Group Finance Director's Review

Group Results

* Restated, as now reporting on an MCEV basis
** Restated net of Institutional sales in Australia
*** Return on equity is calculated using adjusted operating profit after tax and minority interests on an IFRS basis with allowance for accrued coupon payments on the Group's hybrid capital. The average shareholders' equity used in the calculation excludes minorities and hybrid capital.

Funds under management held up well during year of market volatility

During 2008, Old Mutual delivered robust investment performance in challenging markets. Although net client cash flows were negative overall, we produced positive flows of £3.2 billion in our Skandia businesses and £0.1 billion in our combined South Africa businesses. However, these were offset by outflows in our US and Asia Pacific businesses. Excluding the outflows due to a cessation of securities lending which one of our US Asset Management affiliates suspended during the year, net client cash flows were £2.4 billion for the year. The result is pleasing, considering the challenges of delivering on absolute investment performance in the extremely volatile markets in 2008. This is demonstrated through our closing funds under management, which held up well in the year overall, down 5% to £264.8 billion, in a period when markets such as the FTSE 100, the JSE Africa All Share Index and S&P 500 all fell more than 25%.

Breadth of sales product offering in diverse geographic markets

Overall life sales on an APE basis held up well, supported by our core businesses in Nordic and South Africa. We continued to see the benefits of our investment in the Nordic sales channel, where life APE sales were up 30% in local currency. South Africa life sales were up 14% in rand terms. However in the US, sales were constrained, down 23% in local currency. UK and Offshore sales were disappointing, down 19%, with single premium sales being impacted by the market conditions mainly through lower pension sales.

Southern Africa (including Rest of Africa) unit trust sales were up an impressive 46% in local currency with investors moving to lower risk money market funds, but declines in unit trust sales in all other regions more than offset these gains due to the ongoing tough market conditions.

Value of new business

The value of new business (VNB) was down 55% to £104 million but excluding US Life, at negative £66 million, was down 15% for the year on a like-for-like basis. Excellent volumes in Nordic and a strong contribution from OMSA were offset by lower volumes in the UK, ELAM and US Life. The APE profit margin was 6%. The margin was steady in the UK and South Africa compared with 2007, but down marginally in Nordic and to a greater extent in ELAM, where it fell to 6% mainly due to lower volumes and a change in product mix. The US Life margin was negative because of a reduction in the margin of variable annuities as a result of increased guarantee costs and the exclusion of capitalised corporate bond spreads in the Old Mutual MCEV methodology.

Adjusted operating earnings (IFRS basis)

Adjusted operating profit for the year held up in most regions with good contributions from our African, European and US Asset Management businesses, however profits were adversely impacted by adjustments in our US Life businesses. Credit markets remained under stress at the end of 2008. Following review of our asset portfolio we impaired a total of £414 million, of which £28 million affected the 2008 adjusted operating profit as the total impairments are amortised over five years through adjusted operating profit. We are reviewing this policy for US Life and expect to move to an "expected return" approach for impairments from 2009 onwards.

We also reviewed our deferred acquisition costs balances and accelerated amortisation by £159 million for the combined US Life businesses. Further, in our onshore business we stopped selling the single premium immediate annuities (SPIA) block of business and made a £235 million adjustment in respect of additional mortality reserves where we have increased our life expectancy assumption to over 90 years. Finally in our offshore business we incurred a charge of £68 million which reflects the inefficiency of hedge mapping. A further charge of £206 million was made below the line which reflects market volatility, in line with standard industry practice.

Rand currency depreciation substantially contributed to lower earnings, however this was partially offset by US dollar, euro and Swedish krona strengthening and in total the Group delivered adjusted operating profit before tax and minority interests 38% below 2007 and 36% below on a constant currency basis.

* Includes Bermuda Asset Management (now included in USAM)

Assuming constant exchange rates, 2007 adjusted operating EPS would have been 16.4p with the currency impact being negative 0.5p. Financing costs increased over the 2007 mainly due to foreign exchange as the sterling value of non-sterling-denominated debt payments increased. Other shareholders expenses principally comprise head office costs.

