• Home
• Group Chief Executive's statement

Introduction

Our operating results for 2010 are significantly ahead of the prior year results as reported with profits up in each of our businesses. This excellent performance was largely due to strong growth in new business sales, our continued focus on cost control, improved persistency and favourable exchange rates.

In addition to strong financial performance, we also focused on delivering our strategy and have made good progress in 2010. We have agreed to sell US Life, a business that was outside our Group risk and return profile, for $350 million, resulting in an IFRS charge of £713 million. We are awaiting regulatory approval, and expect the transaction to close at or around the end of the first quarter of 2011. The next two years will see a continued single-minded focus to meet our strategic objectives.

The Group is in sound financial shape. At 31 December 2010 our FGD surplus was £2.1 billion and we had total liquidity headroom of £1.4 billion.

Strategy Update

In 2010, we set out a new strategy for the Group. Our strategy is to build a long-term savings, protection and investment group by leveraging the strength of our people and capabilities in South Africa and around the world. Through the delivery of this strategy, we will drive our businesses to enhance value for both our customers and shareholders, increasing our international cash earnings and overall return on equity. During the year, we entered into exclusive negotiations to sell our shareholding in Nedbank, but these discussions did not conclude with a formal offer being made. In 2011, we will continue to work with Nedbank to build shareholder value.

We are now one year into a three-year process to deliver this strategy and are making significant operational progress. We are rationalising our activities over time, reducing the complexity of the Group and improving our structure as we manage our business with a disciplined approach to risk management, governance and allocation of capital. We have taken steps to simplify our Group by selling the US Life business, subject to regulatory clearance, and will continue to maintain our strict criteria for keeping businesses within the Group: they must meet our capital and risk targets; be capable of achieving a 15% return on equity; add value to other parts of the Group; and be capable of creating future value for shareholders.

We have previously said that we will explore the possibility of listing a minority of the US Asset Management business and this remains our intention. The timing of the IPO will be dependent on margin progression, investment performance and growth.

We have set challenging group-wide performance targets for the end of 2012: reducing costs by £100 million; improving return on equity for our Long-Term Savings (LTS) business to between 16% - 18%; and reducing debt by £1.5 billion through proceeds of rationalisation and retained earnings. We have already delivered £59 million of run-rate savings and are committed to deliver our debt reduction target. Return on equity for the LTS business was 18.5% at the year-end, as we benefited from positive, non-recurring items in both the Nordic and Wealth Management businesses. Plans are in place to ensure this performance is sustained within the target range.

We have implemented a new, more effective, governance and control system giving our businesses local autonomy but ensuring that they work within Group structures and disciplines, particularly on risk and product underwriting standards. This new approach has been implemented effectively and has resulted in the level of one-off operational losses reducing significantly across the Group in 2010. We continue to manage risk effectively and have tightly managed the US Life bond portfolio and our business in Bermuda.

We continue to assemble a strong management team, and recently appointed Peter Bain as CEO of US Asset Management, and Peter Todd as Managing Director of Mutual & Federal. These are key roles for the Group as we look to drive the growth of these businesses.

We are clear on our strategy and are committed to delivering it.

Long-Term Savings (LTS)

Our LTS division delivered very strong results for the year with operating profits up 26% on a constant currency basis. This was driven by strong profit performance by all of the businesses within LTS. Life sales for the year were up 7% and unit trust sales were up 28% on a constant currency basis. Funds under management (FUM) increased and margins improved.

We continued to strengthen the LTS management team and we appointed new CEOs to the Nordic business and the investment business in South Africa (OMIGSA) as well as new heads of Product and IT, roles which are critical to leveraging our capability and delivering the strategy.

We made significant strides in implementing the LTS strategy in 2010. The business delivered run-rate savings of £44 million, against the targeted cost reduction of £75 million. This was primarily driven by Wealth Management which removed £35 million of costs in 2010 against its stated target of £45 million by 2012. We are seeking to leverage our IT and administration capabilities in South Africa to drive economies of scale and in December we opened a new office in Cape Town to provide customer service processing and IT support for Retail Europe's customers in Germany, Poland and Austria. Launching new and innovative products through easily accessible distribution channels is key to our aim of becoming our customers' most trusted partner. Whilst this work is still at an early stage, we introduced a number of new initiatives in 2010. Old Mutual South Africa (OMSA) and Mutual & Federal jointly developed a new short-term insurance product iWYZE for the retail mass market in South Africa. This product is distributed through traditional mass market models but also through digital channels and in the nine months since it launched, has already attracted nearly 5,000 customers. To date, iWYZE has also created approximately 150 new jobs in South Africa, primarily for young people.

Through our joint venture in India, Kotak Mahindra Old Mutual Life Insurance, we launched an online portal allowing customers to buy term insurance at a cheaper rate than through normal distribution channels. In Mexico, a unit-linked product was redesigned in conjunction with our team in South Africa and has since proved a key driver of our increased sales in the country. We also introduced a new Mass Retail distribution team into Mexico in December.

