1.0 EUROPE AND LATIN AMERICA

Nick Poyntz-Wright CEO, Skandia UK
Bertil Hult CEO, Skandia Nordic
Bob Head Regional Director, Old Mutual Europe
Rafael Galdón CEO, Skandia ELAM

The Skandia group of companies, acquired by Old Mutual in 2006, has been led by Bob Head since Julian Roberts' appointment as Old Mutual Group Chief Executive in September 2008. It is divided into three business units: UK and Offshore, Nordic and Europe and Latin America (ELAM). In addition Skandia Investment Group (SIG) provides investment management services to the three Skandia businesses as well as other businesses across the Group. Skandia's heritage lies in the Swedish market, where it has operated for over 150 years. It is a strong and well-respected brand.

1.1 UK and Offshore

This business provides products that serve the needs of long-term investors in the UK and international offshore markets. With over a million customers and £35 billion of funds under management at 31 December 2008, we are a leading player in the offshore savings market and a major investment platform company in the UK.

Our main UK operations are investment-led businesses: a life and pensions operation, Skandia Life; an investment platform company, Skandia Investment Solutions; an asset manager creating multi-manager blended solutions, Skandia Investment Management Ltd; and an adviser distribution and support service company, Bankhall.

Skandia's success in the UK has been built by establishing a strong financial adviser franchise offering excellent service and a distinctive proposition. It introduced the multi-manager concept to the UK and has built a strong position in the high-growth open-architecture segment of the UK market. It has a track record and reputation for bringing innovative ideas to market.

Skandia Investment Solutions is an investment platform (often referred to as a fund supermarket). It combines the reputation and strengths of the Selestia business, owned by Old Mutual before we acquired Skandia, with Skandia's MultiFUNDS platform. This platform gives advisers and their customers access to Individual Savings Accounts (ISAs), PEPs and Collective Investment Accounts, which are provided by Skandia MultiFUNDS Limited. In addition, the platform offers an approved pension wrapper and UK and offshore life assurance bonds.

Skandia Investment Management Ltd (SIML) is our asset management company. It provides innovative multimanager funds created by Skandia Investment Group, the part of the Skandia group that specialises in investment research and the construction of multimanager funds. The SIML funds make use of the investment research capability of third-party managers by creating 'blended' solutions of third-party managers with different styles and processes. Since SIML's launch in March 2003, funds under management have grown from around £750 million (including funds held on behalf of other Group companies) to £3.2 billion. The number of funds has expanded from 10 to 48, increasing diversification and appealing to a wider customer base.

Skandia International is our offshore and cross-border specialist, working in partnership with other Skandia and Old Mutual businesses. It includes Royal Skandia, based in the Isle of Man, Skandia Life Ireland based in Dublin, Old Mutual International based in Guernsey and Skandia Leben based in Liechtenstein.

Providing investment solutions in more than 25 countries, Skandia International has generated significant sales and profit growth for almost a quarter of a century. Its continuing high growth potential is based on a number of factors, including the continued growth of its target customer segment, very strong distribution relationships and attractive new market and product development opportunities. In addition to its own growth, Skandia International generates benefits within the Group by working in partnership with fellow Skandia and Old Mutual businesses to create growth opportunities in domestic markets using international products and expertise.

Bankhall is a standalone division within the UK and Offshore business. It mainly provides support services, including compliance consultancy, to directly-regulated financial advisers. It has maintained a market-leading position by providing demonstrable value to advisers.

Through our market-leading platform, a comprehensive range of investment solutions and tax wrappers manufactured in-house, and the competitive advantage achieved through scale, we are well placed to benefit from the growth in platform business and increasing use of platforms by the UK financial services industry.

Markets and products

Skandia UK

Skandia UK focuses on long-term investments. Unlike traditional with-profits providers, it allows each customer to have a personalised and flexible investment portfolio, suited to their goals and risk appetite.

We provide tools for customers to analyse and construct the ideal portfolio using open-architecture solutions which give access to over 1,000 funds from more than 50 top fund management companies - as well as manager-of-managers funds created both in-house and externally. Our buying power enables us to offer these funds to customers at very competitive prices.

Since 2003 we have been at the forefront of the UK fund management industry, introducing innovative funds that have proved popular with advisers and investors. Following the launch of the Global Best Ideas Fund in 2006 and UK Strategic Best Ideas Fund in 2007, the range was enhanced in 2008 with the launch of the Skandia Alternatives Investment Fund and the creation of the Spectrum risk-rated funds launched in April 2008 which attracted over £100 million in their first eight months.

Our target market in the UK is medium- to high-net worth individuals and products are distributed through independent financial advisers (IFAs). Most customer investments come through consolidation - bringing together investments built up across a number of providers to take advantage of the increased investment flexibility that we offer.

Pensions

We provide a range of pension wrappers to meet the retirement-planning needs of individuals, employers and trustees. Our pension products offer wide investment choice in funds where the underlying investments are through third-party fund managers: 80 percent of assets are invested directly into funds and 20 percent are invested through its own manager-of-managers blended investment solutions. Pensions business represents £9.4 billion of assets under management.

Investment bonds

We offer a single-premium investment bond which is tax-efficient for certain consumer segments. As with pensions, the bond offers access to third-party funds and blended investment solutions, all managed by third-party fund managers.

Protection

We also offer premium protection solutions in the form of a unit-linked whole life product and critical illness cover and we have significant market share in these markets. Average premium sizes are high and typical customers include the self-employed and entrepreneurs as well as customers seeking protection linked to efficient inheritance tax solutions. Protection accounts for about 3.4 percent of UK Life sales on an APE basis.

