operate. Productdevelopment and innovation remain at the heart of our offering, with close to40 new products and product enhancements launched during the year. Earlyindications are that innovative major new product launches in Austria andSwitzerland have been very well received in their local markets. LONG-TERM BUSINESS & ASSET MANAGEMENT - OLD MUTUAL SOUTH AFRICA (OMSA) Strong recurring premium sales performance in Retail Businesses Highlights (Rm) 2007 2006 % ChangeLong-term business adjusted operating profit 3,082 3,077 -Asset management adjusted operating profit 946 874 8%Long-term investment return (LTIR) 2,988 1,773 69%IFRS-adjusted operating profit 7,016 5,724 23%Return on Allocated Capital 24% 23% EV-adjusted operating profit (covered business) 4,769 5,752 (17%)EV (covered business) 34,678 33,274 4%Return on EV (covered business) 11.2% 13.5% Life assurance sales (APE) 4,699 4,416 6%Unit trust sales 15,547 14,833 5%Value of new business (post-tax) 756 781 (3%)APE margin (post-tax) 16% 18% PVNBP 31,380 30,004 5%Net client cash flows (Rbn) (18.7) (29.1) 36%SA client funds under management (Rbn) 445 424 5% OMSA net client cash flow remained a challenge for us in 2007, primarily due tonet outflows from institutional clients, notably from two multi-managers,following changes of portfolio managers and concerns about short-termperformance in 2006. Inflows were lower as consultants and investors adopted a"wait and see" approach because of uncertainty over the implications of the newboutique structure on performance. Investment performance for 2007 remaineddisappointing, with figures for the year showing 24% of funds outperformingbenchmarks and achievement of the positions four and six in the AlexanderForbes Large Manager Watch over one and three years respectively. Wedeliberately took defensive positions in most portfolios in 2007 anticipating amarket correction and this cost us performance for the year. Life sales on an APE basis increased by 6% over 2006. Recurring premium salesgrew strongly, up 14% on the back of increased sales force in the Retail Mass market business as well as competitive risk product and credit life sales in theRetail Affluent market. Life Single premium sales were down 7% on 2006primarily due to competitor margin pressure, and also, because we had asignificant deal in our Symmetry multi-manager business at the end of 2006which was non- recurring. The launch of the Absolute Return Fund andenhancements to the fixed bond rates on the lnvestment Frontiers product atmid-year helped improve sales in the second half of the year. We continued togain market share in the Life retail sector. Unit trust sales were up after including sales through Marriott for the fullyear in 2007. Excluding Marriott, sales were down 10% on 2006 because ofresidual concerns over portfolio manager changes and short-term investmentperformance on certain core funds (Dynamic Floor and Enhanced Income funds).The new Stable Growth Fund, was launched in July 2007 and has had good earlysales. IFRS AOP was 23% higher than in 2006. Within this result, our long-termbusiness AOP increased marginally and the LTIR increased 69% after changes incalculation method to more appropriately recognise the value of theshareholders' fund, and the higher asset base. The marginal increase inlong-term business profit was a result of the continued switch to less capitalintensive, lower margin products. Positive contributions arose from an increasein the average level of policyholders' funds under management driven by highermarket levels and a significantly lower IFRS 2 share-based payments charge.These were offset by an increase in the investment guarantee reserve, whichresulted from the adoption of a market-consistent basis for the valuation ofthese reserves as well as the application of a discretionary margin. Asset management AOP was up 8% due to higher market levels. The good returnsachieved also led to a good flow of performance-related fees, and higherproperty profits after the first full-year contribution from Marriott IncomeSpecialists (Marriott). However the profit growth was tempered by additionaladvertising costs associated with the launch of the new boutique structure inOMIGSA, a review of incentive levels for fund managers and loss of fee incomeas a result of the withdrawal of client funds. We declared strong bonuses in February 2008 on many of our with-profitsproducts, in spite of market volatility in early 2008. This reflects the goodreturns these products have generated. Our portfolios' Bonus Smoothing Accountsremain in very strong positions following these strong bonus declarations. Embedded Value was impacted by net capital transfers to Old Mutual plc of R5.9 billion during the year. Excluding these capital transfers, EV increased by 22% over the year and was positively impacted by market levels. However, the EV AOP is lower than in 2006 because the prior year profit was boosted by therecalibration of the risk margin in the discount rate of R1,093 million (R711 million post-tax), while the 2007 profit is reduced by the substantial increase in the investment guarantee reserve to reflect the use of a market consistent methodology, the switch to lower margin business of certain liabilities (which has resulted in lower capital requirements and improved ROC),and the reduction of certain margins in the Corporate segment aimed at providingbetter value for our customers. Retail MassRm 2007 2006 % ChangeLife sales (APE) Savings 613 476 29%Protection 477 411 16%Total 1,090 887 23%Life VNB 322 263 22%Life APE margin (post-tax) 30% 30% Net client cash flow (Rbn) 1.9 1.7 12% Retail Mass sales were up 23% on 2006. This result reflects the continued focuson growing the sales force, which at 31 December 2007 was 11% higher than atthe beginning of the year. Excellent growth was also achieved in sales throughthe broker channel, which were 106% up on the prior year. There was, however, asmall swing to lower margin savings business. VNB was 22% higher than 2006, with the new business APE margin constant at 30%,the latter benefitting from improved burial society results and a lowersecondary tax on companies being offset by an increase in the proportion of lowmargin savings business. We responded to the shift in mix and the lower marginson savings business following the Statement of Intent, which sets minimumstandards for surrender and paid-up values, by implementing changes to adviserremuneration and increasing minimum premiums for savings business. This had anegligible impact on mix, but did improve the profitability of savings businessslightly. In 2007, we continued innovating and delivering financial solutions relevant toour customers. In October we launched the Domestic Workers Fund, incollaboration with the Presidential Working Group on Women, a fund targeted atextending retirement provisioning and risk benefits for domestic workers. InNovember we launched Pay-When-You-Can, an innovative flexible premium funeralproduct for the entry level market, in Shoprite stores nationwide. In Decemberwe launched Zimele compliant funeral plans (contributing to Financial SectorCharter scores), which also address the need for affordable products for thepreviously untapped entry-level market. Retail Affluent Rm 2007 2006 % ChangeLife sales (APE) Savings 1,321 1,278 3%Protection 1,056 897 18%Annuity 197 193 2%Total 2,574 2,368 9%Life sales (APE)Single 868 838 4%Recurring 1,706 1,530 12%Non-life sales* 1,821 1,949 (7%)Life VNB 330 289 14%Life APE margin (post-tax) 13% 12% Net client cash flow (Rbn) (2.7) 0.9 * Includes non-life flows in respect of OMUT, Galaxy and Linked InvestmentService Provider (LISP) sales on an APE basis Life recurring premium sales were 11% higher than for the prior