Old Mutual South Africa - Corporate Citizenship Report 2002

MANAGING DIRECTOR'S STATEMENT

BUSINESS ACTIVITIES

STAKEHOLDERS

Link number 1

CORPORATE CITIZENSHIP GOVERNANCE

ORGANISATIONAL GOVERNANCE

GROWTH

KEY FINANCIAL INFORMATION


	Worldwide, exploration of the relationship between sustainability performance and shareholder value is increasing. In the process, the linkages between the former and key value drivers like brand image, reputation and future asset valuation are being more clearly understood. A key response from Old Mutual has been to work at aligning not only our workplace and social responsibility activities with national transformation, but also our core business activities — as outlined in this section of the report. One example of core business alignment lies in our response to HIV/AIDS, which includes initiatives in product design intended to make financial services products available to people whose HIV status might otherwise exclude them. Another is BEE, including infrastructure investments and affirmative procurement. A third is financial education. BEE AND OUR CORE BUSINESS Old Mutual believes that, if properly implemented, BEE can be a key driver of sustainable economic growth and social transformation in South Africa, and in our business. It is from this perspective that BEE forms an increasingly important part of the company’s core business activities. BEE is built into business plans, and for some years, the company has engaged in BEE activities that are value-adding for all of our stakeholders, and are contributing to the sustained growth of our business.

Old Mutual is also developing a new BEE strategy in the context of the Financial Services Charter process. The strategy is being developed off the base of current activity and is informed by a “10-point BEE delivery framework”. Seven of these areas relate directly to our core business. They are:
	Equity ownership
	BEE investments
	BEE strategic investments or joint ventures
	Infrastructure investments
	Affirmative procurement
	BEE-related product development and services
	Financial education for clients

We report below on current progress in each of these areas. The current process of BEE strategy development will lead to new activity in the year ahead, and this will be covered in the next report.

BLACK EQUITY OWNERSHIP

Old Mutual’s demutualisation and listing in 1999 resulted in 3.2 million policyholders also becoming shareholders. South African shareholders currently constitute about 60% of Old Mutual plc’s share register and many of these shareholders are black.

As a rough approximation, we estimate that black people indirectly own 16% of OMSA through individual shareholdings in Old Mutual plc and via pension funds. There is currently no direct black ownership in OMSA and this is an area that will begin receiving attention in the years ahead.

BEE INVESTMENTS AND STRATEGIC PARTNERSHIPS

Old Mutual is committed to growing BEE investments under management and to entering into partnerships with BEE players.

BEE investments
The extent of our BEE investments totalled R1.9 billion at the end of 2002, equivalent to 1% of OMLACSA assets under management.

There was no movement in this overall figure from 2001. However, within the portfolio, we undertook disposals during the year, and also put capital to work in a number of empowerment entities in which we are already invested.

Goals have been set for 2003 with the specific intention of growing the company’s investment in BEE assets.

AKA Capital chairman Reuel Khoza and OMSA MD Roddy Sparks. Old Mutual has acquired a 10% stake in AKA Capital.

*Our BEE investments are made up of the following categories:*
	LISTED INVESTMENTS R760 million invested in BEE listed companies.
	STRUCTURED INVESTMENTS Old Mutual is a leading investor in a number of structured financing transactions designed to facilitate the acquisition of equity stakes in companies by BEE consortia. To date, R787 million has been invested.
	DIRECT EQUITY HOLDINGS Included in our BEE portfolio are a number of promising unlisted companies in which we have invested R377 million.

Equity Aviation
A recent development saw Old Mutual finance Equity Aviation, a consortium that acquired a 51% interest in Apron Services. Apron Services was wholly owned by Transnet and is the dominant provider of ground handling services at major airports in South Africa.

Equity Aviation comprises Equity Alliance, a BEE group, and SERCO International. The funding from Old Mutual amounted to R57 million and was used to finance Equity Alliance’s share of the purchase price of Apron Services.

Strategic investments or joint ventures
Aka Capital
During the year under review, there was a significant empowerment component to the R7.5 billion merger of Nedcor, Old Mutual plc’s banking subsidiary, and the Board of Executors (BoE).

