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Preliminary results
for the year ended
31 December 2008
An Update from Julian
Operational and Financial Highlights
Capital and liquidity
Outlook and priorities
What does this mean for us?
INTEGRITY
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RESPECT
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ACCOUNTABILITY
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PUSHING BEYOND BOUNDARIES
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2 Preliminary Management Statement to year end December 2008
An Update from Julian
I don’t think anyone could have predicted
just what an extraordinary, challenging
year 2008 turned out to be for all of us.
I have never experienced a time when
markets have moved so dramatically.
One day our share is the biggest winner,
only to be the biggest loser the next day.
On top of all that 2008 was especially tough for us because the
financial turmoil exposed serious weaknesses in our US Life
business. It is cold comfort that these weaknesses have been
seen in other much larger financial groups with US exposure.
Frankly, poor decisions were made and sufficient oversight
was not given to the business. And that has cost us both
financially and in terms of the time and management attention
we have had to put into fixing the problems. But we have
learned important lessons and I am pleased to report that we
have made excellent progress in containing these risks. Both
oversight and governance has been strengthened substantially.
In our US Life business, we have reduced products significantly
and have cut expenses by closing the office in Atlanta and
focusing our activities on Baltimore. Our aim is to refocus the
business on fewer products and raise ROE.
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In our Bermuda business, more precise fund mapping has
improved our hedging, which was 92% effective during
the fourth quarter, and we have a much better understanding
of sensitivities to further market and currency movements.
Against this troubled background we have many strong
performing businesses in the Group, most notably Sweden
and OMSA.
I would like to say right from the
start that the Group’s capital and
liquidity position is much stronger
than many people believe.
We had an FGD (capital) surplus at the end of December of
£0.7bn. In addition each of our businesses is individually well
capitalised and, in South Africa, exceptionally so.
Staying focused during times like these is challenging, and I would like to thank
each and every one of you for
your contribution to our Group.
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Julian Roberts, Chief Executive
3 Preliminary Management Statement to year end December 2008
Operational and Financial Highlights
I would like to encourage you to have a look at our full set of results
on www.oldmutual.com. My thanks to the many teams who have
worked hard over the last few months to compile our results.
Here is just a brief summary of the key Operational and Financial
highlights of our business.
Adjusted Operating Profit
Africa has made a strong contribution to group profits. Whilst
overall, on a sterling basis, Africa was down on 2007, in local
currency terms overall AOP was up by 4% (see Figure 1).
Profit in Europe was flat. The UK and International profit
was virtually unchanged whilst Nordic was strongly positive
due to higher sales and lower expenses.
As anticipated, the US moved from profit into loss as a result
of the additional charges into US Life. After all charges the
onshore business made a loss of £230m and Bermuda a
loss of £137m. US Asset Management remained in profit
but, at just under £100m, was considerably down on 2007,
primarily due to lower management and performance fees.
Mutual & Federal produced a solid underwriting result and,
although there is clearly more work to be done in the business,
the fourth quarter did show improved performance.
In the past we have often emphasised the importance of Funds
Under Management (FUM) as a measure of the success of
our Group. Although FUM remain important, our focus going
forward will be to build a Group of profitable businesses that
delivers value for shareholders. Furthermore, I also want to
ensure that we have a strong focus on the measures
of success for each particular business, rather than just
a generic measure.
Key
Up
Down
Steady
Adjusted Operating Profit
(IFRS basis) DOWN 38%
£999m
The profit earned from
our business operations
excluding some one-off
items and investment
volatility
Figure 1
Adjusted Operating Profit
(IFRS basis pre-tax post minority interest)
By region (£m)
US n Africa n Europe n
Central Costs and Other* n Debt n
2007
£1,332m
260
2008
£727m
976
940
267
266
-119
-140
-270
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4 Preliminary Management Statement to year end December 2008
Key
Up
Operational and Financial Highlights
Life Sales (APE)
Overall life sales held up well, supported by our Nordic and
South African businesses. We continued to see the benefits of
our investment in the Nordic sales channel, where life sales were
up 30% in local currency and South Africa life sales were up
14% in rand terms. However in the US, sales were down 23%
in local currency. UK and International sales were down 19%.
Net Client Cash Flow (NCCF)
Although negative overall, I am pleased to report that NCCF
was positive across most parts of the business.
The European NCCF result was particularly strong. It was
positive in every quarter and, for the year as a whole, was
equivalent to over 5% of opening funds under management.
I think this is a great result given that over the period
confidence in the financial markets has been severely tested
and consumers have faced real pressure on their discretionary
spend, including the money they could set aside for savings.
