2.0 SOUTHERN AFRICA

Paul Hanratty Head, Long-Term Savings and Managing Director, Old Mutual South Africa
Keith Kennedy Managing Director, Mutual & Federal
Tom Boardman CEO, Nedbank

We operate the largest financial services business in South Africa, providing wealth management, investment products, retirement savings, life, disability and health insurance to individuals and groups. We also offer fi nancial services in other parts of Africa through operations in Namibia, Zimbabwe, Malawi, Kenya and Swaziland. Our banking business in Africa is conducted by Nedbank Group, in which we have a 55 percent controlling interest. Nedbank is one of the four largest banks listed on the Johannesburg Stock Exchange (JSE). We also have a 74 percent controlling interest in Mutual & Federal Insurance Company Limited, the South African general insurance company.

2.1 Old Mutual South Africa (OMSA)

Old Mutual South Africa (OMSA) comprises asset management and life operations and has one of the largest advice-based distribution capabilities in the South African industry. The Retail division covers both the Affluent and Mass markets, while the Corporate division provides products and services to corporate, institutional and public sector customers.

Our asset management operations in South Africa are represented by Old Mutual Investment Group South Africa (OMIGSA). This multi-boutique asset management business, currently comprising 13 individual boutiques, was formed in 2007 in response to a growing demand for core and specialist investment capabilities. Our boutiques provide a range of investment capabilities designed to meet a variety of retail and institutional customer needs. We offer investment capabilities to the pension fund and corporate market, as well as managing a range of retail portfolios which individuals can access through the various Old Mutual products.

The Old Mutual brand has very high awareness, trust and loyalty among South African consumers across all market segments. In 2008 it was rated number one for life assurance (2008 Markinor Brands Survey) and for after-sales service (2008 Ask Afrika Orange Index).

Established in 2003, Old Mutual Service Technology and Administration (OMSTA) provides a single, cost-effective point of service, technology and administration for the Retail Affluent, Retail Mass and Corporate customerfacing businesses. It services all our customers, intermediaries and retirement fund members across our full product range through our extensive branch network, call centres, web capabilities and back office. In addition it offers technological infrastructure for OMSA, along with application development for both OMSA and other Old Mutual Group companies internationally.

Markets and products

Retail

Our Retail division covers both the Affluent and Mass markets, offering life, disability, retirement annuities, savings and investment products. We distribute these through independent brokers (IFAs), bank brokers, tied distribution (personal financial advisers for the Affluent segment and salaried sales force for the Mass segment), a direct distribution channel and other retail partnerships. Bancassurance through Nedbank's financial advisers and staff is another important channel.

Our key Retail product offerings include Greenlight, a flexible and comprehensive range of life, disability, and future-needs cover. We provide a range of retirement savings plans, annuities, investment and income products through different wrappers - including the Max, Investments Frontiers and Galaxy product ranges. In the Mass segment we offer customers savings, retirement and funeral cover products.

To ensure products are appropriate for today's environment, our more recent investment and savings products feature significantly lower charges and capital requirements and have greater transparency and flexibility.

Our investment offering is open-architecture, but Old Mutual managed funds form a large part of the underlying assets managed for Retail customers.

Corporate

Our Corporate division sells investment, retirement, insurance, structured products and advisory services to corporate, institutional and public sector customers. Under a life wrapper, we provide underwritten investment products for retirement funds, and group life and disability insurance to retirement funds established by employers for their employees and by trade unions for their members.

Group assurance products provide life cover to employees in the event of death, funeral cover and funeral support services, and a full range of disability solutions.

We customise investment products to meet our individual customers' requirements. These include smoothed bonus portfolios, absolute return portfolios, structured solutions and annuity products, and third-party asset management. We offer other multimanaged asset management solutions and administer a range of retirement schemes for corporates and umbrella arrangements. Many of these schemes are defined contribution and open-architecture.

Asset management

Old Mutual Investment Group (South Africa) (OMIGSA) investment boutiques collectively span all major asset classes and employ unique strategies to meet our customers' different needs and risk profiles. Together, they give customers access to a comprehensive range of savings and investment solutions. We are building on our traditional South African customer base by offering property, exchange traded funds (ETFs) and hedge-fund solutions that also meet the needs of international investors.