The empowerment component of the deal saw Old Mutual partially finance Aka Capital’s acquisition of a controlling stake in BoE Asset Management from Nedcor. In terms of this transaction, Reuel Khoza’s Aka Capital has acquired a 55% stake in BoE Asset Management. 22% of this stake will be offered to the empowerment shareholders of Nedcor’s Peoples Bank. BoE Asset Management has been renamed Quaystone following the acquisition.

Old Mutual and Peoples Bank will hold 40% of the Quaystone business, with a further 5% to be allocated to management and employees. Quaystone is one of South Africa’s largest empowerment fund managers with approximately R14 billion under management as at December 2002.

Old Mutual has also acquired a 10% stake in Aka Capital, with an option to purchase a further 10% stake.

Wiphold (Women Investment Portfolio Holdings)
Towards the end of 2002, Wiphold, the first women’s empowerment company to achieve a JSE listing, announced its intention to delist after securing the support of Old Mutual.

In early 2003, shareholders approved the bid to delist and buy out minority shareholders. The bid was made by a consortium comprised of Wiphold executives and management, Old Mutual, the Wiphold Trust and a new NGO Trust.

The delisting will significantly improve the company’s black and women ownership at shareholder and employee level. Women will hold 61% of unlisted Wiphold with the proportion of shares in black hands at 51%.

Old Mutual will have a 32.5% stake in Wiphold, will put in equity funding of R6.5m, and will provide Wiphold with a R25m working capital facility and a R40m investment facility.

Other strategic investments of joint ventures
As reported in 2001, other strategic investments or joint ventures are:

	Umbono Asset Managers who entered into an alliance with OMAM. Umbono Asset Managers is involved in passive asset management through tracking indices. Umbono now has over R2 billion in assets under management.
	Setsing Financial Services. We report elsewhere on progress with the IDEAS Fund that was created following a joint venture between Setsing Financial Services and OMAM. The company is 65% owned by trade unions affiliated to the Congress of South African Trade Unions (Cosatu) and the National Congress of Trade Unions (Nactu). OMAM holds the remaining 35%.
	J&J — a technology and finance business started by Jay Naidoo and Jayendra Naidoo. Old Mutual provided a R37.5 million capital injection in support of early-stage entrepreneurial efforts by black business, and holds a 25% interest in the company.
	Pro-Active Health Solutions — a health risk management company with three executive directors who also own 62% of the company’s shares. Old Mutual has a 38% stake.

OMAM & SRI Investments

OMAM utilises its investment expertise and resources to manage the funds entrusted to it with a view to creating wealth for the upliftment of individual investors. In doing so, it adheres to client mandates that are designed to ensure assets are managed responsibly, to ensure the best risk adjusted return. Where there are specific mandates to invest in ethical investments the IDEAS Fund, for example, meets the need for mandates requiring OMAM to invest in activities that promote infrastructural development in South Africa. Another avenue with a high social and economic benefit includes black economic empowerment investments. In addition to these, OMAM is a significant investor in bonds that raise finance for government to meet its social development targets.


			SUPPLIERS AND AFFIRMATIVE PROCUREMENT Old Mutual’s Affirmative Procurement Policy, an important component of BEE strategy, is aimed at procuring goods and services from black empowerment enterprises, small, medium, and micro enterprises, disabled-owned enterprises and women owned enterprises. During 2001, a group-wide affirmative procurement policy was developed. This activity was previously decentralised. A first phase of policy implementation during 2002 entailed the development of a centralised database and definitional criteria for purposes of measuring affirmative procurement activity and for planning future activity. This process has now been completed. During the year under review, total affirmative procurement spend was some R210 million, or 22% of the company’s procurement spend. Of this, roughly 6% of all procurement spend went to BEE suppliers, namely companies that are over 50% black-owned. This BEE figure excludes the R30 million contract with Nkonki Advisory Services reported on below. While this contract was concluded in 2002, it will only be reflected in 2003 figures when the work will be undertaken. The balance of affirmative procurement spend was on small businesses, women-owned enterprises or disabled owned enterprises. Office Focus and Leisure@Work During the year under review, we put affirmative procurement to good effect when looking to equip the new West Campus Development, new home to Old Mutual Asset Management and Old Mutual Business School, at Mutualpark. This involved bringing together two empowerment companies to ensure sufficient capacity and expertise in the supply of quality office and furniture products, valued at R1.9 million, for the new building. Office Focus is an established BEE company in the Western Cape with a track record in the supply of contract office furniture to corporations and parastatals. Leisure@Work is also an empowerment business with experience in the supply and project management of large furniture contracts. These two businesses formed a joint venture, trading as ID Focus, and worked together to provide the supply, installation, after-sales service, and continuity of supply of products and services to Old Mutual. Nkonki Advisory Services Old Mutual Employee Benefits’ decision to outsource the administration of its Fund Conversion Services project resulted in tenders from four major South African accounting firms. A combination of service, experience, commitment and quality resulted in Nkonki Advisory Services entering into a 26-month contract with Old Mutual Employee Benefits. Nkonki Advisory Services is the consulting arm of accounting firm Nkonki Sizwe Ntsabula Inc which was formed in 1985 as a practice serving small and developing black businesses.