Skandia International

Skandia International provides a range of award-winning single and regular-premium insurance wrappers designed for private, trustee and corporate investors, local residents in selected markets and expatriates. All its products offer tax efficient investment growth from secure and stable offshore centres. The business is focused on six core geographic regions: Asia, Middle East, UK, South Africa, South America and Europe. These regions have varying levels of market maturity, competition and consumer needs. The common factor is the target customer base: English-speaking expatriates and selected local nationals from the affluent advice-seeking sector.

The product range includes an award-winning portfolio bond and a number of single and regular-premium savings and investment vehicles. The flexibility of the portfolio bond enables customers to invest in virtually any tradeable fund and in a variety of currencies. Our products are supported by a comprehensive suite of trust options, e-business facilities and first-class service.

Market overview

The UK has a sophisticated financial services market, with a well developed advice channel that accounts for the majority of new business in the market. It is highly regulated by the Financial Services Authority (FSA), which is moving towards a more principles-based regulation regime and a focus on outcomes that demonstrate fair treatment of the customer. In 2006 the FSA began its Retail Distribution Review, a major initiative to review the way financial services are distributed in the UK. Following discussions and consultations, the FSA is proposing to introduce a number of measures over the next four years to build consumer confidence in financial services. In particular, these aim to clarify the services being provided and have a requirement for charges to be agreed between the adviser and the customer. Our modern solutions already meet some of the new requirements and we will develop our proposition further to offer the necessary flexibility.

Despite the majority of platform assets being equities, which have fallen in value by 35 percent since October 2007, platforms have grown successfully their total assets by 20 percent during the period. This is the result of collectives' continuing success as investment vehicles, investors' desire to consolidate their portfolios and the tax-efficient wrappers now available on platforms. It is estimated that assets on platforms could grow to £300 billion within the next five years (Source: Navigant Consulting).

The financial crisis is reducing customers' appetite for investing new money. However, the majority of investments made into Skandia are consolidations of existing portfolios. It is estimated that in the UK there are £3 trillion of wrappable assets in traditional savings and investments and it is expected that more of this will be moved onto platforms in future.

Compared with single domestic markets, the offshore financial services market offers greater diversity of geography, distribution and risk management - as well as the opportunities generated by variable macro and micro conditions. Such diversity gives Skandia International greater resilience against regional market effects.

Skandia International conducts all business through advised intermediary channels and its distribution proposition is structured according to the needs and regulatory environment of its principal markets. Long-term global and local distribution partnerships are critical to its success and remain a core strength of the business.

Skandia International's broad geographic coverage is supported by a robust regulatory and compliance framework which ensures strong and close relationships with all its regulators. As in the UK, regulators throughout the world are expected to heighten their supervision of the financial services industry - which may lead to some convergence of regulations across markets.

Strategy for growth

We aim to build on our current position as a leader in the UK platform market by maintaining a customercentred proposition with a full range of investment solutions, simple and transparent charges and flexible remuneration options.

Increasingly, advisers are adopting one platform for the majority of their business. To ensure that Skandia is selected as the preferred platform, our sales force is working closely with advisers to embed the platform into their businesses.

Skandia International will continue to provide leading offshore and cross-border investment solutions to affluent advice-seeking investors worldwide. We will enhance the value proposition by developing a closer relationship with our customers to improve their experience with us. We aim to grow across all core regions through continued strength of service and distribution relationships.

Performance in 2008  

Highlights (£m)	2008	2007	% Change
Adjusted operating profit (IFRS basis) (pre-tax)	167	173	(3)
Return on Equity	5.0%	6.8%
Return on Equity (excluding goodwill)	12.0%	21.4%
Adjusted operating profit (covered business) (MCEV basis) (post-tax)	235	206	14
Return on embedded value (covered business)	15.3%	15.5%
Total life assurance sales (APE)	596	740	(19)
UK life assurance sales (APE)	335	468	(28)
Offshore life assurance sales (APE)	261	272	(4)
Unit trust/mutual fund sales	1,715	2,275	(25)
Value of new business	67	81*	(17)
APE margin	11%	11%*
PVNBP	4,902	6,311*	(22)
PVNBP margin	1.4%	1.3%*
Net client cash flows (£bn)	1.7	3.9	(56)
Funds under management (£bn)	34.9	41.9	(17)

* Restated, as now reporting on an MCEV basis.

Positive net client cash flows despite low investor confidence

Skandia UK and Offshore continued to deliver positive net client cash flows for the year with net inflows of £1.7 billion representing four percent of opening funds under management. This comprised strong International net inflows and positive UK net inflows which were lower than 2007. The market downturn contributed to a 17 percent decrease in funds under management but this compared favourably with the 31 percent drop in the FTSE 100 in 2008. Investment performance was driven by the diversity of our offering with significant changes in asset mix occurring as investors moved into cash based investments. Foreign currency denominated funds benefited from the weakened sterling.

Investment volatility affects sales

Life assurance sales APE declined in line with the market. The largest relative falls in sales were in the bonds and single-premium pensions products and because the 2007 pensions business figure benefited from the lingering benefits of pensions 'A-day' and higher investor confidence at the time. In 2008 the market for single-premium bonds was affected by the introduction of 18 percent flat rate of CGT confirmed in the March 2008 Budget. Skandia's market share across the entire pensions market remained strong particularly in the core product area of single-premium personal pensions. Regular-premium business held up better, ending the year nine percent up on 2007.

Skandia International performed very well in 2008 due to its geographical diversity, full open-architecture proposition, strong distribution relationships and a focus on high net worth customers. Product and e-business developments greatly enhanced our customer proposition in 2008.

Unit trust performance impacted by volatile markets

Unit trust sales were down 25 percent on 2007 as a result of one of the lowest ISA seasons on record for the whole industry and again a reflection of the turbulent market conditions. Within this, institutional mutual fund business of £239 million was up by 45 percent over 2007. Our market share in platform business fell marginally in the year but there were indications that the re-pricing of the platform business in the latter part of the year was starting to have a positive impact on sales. We continue to increase investment solutions on the platform to create wider appeal, especially during periods of market volatility.

