Chief Executive's Statement
We have established a momentum in our business that has the potential to take us much further, as we pursue our ambition to build a world class financial services group
UK
> The UK and RoW adjusted operating profit1 grew to
£42 million in 2004.
> Our UK asset management business, OMAM (UK), and
leading-edge funds supermarket, Selestia, are now well
established.
> OMAM (UK) had £3.4 billion of assets under management
at the end of 2004 and is well positioned for growth.
> Selestia was on track in terms of sales, with inflows of
£423 million during 2004.
USA
> Our US life business produced over half our life assurance sales
and hit new highs. New premiums reached our target of
$4 billion with a margin of 23% of APE.
> US asset management produced excellent investment
performance, with 72% of assets outperforming their customer
benchmarks on a three-year basis.
> Positive equity markets boosted assets under management
by 20% to $185 billion.
> Strong net cash flows in the USA resulted in total funds under
management rising by 12% to £140 billion.
SA
> We had another very profitable year at our OMSA business and
the return on equity, at 24%, continued to be at the high end
of our target range. Total funds under management at OMSA
increased by 15% to R312 billion.
> Gross sales of unit trusts were up by 52%. Our direct sales
force grew and produced an increasing volume of business.
> Nedcor achieved the milestones promised at the time of
its rights issue. Tier 1 solvency exceeded the 7.5% goal.
> Mutual & Federal had an excellent year, with an outstanding
7.8% underwriting ratio and a return on equity of 24%.
1Excluding other shareholders' expenses and debt service costs.
GROUP RESULTS
2004 has seen us make significant progress. Adjusted operating earnings
per share rose by 53% in Sterling and 46% in Rand, with each major
business making a significant contribution. Our South African life business
produced its usual strong profit contribution with return on capital of
24%. Nedcor made good progress in its recovery and a welcome return
to profitability, while Mutual & Federal performed strongly as the short
term insurance cycle reached its peak. Our US businesses increased
their combined adjusted operating profit by 25% to $337 million.
Overall, our adjusted embedded value per share rose by 33% to 139.1p and by 21% to R15.08. Good earnings, the recovery in Nedcor's share price and rising equity markets all contributed. The operating return on embedded value was 19.4% and return on equity for our business rose from 14.4% to 19.1%, reflecting the progress in the business and tight capital management.
BUSINESS PERFORMANCE AND DEVELOPMENT
Our US life business now accounts for roughly half of our life new
business. Sales were up 29% on an Annual Premium Equivalent (APE)
basis to $501 million and, as a result, assets under management in
this business grew from $13.3 billion to $17.3 billion. Margins remained
at historically high levels under helpful interest rate conditions. We
continued to innovate and adapt our product range to changing
customer needs, particularly in the equity index annuity and mortgage
term insurance markets. In order to bolster our ratings in support of this
growth, we added a further $200 million of capital in December, making
a total of $300 million for the year. We successfully finalised the transfer
of our outsourced back-office functions in order to reduce costs and
improve service to customers and agents. We expect our US life
business to start paying dividends in 2007.
South African life sales fell by 10%, impacted by disappointing Employee Benefit sales, and we did not recover as well as we hoped in the broker market. More encouragingly, our Personal Financial Advisors (PFA) sales force grew by 14% to over 2,600, individual single premium sales were up 16% and unit trust sales were up 52% to R5.0 billion. Group Schemes sales were up by 10%, and our overall South African life margins remained unchanged at 25%.
Investment performance at Old Mutual Asset Managers (OMAM) South Africa was good - we came top in the Alexander Forbes Global Manager Watch (Large) Survey and 50% of our unit trusts performed in the top quartile of their comparator groups. Our new investment product, Max Investments, which brings the best of the unit trust and life assurance worlds to the customer, was the first product of its type to be launched in the South African market in November. Total funds under management at Old Mutual South Africa (OMSA) increased by 15% to R312 billion.