Bulawayo Railway line

N3 Tollroad

Beit Bridge to Bulawayo Railway line

INFRASTRUCTURE INVESTMENT

Given the direct correlation between increasing the country’s infrastructure stock and GDP growth, this form of investment has a positive impact on economic development, poverty alleviation and South Africa’s global competitiveness.

As a result, we take a proactive approach to investing in and developing financing instruments for infrastructural development. Old Mutual is currently the biggest private sector manager of infrastructure assets in South Africa, with R2bn in its management portfolio (including the Infrastructural, Development and Environmental Asset Infrastructure Fund (IDEAS Fund)).

Our involvement stretches from the development of bulk infrastructure, like roads, railways, electricity and telecommunications, to social infrastructure investment like hospitals and government buildings.

Old Mutual’s activity in infrastructure asset management occurs in three ways: on the life company’s balance sheet for the benefit of policyholders; through the IDEAS Fund managed by OMAM for various clients; and through the South African Infrastructure Fund, which OMAM manages jointly with Australia’s Macquarie Bank.

The focus of the IDEAS Fund is on supporting infrastructure development in South Africa. The fund is, however, also mindful of broader SADC development and has contributed to a number of regional initiatives.

The IDEAS Fund holds two types of assets: developed assets that are completed investments with a steady and sustainable earnings stream; and development assets under construction with no profit earnings stream. The portfolio values development assets at their original cost; all others are valued at their market value.

Portfolio
The following pie chart shows the structure of the IDEAS Fund as at 31 December 2002.

Most of the cash holding is expected to be used up in deals that are expected to close during the first quarter of 2003.

IDEAS Fund — Developed Assets

	Infrastructure Finance Corporation (INCA)
	New Limpopo Bridge
	Beit Bridge Bulawayo Railway
	National Housing Finance Corporation (NHFC)
	Telkom
	N3 Toll Concession (N3TC)
	Trans Africa Concession — Maputo Corridor Toll Road

IDEAS Fund — Development Assets

	Bakwena Platinum Concession Company (BPCC) — N4 West Toll Road
	The South Africa Infrastructure Fund

N3 Toll Concession — Socio-economic impact of the investment

N3 Toll Concession has committed R22 million to a programme that includes public participation and liaison, training, and promoting the economic and social development of previously disadvantaged enterprises (PDEs).

Zimele Investments Enterprises has been formed to focus on PDE development and job creation. Within the N3 Toll Concession, 820 people have been trained in a range of skills necessary within the engineering works.

Contracts awarded to PDEs within the project were valued at R261 million. These included construction and plant hire, design and supervision, operations, maintenance, communications, printing, legal and training. In addition, contractors have been assisted in developing the management of their businesses.

N3 toll road contracts have generated 1 439 jobs, 843 of which are carried out by people from local communities.

In terms of performance, developed assets have grown by 13.5% a year since the Fund’s inception. Over the same period, growth in the total portfolio, including development assets, was 12.6% a year. One-year performance in the period to end of December 2002 was a negative 3.4% growth for developed assets and a negative return of 0.8% for the total portfolio over the short term.

The large cash holding of the fund, following the successful disposal of the Cashbank Convertible Debenture and Cashbank Ordinary Shares, significantly influenced the short term performance of the Fund.

However, prospects for performance are positive due to the strong dealflow pipeline developed by the Fund.