LTS: Emerging Markets

In South Africa, our business delivered a strong performance with life sales up 7% and unit trust sales up 17%. There was a noticeable improvement in sales in the second half as interest rates were cut and as the economic environment in South Africa stabilised. We saw good sales growth in both the Retail Affluent and Mass Foundation segments, with a particular focus on savings products. The latest economic data is encouraging for the performance of the business in 2011.

We launched the Futuregrowth Agri-Fund focusing on responsible equity investments in agricultural land, agri-businesses and farming infrastructure. OMIGSA attracted more than R8 billion into social infrastructure investment. Responsible funds are an important part of our commitment to helping build South African infrastructure and increase jobs for all parts of society.

Mexico saw growth of 36% due to the introduction of a regular premium savings product in the first half of the year. In China, our joint venture with Guodian had a strong year with APE sales up 77% to CNY163 million in 2010, following a new channel diversification strategy.

We have set a target for our profits from our rest of African insurance operations to be the equivalent of 10% of our South African profits by 2012, and 15% by 2015. To do this, we will leverage our experience and knowledge of the mass market sector in South Africa to grow our distribution channels through tied-agents and bancassurance and drive product development. We will also look to exploit new channels as they are established. For example, in Kenya we have seen initial success in distribution through mobile phones.

We see other opportunities for growth in Africa, but remain mindful of our strict criteria for investment and any expansion must be within appropriate risk-adjusted returns.

We have a solid foundation in South Africa from which we can drive growth in other emerging markets, and we are adapting our senior management structures, roles and responsibilities to achieve this. Our priorities for 2011 include growing our sales force; designing and adapting products for a wide range of customers; making it easier for our customers to access financial services and promoting a savings culture in the markets in which we operate. We have confidence in the underlying business and are well-positioned to exploit business opportunities as the economies of the Emerging Markets grow.

LTS: Nordic

The Nordic economies experienced positive GDP growth in 2010 and our Nordic business also had a good year, delivering a 66% uplift in profit. Life sales were down 21% on the prior year, in line with management expectations, following the closure of an unprofitable business line in 2009. Our Danish business grew strongly. FUM was up 14% on the prior year, mainly due to improved equity markets, which also contributed to strong growth in mutual funds, up 37%.

During 2010, the Nordic business focused on building distribution and product offerings, increasing efficiency and optimising its structures and risk frameworks. The management team was strengthened and a new CEO appointed.

2011 is a critical year for Nordic as it focuses on delivering its cost savings target of £10 million per annum. The cost of delivering these savings is likely to have a negative impact on the profitability of the business in the coming year. The management will continue to focus on driving sales, increasing margins and delivering an improved distribution and product offering for the future development of the businesses in a rapidly changing marketplace. The economic outlook for the year is positive across all the geographies and we expect the Nordic savings markets to grow, albeit in a more competitive and fragmented market environment.

LTS: Retail Europe

Retail Europe delivered a very positive performance in 2010, in the context of GDP growth in all its markets. Equity markets were up, with the DAX showing a 16% gain for the year. Profits for Retail Europe were up 140% on the prior year, with APE sales up 7% and mutual funds flat. FUM was up 23%.

Retail Europe continued to focus on building an integrated organisation and reducing operating costs. As part of the focus on costs, IT and client administration services for Retail Europe are being transferred to South Africa. One-off costs associated with the transfer will impact profitability in 2011, before the benefits start to come through in 2012.

The uplift in sales was driven by new product launches in Germany, Poland and Switzerland. We also improved our marketing and sales drives to customers and built strong, more fruitful relationships with our distributors in 2010 and these proved to be significant drivers of the business's improved profits.

Macro-economic factors will continue to influence the business in 2011. Positive equity and bond market performances will raise consumer confidence although we expect there to be continued concern over unemployment levels. We have a programme of product innovation for the markets in Germany and Poland which should underpin growth in these attractive markets.

LTS: Wealth Management

This has been a significant year for Wealth Management. APE sales were up 19%, and it delivered an 86% growth in profit, driven by delivery of £35 million of run-rate savings, against its 2012 target of £45 million.

Investor confidence was boosted by the return to growth in equity markets which led to increased funds under management in all of our businesses. In the UK, we saw a continuation of the trend of IFAs converting to platform sales, for both wrapped and unwrapped sales. This was particularly noticeable in the first half as IFAs moved large blocks of business on to our platform ahead of the tax year-end. Skandia's market share in the UK continued to grow, and at the end of the third quarter we had captured 7.4% of all industry channels, versus 6.4% in the fourth quarter in 2009. Skandia Investment Group's (SIG) Spectrum risk-targeted funds had a successful year with funds under management at more than £750 million with the funds now available on all the major IFA platforms in the UK. SIG also provided the technical expertise to allow the Nordic business to launch its own risk-targeted funds, based on the Spectrum concept, into Sweden.