New business contribution

VNB fell by 17 percent to £67 million due to lower new business volumes. The reduction was partially mitigated by a strengthening of the assumptions for the amount of fee income rebated from fund managers, aligning Skandia more closely to the market. New business contribution was also positively impacted by the mix of business effects, with a shift towards sales of more profitable portfolio bond charging structures within Skandia International. The new business margin ended the year at 11 percent, in line with 2007.

Adjusted operating profit (IFRS basis) level with 2007 despite market conditions

An excellent adjusted operating profit (IFRS basis) was generated in spite of the current climate with a decrease of three percent to £167 million for the year, in part reflecting the reduction in funds under management and sales. This was partially offset by changes to the policyholder taxation basis for Skandia UK following the market falls experienced in 2008. Additional integration costs were incurred in 2007, as previously communicated. A favourable variance of £33 million arose following the implementation of PS06/14 - the prudential reserving requirements that permit non-linked insurance business to be valued on a more realistic basis.

Increase in adjusted operating profit (covered business) (MCEV basis)

The adjusted operating profit (MCEV basis), on covered business after tax, increased by 14 percent to £235 million. This increase includes a positive impact of £56 million from operating assumption changes. This mainly resulted from the recognition of retained unit trust company rebates (referred to above) as we outsource the investment of policyholder funds to unit trust companies. Other operating assumption changes included adjustments to expense assumptions to reflect current maintenance expense experience and modeling improvements. Experience variances were positive in aggregate at £17 million due to impacts on charges and continued positive experience in relation to retained rebates assumptions.

Capital

Current levels of statutory capital for Skandia UK and Skandia International are within or above the target ranges set by management. The businesses are well capitalised with a solvency ratio of 2.6 times the required level.

Continued investment innovation at Skandia

During the year, we continued our track record of innovation in multi-manager investment solutions. The Spectrum range of risk-controlled funds was launched in April 2008 and attracted over £120 million of gross subscriptions by 31 December 2008. In the volatile market, the risk controlled nature of the funds proved very effective from both a return and risk perspective. In June 2008, we launched the Skandia Alternative Investments Fund which has an absolute return focus and has funds under management in excess of £30 million. The high profile Best Ideas fund range continued to attract new sales with funds under management of over £391 million at 31 December 2008. The UK Strategic Best Ideas Fund had funds under management of £80 million at 31 December, and continues to be one of the best-selling funds. Amid deteriorating equity markets the UK Strategic Best Ideas Fund has continued to perform exceptionally well, with the fund being the best performing UK fund in the IMA UK ALL Companies Sector during 2008 (a universe of over 320 funds).

Skandia supports changes in the UK distribution landscape

The FSA published its paper on the Retail Distribution Review on 25 November 2008 moving the Review from the consultation phase into the implementation stage. The paper focused on the clarity of the service (distribution channels), remuneration, professional standards and prudential requirements. We have already started to support our distributors through offering assistance in preparing our businesses for the change and assisting advisers in obtaining the necessary qualifications. The intention of the FSA is to consult with the industry on implementing the proposed changes over a period running through to 31 December 2012.

On 3 November 2008 we announced that we are ending our membership of the Association of British Insurers ("ABI"). Our proposition is clearly differentiated from old-style life and pensions companies, finding little alignment of interests with the broader ABI membership. We announced a new pricing structure in September 2008 removing the initial charge on platform sales. This move not only made our proposition very competitively priced but it also made the charging structure simple and transparent. The price changes have been positively received by financial advisers.

Marketing

The volume of business placed electronically has continued to increase. Alongside the competitive terms that we negotiate from the fund management groups, this enabled Skandia UK to re-price its proposition in September 2008, making it highly competitive. Skandia International enhanced its proposition by developing a new Swedish pension and adding to its online capability.

Customer service

We continued to focus on excellent customer service, which is seen as a major differentiator in financial services.

In recognition of our outstanding customer service we achieved a five-star rating in the industry Financial Adviser Awards for the eleventh year running and became the first company to win the Outstanding Achievement Award for Pensions and Investments. We have now won more than 30 five-star awards in the 18-year history of the Financial Adviser Awards.

We won the MultiManager of the Year award at the annual Investment Life & Pension Moneyfacts Awards in September 2008 and were also Commended in the Best Unit Trust/OEIC Provider category. These awards recognise the outstanding achievements of providers who manage to stand out from the crowd by offering high calibre products and delivering first-class service.

Skandia International continues to meet customers' service expectations through a programme of operational improvements, including establishing an optimum service model for overseas branches. Technological enhancements will support the continuing drive for greater operational efficiency.

Principal risks and uncertainties

The principal risks to Skandia UK arise from operational experience, along with market risk as Skandia UK derives income from fees which are charged as a percentage of funds under management. The Broader financial risks are limited. Skandia UK does not offer material investment guarantees. Although we offer protection business, and so have exposure to mortality and morbidity risk, the majority of the risk is transferred to reinsurance counterparties. Credit risk exposures are small; the main exposures are the risk of default on the investment of company assets. Skandia UK has exposure to risk arising from operating experience in respect of factors including persistency and management expenses. These risks are managed within the operational functions which have primary responsibility for the identification, mitigation and monitoring of risks. Risks exceeding pre-determined thresholds are escalated and reported to management and to the Group Chief Risk Officer, along with details of the mitigating management action. Recent falls in investment markets have adversely impacted fund-related revenues and new business volumes. The profitability and capital position of Skandia UK remain strong.