Life sales
DOWN 8%
£1,611m
A standard measure of the
volume of life business sold
Net Client Cash Flows (NCCF)
DOWN 105% from a £23.4bn
inflow in 2007
£1.2bn
This is the difference
between the amount of
money coming into and
going out of the company
from our customers
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Funds Under Management
FUM were down by just 5% in markets which have dropped by
considerably more than this. This is a remarkable achievement.
I would like to thank our asset managers and sales staff for
delivering a great result.
In South Africa FUM were flat over 2007, mainly due to lower
asset values in volatile markets and improved NCCF of R5.5
billion, offset by the inclusion of Futuregrowth’s R35 billion
of FUM. The acquisition of Futuregrowth (a newly acquired
investment boutique) has resulted in an expanded set of fixed
income products available to the Old Mutual customer base.
In South Africa NCCF improved over 2007. However, it remains
negative as the prevailing adverse economic environment
prompted client withdrawals.
•
Nevertheless, South African unit trust sales were up an
impressive 33% in local currency. The majority of our South
African boutiques delivered a better investment performance
than they had done the previous year. The investment
boutiques model of independent investment philosophies and
processes is well received by advisors and investors, and there
is a continued focus on improving investment performance and
product innovation. There is also increased co-operation with
other parts of the business like the Skandia Investment Group,
which is great news.
Steady
Mutual Fund Sales
DOWN 21%
£6,600m
This is cash received on the
sale of unit trusts mutual
fund products
Outflow
Skandia UK and International continued to deliver positive
NCCF for the year with net inflows of £1.7 billion representing
4% of opening funds under management. This comprised
strong International net inflows and positive UK net inflows
which were lower than 2007.
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Non-life Sales
It comes as no surprise that overall sales of unit trusts are down
as investors move away from volatile equity based investments
to more secure cash-based investments.
Down
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PUSHING BEYOND BOUNDARIES
Funds Under Management (FUM)
DOWN 5%
£264.8bn
The amount of funds
that we manage on
behalf of our customers
5 Preliminary Management Statement to year end December 2008
Capital and liquidity
Group Capital (FGD) position)
I am pleased to report that Old Mutual’s capital position is
robust, both at a Group and an operating level. The Group’s
pro-forma FGD surplus at 31 December 2008 was £0.7 billion.
This is slightly below our self-imposed target range which
ensures we have sufficient headroom to cover any capital
issues across the Group’s operations. Great news indeed
and something which we need to make sure all our customers
and advisors know about.
Business Unit Capitalisation
On an individual basis (see Figure 2), all our businesses are
well capitalised. Our Nordic and UK businesses are capitalised
with a surplus 9.9 times and 2.6 times the required level
respectively.
Our European businesses are capital light by their nature and
therefore present very little capital risk.
In South Africa, we have the strongest capital position and
credit rating in the long-term insurance industry, with a surplus
in OMSA of 3.8 times the required level. It was really great to
see how the team in South Africa pro-actively communicated
this news to customers (see image).
In the case of US Life, during 2008 we took action to maintain
capital in the onshore business at three times its required level.
$582 million of cash was injected into the offshore US Life
business during 2008, with a further $522 million issued by way
of a loan note with Old Mutual plc in December 2008, resulting
in this business now having significant excess capital over its
regulatory requirement.
Liquidity
The Group has available cash and facilities of over £600 million
as at 31 December 2008, which is sufficient to cover our
requirements.
Dividend
As I have outlined above our businesses are well capitalised
at a Group and Business Unit level. Markets continue
to be unpredictable and we believe that it is important for
us to retain our capital and cash. The Board has therefore
determined that we won’t be paying a dividend during 2009.
This decision will be reviewed again at a later stage in light
of the then prevailing market and economic conditions
Nedbank’s key ratios also demonstrate its capital strength. In
fact Nedbank announced its results last week and has done
well in difficult circumstances. Overall performance was good
and, with a Tier 1 capital ratio of 9.6% which is above that of
most UK and US banks, the business is well set to withstand
the effects of a slowdown in the SA economy.
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Figure 2
Business unit
OMLAC(SA)
Mutual & Federal
US Life – Onshore
Nordic
UK
Nedbank
Core Tier1
Tier 1
Total
Ratio
3.8x
130%
305%
9.9x
2.6x
8.2%
9.6%
12.4%
6 Preliminary Management Statement to year end December 2008
Outlook and
priorities
Over the last five months we have conducted a thorough
review of every part of our business with the help of
Bain management consultants. Many people across
the Group provided input to the review, and I would
like to thank you for your contributions. It is the first
time that we have conducted such an extensive look
at our Group, and I am pleased to report that we have
a solid foundation to build the Old Mutual of the future.