year, driven bycontinued good sales of risk business, leveraged from enhancements to ourGreenlight risk product range (17% higher) and good credit life sales (26%higher), reflecting the extension of personal credit through Nedbank. Recurringpremium Max Investment savings business (both life and non-life wrappers)performed well ending the year 17% up, with significant growth (62%) of thenon-life recurring option, but from a relatively low base. Single premium life sales were 4% up on 2006. Single premium investment saleswere flat as we were challenged by perceptions about OMIGSA restructuring, keystaff losses and OMIGSA investment performance in some of the flagship funds,principally our Dynamic Floor and Enhanced Income funds. These effects wereoffset by improved investment performance, the new Absolute Return Fund launchand enhancements to the fixed bond rates of the life product. In the lastquarter there were large non-recurring inflows into the private equity fund ofInvestment Frontiers. Single premium sales of the offshore investment productthrough Old Mutual International continued to accelerate and were 56% up over2006. Life VNB was 14% higher than 2006, with the new business APE margin improvingfrom 12% to 13%. The biggest driver of the improvement was the impact ofincreased volumes, particularly on the recurring premium book on the absorptionof initial distribution costs, both at a product level and in the distributionchannels. Bancassurance sales through Nedbank continued to grow and were up 16% over2006. The launch of a new, low cost, simple savings product through Nedbankbranches was very well received. Credit life sales slowed following theintroduction of the National Credit Act, but were offset by the new savings andrisk product flows. Corporate Segment Rm 2007 2006 % ChangeLife sales (APE) Savings 597 629 (5%)Protection 145 99 46%Annuity 111 193 (42%)Healthcare 183 239 (23%)Total 1,036 1,160 (11%)Life sales (APE) Single 644 788 (18%)Recurring 392 372 5%Non-life sales* 755 1,678 (55%)Life VNB 104 229 (55%)APE margin (post-tax) 10% 20% Net client cash flow (Rbn)** (17.9) (31.7) 44% * Includes non-life flows in respect of OMIGSA and Old Mutual Properties on anAPE basis ** Includes NCCF for OMIGSA Net client cash flows in the Corporate market, although still stronglynegative, were less severe than in 2006, and Employee Benefits net client cashflow was significantly better than 2006. Termination experience, in particular,was very good and the impacts of the launch of the Absolute Growth Portfolios,as well as strong bonuses, were factors in this regard. Net client cash flowsin OMIGSA were adversely affected by withdrawals following the loss of two keyportfolio managers, clients switching from core and balanced mandates andresidual concerns about short-term performance in 2006. Total Corporate sales were lower than 2006, driven by lower sales of Symmetry(who had a very large deal in 2006), Annuities and Healthcare. There was astrong performance in the second half of 2007 in the Guaranteed Products wherethe launch of the Absolute Growth Portfolios was successful and has started toattract good new sales. Risk sales were also strong in 2007 compared to theprior year. Although Annuity sales were lower than 2006, the pipeline for 2008is strong and business was secured at the end of 2007 which should flow throughto 2008. Healthcare sales are below last year due to a shrinking market, with governmentemployees moving to GEMS, and a somewhat reduced focus on Oxygen within thedistribution channels. Appointments have been made to drive the distribution ofHealthcare more effectively, especially in the Retail distribution channels. The decrease in new business margins and VNB relative to 2006 is mainly aresult of a reduction in the Platinum Pensions 2003 capital charge which wasdone so as to offer better value to customers and drive future sales, as wellas lower volumes of high margin annuity business towards smoothed bonusproducts. Lower sales volume in Symmetry and Healthcare also contributed. Thishas had a knock-on impact reducing the overall life new business margin. Old Mutual Investment Group South Africa (OMIGSA) Sources of FUM (Rbn) 2007 2006 % ChangeLife 319 283 13%Unit trusts 48 40 20%Third party 88 95 (7%)Total OMIGSA managed assets 455 418 9%Managed by external fund managers 34 30 13%Total OMSA FUM 489 448 9%Less: managed by group companies for OMSA (44) (24) (83%)Total OMSA client funds managed in SA 445 424 5% The implementation of the boutique structure in OMIGSA has been a key featurefor 2007. We continue to focus on stabilising the structure and increasinginvestors' confidence in individual boutique investment philosophies. Non-life sales (OMIGSA) are significantly lower than prior year as a result ofthe non-repetition of two very large deals in the first half of 2006 (R11.1 billion), and the smaller pipeline at the start of 2007. The investor andconsultant concerns relating to OMIGSA's restructuring into a multi-boutiquebusiness and some areas of investment performance have also contributed to lowsales. These, however, have started to improve. 2007 ended on a highly volatile note as the unravelling global sub-prime crisisdented investor confidence and global financial markets. Against this uncertainbackdrop, the investment performance across our different boutiques wassatisfactory. Although the three year performance slipped as poorer short-termequity performance fed through to the longer term performance numbers, we hadanticipated a market correction and generally the portfolios were defensivelypositioned. Overall, just over half of the funds outperformed their benchmarksover one and three years respectively to the end of December. For the peercognisant institutional funds, 45% and 9% of mandates were above the industrymedian over one and three years respectively. More than half of institutionalmandates outperformed their benchmarks over these same periods. The MacroStrategy Investments boutique's Profile Balanced Fund was ranked fourth overone year, sixth over three years and third over five years ending 31 December2007 in the Alexander Forbes Global Large Manager Watch survey. In 2007, half of the key unit trust funds, representing 69% of unit trustassets, were first and second quartile performers over one year, 69% were firstand second quartile over three years and 64% over five years to the end ofDecember 2007. The boutiques with the most notable performance for the three years ending 2007were the Absolute Return, Macro Strategy Investments, Fixed Income and SelectEquity boutiques, with 100%, 99%, 95% and 76% respectively of their funds undermanagement beating their benchmarks. During the year, Marriott Income Specialists' launched the MarriottInternational Income Growth Fund, OMIGSA Property launched Triangle, anindustry defining direct property fund, Umbono Fund Managers launched the RAFI 40 Index Fund and OMUT launched their Stable Growth Funds. Outlook The long-term outlook for savings and wealth management in South Africa remainspositive, with the following points as key contributors: > Prudent fiscal and monetary policy is expected to return the economy to arobust growth path in the latter half of 2008. > Continued growth of black middle class and affluent markets off the back of agrowing economy and Black Economic Empowerment efforts. > Government is formulating policy that would create a framework for mandatoryretirement savings. > Strong growth in household incomes, enabling more people to start or increasesavings for retirement. > Improvements in financial education and transparency of financial productsenhancing accessibility. In the short term, a slowdown in growth rates of both the economy anddisposable incomes is expected