Our investment boutiques include:

• Specialist equity businesses
• Futuregrowth (fixed income)
• Umbono Fund Managers (index tracking)
• OMIG Property Investments (property asset management and property management)
• SYmmETRY (multi-manager portfolios for institutional investors across multiple asset classes)
• Private equity and infrastructure investment
• Old Mutual Specialised Finance (corporate advisory, corporate lending, securities lending and structured products).

Market overview

In 2008 local markets followed a similar pattern to international markets, with a dramatic fall followed by a marginal recovery at the end of the year. The Johannesburg All Share index lost over a quarter of its value, with dramatic variances between sectors. Inflation continued to rise through the first three quarters of the year but fell back in the last quarter, prompting a reduction in interest rates at the end of the year. These factors, combined with slower global growth and lower demand for South African exports, slowed local economic growth in 2008 - after four years of strong expansion.

The financial services sector has so far remained largely unaffected by the global financial crisis. Competition has continued to increase as banks, life assurers and asset managers expand their product ranges in an effort to grow market share. New entrants challenge existing practices without the burden of legacy issues.

Following the changes in the leadership of the African National Congress (ANC) at the end of 2007, 2008 was an eventful year on the political front. The most notable change was the replacement of Thabo Mbeki by Kgalema Motlanthe as State President in the second half of 2008. We view the peaceful change in ANC and state leadership and the subsequent emergence of a new political party as encouraging signs of the development of democracy in the country.

The regulatory regime has been evolving to provide greater transparency and protection to the consumer. New commission regulations, effective from 1 January 2009, represent one of the most profound changes to the long-term insurance sector for many years.

The overall savings rate in South Africa remains low, and a large proportion of savings is being channelled into non-financial investment vehicles such as property. The economic growth of recent years has fuelled growth in the emerging and middle-income market segments; these segments will continue to present opportunities going forward, albeit with growth at lower levels.

The long-term outlook for the savings and investment environment is positive for a number of reasons:

• The prudent fiscal and monetary policies of recent years are expected to continue and to guide the economy back to robust growth
• The growing black middle class and affluent markets supported by economic expansion and Black Economic Empowerment efforts will sustain growth in consumer spending
• The Government is continuing to invest in infrastructure
• There are Government plans for a mandatory retirement savings framework
• The level of financial awareness and the transparency of financial products is improving.

Strategy for growth

Our strategic aim is to move from being a traditional life insurer to become a leading provider of investment and savings solutions to each and every South African.

To achieve this, we are working to become a consistently top-performing asset manager in every asset class through our range of investment boutiques - which we will expand to cover more niche positions. We are already recognised as the number 1 long-term insurance brand in the market and are building recognition and awareness as a leading savings and investment brand. We will broaden our financial services offerings, and update existing products, to satisfy a demanding customer base and new regulations. We will also add products aimed at the Foundation Market. At a time when others are expected to make cutbacks, we will unlock competitive advantage by growing access to customers and distribution ahead of our competitors. And we will use our strong operating position in southern Africa to expand selectively into other parts of Africa that offer high growth potential.

Operational excellence and cost control are essential if we are to provide our customers with affordable and competitive products at a sustainable margin. Through OMSTA, we will continue reducing the operational cost of the business, making better use of IT to improve customer service and provide a solid platform for growth.

We also want to position Old Mutual as the leading South African corporate citizen in financial services. OMSA has always played a leading role in supporting the economy and people of South Africa. We will continue doing this through broad-based initiatives aimed at creating opportunities for disadvantaged people and businesses alike.