Taxation

The Group's effective adjusted operating profit (IFRS basis) tax rate decreased to 9% from 26% in the comparative period. This tax rate is anomalously low due to the unprecedented market conditions in 2008 coupled with a reduced adjusted operating profit which magnifies the rate effect of any adjustment. The reduction in the tax rate is due to a number of factors. These include releases of tax provisions as a result of the closing of issues being agreed with tax authorities, consistent levels of tax exempt dividend income now representing a greater proportion of the reduced adjusted operating profit, the effect of the different basis of taxation of life tax companies, non-taxable foreign exchange gains, reduction in tax rates and more profits being earned in lower taxed jurisdictions and the utilisation of previously unrecognised deferred tax assets. These factors were partially offset by increased secondary tax on companies charges and a decreased adjusted operating profit, non-recognition of deferred tax assets arising in US Life and adjustments in respect of prior periods.

In the longer term, it is expected that the tax rate would tend to return to the 2007 level.

Return on equity

Return on equity for the Group declined to 9.0% in 2008 from 13.2% in 2007, primarily due to losses from the US Life businesses. This contained some very satisfactory performances from our South African businesses where OMSA achieved a return on allocated capital of 27.8%, Nedbank a return on equity (excluding goodwill) of 20.1% and Mutual & Federal achieved a return on capital of 33.9%.

Shareholders equity

Throughout the year, shareholders equity remained steady with retained profits and foreign exchange gains on consolidation being offset by unrealised losses in the US Life businesses and the payment of dividends.

Old Mutual Market Consistent Embedded Value (MCEV)

The Market Consistent Embedded Value Principles (the "Principles") were published in June 2008 by the CFO Forum, a group representing the Chief Financial Officers of major European insurers, and compliance with these Principles is mandatory in 2009. These Principles provide a framework intended to improve comparability and transparency in Embedded Value reporting across Europe. Old Mutual plc has published European Embedded Value ('EEV') results since 2004. The Principles have been fully complied with for all businesses as at 31 December 2008, with the exception of the use of an adjustment of 300 basis points in the risk free rate due to current market conditions for the US Life Onshore business. This adjustment reflects a liquidity premium as at 31 December 2008, and has been determined after reviewing published and proprietary literature and data relating to corporate bond spreads with in the US Life corporated bond portfolio. The Group has replaced the European Embedded Value basis with the MCEV basis for the covered business and figures for 31 December 2007 have been restated accordingly, and comply fully with all of the Principles. The MCEV supplementary information provides details on the methodology, assumptions and results of the MCEV for the Old Mutual Group in accordance with the disclosure requirements of the Principles and includes conversion of comparative supplementary information for 2007, previously prepared on the EEV basis, to a MCEV basis.

The impact as at 31 December 2007 of moving from an EEV to a MCEV methodology is a reduction in Embedded Value of the covered business of 7.5% from £6,861 million to £6,349 million. Within the European and Southern African businesses, the aggregate allowance for risk within the EEV and MCEV approaches is broadly aligned and hence relatively minor impacts were experienced on these businesses when moving from an EEV to a MCEV approach. Most of the reduction in Embedded Value was attributable to the United States business which decreased by 57% from £1,069 million to £462 million. For this business the aggregate allowance for risk under EEV is not aligned with the requirements under the Principles and a number of factors contribute to the difference in approaches as explained in detail in the supplementary information. However, it should be noted that compared to EEV reporting, MCEV reporting merely changes the timing of recognition of profits and not the ultimate profitability that will emerge on covered business.

Adjusted Group MCEV per share 117.6p

The adjusted Group MCEV per share was 117.6p and adjusted Group MCEV was £6.2 billion at 31 December 2008 (31 December 2007: 166.3p and £9.0 billion respectively). The 48.7p decrease in adjusted Group MCEV per share was driven by the fall in equity markets and the impact of lower global interest rates and higher volatility which increased the cost of policyholder financial options and guarantees.

Return on Group MCEV

Return on Group MCEV declined to 7.8% from 13.7% at 31 December 2007. The lower adjusted operating MCEV earnings in 2008 were the net effect of higher earnings in the South African and European life businesses driven by positive operating assumption changes and the reduction in the number of shares following the share buy-back programme, offset by lower new business contributions, adverse persistency, higher financial guarantee costs, hedge losses and impairments in the United States, impairments in Nedbank and lower asset based charges in the asset management companies.

Capital position

The Group's gearing level remains within our target range, with senior debt gearing at 31 December 2008 of 4.0% (2.0% at 31 December 2007) and total gearing, including hybrid capital, of 26.7% (21.2% at 31 December 2007).

Capital requirements are set by the Board, taking into account the need to maintain desired credit ratings and to meet regulatory requirements at both the Group and local business level.

Our share buyback programme announced at the beginning of October 2007 was completed in May 2008. A total of approximately 239 million shares were repurchased through the London and Johannesburg markets at a total cost of £351 million.