as monetary policy is tightened to containinflationary pressures and as global economic growth slows. Increasedcompetition is expected for the flows into the market, and also for existingassets, especially for retirement annuities that have been transferable betweenfunds from October 2007. In this environment, distribution, superior investmentperformance and coverage of all asset classes will be crucial for success. Old Mutual is well placed to compete in this environment, with our investmentboutiques continuing to grow and the coverage of asset classes increasing, andwe have the ability to leverage our large distribution network to deliverfinancial solutions to our advantage. We also see great short term opportunities of growth of insurance products inthe lower to middle income market where product penetration is low. Old Mutualhas strong market leadership through our Retail Mass Market business to benefitfrom these opportunities. BANKING - NEDBANK GROUP (NEDBANK) 2007 financial targets achieved Highlights (Rm) 2007 2006 % ChangeIFRS-adjusted operating profit 9,220 6,973 32%Headline earnings* 5,921 4,435 34%Net interest income* 14,146 10,963 29%Non-interest revenue* 10,445 9,468 10%Net interest margin* 3.94% 3.94% Cost to income ratio* 54.9% 58.2% ROE* 21.4% 18.6% ROE* (excluding goodwill) 24.8% 22.1% * As reported by Nedbank We are pleased with the balance we have achieved between delivering on ourshort-term performance targets and investing to build a platform for long-termgrowth. Although the financial performance is now benchmarking closer to thatof Nedbank's peers, we aspire to improve further. Headline earnings increased by 34% to R5,921 million. Basic earnings grew by33% to R6,025 million. Headline earnings per share (EPS) increased by 34% to 1,485 cents (2006: 1,110cents). Diluted headline EPS increased by 33% from 1,076 cents to 1,429 cents.Basic EPS grew by 33% from 1,135 cents in 2006 to 1,511 cents in 2007. Nedbank's return on average ordinary shareholders' equity (ROE) improved from18.6% to 21.4% for the year, exceeding the target of 20% that was set in 2004at the start of our recovery programme. ROE, excluding goodwill, improved from22.1% to 24.8%. Net interest income (NII) NII grew 29% to R14,146 million (2006: R10,963 million) due to strong growth inaverage interest-earning banking assets of 29%. Nedbank's net interest margin for the year was 3.94%, unchanged from 2006. Themargin benefited from the endowment impact of interest rate increases oncapital and current and savings accounts of 0.4%, and decreased from liabilitymargin compression of 0.1% as deposit interest rates continued to price inupside risk and as the sector had to source a higher proportion of funding fromthe wholesale deposit market. In addition, the NII margin decreased from assetmargin compression of 0.3% mainly from the impact of strategic changes in theproduct mix of personal loans and competitive pricing behaviour particularly inhome loans and commercial mortgages. Impairments charge on loans and advances The credit loss ratio increased from 0.52% in 2006 to 0.62% in 2007. The growthin advances and the increase in the credit loss ratio are reflected in a 46%increase in the impairments charge to R2,164 million. Impairment levels haverisen in Nedbank Retail and Imperial Bank, while the credit loss ratios inNedbank Capital and Nedbank Corporate have remained at lower than expectedlevels, assisted by active credit management and unusually high levels ofrecoveries. The effect of the deteriorating retail environment has beenmitigated to some extent through tighter credit policies and an early focus oncollection processes and systems. Nedbank has continued to apply stringentcredit management policies and has tightened credit granting requirements inthe retail areas most affected by the worsening credit cycle over the last twoyears. Nedbank has no direct exposure to US sub-prime mortgages. The group isindirectly exposed in that it does have some banking relationships withinstitutions with sub-prime exposure. These are relatively small and are notcurrently expected to lead to any losses in the Nedbank group. Nedbank Retail raised an additional Incurred But Not Reported (IBNR) provisionof R167 million in December 2007 to anticipate the effect of the current higherinterest rates not yet evident in the historic data used for provisioningcalculations. Non-interest revenue (NIR) NIR for the year increased by 10% to R10,445 million. This growth in NIR was driven primarily by commission and fee income growth of15% and an increase in private equity revaluations, realisations and dividendincome. This growth was partially offset by weak trading results as reported in thefirst half, mainly due to poor trading within the business alliance withMacquarie, the competitive pricing structure for transactional products adoptedin Nedbank Retail, where fees have been reduced by an average of 19% sincemid-2006, and a continuing move from cheques to electronic channels by businessbanking clients. Expenses Expenses continue to be tightly managed increasing by 14% to R13,489 million.The "jaws" ratio continued to improve throughout the year, with total revenuegrowth of 20% being 6% above expense growth of 14%, resulting in the efficiencyratio improving from 58.2% for 2006 to 54.9%. Growth in operating expenses slowed, as anticipated, while staff expensesincreased reflecting the investment Nedbank has made in client-facing staff andan increase in variable pay as a result of the continued improvement inoperating performance. Marketing costs increased as planned as Nedbankcontinued to invest in repositioning the Nedbank brand. Expenses included the costs for the integration of Old Mutual Bank intoNedbank, Bond Choice's expenses and the IFRS2 charge in respect of the group'sBEE transaction. Advances and deposits During 2007, advances grew 21% to R374 billion, with average interest-earningbanking assets increasing by 29% to R359 billion. As a result of the strong advances growth, total assets increased 15% to R489 billion. Growth in higher-risk areas, such as personal loans, slowed as thegroup tightened credit criteria and focused on higher-quality, lower-marginpersonal loans. Deposits increased by 18% from December 2006 to R385 billion atDecember 2007. Nedbank's liquidity remains sound in an overall liquidity environment that wasmade more challenging by the negative international liquidity developments.Contagion of South African markets has been limited, with little directexposure by local banks to the US sub-prime markets. The primary impact hasbeen limited to a reduction in international liquidity, which has traditionallynot been a large portion of the funding base, and an increase in the cost ofcapital market debt. This has had a small negative impact on the cost ofrolling over conduit paper and new subordinated-debt issues. During 2007 Nedbank successfully launched its inaugural auto loans andresidential mortgage-backed securitisation programmes, raising R1.7 billion andR1.87 billion respectively. These programmes have diversified the funding baseand added tenor to the bank's existing funding profile. In addition, Nedbankissued a further foreign syndicated loan of USD500 million in February 2007,raising additional foreign funding and creating further fundingdiversification. Risk and capital management Nedbank has successfully implemented its Basel II blueprint. This is in linewith the revisions to the Banks Act and the new internationally based Basel IIbanking regulations introduced by the South African Reserve Bank (SARB), whichwere effective from 1 January 2008. The main purpose of Basel II is to promotesignificant enhancement and sophistication of risk and capital measurement