There are many opportunities where we can produce an
improvement. Our spread of businesses is wide, making it
complicated to manage on a decentralised basis and difficult
to show the true value of each. We need to change in two
ways:
1We must run the group differently to show we can
manage the diverse spread of businesses
2When the opportunity arises, we need to reduce
the breadth of the portfolio of businesses
Before I talk about our priorities going forward, I would like
to briefly re-state our vision and the focus on our strategic
priorities as identified by the review of our business.
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7 Preliminary Management Statement to year end December 2008
Outlook and priorities
Vision:
Five clear priorities
over the next three
years:
To become the
international long
term savings and
investment provider
of choice and the
premier financial
services provided
in South Africa.
No matter if you are working
for Nedbank in South Africa or
Skandia in the UK, or anywhere
else in the Group, I’d like
everyone to work with their
team to work out how you can
support our achievement of
these priorities. We are just at the
beginning of the process, and
over the next few months we
will be working out the details of
how we are going to deliver our
priorities. I will also explain later
in this document how we will
ensure that we deliver against
these priorities in a structured
and deliberate way.
1Manage our capital
and liquidity
2Streamline our portfolio
of businesses over time
3Build our long term
savings business
4Deliver value
in South Africa
5Drive operational
efficiency
From now on the majority of our
communication will be focused
on updating you on how we are
doing against these priorities. To
make it easier to remember, and
to structure our communication
updates to you in a logical way,
I am going to call these priorities
our Big Five.
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8 Preliminary Management Statement to year end December 2008
Outlook and priorities
1
Manage our capital and liquidity
As I said before (see page 5), we will be actively monitoring
management of capital and liquidity levels at both a Group and
individual level. For example a monthly Group Risk and Capital
Committee was established to ensure that the allocation of
capital is strictly overseen.
2
Streamline our portfolio of businesses
over time
As a group we have often been criticised for being too
complex, and operating in too many countries with too
many lines of business and companies. There are too many
businesses where we are sub-scale and without a realistic
chance of achieving scale within an appropriate time without
change. Simplification is required.
However, it is clear to me that in the current environment,
execution is not only difficult but, if achievable, could destroy
shareholder value. So, getting to the optimal shape for the
Group will not happen overnight.
We have already taken or have started to take action on
some parts of our portfolio. We have agreed to the sale of
our Australian business. We have exited Portugal. We are
refocusing our businesses in continental Europe. We remain
committed to our established businesses in India and China
but intend to scale back significantly our aspirations in the
Far East – and it is with regret that I have to announce the
closure of our office in Hong Kong.
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Of course I would like to do more and to move more quickly.
And if there is the opportunity to do more this year then
we will certainly do it. But we have to be realistic about
what is achievable.
3
Figure 3
Build our long term savings business (LTS)
I would like to announce the creation of a long term savings
business division. We have distinctive technology and
capabilities within our South African, UK and Nordic platform
businesses. There is a significant opportunity to deploy this
technology and our product capability more effectively across
the Group and, as a result, change the economics of the
business model.
I have often said that we need to work closer together as a
Group, and I believe that the creation of a long term savings
business division creates a compelling reason to do just that.
And in the process, we are able to unlock more value for our
business, create a more efficient business and offer greater
value and variety of products and services to our customers
around the world.
I am therefore delighted to announce that Paul Hanratty
(currently CEO of OMSA) has been appointed as Head of LTS.
Bob Head who runs our Skandia businesses, Chris Chapman
in the US, Steffen Gilbert in the Far East and also the OMSA
business will now all report to Paul. He will relocate to London
and will be based here as part of my Executive Committee. We
have started the process for seeking a replacement for him in
OMSA (see Figure 3).
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Paul Hanratty
Head of LTS
TBC
OMSA CEO
Chris Chapman
US Life
Bob Head
Head of OM Europe
Steffen Gilbert
Asia Pacific
9 Preliminary Management Statement to year end December 2008
Outlook and priorities
4
5
On the theme of working together, the value that has been
created by the closer co-operation between Nedbank and
OMSA over the last few years has been pleasing. We have
already delivered in excess of 1 billion Rand in annual pre-tax
savings. But I want to go further and I believe that there is more
value that can be achieved.
We will target greater operational efficiency and further
strengthening of our governance and risk management
processes.