Nedcor achieved the milestones promised at the time of its rights issue. Tier 1 solvency exceeded the 7.5% goal and new governance is working effectively to control risks. The new management team is in place, with a clearly defined strategy. Profits met our targets for the year and, although growth was subdued overall, there were some notable successes - bancassurance sales rose 57% for example. Our objective remains a 20% return on equity at Nedcor by 2007.
Mutual & Federal had an excellent year, producing an outstanding 7.8% underwriting ratio and a return on equity of 24%. Its reputation for quality service was maintained and it won the three most prestigious customer service awards in the general insurance industry.
We have been working hard to complete the Black Economic Empowerment (BEE) ownership plans that are so important for the growth of all our South African businesses, and expect to be able to make a firm announcement on our detailed plans in this area in the near future.
Our US asset management business continued to produce excellent investment performance, with 72% of assets outperforming their customer benchmarks on a three-year basis. The developing strength of our distribution effort, combined with underlying investment performance, delivered $12.3 billion in net client cash flow which, together with positive equity markets, boosted assets under management by 20% to $185 billion. Almost two-thirds of Group assets under management are now for the account of US clients.
Our UK start-up businesses produced positive results. Selestia, in only its third year of operation, had sales of £423 million, and continued to win awards for its South African built systems and service to independent financial advisors. OMAM (UK) again won accolades for its investment performance, and attracted high margin hedge fund investors to replace unit trust funds withdrawn by Gerrard clients.
Our fledgling business in India is making steady progress and we now have over 40 branches. We have also established a representative office in Beijing to facilitate a Chinese life joint venture in due course. Mike Levett's retirement this year is in many ways the end of an era for the Group. He has served Old Mutual with distinction for over 46 years and has overseen the transformation of the business into its current powerful form. Along with all my colleagues, I thank him for his great contribution to Old Mutual and wish him a well-earned, happy retirement.
OUTLOOK
Market conditions in our industry are favourable at present, and the
South African economy is strong. The momentum we have built up
is expected to continue into 2005, although we will spend further
amounts on the growth of our US asset management business and
SA life distribution systems. We expect Nedcor to make steady progress
towards its 2007 goal for return on equity. Old Mutual has shown that
it is well able to prosper as an international financial services company,
and we look forward to the next phase of our journey with confidence.
Chief Executive
28 February 2005
Outlook:
Strategy
- Our strategy has not changed. We are using
our high quality and powerful South African
base to create an international financial
services company. More than half our life
sales and nearly three-quarters of our
asset management clients are now in the
USA and the UK.
- Our core industry is the management of
money. We provide high quality investment
skills to build and protect client assets.
- We are focused on the specific needs of our client base in whichever market we operate. We are built for organic growth as well as being able to take on strategic opportunities as they arise. We aim to build on our skills and potential in each of our markets.
Priorities
- In the UK our asset management businesses
and leading-edge fund supermarket are now
well established - exploitation of these skills
is our top organic priority. In India, we have
over 40 branches and in China we have a
representative office - fledgling businesses
under development for the long term.
- In the USA we are committed to growing
our life business at a level that will produce
a dividend in 2007. In asset management,
the building of our load fund platform is well
underway and a top organic priority. Adding
new affiliates with new investment styles to
take advantage of changing customer needs
is at the top of our strategic agenda.
- Mutual & Federal is investing in better data management systems and claims handling arrangements to prepare for the downward pressure on rates. Nedcor has a clear five-point plan. At OMSA, our priority is attracting more customers by improving standards of investment and quality of products, as well as building our sales capability.
Value creation
- Old Mutual is in a very different position
today from three years ago. We have sold
non-core businesses and a number of asset
management companies. We have resolved
some difficult problems and established
common metrics, values and methodologies
around the Group.
- Organic growth has the potential to
increase our profitability in the USA and
ensure that the international diversity of
the Group continues to develop. Our
ambition remains to create value by
becoming a world class international
financial services company.
- Producing high returns on equity, returns on assets and returns on embedded value, and growing the base from which these are derived, are key focuses for the future.