andmanagement, thereby further elevating the safety and soundness of the bankingindustry. Nedbank has received formal approval from the SARB for the Advanced InternalRatings Based (AIRB) approach for credit risk for its principle operations inSA, while Imperial Bank and the African subsidiaries have adopted thestandardised approach. Nedbank's risk and capital management capabilities allowit to optimise the risk/return trade-offs equation and grow the businessesprofitably within a clearly established risk appetite. During the year Nedbank continued to actively manage its capital: > the expensive NED2 R4 billion bond on its call date in July 2007 was redeemed; > execution of several Tier 2 subordinated-debt issues totalling R6.77 billion,thereby continuing to build a smooth and diversified subordinated-debt maturityprofile. (A highlight was the R2 billion inaugural Tier 2 investment in a SouthAfrican bank by the International Finance Corporation and the AfricanDevelopment Bank); > completion of a R1.7 billion Imperial Bank asset securitisation; > completion of a R1.87 billion Nedbank Retail home loan securitisation; and > issue of Tier 1 perpetual preference shares of R364 million. Certain hybrid capital instruments now qualify as Tier 1 regulatory capitalunder Basel II and Nedbank is well-advanced in planning its inaugural hybridTier 1 issue. Nedbank Group, Nedbank Limited and Imperial Bank Limited all received ratingupgrades from Moody's and Fitch during 2007. This was very pleasing andrecognises the successful turnaround of Nedbank over the past few years. Nedbank expects to issue further Tier 2 capital and hybrid forms of Tier 1capital in 2008. Nedbank is committed to improving its profile as an issuer inthe debt capital markets and this should result in a more robustsubordinated-debt yield curve. Prospects The slowdown in consumer spending, the increase in consumer credit stress,continuing electricity shortages and sustained dislocation in credit and equitymarkets are likely to make the year ahead significantly more challenging forthe South African economy and the banking sector. The key factors influencingperformance in 2008 are: > slower growth in retail advances; > continued good growth in wholesale advances, although the influence ofelectricity shortages on the economy may cause this to slow; > lower margins as a result of margin compression in certain categories ofadvances and continued reliance on wholesale funding, which are only partiallyoffset by the endowment benefit arising from past interest rate increases; > higher impairment charges due to the impact of higher interest rates on theretail portfolios and lower wholesale recoveries; and > fewer positive non-recurring items and revaluations in the private equityportfolios. While the general banking environment will be much tougher than in previousyears, Nedbank is confident of continuing to improve its performance off thesolid platform built over the past four years. Nedbank's focus is now on workingtowards its vision of becoming southern Africa's most highly rated andrespected bank. The main focus areas for Nedbank in 2008 include building on its transformationjourney, and growing our retail distribution network, transactional bankingmarket share, relevance in the public sector, business banking franchise andmass-market strategy. In addition, Nedbank is focused on being involved in social and communityprojects, managing the credit cycle, disciplined expense management, ongoingcapital management activities, with an active process of continuous improvementin all operations and applying economic-value-based management. From 2008economic profit (EP) replaces ROE as the primary internal financial performancemeasure in the group. EP is a best-practice measure since it incentivises anappropriate balance between return and growth, and better aligns withshareholder value creation. Medium- to long-term financial targets After successfully delivering on the short-term financial targets of a 20% ROEand 55% efficiency ratio in 2007, Nedbank set the following key medium- tolong-term external targets: > ROE (excluding goodwill) 10% above Nedbank's monthly weighted average cost ofordinary shareholders' equity. > Growth in diluted headline EPS of at least average CPIX plus GDP growth plus5%. In the medium term Nedbank targets to meet or exceed the comparable performanceof its peers. GENERAL INSURANCE MUTUAL & FEDERAL Solid performance in a challenging year Highlights (Rm) 2007 2006 % ChangeIFRS-adjusted operating profit 1,256 1,039 21%Gross premiums* 9,323 8,549 9%Earned premiums* 7,948 7,458 7%Claims ratio* 66% 63% Combined ratio* 95.4% 93.9% Solvency ratio* 42% 49% Return on capital* (3 year average) 31.7% 27.5% * As reported by Mutual & Federal Mutual & Federal maintained solid results in the context of a highlycompetitive trading environment and a gradual decline in the underwriting cyclefollowing the record results achieved in 2004 and 2005. The underwriting result for the year was adversely impacted by an increase inthe severity and frequency of large claims, particularly industrial fires.Severe weather conditions experienced in South Africa also negatively impactedthe results. In addition, despite strong rating adjustments and underwritinginterventions, results in the motor account continued to be negatively impactedby an increase in claims emanating from high levels of accidents on SouthAfrican roads. Gross premiums Gross premiums in Risk Finance grew by only 2%, but the Personal and Commercialportfolios grew 9% and 13% respectively, giving an overall increase of 9%against the prior year. This was achieved despite the cancellation of certainuneconomical blocks of business within the Personal division. Mutual & Federaldoes not accept risks at sub-economic rates and has diligently followed prudentunderwriting practices. Combined ratio weakens Mutual & Federal generated an underwriting surplus of R366 million (2006: R455million), or a ratio of 4.6% to earned premiums (2006: 6.1%), which is aboveour long-term objective of 4%. The estimation methods used in providing forclaims and other technical liabilities were further refined and this releasedR96 million (2006: R215 million) into the underwriting result. If theseadjustments are excluded, the underwriting result improved over the previousyear by R52 million. The trading environment remains conducive to producing an improved underwritingprofit in 2008 with signs of a hardening of rates in certain sectors. Recentelectricity load shedding has created substantial inconvenience to Mutual &Federal, but it is unlikely to impact the underwriting account significantly. Solvency ratio The solvency ratio has decreased from 49% to 42% following the payment of aspecial dividend of R2 per share in December 2007. Strong growth in adjusted operating profit and return on capital exceedingtarget The adjusted operating profit includes R262 million arising from a change inthe long-term investment return rate from 11.1% to 15.6%. This, together withthe special dividend of R8 per share paid in 2006, and R2 per share in 2007 hascontributed to the increase in the return on capital from 27.5% in 2006 to31.7% in 2007. This is well ahead of our targeted return of 20%. Sale discussions continue Old Mutual announced in November 2007 that it had entered discussions withcommunity-based investment group, Royal Bafokeng Holdings, regarding apotential sale of its controlling interest in Mutual & Federal. The discussionsare continuing, and a further announcement will be made in due course. US LIFE Continuing strong international variable annuity sales add to diversity ofearnings Highlights (USDm) 2007 2006 % ChangeIFRS-adjusted operating profit (pre-tax) 195 230 (15%)Return on equity 