Performance in 2008

Highlights (Rm)	2008	2007	% Change
Long-term business adjusted operating profit	3,390	3,082	10
Asset management adjusted operating profit	1,078	946	14
Long-term investment return (LTIR)	3,521	2,988	18
Adjusted operating profit (IFRS basis) (pre-tax)	7,989	7,016	14
Return on allocated capital	27.8%	24.0%
Adjusted operating profit (covered business) (MCEV basis) (post-tax)	4,972	3,857	29
Return on embedded value (covered business) (post-tax)	14.4%	11.7%
Life assurance sales (APE)*	5,145	4,516	14
Unit trust/mutual fund sales**	20,648	15,547	33
Value of new business	831	694^	20
APE margin	16%	15%^
PVNBP	35,440	32,010^	11
PVNBP margin	2.3%	2.2%^
Net client cash flows (Rbn)	(5.5)	(18.7)	71
SA client funds under management (Rbn)	443.0	445.0	-

* Life sales now exclude healthcare business. 2007 sales have been restated from R4,699m.
**Unit trust/mutual fund sales now include Marriott.
^ Restated as now reporting on MCEV basis.

Funds under management were flat over 2007 mainly due to lower asset values in volatile markets and improved net client cash outflows of R5.5 billion offset by the inclusion of Futuregrowth's R35 billion of funds under management. The acquisition of Futuregrowth has resulted in an expanded set of fixed income products available to the Old Mutual customer base. Retention of third-party assets has improved significantly with the bedding down of the OMIGSA boutique structure leading to the overall reduction in client outflows relative to 2007. Outflows remained a challenge, affected by higher bonuses declared in 2007 and early 2008, which increased the level of normal benefit payments, particularly in Employee Benefits (EB), as well as higher member withdrawals from pension funds as a result of the deteriorating economic environment.

Life assurance sales increased 14 percent in 2008. This improvement was particularly pleasing considering the effect of the current economic climate on consumer spend. We achieved excellent growth in life singlepremium sales of 26 percent compared to 2007, but we experienced a slow down in single-premium sales in the fourth quarter. Savings products sales grew by 12 percent as investors opted for more conservative fund options under the life wrapper in response to volatile investment markets, particularly in the Retail Affluent market. Annuity sales were up 85 percent with some good flows in the Corporate Segment's new guaranteed-term annuity product as well as with-profit annuities. Our focus on working closely with consultants advising institutional investors has helped us grow our sales pipeline, although the sales process is longer as investors are more cautious in the current markets before deciding to move assets.

Life recurring-premium sales were strong, up eight percent over 2007. Sales of recurring-premium savings products increased by 16 percent compared to 2007 driven by an expansion in the Retail Mass segment sales force. High interest rates adversely affected our credit life sales through the banking channel as loan advances dropped. Sales of risk products to the Retail Affluent market were largely flat over 2007 as customers faced affordability problems. In December 2008 we reached an agreement to sell our healthcare business to Lethimvula. As a result we now exclude healthcare sales from our life sales and from our embedded value calculations.

Unit trust sales of R20.6 billion were 33 percent higher than in 2007, showing excellent growth, albeit from a low base with investors moving to lower risk money market funds. We continue to focus on improving investment performance, as well as focus on the alignment of our unit trust fund offering to our boutique capability and allowing the OMIGSA boutiques to operate with independent investment philosophies and processes.

VNB grew 20 percent over 2007 driven by the increase in sales and the increase in the margin as a result of strong with-profit annuity sales in the Corporate Segment where the APE margin increased from 15 percent in 2007 to an outstanding 23 percent for 2008. The contribution of the with-profit annuity sales to the APE margin was partly offset by the higher frictional tax costs after reducing the proportion of capital invested in equities. The Retail Affluent margin also declined as a result of the lower proportion of high margin risk business following the fall in credit life sales.

Adjusted operating profit (IFRS basis) increased strongly, up 14 percent over 2007. Despite challenging markets, our long-term business profits increased 10 percent, driven by lower costs due to sound management of expenses with the lower Old Mutual plc share price impacting incentive costs. In addition we gained some significant non-repeating items including a reduction in employee benefit obligations of R128 million, interest on SARS refund of R64 million and an insurance claim of R37 million. We also saw improved general experience variances. Although we increased our allowance for worsening persistency and we increased our investment guarantee reserve (IGR) by R409 million during the year, these assumption changes were not as adverse as in 2007 when we determined the IGR on a marketconsistent basis for the first time. These positive factors were partially offset by lower capital charges as a result of lower asset values and the move to lower margin products such as the move by Old Mutual Staff Fund to Absolute Growth Portfolios as well as negative termination experience especially in the mass market segment.

