Group Business Review
Group Finance Director's Review
Operating earnings,
at just short of £1 billion,
have increased by 47%
in Sterling due to good
progress from all businesses,
none more so than Nedcor
where recovery is making
good progress
Group Results
2004 EPS up by 53% to 15.3p
Strong delivery across all businesses contributed to an increase of
47% in adjusted operating profit before tax to £956 million. Adjusted
operating profit after tax and minority interests increased by 54% from
2003 to £574 million in 2004, resulting in a 53% increase in adjusted
operating earnings per share to 15.3p for 2004. The basic earnings
per share is 14.1p (2003: 8.0p), representing a 76% increase.
Operating profit on ordinary activities before tax increased to £908 million compared to a profit of £475 million in 2003.
Funds under management and fund flows
During 2004 funds under management increased by 12% from £125
billion to £140 billion. Our international diversity delivered strong net
cash flows (increased from £1.8 billion in 2003 to £5.3 billion in 2004)
as strong performances by our US and UK businesses more than offset
weak flows in South Africa.
Achieved profits
The Group’s adjusted operating profit on an achieved profits basis of
£1,111 million increased by 57% from £707 million in 2003. Adjusted
operating profit for life assurance of £749 million was up by 25% from
£600 million in 2003, driven by increased new business in the USA
and improved experience variances in South Africa. Adjusted operating
earnings per share on an achieved profits basis rose from 10.8p to 19.1p.
Achieved profits equity shareholders’ funds (adjusted for own shares
held in policyholders’ funds and to bring listed Group subsidiaries to
market value) of £5,359 million at 31 December 2004 increased by
33% from £4,015 million at 31 December 2003. This benefited from
an improvement in the Rand exchange rate, an increase in the share
prices of Nedcor and Mutual & Federal and the impact of the Nedcor
rights issue.
Adjusted embedded value per share (before dividends) up by 37%
Adjusted embedded value (EV) per share at 31 December 2004 was
139.1p after dividends (143.8p before dividends) representing a growth
in EV per share before dividends of 37% over 2003. EV per share has
benefited from the strong result for the year including the recovery at
Nedcor, increased Group net cash flows, higher market levels and a
stronger Rand offset by a weaker US Dollar.
Capital
The Group’s gearing level remains favourable, with senior debt gearing
at 31 December 2004 of 11.0% (14.7% at 31 December 2003)
and total gearing, including hybrid capital, of 16.5% (21.7% at
31 December 2003). Hybrid capital excludes hybrid debt from banking
activities and includes the $750 million of Guaranteed Cumulative
Perpetual Preferred Securities issued during 2003 that are reported
as part of non-equity minority interests in the financial statements.
Senior debt gearing is defined as senior debt over senior debt plus
adjusted embedded value on an achieved profits basis. Senior debt
excludes debt from banking activities and is net of cash and short term
investments which are immediately available to repay debt. Total gearing
is similarly based, but includes hybrid capital instruments within debt.
Strong support from Old Mutual ensured that the Nedcor rights issue completed in May 2004 was a success, raising R5.2 billion. That issue, together with repatriation of surplus foreign capital and other management actions, strengthened Nedcor’s capital base resulting in a capital adequacy ratio at 31 December 2004 of 12.1% (10.1% at 31 December 2003).
The Group’s shareholding in Mutual & Federal increased to 88% early in 2004 as a result of the offer to acquire the outstanding minority interests, which resulted in acceptances representing 37% of Mutual & Federal’s issued share capital. Following that transaction, Mutual & Federal paid a special dividend of R860 million, reducing its solvency margin, being the ratio of net assets to net premiums, to 53% at 31 December 2004 (61% at 31 December 2003). This remains comfortably above the minimum required to support current operations and to facilitate the future growth of the business.
The solvency ratios of the Group’s major life businesses at 31 December 2004 remain well above the minimum statutory requirements, with South Africa’s excess assets (after regulatory asset limitations) equivalent to 2.6 times the statutory minimum, and the US business at 299% of the risk-based capital requirement.