5.9% 7.3%* EV-adjusted operating profit (pre-tax) 126 181 (30%)Return on Embedded Value 3.8% 6.1% Life assurance sales (APE) 671 455** 47%Value of new business (post-tax) 144 83 73%New business margin (post-tax) 21% 18%** PVNBP 6,305 4,093** 54%Funds under management (USDbn) 24.1 22.1 9% * Restated due to change in ROE methodology** Restated due to change in US Life APE calculation to align with the volumeof new business calculation. Growth in funds under management Funds under management of USD24.1 billion at year end were up 9% due to positivenet client cash flows of USD2.4 billion, primarily driven by strong Old MutualBermuda variable annuity sales partially offset by increased surrenders on theMulti-Year Guaranteed Annuity block of business and a 1% decrease in fair valueof invested assets. The business returned cash in 2007, while exceeding targeted risk-based capitalratios in the operating entities including OM Financial Life Insurance Companyand Old Mutual Bermuda. Excellent sales growth in international variable annuity business Total life sales were USD6.1 billion on a gross basis, up 58% over 2006. Totallife sales APE were USD671 million, a 47% increase over 2006. Sales by Old Mutual Bermuda were the largest contributor to the increase over the prior year. Old Mutual Bermuda increased sales on an APE basis by 201% to USD360 millioncompared to 2006, representing 54% of APE sales in the US Life business. Theincrease in sales was due to a new product launch in April 2007 and newdistribution agreements in Asia. Bermuda now represents 25% of the total fundsunder management. Universal Life sales were up over the comparative period by28% as part of a shift from a term life focused distribution to a more balancedlife portfolio. Continued demand for fixed indexed annuities was also acontributing factor. We have an attractive and diverse mix of product offeringsincluding variable annuities, fixed indexed annuities, term life and universallife. Value of new business and healthy margins driven by strong offshore variableannuity sales VNB for the year of USD144 million was up 73% due to the higher volume of Bermuda variable annuity business. The new business margin of 21% was at the high end of our longer-term expectations primarily driven by Bermuda variable annuity business. The overall business continues to benefit from good investmentperformance and enhanced distribution. Our coordinated retail distributionstrategy has made good progress. Underlying results solid IFRS- and EV-adjusted operating profit and returns decreased in 2007 compared to2006. This was due to assumption and modelling changes recorded during 2007 andnon-recurring net investment income in the first half of 2006 of USD18 million.As indicated at our interim results, we strengthened our annuitant mortalityassumptions and adopted a more conservative approach to future assumed spreads.These changes resulted in a USD277 million (USD186 million post-tax) adjustment to embedded value (of which USD195 million (USD131 million post-tax) is in respect of annuitant mortality assumptions which are included within EV adjusted operating profit) and a USD60 million adjustment to pre-tax IFRS-adjusted operating profits. Excluding these impacts, IFRS adjusted operating profit was up 20%, driven by higher average asset levels. Credit update 3% of US Life's fixed income portfolio of USD21 billion has direct exposure tosub-prime debt and this helped US Life weather the market turbulence during thesecond half of 2007. The sub-prime exposure is highly rated (86% is AAA, 99% isAA and higher, and 100% is A and higher), concentrated in first mortgageswithout rate-reset risk, and owner- occupied, rather than investor properties. Approximately 2.3% of US Life's investment portfolio has exposure to monolineinsurers, of which USD493 million (85% of the total exposure) is indirect(wrapped) exposure, with a 95% fair value to book value ratio, and USD90 millionis direct (unsecured) exposure, with a 87% fair value-to-book value ratio. Ofthe 15% that represents the unsecured exposure, most are being recapitalised,or have sufficient funds to go into run-off mode, if necessary. US Life was not fully immune to the unfavourable credit conditions and recordedUSD64 million of impairment provisions during the fourth quarter. For IFRS-adjusted operating profit, the impairment provision did not impact thelong-term investment return in 2007. The investment portfolio's aggregate credit experience remained withinexpectations and is in line with long-term assumptions. Business Review US ASSET MANAGEMENT Another year of strong investment performance and asset growth Highlights (USDm) 2007 2006* % ChangeIFRS-adjusted operating profit 324 259 25%Mutual fund/unit trust sales 3,782 3,088 22%Net client cash flows (USDbn) 35.2 31.0 14%Operating margin 27% 27% Funds under management (USDbn) 332.6 272.6 22% * 2006 comparative information has been restated to include OMAM (UK)(transferred from the Skandia UK segment to the US asset management segment),and to exclude fund flows related to eSecLending, which was sold in 2006 Investment performance drives growth in funds under management Strong investment performance at our affiliates continued to attract new fundsduring a volatile year in global equity markets. At 31 December 2007, 83% ofassets had outperformed their benchmarks and 83% were ranked above the medianof their peer group over the trailing three year period. A pleasing USD35.2 billion of net client cash flows, 13% of opening funds under management, were up 14% on 2006 with Rogge, Acadian, Barrow Hanley and Dwight the largestcontributors. Market appreciation of USD22 billion and the acquisition of USD3 billion in assets at Ashfield Capital Partners contributed to an overall increase in funds under management of 22% to USD332.6 billion at 31 December 2007. Retail sales growth continues Old Mutual Capital's gross mutual fund sales increased 3% from 2006 to USD1,408 million despite the impact of volatile markets during the second half of the year. At year-end, fourteen of Old Mutual Capital's mutual funds carried four or five star rankings by Morningstar. OMAM (UK) unit trust sales increased 38% over 2006 to USD2,374 million, benefiting from investments made during 2006 to enhance the product offering and distribution capabilities of the business. IFRS-adjusted operating profit increases 25% AOP for the year was up 25% compared to the prior year, primarily as a resultof increased funds under management and higher performance fees. The operatingmargin remained in line with the prior year, dampened during 2007 by expensesassociated with long-term equity plan implementations. The loss of margin isoffset, however, by above average net client cash flows. Aligning the interestsof our affiliates and shareholders through equity plans is critical to settingus apart in this regard. ASIA PACIFIC Highlights (GBPm) 2007 2006 % ChangeAustralia unit trust/mutual funds sales 604 560* 8%Australia institutional sales 115 - n/aSkandia:BSAM (China) Gross Premiums ** 122 38 221%Advisors selling Skandia: BSAM products 2,477 799 210%KMOM (India) Gross Premiums ** 163 108 51%KMOM branches 106 65 63% * Skandia businesses included in the 2006 numbers have been adjusted on a pro forma basis assuming ownership for 12 months rather than 11 months ** This represents 100% of the businesses; OM owns 50% of Skandia:BSAM and 26%of KMOM In January we announced the appointment of Steffen Gilbert as Regional Head ofAsia Pacific and we announced the establishment of our Asia Pacificheadquarters, based in Hong Kong. This will form the base from which we intendto expand our existing operations throughout the region. Australia Operations in Skandia Group Australia