Infrastructure investments managed by OMAM (SA) (Market Value)
	Rm 2002	Rm 2001
*Investment by OMLACSA and IDEAS Fund*
Eskom Promissory Notes	433	400
Beit Bridge to Bulawayo Railway line	70	89
Infrastructure Finance Corporation	91	84
MSI — Pan African cellular operator	69	83
Cashbank Holdings	0	57
N4 toll road	59	57
N3 toll road	73	45
New Limpopo Bridge	29	29
N4 West toll road	14	14
Lesotho Highlands Bond	6	5
Telkom Bond	5	5
Eskom Bond	5	5
Other Bonds	105	61
Cash	191	86
Total investment by OMLACSA and IDEAS Fund	1 151	1 002
SA Infrastructure Fund (total commitments)*	800	800
Total amount managed by OMAM (SA)	1 951	1 802
*Of this amount 10% is held by OMLACSA

*IDEAS Fund investment performance*
	Year to end of December 2001	Year to end of December 2002
Developed assets	14.0%	(3.4%)
Total portfolio	20.8%	0.8%

	BEE-RELATED PRODUCT DEVELOPMENT AND SERVICE PROVISION Access to financial services One of the challenges facing the financial services sector in South Africa is that of the accessibility of financial services to previously disadvantaged South Africans, particularly those in the low-income market. This issue of access is one that the life assurance industry has gone some way in addressing. Life assurance products are already accessible at premium levels that are substantially lower than in most other countries where similar products are offered. Old Mutual’s Group Schemes business has for many years been addressing this challenge. Group Schemes uses an education-based approach to supply risk and savings products, mainly to individual members of affinity groups. Ongoing challenges for the industry, and for Old Mutual, include working to reduce lapses and surrenders, ensuring that products are flexible, working with policyholders to reduce overcommitment to products, and finding ways to ensure that policyholders who are in distress are accommodated in an appropriate manner. Old Mutual is also committed to growing its black sales force. Currently over 50% of the company’s sales force is black. BEE financing Another challenge facing the financial services sector is the role it will increasingly be playing in relation to the financing of BEE in South Africa. Old Mutual believes that it can make a substantial contribution in this regard — through using our distribution muscle to gather retail and institutional funds in suitably designed vehicles that are appropriately invested to deliver both BEE economic ownership and suitable control opportunities. Such vehicles can also be designed to facilitate investment in infrastructural development. We believe that these can and should create attractive business opportunities in their own right. To date, the IDEAS Fund reported on elsewhere is one example. Further innovation by Old Mutual in this area of BEE-related product development will be covered in our next report. FINANCIAL EDUCATION AND ADVICE The objectives behind our financial education initiatives are to assist in creating a savings culture, and to equip current and potential policyholders and clients to make informed personal financial decisions. During 2002, Old Mutual spent R9 million on radio talk shows, sponsored articles in the press and magazines, Money Management Handbooks and financial workshops at worksites. These impacted across all income groups. We have found face-to-face contact most effective and have received good feedback from numerous financial management workshops and seminars. In the private sector these have reached approximately 40 000 people, while a total of 280 members of parliament benefited from workshops in January and August last year. However, to reach a wider audience, we again presented our You and Your Money radio talk shows. Old Mutual and Peoples Bank representatives from across the country were trained to speak to audiences on money matters. Presentations were made on nine African language and five community radio stations reaching a combined listenership of over 4.6 million people. Our “Six of the Best” series of booklets, produced in partnership with Peoples Bank, explain the basics of money management. Over 20 000 have been distributed by Old Mutual and Peoples Bank, and the booklets were serialised over a period of 16 weeks in the Sowetan newspaper, which boasts a daily readership of 1.8 million. Beyond these initiatives, financial education is integrated into core business activities in the form of daily customer advice and the education component entrenched in Group Schemes’ advice-based selling. In addition to these, customers benefit from education from the sales and service processes offered through a countrywide branch network and call centres. Old Mutual Employee Benefits conducts training for the trustees of retirement funds. Legislative complexities and heightened trustee responsibilities have created the need for a more structured approach to trustee training. During 2002 training, directed especially at newly elected and appointed trustees, was undertaken for 24 funds and approximately 250 trustees.