Our asset management adjusted operating profit was up 14 percent due to lower expenses attributable to the impact of a lower Old Mutual plc share price on incentive costs. The impact of the move to performance based income in the current environment resulted in lower asset management fee income which was offset by strong performance in our credit operation (OMSFIN).

The LTIR increased by 18 percent after increasing the rate applied at the beginning of the year by 100bps to 16.6 percent, reflecting the high investment returns on shareholder funds achieved in 2007 and higher investible asset balances.

Adjusted operating profit (MCEV basis) increased by 29 percent over 2007, mainly due to higher expected return (based on higher one-year swap rates), higher new business contribution and the higher adjusted operating profits (IFRS basis) discussed above. These positive factors were partly offset by the impact of adverse termination experience particularly in the Retail segments as a result of the tougher economic environment.

Capital position  

Rm	2008	2007	% Change
Admissible capital	42,582	45,039	(6)
Statutory capital adequacy requirement (SCAR)	11,176	11,739	(4)
Statutory capital cover	3.8 times	3.8 times

OMSA's life company capital position remains strong in spite of turbulent markets. The statutory capital cover remained stable at 3.8 times since December 2007. Admissible capital was lower than December 2007 levels due to a fall in market values, offset by the effect of our hedging programme and increased cash holdings.

At 31 December 2008 the statutory capital requirement reduced four percent to R11,176 million as a result of a decision to hold more cash and reduce our exposure to equities. The impact of lower equity markets and the new regulatory requirement to include allowance for operational risk, credit risk and investment guarantee reserve sensitivity in capital requirements, were offset by higher assumed management actions in the investment resilience scenario used for calculating the capital requirement.

Retail Mass

Rm	2008	2007	% Change
Life sales (APE)
Savings	736	613	20
Protection	576	477	21
Total	1,312	1,090	20
Value of new business	270	240^	13
APE margin	21%	22%^
Net client cash flows (Rbn)	2.0	1.9	5

^ Restated, as now reporting on an MCEV basis.

Retail Mass sales were up a pleasing 20 percent over 2007 largely due to strong growth in salaried adviser manpower. The broker and direct channels also delivered strong sales growth. Net client cash flows were five percent ahead of last year. The impact of higher surrenders (indicative of the current economic conditions) and greater volumes of maturing savings business (introduced ten years ago and short-term savings business introduced five years ago) was offset by favourable mortality experience.

VNB increased at a slower rate than sales due to the re-pricing of our protection product range and the impact of lower expected returns (based on assumed lower future swap yields) on the value of future profits on the segment's protection products.

Retail Affluent

Rm	2008	2007	% Change
Life sales (APE)
Savings	1,428	1,321	8
Protection	996	1,056	(6)
Annuity	219	197	11
Total	2,643	2,574	3
Life sales (APE)
Single	907	868	4
Recurring	1,736	1,706	2
Non-life sales
Unit trust/ mutual fund sales	17,978	13,339	35
Other non-life sales	4,782	4,871	(2)
Value of new business	320	336^	(5)
APE margin	12%	13%
Net client cash flows (Rbn)	(1.1)	(2.7)	59

^ Restated, as now reporting on an MCEV basis.

Net client cash outflows improved over 2007 but remained negative, as the prevailing adverse economic environment increased client withdrawals.

Total Retail Affluent life sales on an APE basis increased a solid three percent. Recurring-premium sales experienced challenges, with inflationary pressures and higher interest rates which impacted negatively on consumer disposable income. Recurring-premium savings sales grew by 13 percent with Max Investment recurring-premium sales up six percent and a full year contribution from Nedlife's Dreammaker, launched in the middle of 2007, producing a 112 percent increase albeit off a low base.

The shift from life-wrapped savings business to other wrappers continues with non-life recurring-premiums up 32 percent from a relatively low base. Greenlight sales grew by one percent as a result of affordability issues among customers and credit life sales declined on 2007 after the reduction in loan volumes as a result of the high interest rate regime and the impact of the National Credit Act.