include retail mutual funds andinstitutional investment funds. After breaking even for the first time in 2006,the business generated an operating profit of AUD7.8 million (GBP3.3 million) in2007. At 31 December 2007, funds under management were AUD14.5 billion (GBP6.4 billion), up 2% from AUD14.2 billion (GBP5.7 billion) at 31 December 2006. This was made up of institutional funds of AUD8.7 billion and retail funds of AUD5.8 billion. Integration of the institutional business, acquired in late 2006, is now complete and on track to generate the expected cost savings. The 2007 John West Platform awards in Australia named Australian Skandia Limited as the rising star for having above average platform funds under management growth. China Skandia:BSAM, our 50:50 joint venture with the Beijing State-owned AssetManagement Company (BSAM), is now in its third full year of operation andcontinues to show strong sales growth (gross premiums for the year were overthree times the comparative prior year). The business sells unit-linkedproducts and has licences to operate in Beijing, Shanghai, Jiangsu Province andGuangdong Province. Despite its recent entry into the market, of the 24 foreignowned joint venture insurance companies in China, Skandia:BSAM had, for 2007,the eighth largest gross premium flows (up two places compared to 2006). Ourunit-linked product range was granted "the most welcome financial product"award at the Shanghai Financial Expo 2007. New business margins are just over25% which is higher than our long-term expectations. India Kotak Mahindra Old Mutual Life Insurance Ltd (KMOM), our joint venture with theKotak Mahindra Group, in which we have a 26% stake, continues to show steadyprogress. The business now operates in 74 cities and 106 branches across India.Gross premiums for the calendar year were GBP163 million, up 51% from GBP108 million for the comparative period. In September we agreed to boost the venture with a capital injection of INR1.5 billion (approximately GBP19 million) in order for the business to extend its office network and increase its workforce. New business margins are healthy and are consistent with those of listed competitors in the country. Outlook Our key Asia Pacific objective is to develop a credible operation in terms ofboth size and profitability. As well as building and widening our presence inexisting markets, we will develop opportunities for geographic expansion. We will continue to provide working capital to our Indian and Chinese jointventures to support their further expansion and expect our Australian businessto continue to grow profitably in 2008. GBP exchange rates AUD RMB INRClosing 2.26 14.47 78.15YTD Average 2.39 15.23 82.77 27 February 2008 Consolidated income statementFor the year ended 31 December 2007 GBPm Year ended 31 December Year ended 2006 31 December 2007 RestatedRevenue Gross earned premiums 4,941 4,026Outward reinsurance (201) (178)Net earned premiums 4,740 3,848Investment return (non-banking) 6,071 10,188Banking interest and similar income 3,190 2,427Banking trading, investment and similar income 170 181Fee and commission income, and income from service activities 2,457 2,171Other income 212 307Share of associated undertakings' (loss)/profit after tax (1) 6Profit on disposal of subsidiaries, associated undertakings and strategic investments 25 85Total revenues 16,864 19,213Expenses Claims and benefits (including change in insurance contract provisions) (6,612) (7,554)Reinsurance recoveries 184 216Net claims and benefits incurred (6,428) (7,338)Change in investment contract liabilities (2,618) (4,655)Losses on loans and advances (157) (123)Finance costs (50) (91)Banking interest payable and similar expenses (2,053) (1,461)Fee and commission expense, and other acquisition costs (650) (592)Other operating and administrative expenses (2,724) (2,709)Change in third party interest in consolidated funds (156) (278)Goodwill impairment (5)Amortisation of PVIF and other acquired intangibles (360) (379)Total expenses (15,196) (17,631)Profit before tax 1,668 1,582Income tax expense (479) (563)Profit from continuing operations after tax 1,189 1,019Profit from discontinued operations after tax 57 74Profit after tax for the financial year 1,246 1,093Profit for the financial year attributable to: Equity holders of the parent 1,972 836Minority interests Ordinary shares 224 207Preferred securities 50 50Profit after tax for the financial year 1,246 1,093Earnings per share Based on profit from continuing operations (pence) 18.3p 15.8pBased on profit from discontinued operations (pence) 0.9p 1.2pBasic earnings per ordinary share (pence) 19.2p 17.0pBased on profit from continuing operations (pence) 17.3p 15.0pBased on profit from discontinued operations (pence) 0.8p 1.1pDiluted earnings per ordinary share (pence) 18.1p 16.1pWeighted average number of shares millions 4,894 4,705 Adjusted operating profitFor the year ended 31 December 2007 Reconciliation of adjusted operating profit to profit after tax GBPm Year ended Year ended 31 December 31 December 2007 2006 RestatedSouth Africa 1,165 1,036United States 260 264Europe 268 239 Other 2 1 1,695 1,540Finance costs (119) (130) Other shareholders' expenses (41) (33)Adjusted operating profit before tax* 1,535 1,377Adjusting items 73 (34)Profit for the financial year before tax (excluding policyholder tax) 1,608 1,343Total income tax expense (479) (563)Income tax attributable to policyholder returns 60 239 1,189 1,019Profit for the financial year after tax from continuing operations Profit for the financial year after tax from discontinued operations 57 74Profit after tax for the financial year 1,246 1,093 Adjusted operating profit after tax attributable to ordinary equity holders GBPm Year ended Year ended 31 December 31 December 2007 2006 RestatedAdjusted operating profit* before tax 1,535 1,377Tax on adjusted operating profit (390) (352)Adjusted operating profit* after 1,145 1,025tax from continuing operations Adjusted operating profit* after tax from continuing operations 1,145 1,025Adjusted operating profit* after tax from discontinued operations 61 39Adjusted operating profit* after tax 1,206 1,064Minority interest ordinary shares (242) (224)Minority interest preferred securities (50) (50) 914 790Adjusted weighted average number of shares (millions) 5,411 5,222Based on adjusted operating profit from continuing operations** (pence) 16.1p 14.6pBased on adjusted operating profit from discontinued operations** (pence) 0.8p 0.5pAdjusted operating earnings per share** (pence) 16.9p 15.1p * For long-term business and general insurance businesses, adjusted operatingprofit is based on a long-term investment return, includes investment returnson life funds' investments in Group equity and debt instruments, and is statednet of income tax attributable to policyholder returns. For the US AssetManagement business it includes compensation costs in respect of certainlong-term incentive schemes defined as minority interests in accordance withIFRS. For all businesses, adjusted operating profit excludes goodwillimpairment, the impact of acquisition accounting, put revaluations related tolong-term incentive schemes, the impact of closure of unclaimed shares trusts,profit/(loss) on disposal of subsidiaries, associated undertakings andstrategic investments, dividends declared to holders of perpetual preferredcallable securities, and fair value (profits)/losses on certain Group debtmovements. ** Adjusted operating earnings per ordinary share is calculated on the samebasis as adjusted operating profit. It is stated after tax attributable toadjusted operating profit and minority interests. It excludes incomeattributable to Black Economic Empowerment trusts of listed subsidiaries. Thecalculation