At 31 December 2004, the Group had in issue US$636 million 3.625% Convertible Bonds maturing on 2 May 2005, which are guaranteed by and convertible into ordinary shares in the Company at a conversion price of 190p per share and an exchange rate of one US Dollar to 69.52p Sterling.
During 2004, Old Mutual plc entered into a new £1.1 billion five-year multi-currency Revolving Credit Facility, which matures during May 2009, and cancelled its existing £900 million, US$600 million and US$60 million Revolving Credit Facilities. The new facility was undrawn at 31 December 2004.
Old Mutual is now twelve months into a Group-wide Economic Capital (EC) Programme. Once completed, this will significantly improve the Group’s ability to measure risk and business performance. It will also improve transparency and communication with regulators, ratings agencies and investors. Early results are highly encouraging, showing the Group’s available financial resources to be well above the EC required for our target rating.
Since 1 January 2005 the Group has met the minimum capital resources requirement under the Financial Groups Directive which applies to UK-based financial conglomerates.
Taxation
The Group’s effective tax rate (based on the tax charge as a proportion
of adjusted operating profit) of 25% decreased from 34% in 2003.
This is primarily as a result of the much improved profitability at Nedcor.
In 2003 the Group’s effective rate was higher due to Nedcor’s non-tax
deductible expenses, which were relatively fixed amounts on a very low
profit base.
International Financial Reporting Standards (IFRS)
Implementation of IFRS across the Group is currently nearing completion.
We are planning to publish a restatement of our 2004 year-end income
statement and balance sheet under IFRS in May 2005. The aspects of
IFRS that will most impact the Group, in common with our peers, are
those that deal with financial instruments and insurance and investment
contracts. Currently there are a few remaining points of clarity regarding
the final version of certain elements of IFRS and interpretation of a
number of principles. We anticipate that these points will be resolved
before publication of our 2004 numbers restated under IFRS in May.
European Embedded Value (EEV)
The Group has continued to publish supplementary information on an
achieved profits basis for the 2004 financial year. We support the new
EEV proposals that have been developed by the European CFO Forum
with the purpose of increasing comparability and uniformity in EV
reporting. We are currently assessing the impact of those new proposals
and for the 2005 interim announcement we will discontinue publishing
information on an achieved profits basis and commence reporting in
line with EEV. We continue to be committed to monitoring our business
on an EV basis as we see this as a key indicator of long-term value.
Dividend
The directors of Old Mutual plc are recommending a final dividend for
the year ended 31 December 2004 of 3.5p per share (making a total of
5.25p for the year, an increase of 9.4% over 2003). The indicative Rand
equivalent of this final dividend is 38.0c*** (making a total of 58.5c***
for the year, an increase of 4.5%).
The record date for this dividend payment is the close of business on Friday, 22 April 2005 for all the Exchanges where the Company’s shares are listed. The last day to trade cum-dividend on the JSE Securities Exchange South Africa (JSE), the Namibian and the Malawi Exchanges will be Friday, 15 April 2005, on the Zimbabwe Stock Exchange, Thursday, 14 April 2005, and on the London Stock Exchange, Tuesday, 19 April 2005. The shares will trade ex-dividend from the opening of business on Monday, 18 April 2005 on the JSE, the Namibian and the Malawi Exchanges, from the opening of business on Friday, 15 April 2005 on the Zimbabwe Stock Exchange, and from the opening of business on Wednesday, 20 April 2005 on the London Stock Exchange.
Shareholders on the South African, Zimbabwe and Malawi branch registers and the Namibian section of the principal register will be paid the local currency equivalent of the dividend under the dividend access trust arrangements established in each country. Local currency equivalents of the dividend will be determined by the Company using exchange rates prevailing at close of business on Thursday, 31 March 2005 (Wednesday, 30 March 2005 in the case of Zimbabwe) and will be announced by the Company on Friday, 1 April 2005.
Share certificates may not be dematerialised or rematerialised on the South African branch register between Monday, 18 April and Friday, 22 April 2005, both dates inclusive, and transfers between the registers may not take place during that period.
The final dividend is subject to approval at the Annual General Meeting of Old Mutual plc, which is to be held in London on Wednesday, 11 May 2005. Subject to being so approved, the final dividend will be paid on Tuesday, 31 May 2005.