Continue to deliver value from South Africa
Drive operational efficiency
– both within and between businesses
Tom Boardman is a member of my Executive Committee and
will remain so. Both he and Paul will be tasked with delivering
greater synergies – particularly on the retail side. They will
also be responsible for agreeing and driving towards new
bancassurance targets.
In respect of operational efficiency I am delighted to announce
the appointment of Paul Maddox, who will join my Executive
Committee and will be responsible for driving all major Group
wide change programmes to deliver our strategy. This includes
working with the accountable Executive Committee members
to provide assurance that change programmes are progressing
according to plan.
One outcome of the review is that during this year Nedbank,
which has several wealth management joint ventures with Old
Mutual, may acquire those joint ventures entirely, in exchange
for an increased shareholding for us in Nedbank.
There are significant cost and performance efficiencies that
can be achieved. Delivery of these savings may require better
processes and technology but could also involve consolidation
of activities.
M&F has received comparatively little investment over recent
years. The focus for that business this year is on transformation
– increasing profitability, strengthening the balance sheet and
driving greater cooperation with Nedbank and OMSA. Keith
Kennedy, CEO of M&F, will report directly to me.
Paul has only just joined the team and I want him to look at
the opportunities and the realistic timescale for how we do
this. It is early days, and I want to ensure that we do this in
a way that is absolutely consistent with our values and the
talent and aspiration of our people where possible. We will
be communicating more about this in the coming months.
Further work is also underway to embed our risk and
governance processes. In this respect I am bringing together
our risk and actuarial functions at plc. Andrew Birrell will
take responsibility for both and will join my reshaped
Executive Committee.
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10 Preliminary Management Statement to year end December 2008
A strong leadership team with clear
accountability for delivery
I have already outlined the roles and responsibilities of
Paul Hanratty, Paul Maddox and Andrew Birrell. I have also
asked Don Hope to join the Executive Committee. He will
be responsible for strategy.
I am in the process of recruiting a new Group HR Director.
To ensure that we deliver on our priorities, we need to
make sure that we have the right people in place. I have
said before that we have incredible talent in our Group.
What we need is a structured process to ensure that we
develop the talent of our people. The Group HR Director
will be working closely with the businesses to ensure that
this happens.
I hope that I have given you a clear picture of our priorities
over the next few months, and where the Group is going.
To make this happen we need to have a strong leadership
team with clear accountability for delivery. I have absolute
belief that our new Executive Committee has what it takes
to lead our business going forward.
Julian Roberts
OM Group CEO
Tom Boardman
Nedbank CEO
Andrew Birrell
Head of Risk
& Actuarial
TBC
Head of
Group HR
Paul Hanratty
Head of LTS
Philip Broadley
Group CFO
Don Hope
Head of Strategy
My thanks go to Bob Head and Chris Chapman who came
off the Executive Committee to focus on their business
areas and to Rosie Harris for her contribution in the Risk
and Governance area.
To read more detailed biographies got to www.oldmutual.com
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Paul Maddox
Head of Strategic
Implementation
Tom Turpin
USAM CEO
11 Preliminary Management Statement to year end December 2008
What does this
mean for us?
The changes I have outlined will inevitably involve some tough
decisions. Markets continue to be volatile, customers demand
(and are entitled to) more, the cost of doing business increases
all the time, the competitive landscape continues to change – to
name but a few things which, depending on your perspective,
you could view as either opportunities or threats.
In the meantime we will focus on changes that we can execute
and which will increase significantly the efficiency and the value
of our businesses.
I am determined however to unlock the value of our Group
in a way that makes the most of the excellent talent of our
people and the capabilities of our businesses. There will
be no more us and them. I am depending on our leaders
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to run our various businesses as well as they can, but at the
same time to always keep an eye on how we can leverage
opportunities and help each other to do things better. We
have been talking about this for a while, but the time has
come for us to do this in a structured, well-thought through
way. The appointment of Paul Hanratty, Tom Boardman, Paul
Maddox, Don Hope and Andrew Birrell in their new roles is the
first step in that direction. To me it is about working together,
simplification, streamlining and delivery.
It won’t be an easy journey. These things never are. Along the
way we will face setbacks and uncertainty. We have our Big
Five priorities which we have to deliver on, and I will keep you
posted on how we progress.
I see my role and that of the Executive Committee as setting
the vision and strategic priorities for the Group, and to create
the opportunities for you to contribute and take our Group
forward. I recognise that you have already contributed a lot and
want to thank you for your commitment and effort. We have a
big challenge ahead of us. I know that I can count on you to
make our Group great.
Julian Roberts, Chief Executive