Outlook for 2009

Details of the changes to be introduced as part of the FSA's Retail Distribution Review are still under discussion. Meanwhile, we are already preparing to incorporate the changes that the FSA wishes to include, with the aim of optimising our position in the new model of financial services and the distribution landscape that is likely to emerge. It will be particularly important to secure significant funds under management to ensure scale in the platform market that this review will stimulate. To secure assets on our platform we are running an aggressive campaign of activity which began in 2008 with the removal of the initial margin on platform products to make our costs highly competitive.

Our offshore business is geographically diversified, with sales in Europe, the Middle East, the Far East, Africa and Latin America, as well as in the UK. It is well positioned for further growth in 2009 and beyond. Investment in the operating infrastructure to drive efficiencies and continued excellence in customer services will support further market, product and distribution opportunities. Whilst 2009 will be a challenging year, Skandia International remains confident about long-term future growth prospects owing to a growing customer base, robust regulatory and compliance infrastructure and a strong offshore brand.

Priorities for 2009

• Continue to build our position as a leading platform by widening customers' investment choices, offering greater flexibility and access to more investments, and providing simple, transparent pricing
• Work more closely with distributors to help them meet the new requirements of the Retail Distribution Review
• Maintain our high level of customer service and continue to improve efficiency by increasing our ability to process business electronically
• Generate growth for Skandia International in new and existing markets through product and distribution efforts and building on the operational infrastructure to facilitate new product development.

1.2 Nordic

This business operates in Sweden, Denmark and Norway, offering a wide range of products for both retail and corporate customers including traditional life, unit-linked, healthcare insurance, banking, financial advisory and mutual funds. Our vision is to have the most satisfied customers in the Nordic savings market.

Our operations focus on four end-customer groups, which we class as Private Sweden, Corporate Sweden, Private Norway and Corporate Denmark.

Skandia Liv is a traditional life assurance company serving customers in Sweden and Denmark. It is a wholly owned subsidiary of Skandia but run on a mutual basis. It operates within a strict local legal framework and the benefits usually associated with share ownership accrue to Skandia Liv's policyholders rather than to the holding company. Consequently, Skandia Liv is not consolidated in the Old Mutual Group accounts.

In 1990 Skandia launched Sweden's first fund insurance company, Skandia Link. Today Skandia Link offers savings products for both private and corporate business.

SkandiaBanken was initially a niche player in the Nordic banking market but has now become established as a full-range online retail bank serving customers in Sweden and Norway. It is well positioned to take advantage of the growing demand for direct self-service savings products.

Together, the Skandia Nordic divisions have a broad product mix, a range of insurance, banking and investment business, market-leading expertise and a proven business model. This combination differentiates us and gives us competitive advantage.

Markets and products

We have a combined Nordic customer base of around 2.5 million customers and, with our full range of product offerings, are well positioned in a challenging savings market.

Our Corporate business operates in Denmark and Sweden, serving small and medium enterprises, large companies, international corporates and the public sector. It distributes its products through independent financial advisers (IFAs), other external partners and a directly employed sales force. Corporate Sweden and Denmark offer products and financial advice from our unit-linked, traditional life and healthcare businesses.

The Retail business operates in Norway and Sweden, targeting affluent and mass affluent private customers. This market is served mainly through our directly employed advisers, the internet and IFAs. Private Sweden offers savings products and financial advice from our banking, unit-linked, mutual funds and traditional life business. Private Norway offers products and financial advice from our bank and healthcare businesses.

Unit-linked

We offer a wide range of unit-linked funds in various classes and with varying risk profiles. Funds, including those offered by our own fund companies, are managed externally and managers are selected and monitored using our proprietary evaluation process.

Traditional life

Traditional life products are an important part of the integrated product offering in the Swedish market. As the market's largest life company, Skandia Liv is active in both the private and corporate pensions segments of the Swedish traditional life market. We provide insurance products with a security profile featuring long-term savings with a guaranteed yield plus protection. In 2008 Skandia Liv was ranked top traditional life assurer by independent Swedish consultants and distributors.

Mutual funds

We offer unit trust products through our banking subsidiary, SkandiaBanken. Skandia Fund Products' offerings are available to customers via SkandiaBanken for unit-linked savings, direct savings and individual pension savings. Customers can access premium pension savings via the national PremiePensionMyndigheten (PPM) system and decide how they wish their money to be managed by choosing from PPM's range of funds.

Banking

SkandiaBanken offers a full online retail banking service. It is focused on strengthening its offering to small enterprises and private individuals by selling noninsurance products. It also serves as a direct distribution channel, targeting self-service customers with a full range of savings products through a new online platform. In 2008 SkandiaBanken won several awards in Norway and Sweden for outstanding service. During the year the savings offering was further strengthened by the widening of the fund range, introducing discounted share trading and launching new saving products.

Private healthcare

We offer private healthcare products to companies and their employees. Our healthcare division also provides support to our unit-linked and traditional life business in Sweden and Denmark, adding value to the pension scheme products and providing cross-selling opportunities for further business.

Market overview

The Swedish savings and pension market has three pillars: individual, employer-generated and stategenerated savings. In 2008 the individual market held about 50 percent of assets while employer-generated and state-generated savings each held about 25 percent. The figure for state-generated savings includes only the PPM part, as this is the only part of the public pension system where the individual decides on the investment.

Traditionally, we have been very strong in corporate pensions, the dominant segment of the Swedish life market. However, the corporate market is changing. Our strategies to increase sales in this segment must now take account of pricing pressures and collective agreement procurements. Swedish brokers are shifting their focus to small- and mid-size companies and individuals.