			The National African Federated Chamber of Commerce (Nafcoc), which represents black-owned businesses, recently signed a co-operation agreement with Old Mutual Personal Financial Advice (OMPFA). Old Mutual will provide advice to Nafcoc’s approximately 220 000 members on both personal financial matters and business assurance. Nafcoc and OMPFA will also jointly arrange business seminars for SMEs (Small to Medium Enterprises), present training sessions to SMEs, promote their respective services on the Internet, and publish joint promotional articles in magazines. In addition, OMPFA will present a personal financial planning module at Nafcoc training sessions. “Nafcoc is very excited by the strategic agreement we’ve signed with OMPFA,” says Sipho Mseleku (chief executive, Nafcoc). “Most of our black businessmen and women already deal with Old Mutual, we are just formalising that relationship. “We feel that our members — who are small, medium and micro-business owners, sole proprietors, partnerships, and corporates — will benefit greatly from an alliance with the largest, most progressive financial institution in the country.”

	During 2002, 280 members of parliament participated in financial education workshops run by Old Mutual.

	HIV/AIDS AND OUR BUSINESS ACTIVITIES Business impact Old Mutual’s assessment of the business impact of HIV/AIDS is on-going, focusing on staff and customers, as well as the broader financial and economic impacts on society of HIV/AIDS. This understanding is essential if we are to ensure that our strategies, policies and procedures meet the needs of policyholders, shareholders and staff. Our business impact research has three facets. Internal impact Firstly, we analyse the implications of the HIV/AIDS pandemic on the internal workings of the company. The focus here is predominantly to assess the direct and indirect staff costs as a result of HIV/AIDS. We have used the results of an anonymous seroprevalence assessment conducted in 2002 (see page 46) to model the current and expected future number and profile of staff infected with HIV/AIDS. We are in the process of using this model to estimate the resulting impacts on: costs of death and disability; medical aid costs; staff productivity, sick and compassionate leave; and staff turnover, recruitment and training and development. In future years we will continue to monitor HIV/AIDS prevelance levels against expectations and adjust our models and strategies as necessary. Customer impact The second aspect of business impact research focuses on Old Mutual’s customers and target markets. We are considering the impacts of the epidemic on the absolute size and spending power of each segment of our customer base. The results of these assessments will be incorporated into strategy formulation for the business units. In calculating the value of its liabilities, Old Mutual makes full provision for the effect that HIV/AIDS is expected to have on the number of claims that will be paid in the future. This provision allows for the expected deterioration in mortality (and morbidity) experience due to HIV/AIDS over the outstanding term of the in-force business. It takes account of the increasing proportion of AIDS-related deaths (and illnesses) that are expected to occur over time. To date, the actual incidence of AIDS-related deaths and sickness has been fully covered by our provision. Broader economic impact The third facet of business impact is an assessment of the broader economic impact of the epidemic. We review all work published on this subject in order to assess the possible impact of HIV/AIDS on economic variables including growth, interest rates, inflation rates and government spending. These expected economic impacts are factored into our longer term business planning process. We are also researching the possible impacts on investment returns at the asset class, sector and stock level. In making investment decisions on policyholder and shareholder assets, OMAM attempts to factor in the impact of HIV/AIDS on each specific investment.

	Artwork created by children of Old Mutual employees for World AIDS Day. The artwork was created at an HIV/AIDS education workshop offered by Old Mutual during school holidays.		Products and financial advice Despite being the first company to offer a comprehensive financial advice service (Omucare) for people with a shortened life expectancy, including those who are HIV positive, product development remains a challenge and we continue to drive the development of suitable and affordable products. While the company differentiates between different life risks to price its products, we do not discriminate unfairly on the basis of HIV status. New product development is being driven at both a company and industry level. This includes co-operation at an industry level in investigating the merits of providing compulsory mortgage insurance products for customers, irrespective of their HIV status. Old Mutual currently provides a life cover product for HIV-positive customers and also places strong emphasis on consumer education. We have selected intermediaries who are empowered to provide appropriate advice to customers infected or affected by HIV/AIDS. During the year under review, Old Mutual began moving away from using exclusion clauses on our new product ranges, and some life assurance products — albeit with limited cover — do not require HIV testing. Another offering is a specific Disease Management Programme provided by Old Mutual Healthcare. This supports people living with HIV/AIDS. Professionally developed and managed, the programme focuses on early treatment, close monitoring and appropriate drug regimes. These are all key factors in effective management of the disease and in helping members enjoy healthier, more productive lives.