The Group is in compliance with the Financial Groups Directive (FGD) capital requirements, which apply to all EU-based financial conglomerates. Our pro-forma FGD surplus was in excess of £0.7 billion at 31 December 2008. The FSA requirement is to maintain a positive surplus at all times. Sensitivities to market movements, although not linear, are that a 1% fall in South African rand against sterling is broadly equivalent to a £14 million reduction in FGD, a 1% gain in the US dollar against sterling broadly equivalent to a £4 million fall in FGD and a 1% fall in the JSE broadly equivalent to a £4 million decline in FGD. The level of defaults, impairments and realised losses in our US corporate bond portfolio also impact on the FGD surplus. We improved the pro-forma FGD sensitivity to the dollar since our Q3 Interim Management Statement as a result of hedging activities undertaken.

Unrealised losses

In our US Life onshore business, as at 31 December 2008, 97% of our investment portfolio is cash, government backed or investment grade securities of triple B and higher. Concentration risk is low as the top ten holdings account for 5.5% of the portfolio. The portfolio is well-matched since the assets have an average duration of 6.0 years against an average duration of 5.9 years for the liabilities. US Life's net unrealised losses increased over the year to £1.8 billion at 31 December 2008 reflecting the market-wide re-pricing of credit spreads and other risks which do not relate to specific factors within the US Life portfolio. The unrealised losses account for 13% of our total portfolio on an IFRS basis. We have the ability and we intend to hold these fixed income securities to maturity, which in economic terms limits the impact of the current market dislocation.

We have adopted the reclassification amendment to IAS 39 and have elected to classify around 150 securities from the "available-for-sale" category to the "loans and receivables" category as at 1 July 2008. This is on the basis that the securities in question are no longer regarded as being traded in the active market. For "available-for-sale" investments, the securities are re-valued and the unrealised losses are accounted for in shareholders' equity whereas for "loans and receivables" no revaluations are recorded.

Holding company net debt

The table below shows the net reported debt of the Old Mutual plc holding company and its sub holding companies.

Total net debt within the holding company at the end of 2008 was £2,263 million. A total of £1,138 million of operational and capital receipts were received from business units during 2008. £565 million was invested in the businesses and £353 million was used to pay the 2007 final and the 2008 interim dividend. In addition, £175 million was spent on repurchasing shares during the year. Other movements of £298 million mainly reflect a positive impact of the marking to market of our debt liabilities.

Risks and uncertainties

There are a number of potential risks and uncertainties that could have a material impact on the Group's performance and that could cause actual results to differ materially from expected and historical results.

We have included our view of these principal risks as well as the impact of current economic and business conditions in the Business Review sections of this report. The current economic conditions create uncertainty particularly over the future levels of world equity markets, defaults in corporate bond portfolios, particularly in the United States, currency fluctuations, demand for the Group's products and other economic factors. These uncertainties have been considered individually and in combination in the Group's forecasts and projections, taking account of reasonably possible changes in trading performance and economic conditions in the markets in which the Group operates. The results show that the Group should be able to operate within the level of its available credit facilities and with an adequate level of capital, both at a Group level and within each of its major regulated Group entities. To the extent that changes in trading performance and economic conditions prove to be more severe than thought reasonably possible, the Group has evaluated and concluded on feasible management actions that would be possible in such circumstances so as to ensure adequate levels of liquid and capital resources are maintained.

The Group continues to meet Group and individual entity capital requirements, and day-to-day liquidity needs through the Group's available credit facilities. The Company's primary existing revolving current facility of £1.25 billion does not mature until September 2012.

The Board of Directors has the expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the financial statements contained with this announcement.

The Listing Rules of the UK Listing Authority (LR 9.7A.1) require that preliminary unaudited statements of annual results must be agreed with the listed company's auditors prior to publication, even though an audit opinion has not yet been issued. In addition, the Listing Rules require such statements to give details of the nature of any likely modification that may be contained in the auditors' report to be included with the annual report and accounts. Old Mutual plc confirms that it has agreed this preliminary statement of annual results with KPMG Audit Plc and that the Board of Directors has not been made aware of any likely modification to the auditors' report required to be included with the annual report and accounts for the year ended 31 December 2008.

Related party transactions

There have been no related party transactions or changes in the related party transactions described in the Company's latest Annual Report during 2008 that could have a material effect on the financial position or performance of the Group.

Philip Broadley
Group Finance Director

4 March 2009