The individual market is expected to continue growing in significance. Factors such as reduced state and employer pension benefits will require people to take more responsibility for their future financial security. We see this growth and the demand for advice and self-directed solutions in the private business area as major business opportunities. The individual market is characterised by multiple savings instruments and varying customer preferences. The main savings forms are insurance (SEK700 billion), bank deposits (SEK700 billion), mutual funds (SEK600 billion), equity (SEK600 billion) and bonds (SEK100 billion). Revenue in the total individual savings market is expected to grow from SEK40-50 billion in 2008 to SEK70-80 billion by 2015, driven primarily by market appreciation, increasing disposable income and asset reallocation.

The current growth of advisory services in the individual market offers us a huge potential opportunity - but it will be important to manage our relationships with IFAs effectively.

The 2008 financial crisis created a move towards more traditional savings products. While the major banks lost customers to small niche banks, SkandiaBanken increased their customer numbers by 24 percent and grew market share from 12 percent to 16 percent by offering new products with high interest rates. The major banks lost funds under management of SEK35 billion in 2008, while the niche banks gained SEK11 billion.

In the Nordic countries the crisis led to government-led initiatives including increased bank guarantees and lowered repossession rates. It is expected that further legislative change will follow.

Interest in complementary and alternative solutions to national healthcare systems remains great in the Nordic countries. However, competition in this area has intensified considerably.

Strategy for growth

Our vision is to have the most satisfied customers in the Nordic savings market. To achieve this, we will move from our current position as a product supplier mainly offering insurance products to become a more customer-oriented financial solutions provider. We will improve and develop our customer interface, enhance our product offering and make our products available to customers via different channels.

The principal challenge is to build attractive offerings that provide both end-customers and distributors with advisory tools and top quality advice, innovative products, top-quartile returns and the market's best customer service.

Performance in 2008  

Highlights (SEKm)	2008	2007	% Change
Adjusted operating profit (IFRS basis) (pre-tax)	1,076	874	23
Return on Equity	5.6%	4.3%
Return on Equity (excluding goodwill)	17.0%	16.3%
Adjusted operating profit (covered business) (MCEV basis) (post-tax)	1,839	880	109
Return on embedded value (covered business)	12.9%	7.6%
Life assurance sales (APE)	2,599	1,992	30
Unit trust/mutual fund sales	3,207	3,474	(8)
Value of new business	397	313*	27
APE margin	15%	16%*
PVNBP	12,108	9,329*	30
PVNBP margin	3.3%	3.3%*
Net client cash flows (SEKbn)	7.0	2.7	159
Funds under management (SEKbn)	91.9	116.7	(21)

* Restated, as now reporting on an MCEV basis.

Strong net client cash flows

Net client cash flows for the year were an exceptional SEK7.0 billion, representing six percent of opening funds under management. The positive performance was largely driven by strong net inflows in the life business benefiting from an excellent sales performance and reduced outflows. However, volatile equity markets negatively impacted asset growth during the year, with funds under management at 31 December 2008 down 21 percent to SEK91.9 billion.

Sales performance continued to improve

We delivered excellent growth in sales during 2008 with life sales on an APE basis up 30 percent mainly due to strong sales in Sweden. The broker sales channel accounted for the majority of this increase as a result of strengthened relationships, supported by the new investment portfolio product and faster introduction of new funds to the market. A focus on the selling of unit-linked products has continued throughout the internal sales force which together with several sales initiatives, contributed to the improved sales. The very strong upward trend in new sales continued throughout 2008 and so far there have been no negative effects on sales performance from thevolatile markets.

Mutual fund sales were down eight percent on 2007, mainly due to lower inflows to fund deposits within our bank offering, partially offset by growth through other channels. This growth was mainly through deposits in fixed income and money market funds and through a hedge fund launched in the third quarter.

VNB grew strongly in 2008

VNB of SEK397 million for the year was up 27 percent on 2007, in line with the excellent life sales. In addition to strong volume growth, the APE margin benefited from the introduction of currency spreads and tighter cost controls. These largely offset the business mix impact in Sweden, particularly from the removal of Kapitalpension product tax advantages as well as the strengthened retention assumptions in 2008 and the negative economic changes in 2007. The life new business margin ended the year at 15 percent just below the margin in 2007. In the medium term, the new business margin is expected to improve to reach the high teens.

Strong underlying adjusted operating profits despite market turbulence

Adjusted operating profit (IFRS basis) increased 23 percent over 2007 despite the equity market downturn. This was largely due to excellent cost control and SkandiaBanken continuing to benefit from an improved interest margin.

The adjusted operating profit (MCEV basis) was up 109 percent on 2007, mainly due to strong VNB growth and the positive effect from assumption changes. In 2007 there was a negative effect of SEK526 million relating to strengthened retention assumptions and lower fund charges on "tick-the-box" collective agreements and tendered corporate business. In 2008 the effect from operating assumption changes was SEK391 million. This was mainly attributable to the introduction of currency spreads and increased assumption for the take-up rate for unit-linked contracts on retirement, partly offset by strengthened retention assumptions. Experience variances in 2008 of SEK142 million were driven by a higher level of fee income than assumed and tax and profits not valued within the value of in-force (e.g. Healthcare Business). Both were partly offset by a negative retention effect mainly caused by premium reductions due to a Swedish legislative change relating to the level of tax deductible pension savings contributions.

Continued growth in banking business benefiting from market conditions with improved interest margin

SkandiaBanken is completely funded by deposits and therefore has a unique liquidity position enabling it to benefit from the current market situation with an improved interest margin and increased business volumes. SkandiaBanken has sufficient surplus liquidity and management continue to ensure that the liquidity position remains strong. The capital ratio as at 31 December 2008 was 14.1 percent (Basel II, pillar one). SkandiaBanken's lending portfolio has been built on sound lending practices and comprises of 95 percent mortgages which have excellent credit worthiness with the remaining five percent comprised of unsecured loans. The average loan-to-value in the portfolio at the end of the year was approximately 40 to 45 percent. As a consequence, the bank has been only marginally affected by the market turbulence. The credit loss ratio (credit losses as a percentage of the opening lending balance) remains low at only 0.13 percent. The net interest margin was 1.67 percent in 2008 compared to 1.32 percent in 2007. We are confident that SkandiaBanken's conservative lending policy means it is well positioned to respond to any adverse market developments.