of the adjusted weighted average number of shares includes ownshares held in policyholders' funds and Black Economic Empowerment trusts. Consolidated balance sheetAt 31 December 2007 GBPm At At 31 December 31 December 2007 2006 RestatedAssets Goodwill and other intangible assets 5,459 5,367Mandatory reserve deposits with central banks 615 515Property, plant and equipment 608 499Investment property 1,479 1,149Deferred tax assets 683 511Investments in associated undertakings and joint ventures 81 83Deferred acquisition costs 2,253 1,578Reinsurers' share of long-term business policyholder liabilities 1,394 1,314Reinsurers' share of general insurance liabilities 57Deposits held with reinsurers 213 247Loans and advances 30,687 26,438Investments and securities 90,220 81,915Current tax receivable 83 60Client indebtedness for acceptances 165 188Other assets 2,181 3,106Derivative financial instruments assets 1,527 1,263Cash and cash equivalents 3,469 3,101Non-current assets held-for-sale 1,617 1,165Total assets 142,734 128,556Liabilities Long-term business policyholder liabilities 84,251 75,265General insurance liabilities 265Third party interests in consolidation of funds 3,547 3,041Borrowed funds 2,353 1,978Provisions 499 542Deferred revenue 462 283Deferred tax liabilities 1,413 1,393Current tax payable 320 283Other liabilities 6,180 7,247Liabilities under acceptances 165 188Amounts owed to bank depositors 31,817 27,130Derivative financial instruments liabilities 1,716 1,071Non-current liabilities held-for-sale 414 1,107Total liabilities 133,137 119,793Net assets 9,597 8,763Shareholders' equity Equity attributable to equity holders of the parent 7,961 7,237Minority interests Ordinary shares 933 848Preferred securities 703 678Total minority interests 1,636 1,526Total equity 9,597 8,763 Consolidated cash flow statementFor the year ended 31 December 2007 GBPm Year ended Year ended 31 December 31 December 2007 2006Cash flows from operating activities Profit/(loss) before tax from continuing operations 1,668 1,582Profit before tax from discontinued operations 82 132 1,750 1,714Capital gains included in investment income (1,836) (4,076)Profit/(loss) on disposal of property, plant and equipment 4 (1)Depreciation of property, plant and equipment 73 68Amortisation and impairment of intangible assets 403 428Impairment of loans and receivables 183 143Share-based compensation expense 15 40Share of associated undertakings' loss after tax (1) (6)Loss arising on disposal of subsidiaries, associated undertakings and strategic investments (25) (85)Other non-cash amounts in profit 29 68Non-cash movements in profit before tax (1,155) (3,421)Reinsurers' share of long-term business policyholder liabilities (53) (785)Deferred acquisition costs (482) (632)Loans and advances (5,339) (5,543)Insurance liabilities 1,962 2,886Investment contracts 4,124 6,594Amounts owed to bank depositors 4,647 5,251Other operating assets and liabilities (491) 555Changes in working capital 4,368 8,326Taxation paid (563) (317)Net cash inflow from operating 4,400 6,302activities Cash flows from investing activities Acquisition of financial investments (3,896) (4,294)Acquisition of investment properties (26) (4)Net acquisition of tangible fixed assets (186) (120)Net acquisition of intangible fixed assets (67) (39)Acquisition of interests in subsidiaries (278) (1,318)Disposal of interests in subsidiaries, associated undertakings and strategic investments 106 78Net cash outflow from investing activities (4,347) (5,697)Cash flows from financing activities Dividends paid to: Equity holders of the Company (333) (282)Equity minority interests and preferred security interests (205) (199)Interest payable (excluding banking interest payable) (83) (52)Net proceeds from issue of ordinary shares (including by subsidiaries to minority interests) 42 52Net receipts from unclaimed shares trust 95 Issue of subordinated debt 699 297Other debt repaid (356) (96)Net cash outflow) from financing activities (141) (280)Net (decrease)/increase in cash and cash equivalents (88) 325Effects of exchange rate changes on cash and cash equivalents 50 (575)Cash and cash equivalents on acquisition of new subsidiaries 581Cash and cash equivalents at beginning of the year 3,634 3,303Cash and cash equivalents at end of the year 3,596 3,634Consisting of: Coins and bank notes 211 236Money at call and short notice 3,169 2,856Balances with central banks (other than mandatory reserve deposits) 121 9Cash and cash equivalents from non-current assets held-for-sale (32) - Cash and cash equivalents 3,469 3,101Mandatory reserve deposits with central banks 615 515Other cash equivalents 808 1,101Cash and cash equivalents subject to consolidation of funds (1,296) (1,083)Total 3,596 3,634Other supplementary cash flow disclosures Interest income received (including banking interest) 4,858 4,059Dividend income received 388 513Interest payable (including banking interest) 2,130 1,552 Cash flows presented in this statement include all cash flows relating topolicyholders' funds for the long-term business. Cash and cash equivalents subject to consolidation of funds are not included inthe cash flow as they relate to the minority holding in the funds. Management do not consider that there are material amounts of cash and cashequivalents which are not available for use by the Group. Consolidated statement of changes in equityFor the year ended 31 December 2007 Millions GBPm Number of shares issued Attributable to and fully equity holdersYear ended 31 December 2007 paid of the parentEquity holders' funds at beginning of the year 5,501 7,237Change in equity arising in the year Fair value gains/(losses): Property revaluation 95Net investment hedge (13)Available-for-sale investments: Fair value losses (161)Shadow accounting 25Currency translation differences/exchange differences on translating foreign operations 129Other movements (4)Aggregate tax effect of items taken directly to or transferred from equity 34Net income recognised directly in equity 105Profit for the year 1,972Total recognised income and expense for the year 1,077Dividends for the year (373)Net sale of treasury shares 149Shares repurchased in the buyback programme (177)Issue of ordinary share capital by the Company 3Net acquisition of interests in subsidiaries Exercise of share options 9 9Fair value of equity settled share options 36Equity holders' funds at end of the year 5,510 7,961 Millions GBPm Total minority TotalYear ended 31 December 2007 interest equityEquity holders' funds at beginning of the year 1,526 8,763Change in equity arising in the year Fair value gains/(losses): Property revaluation 1 96Net investment hedge (13)Available-for-sale investments: Fair value losses (161)Shadow accounting 25Currency translation differences/exchange differences on translating foreign operations 4 133Other movements (4)Aggregate tax effect of items taken directly to or transferred from equity 34Net income recognised directly in equity 5 110Profit for the year 274 1,246Total recognised income and expense for the year 279 1,356Dividends for the year (165) (538)Net sale of treasury shares 149Shares repurchased in the buyback programme (177)Issue of ordinary share capital by the Company 3Net acquisition of interests in subsidiaries (4) (4)Exercise of share options 9Fair value of equity settled share options 36Equity holders' funds at end of the year 1,636 9,597 Share Share Other TranslationYear ended 31 December 2007 capital premium reserves reserveAttributable to equity holders of the parent at beginning of the year 550 746 2,901 (421)Changes in equity arising in the year: Fair value gains/(losses): Property revaluation 95 Net investment hedge (13)Available-for-sale investments: Fair value losses (161) Shadow accounting 25 Currency translation differences/exchange differences on translating foreign operations 129Other movements (10) (2)Aggregate tax effect of items taken directly to or transferred from equity 22 3Net income recognised directly in equity (29) 117Profit for the year Total recognised income and expense for the year (29) 117Dividends for the year Net sale of treasury shares Shares repurchased in the buyback programme Issue of ordinary share capital by the Company 3 Exercise of share options 1 8 Fair value of equity settled share options 36 Attributable to equity holders of the parent at end of the year 551 757 2,908 (304) GBPm Perpetual preferred Retained callable Year ended 31 December 2007 earnings securities TotalAttributable to equity holders of the parent at beginning of the year 2,773 688 7,237Changes in equity arising in the year: Fair value gains/(losses): Property revaluation 95Net investment hedge (13)Available-for-sale investments: Fair value losses (161)Shadow accounting 25Currency translation differences/exchange differences on translating foreign operations 129Other movements 8 (4)Aggregate tax effect of items taken directly to or transferred from equity 9 34Net income recognised directly in equity 17 105Profit for the year 972 972Total recognised income and expense for the year 989 1,077Dividends for the year (373) (373)Net sale of treasury shares 149 149Shares repurchased in the buyback programme (177) (177)Issue of ordinary share capital by the Company 3Exercise of share options 9Fair value of equity settled share options 36Attributable to equity holders of the parent at end of the year 3,361 688 7,961 GBPm At 31 DecemberOther reserves 2007Merger reserve 2,716Available-for-sale reserve (30)Property revaluation reserve 75Share-based payments reserve 147Attributable to equity holders of the parent at end of the year 2,908 Retained earnings have been reduced by GBP588 million at 31 December 2007 inrespect of own shares held in policyholders' funds, ESOP trusts, Black EconomicEmpowerment trusts and other related undertakings. Included in the dividend forthe year is GBP40 million of dividends declared to holders of perpetual preferred callable securities. Within issue of ordinary share capital by the Company are prior year transaction costs totalling GBP2 million deducted from the share premium. Included within other reserves is the merger reserve for theadditional share consideration made in respect of the Skandia acquisition,being the difference between the market value of the shares on the date ofissue and the nominal value included as share capital. Millions GBPm Attributable to Number of shares equity holdersYear ended 31 December 2006 issued and fully paid of the parentEquity holders' funds at beginning of the year 4,090 4,751Changes in equity arising in the year Fair value gains/(losses): Property revaluation 28Net investment hedge 75Available-for-sale investments: Fair value losses (111)Recycled to income statement on realisation 17Shadow accounting 28Currency translation differences/exchange differences on translating foreign operations (852)Other movements 38Aggregate tax effect of items taken directly to or transferred from equity 14Net expense recognised directly in equity (763)Profit for the year 836Total recognised income and expense for the year 73Dividends for the year (321)Net sale of treasury shares 18Issue of ordinary share capital by the Company 1,400 2,674Net acquisition of interests in subsidiaries Exercise of share options 11 14Fair value of equity settled share options 28Equity holders' funds at end of the year 5,501 7,237 Millions GBPm Total minority TotalYear ended 31 December 2006 interest equityEquity holders' funds at beginning of the year 1,668 6,419Changes in equity arising in the year Fair value gains/(losses): Property revaluation 28Net investment hedge 75Available-for-sale investments: Fair value losses (111)Recycled to income statement on realisation 17Shadow accounting 28Currency translation differences/exchange differences on translating foreign operations (208) (1,060)Other movements (42) (4)Aggregate tax effect of items taken directly to or transferred from equity 14Net expense recognised directly in equity (250) (1,013)Profit for the year 257 1,093Total recognised income and expense for the year 7 80Dividends for the year (160) (481)Net sale of treasury shares 18Issue of ordinary share capital by the Company 2,674Net acquisition of interests in subsidiaries 11 11Exercise of share options 14Fair value of equity settled share options 28Equity holders' funds at end of the year 1,526 8,763 GBPm Share Share Other TranslationYear ended 31 December 2006 capital premium reserves reserveAttributable to equity holders of the parent at beginning of the year 410 730 374 357Changes in equity arising in the year: Fair value gains/(losses): Property revaluation 28 Net investment hedge 75Available-for-sale investments: Fair value losses (111) Recycled to income statement on realisation 17 Shadow accounting 28 Currency translation differences/exchange differences on translating foreign operations (852)Other movements (6) Aggregate tax effect of items taken directly to or transferred from equity 11 (1)Net expense recognised directly in equity (33) (778)Profit for the year Total recognised income and expense for the year (33) (778)Dividends for the year Net sale of treasury shares Issue of ordinary share capital by the Company 139 3 2,532 Exercise of share options 1 13 Fair value of equity settled share options 28 Attributable to equity holders of the parent at end of the year 550 746 2,901 (421) GBPm Perpetual preferred Retained callable Year ended 31 December 2006 earnings securities TotalAttributable to equity holders of the parent at beginning of the year 2,192 688 4,751Changes in equity arising in the year: Fair value gains/(losses): Property revaluation 28Net investment hedge 75Available-for-sale investments: Fair value losses (111)Recycled to income statement on realisation 17Shadow accounting 28Currency translation differences/exchange differences on translating foreign operations (852)Other movements 44 38Aggregate tax effect of items taken directly to or transferred from equity 4 14Net expense recognised directly in equity 48 (763)Profit for the year 836 836Total recognised income and expense for the year 884 73Dividends for the year (321) (321)Net sale of treasury shares 18 18Issue of ordinary share capital by the Company 2,674Exercise of share options 14Fair value of equity settled share options 28Attributable to equity holders of the parent at end of the year 2,773 688 7,237 GBPm At 31 DecemberOther reserves 2006Merger reserve 2,716Available for sale reserve 28Property revaluation reserve 48Cash flow hedge reserve (1)Share-based payments reserve 110Attributable to equity holders of the parent at end of the year 2,901 Retained earnings have been reduced by GBP704 million at 31 December 2006 inrespect of own shares held in policyholders' funds, ESOP trusts, Black EconomicEmpowerment trusts and other related undertakings. Included in the dividend forthe year is GBP39 million of dividends declared to holders of perpetual preferred callable securities. Within issue of ordinary share capital by theCompany are transaction costs totalling GBP2 million deducted from the sharepremium. Included within other reserves is the merger reserve for theadditional share consideration made in respect of the Skandia acquisition,being the difference between the market value of the shares on the date ofissue and the nominal value included as share capital. This information is provided by RNS The company news service from the London Stock Exchange

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