During 2011, Wealth Management will continue to focus on cost reduction, improving efficiency and meeting its 2012 targets, increasing risk controls and improving the functionality of the platform and the richness of the product offering. We are seeing an increasing demand from customers for products and services that are focused on their needs, are easy to understand and do not rely on heavy up-front commission to drive sales and with the forthcoming Retail Distribution Review, governments having to roll-back state retirement provision and the corresponding need for personal retirement savings, our Wealth Management business is well placed to meet customer demand. We plan for the platform to add to the profits of the Wealth Management business in 2012.

Nedbank

Household finances improved in South Africa as debt started to reduce and interest rates eased to the lowest levels in 36 years. The recovery in the credit cycle has proved to be more modest compared to previous cycles. The ratio of household debt to disposable income reduced marginally and at the same time debt service levels decreased to 7.5% and are now at a level that is more conducive to improving economic growth in the consumer sector. In the corporate sector, excess capacity and uncertainty over the sustainability of the local and global recovery limited spending.

Nedbank showed solid earnings growth in a challenging economic environment. Headline earnings increased by 15% to R4,900 million, and non-interest revenue increased 11% to R13.2 billion. Net interest income increased 2% to R16.6 billion.

Nedbank's credit loss ratio improved to 1.36% for 2010, its liquidity position remains sound and its capital ratios remain above target levels. The Tier 1 capital adequacy ratio of 11.7% marginally improved from that at 31 December 2009, and the total capital adequacy ratio ended the period at 15.0%.

Nedbank is a strongly performing business and a significant contributor to the Group. We have a clear strategy for growth with the key thrusts being the repositioning of Nedbank retail, growing non-interest revenue, focusing on areas that yield higher economic profit and increased focus on the rest of Africa.

Mutual & Federal

2010 was a good year for Mutual & Federal with profits up 27% and a strong underwriting performance following the cancellation of unprofitable business, a relatively benign claims environment and a greater focus on claims cost control.

During 2010, we introduced the step-change programme at M&F. Peter Todd has been appointed as Managing Director of M&F and will drive the delivery of the step-change programme over the next three years. The objectives of the programme are to embed profitable and sound underwriting; to develop better products; to be more customer-focused; grow our customer base by offering the right distribution models; and improve efficiency. As part of the step-change programme, we aim to improve profitability through growth in the direct and broker channels and through the reduction of claims costs and expenses. During the year, we entered the direct insurance channel via iWYZE, the joint initiative with OMSA. This is the first step in extracting greater value from M&F's position within the Old Mutual Group following the buy-out of minorities.

With its strong balance sheet and increased focus on alternative distribution channels, we are confident that we can grow revenue while improving our expense ratios.

US Asset Management (USAM)

USAM profits improved 4% over 2009 due primarily to higher average FUM. We saw net inflows into fixed income products, which were offset by outflows from equity, alternative and stable value products leading to an overall negative NCCF of $18.0 billion. During the recent market dislocation, a number of our affiliates underperformed in certain of their strategies, but we are confident that they will deliver outperformance in time. Echo Point began operating as a USAM affiliate in October launching with $1.7 billion funds under management in international growth equities.

Non-US clients represented more than a quarter of total funds under management and a key objective for us is to grow and diversify this base. We have expanded our global distribution through the hiring of new staff and we are expanding our distribution presence in the Middle East, resulting in US Asset Management now operating out of 13 countries. Growing the international element for US Asset Management is a priority for the business and we continue to work toward improving our margin with a target of 25-30% by the end of 2012 and improving investment performance.

Peter Bain has been appointed CEO of US Asset Management. Peter has a proven track record in growing a boutique asset management company and his appointment is a key milestone for the US Asset Management business as we look to grow the business.

We believe in our boutique model, with its 18 affiliates and 160 investment strategies. As investor confidence improves, and with our extensive diversified product portfolio including non-US equity exposure, we believe we have the opportunity to capture a share of these flows.

We continue to explore the possibility of a partial IPO by the end of 2012.

Dividend

The Board has considered the position in respect of a final dividend for year ended 31 December 2010, and is recommending a final dividend of 2.9p per share (or its equivalent in other currencies). This makes a total dividend payment for the year of 4.0p compared to 1.5p in the previous year. A scrip alternative will be offered to eligible shareholders.

South African Empowerment

In South Africa in 2010, OMSA achieved and Nedbank maintained a Level 2 rating status and Mutual & Federal a Level 3 rating status as BBBEE contributors.

Outlook

We have made some significant operational progress and we expect 2011 to be a year of further delivery. We are committed to our three-year strategy and meeting our stated operational targets.

Julian Roberts
Group Chief Executive
8 March 2011