Both deposit and loan books at SkandiaBanken increased in 2008. Excluding the divested car finance business, lending increased to SEK43.8 billion, up nine percent since 2007. The increase related mainly to successful mortgage campaigns during the year in Sweden, together with a highly competitive floating interest rate which led to increased lending volumes. As a consequence of the turbulent market conditions, customers have been switching funds from ordinary saving accounts with variable interest rates to saving accounts with fixed interest rates. Deposits of SEK52.0 billion were up three percent since 2007 and the number of customers increased seven percent over 2007. SkandiaBanken's operating profit for 2008 was SEK283 million, 48 percent higher than 2007.

Capital

Skandia Nordic's capital position is stable with sufficient surplus equity exceeding both external requirements and internal buffers. The businesses are well capitalised with a surplus 9.9 times the required level.

Other

Our integration of Skandia, Skandia Liv and SkandiaBanken continued during 2008. We implemented a new operating structure in the private and corporate business areas where there are strong potential synergies in terms of scale, brand, cross-selling and administration. Restructuring and other activities resulted in cost reductions of SEK150 million in 2008, making a significant contribution to the year's good result.

During the year we announced that Skandia and Livfösäkringsaktiebolaget Skandia (publ) (Skandia Liv) are reviewing the potential benefits to both the Group and to Skandia Liv policyholders of demutualising Skandia Liv. The review is at a very preliminary stage and a conclusion is not likely before late 2009.

As announced on 3 October 2008, a ruling has been passed in respect of the arbitration proceedings between Skandia AB and Skandia Liv. The arbitration board did not accept Skandia Liv's claim to any part of the purchase price paid, but ruled that Skandia AB is obliged to pay Skandia Liv a total sum of SEK580 million (£47 million) plus interest by way of compensation in relation to fees under the asset management agreement which Skandia Liv deemed to be higher than prevailing market rates. Old Mutual had already set aside SEK500 million (£41 million) to cover the arbitration within our pre-acquisition balance sheet. Skandia AB will also have to compensate Skandia Liv for future payments to DnB NOR that are higher than prevailing market rates until the contract with DnB NOR expires in 2013. A new provision of SEK426 million has therefore been set up.

In 2008, Skandia Link won the Risk & Försäkring award for Best Average Return to Clients Over Three and Five Years in the Swedish Market, and SkandiaBanken Sweden won Privata Affärer's Initiative of the Year award.

Marketing

We successfully launched a number of innovative market-facing products including the insurance-wrapper Skandia Investment portfolio, unit-linked mutual funds such as Swedish Stars and Skandia Global Hedge, Skandia Lifeline child insurance and a number of banking products.

Customer service

Our focus on enhancing customer service delivery earned SkandiaBanken Sweden the runner-up position in the award for Best Home Loan Institute and SkandiaBanken Norway the award for Most Client- Friendly and Service-Minded Internet Bank for the seventh year running. Skandia Sweden also reclaimed top position in the broker satisfaction index.

Principal risks and uncertainties

Nordic's main risks relate to strategic and operational risks as well as market risks. The market risks mainly relate to asset based income which reduces when the value of the unit-linked funds declines. Having a diversified product range and a wide range of investment options addresses some of the market risks. Risks arising from operating experience (e.g. persistency and management expenses) are managed through the risk framework which includes a three-lines-of-defence model and risks exceeding pre-defined risk tolerance levels are escalated to the Group Chief Risk Officer. Political and regulatory changes which could have an impact on the businesses are continuously monitored and managed.

Outlook for 2009

The continuing financial crisis will make 2009 a challenging year. In addition, there will be more legislative changes that will impact on our business.

Our corporate customers have been affected by the economic downturn and the effects of that will start to be seen in 2009. The private client market is now already under pressure and customer behaviour will be impacted. This could lead to lower customer activity during the year, however we continue to focus on developing innovative financial product solutions to address customer needs in the current economic climate.

We continue to benefit from a combination of a broad product mix, a range of insurance, banking and investment business, market-leading expertise and a proven business model. We believe ourselves to be well positioned to handle the challenges ahead, as demonstrated by the delivery of excellent results in 2008 despite the market turbulence.

Priorities for 2009

• Top quality customer service
• High quality, innovative offers for our end-customers and distributors through advisory tools and top quality advice, innovative products, top quartile returns and excellent customer service
• New investment portfolio products
• Cost control.

1.3 Europe and Latin America

Our Europe and Latin America business (ELAM) provides long-term insurance and savings products across continental Europe and in Latin America. Our entrepreneurial approach and leadership style has enabled us to deliver strong growth since start-up in the late 1990s. We have a strongly local distribution focus, while continuously seeking to exploit the scale and revenue enhancement opportunities that come from being part of the Old Mutual Group.

From January 2009 we have restructured the business in continental Europe to reflect our principal customer segments in order to leverage capabilities and operational efficiencies across geographies. The transition to two main business structures will take place throughout 2009:

• Affluent: targets the affluent segment and currently comprises the businesses in France, Italy and Spain
• Mass Retail: meets the savings needs of this significant part of the population and comprises the businesses in Germany, Austria, Switzerland, Poland and Eastern Europe.

This foundation for efficiency in Central Europe and the integration of the Southern European businesses will allow us to take advantage of further efficiency opportunities in the future in the Mass Retail and Affluent businesses.

Latin America continues to serve a mix of customer segments, primarily through tied financial planners.

Markets and products

Our products include both unit-linked insurance and mutual funds. These are invested through a wide range of open-architecture funds in various asset classes, including funds selected and tracked using our 4P (Philosophy, Process, People, Performance) process. Our managed funds allow asset allocation in line with customers' risk profiles.

To meet customer demand our offer includes both regular-premium products with optional top-ups and single-premium products. Regular-premium products create a steady flow of lower-value premium amounts with a high embedded value, while single-premium products create larger but more volatile net client cash flows.

We sell through a number of channels. In Europe we distribute via independent financial advisers (IFAs), sales organisations, banks and networks. In Latin America most of the business is distributed via our tied financial planners. We employ a segmentation approach to distribution, understanding that each channel has different needs, objectives and drivers.

Market overview

Our external market environment is strongly regulated. Over recent years government policy has driven growth in private long-term savings as well as improved transparency for customers. This has generally been favourable to us - though some regulations aimed at the market as a whole, such as Germany's Mindestuzführungsverordnung, have not matched our niche offering well.

We believe the fundamentals of the European market remain positive over the long term. Shortfalls in public pension systems and transfer of wealth to the next generation provide opportunities for investment from individuals. Similar opportunities should emerge in Latin America as its economies mature.

In the short term, the global economic crisis is offsetting these positive market fundamentals. Government interventions in European financial markets in 2008 dampened the demand for long-term savings products through the securing of bank deposits and stimulation of private spending rather than savings.

The unit-linked segment continues to attract competition from traditional players - an indication of its relevance and future potential. In the short term, traditional life has increased its relative importance as investors seek guarantees. We believe that this is a temporary effect and that the unit-linked segment will regain ground as the market recovers.

The IFA channel remains important and is expected to continue growing, with banks and sales organisations continuing to be strong players. Consolidation in these channels will change the landscape over the longer term and will make strong relationships even more important.

Technology continues to offer interesting opportunities for reaching and serving customers and distributors. While online direct sales are not a big driver of life insurance sales, the servicing and communication opportunities should allow providers to reduce operational costs while delivering improved service and convenience. Effective use of technology linking distributors and suppliers to make product delivery simpler is a cornerstone of the open-architecture model.

Strategy for growth

We believe that success comes from serving customers and distributors effectively through constant innovation.

Our strategy is to place the customer at the centre of what we do and to fully focus the business on meeting customer needs. Focusing our product and service offer on specific customer segments will allow us to meet their expectations better. The key drivers for success in the Affluent segment are breadth of offer and quality of advice and service. Mass Retail business is driven by efficiency and simplicity. Institutional business is driven by investment performance and access to products.

We remain focused on building scale in funds under management through net client cash flows and increased market share, as well as securing profitability through cost efficiency.

Performance in 2008

Highlights (€m)	2008	2007	% Change
Adjusted operating profit (IFRS basis) (pre-tax)	14	43	(67)
Return on Equity	(0.3%)	1.5%
Return on Equity (excluding goodwill)	(1.3%)	7.3%
Adjusted operating profit (covered business) (MCEV basis) (post-tax)	5	13	(62)
Return on embedded value (covered business)	0.6%	1.5%
Life assurance sales (APE)	211	276	(24)
Unit trust/mutual fund sales	2,077	3,071	(32)
Value of new business	13	57*	(77)
APE margin	6%	20%*
PVNBP	1,559	2,182*	(29)
PVNBP margin	0.8%	2.6%*
Net client cash flows (€bn)	1.1	1.8	(39)
Funds under management (€bn)	10.3	13.0	(21)

* Restated, as now reporting on an MCEV basis.

Strongly positive net client cash flow during market volatility

Net client cash flows were robust considering the market volatility, especially in the highly unstable fourth quarter of 2008. With the market in some of our operating countries, for example France and Italy, showing substantial outflows during the fourth quarter, our own performance compares strongly. Strong persistency, driven by pro-active retention campaigns and the ability for clients to switch to more conservative portfolios, provided support to strong net client cash flows.

Funds under management ended the year 15 percent below 2007 on a like-for-like basis (net of Palladyne which was divested during 2008). This included negative market movements on portfolio values of 27 percent of opening funds under management, reflecting the fall in financial markets across the globe throughout 2008. In comparison, the majority of European equity indices fell between 30 percent and 50 percent in 2008. Funds under management were partially supported by the effective asset mix of the portfolio which incorporates non-equity asset classes and reflects the investment appetite of customers that shifted further during 2008 towards guaranteed funds and other less risky asset classes.

Life sales impacted by constrained sales environment

Life sales on an APE basis were down throughout the year but especially in the fourth quarter due to negative investor sentiment. This effect was stronger in singlepremium business, where investors typically have access to a wider range of investment opportunities and seem to have been taking a "wait-and-see" approach to investing under the current conditions. Regular-premium business has been relatively more stable, reflecting the smaller premium sizes and habitual nature of saving on a regular-premium basis. Nevertheless, regular-premium sales have also been under pressure during the year, and the market volatility had a dampening effect on the traditional European seasonal ramp-up in sales in the final quarter, with the fourth quarter falling short of prior year levels.

Focused activity to support mutual fund sales

Given the market volatility and our core differentiator of this business line being international equities, mutual fund sales provided a solid contribution, although down 20 percent compared with 2007 on a like-for-like basis. We continued our efforts to deliver innovative products and quality service. During 2008, much focus was placed on improving the productivity of financial planners in Latin America. Increased training, new product offers and planning tools assisted financial planners in generating sales in the current conditions.

Value of new business and profit margins down

VNB of €13 million was down 77 percent over 2007, mainly as a result of lower sales in 2008 in light of the market crisis. In addition, VNB was negatively affected by changes in operating assumptions, where in particular the changed regulation on policyholder profit participation reduced German VNB. The APE margin deteriorated to six percent from 20 percent in 2007. This was attributed to lower APE sales, which for the more recently established businesses was aggravated by a relatively fixed expense base leading to acquisition expense over-runs. In addition, the strong sales of high margin business in Poland in 2007 was not sustained in 2008.

Adjusted operating profit (IFRS basis) impacted by wider market environment

We generate a significant element of our revenues from funds under management and these fees were lower in line with reduced levels of funds under management. This negative impact was partially offset by the growth of the in-force book of business during the year. Furthermore the revised policyholder participation regulations implemented in Germany during 2008 both widened the definition of revenues to be shared with policyholders and increased the level of participation. This had a €20 million impact on the IFRS adjusted operating profit for the year. This calculation is net of acquisition expenses and these were lower, in line with new sales levels, and so policyholder participation levels were relatively high. To protect the bottom line, we maintained our expense base at 2007 levels, identifying efficiencies to offset growth in sales force and inflationary impacts.

Adjusted operating profit (MCEV basis) suffered from weak new business contribution and negative experience variances

MCEV adjusted operating profit was €5 million for 2008, 62 percent lower than 2007. This was largely due to lower VNB and poorer experience variances which included divisional restructuring costs. The operating assumption changes had a negative impact on the adjusted operating profit, but not to the same magnitude as for 2007. Changes have been made to persistency rates and expense levels, both of which have been strengthened.

Capital

ELAM's businesses continue to measure and monitor their capital resources on an ongoing basis to ensure compliance with the minimum capital requirements of the regulators in each territory in which we operate. Internally we manage our businesses to maintain a buffer of at least 25 percent in excess of the local requirements. Due to the decrease in funds under management levels, solvency requirements across our markets reduced while our capital employed increased, and therefore solvency coverage increased significantly over the year.

Marketing

The volatility of international financial markets increased the importance of marketing to reinforce our sales message in three areas:

Product innovation

Innovation focused on protecting investments to retain existing business and generate new sales. Examples included launching our own traditional life fund in France offering customers capital security and a product with annuity features in Germany.

Expansion of distribution

We continued to grow our distribution base across all our markets. In Italy we added a number of large distributors and in Spain we launched an internal sales force.

Branding

All our businesses operate under the Skandia brand name in their local markets. We carried out the first wave of rebranding to the new Skandia green brand in several markets; this enabled us to re-emphasise the benefits of our offer even in the current negative financial market environment.

Customer service

We continued to focus strongly on our customers, delivering a number of new products and service innovations throughout the year. Examples include annuity features in Germany, a second Easy Plan product in Switzerland, various distributor products in Italy and France, dollar-cost averaging and rebalancing features in Europe and new investment alternatives in Latin America. We also improved service to our customers and distributors through differentiated service offers to top distributors, pro-active service and retention campaigns, and improved distributor tools.

These innovations have been well received by the market, as can be judged from the various product and service awards won during the year, including:

• Austria: FONDS Professionell Service Award
• Germany: Runner-up, AssCompact Fondspolicen Award
• France: Gold Pyramid, Investissement Conseils Awards
• Spain: Winner, Expansion Mutual Funds Portfolio Competition
• France: Gold Medal, Dossiers de l'Epargne Awards
• France: Bronze Trophy, Le Revenu Awards.

Principal risks and uncertainties

ELAM's business model carries limited guarantee and liability risk. Strategic and operational risk is reviewed regularly and managed through our risk framework. Our ongoing focus to build and diversify distribution aims to reduce concentration risk. The existing concentration levels remain within a reasonable range and we expect that future planned activities will assist us to manage this risk further.

ELAM's business mix, which includes regular- and single-premium, retail and institutional business, provides mitigating support to impacts on business results in the current volatile market conditions. However, uncertainty about the future extent and length of a global recession remains and market trends remain difficult to predict. ELAM's geographic diversity reduces the economic, market political and legal/regulatory risks that would typically exist in single-market businesses. The transition to our new business line structure carries some change risk. A strong change management programme has been defined to reduce impacts to new and existing business.

Outlook for 2009

The global financial crisis and recessionary pressures are expected to be the main influence on the market in 2009. We expect new business to be constrained as investor confidence remains suppressed.

Guaranteed products are likely to remain important to investors in 2009, temporarily slowing the growth of the unit-linked segment compared with traditional life. Products such as our traditional life fund in France and our rebalancing features will help us win sales in the current climate.

Regular-premium business - which has been relatively unaffected by the market crisis - is expected to help our sales development in 2009, as the averaging effect of regular-premium investments should support our sales propositions.

Our strong performance in net client cash flow and client asset values compared to the market has been positive for our market share. We believe that we will be able to capitalise on this further once confidence returns and markets return to growth.

Priorities for 2009

• Rapid transition to the new business structure, building on existing expertise and improving operational scale efficiencies while retaining day-to-day focus on customers and distributors
• Further develop the platform for reaching and servicing the Affluent segment, including products, distribution, advice and service
• Improve efficiency in the Mass Retail business, focusing on simplification and matching the offer to the market, improving profitability and increasing market share
• Innovative solutions for customers and distributors to support them through the difficult times.

1.4 Skandia Investment Group

Skandia Investment Group (SIG) is our investment management organisation. It brings together all Skandia's investment research, analysis, portfolio management, open-architecture and investment product expertise. SIG encompasses Skandia's three in-house investment management companies: Skandia Global Funds, Skandia Fonder and Skandia Investment Management Limited (SIML).

The formation of SIG created one of the world's largest multi-manager investment organisations, managing assets of around £53 billion across a variety of multimanager and open-architecture investment products.