Life single-premium sales were up four percent with living annuities up 20 percent on 2007. Conventional annuity sales were also solid as a result of the continued competitiveness of our annuity rates, enhanced by a recent repricing exercise. Total annuity sales including living annuities were up 11 percent on 2007. However, Max Investment and Investment Frontiers singlepremium sales were down 10 percent and one percent respectively on 2007 as a result of the impact of market volatility on single-premium investments.

Non life single-premium savings business was up 25 percent on 2007 due to investors moving to money market funds in the volatile investment markets and the relaunch of Galaxy Elite, an upgrade to our existing investment platform.

VNB decreased by five percent despite the overall increase in sales. In addition to the higher frictional tax costs following the change in shareholder investment mandate (more cash, fewer equities) the decline was also caused by the lower credit life sales, which have high margins.

Corporate Segment

Rm	2008	2007	% Change
Life sales (APE)
Savings	386	346^	12
Protection	125	145	(14)
Annuity	350	111	215
Total	861	602	43
Life sales (APE)
Single	671	393	71
Recurring	190	209	(9)
Value of new business	201	91^	121
APE margin	23%	15%^
Net client cash flows (Rbn)	(4.0)	(4.1)	2

^ Restated, as now reporting on an MCEV basis.

Corporate life sales on an APE basis were 43 percent higher in 2008, driven by higher sales in Employee Benefits savings and annuity products. Single-premiums were excellent. The introduction of the Guaranteed Term Certain product boosted annuity sales, and there were also good flows into Smoothed Bonus products. Sales of protection products were below 2007 as insurers stepped up efforts to retain business thereby reducing potential new business. Our retention of protection business also improved in 2008.

VNB increased significantly in 2008 relative to the increase in sales. This was because of higher sales volumes in EB combined with the favourable mix of sales, notably the higher proportion of with-profit annuity sales. This had a flow on impact in the new business margin improving relative to 2007.

Net client cash flows in the EB arena were marginally better than in 2007. Higher inflows were almost offset by higher outflows. Terminations were similar to 2007 levels, but benefit payments were much higher. Higher bonus declarations during 2007 (smoothed bonus) and early 2008 (annuities) increased the level of normal benefits. In addition to this, a trend of increased benefit withdrawals from funds as a result of current economic pressures contributed to increased outflows.

Customers continued to transfer from the old smoothed bonus products to the Absolute Growth Portfolios launched in 2007. Transfers of R21 billion occurred during the year. These transfers are not counted as new business.

Old Mutual Investment Group South Africa (OMIGSA)

Rm	2008	2007	% Change
Life sales (APE)	329	250	32
Unit trust/mutual fund sales	2,669	2,208	21
Value of new business	40	28	43
APE margin	12%	11%
Net client cash flows (Rbn)	(2.4)	(13.8)	83

Funds under management

Rbn	2008	2007	% Change
Life	296	319	(7)
Unit trusts	45	48	(6)
Third party	110	88	25
Total OMIGSA managed assets	451	455	(1)
Funds managed by external fund managers	29	34	(15)
Total OMSA funds under management	480	489	(2)
Less: managed by Group companies for OMSA	(37)	(44)	(16)
Total OMSA client funds managed in SA	443	445	-

Life sales were ahead of 2007 as a result of good repeat investments by existing customers in SYmmETRY. Non-life sales were higher than 2007 as a result of better unit trust flows on the back of improved stability of our investment professional teams in the boutiques. Net client cash outflows were largely from institutional customers to fund benefit payments.

As our boutique structure has bedded down, our teams have stabilised. We have set strong foundations over the last two years and are seeing improving levels of acceptance and confidence in individual boutique investment philosophies and processes. The acquisition of Futuregrowth and merger of the OMIGSA Fixed Income and Futuregrowth teams has proceeded smoothly, with minimal disruption to their investment processes.

The South Africa equity market (JSE All Share Index) fell 26 percent during 2008. The outperformance of resources during the six months to the end of June reversed abruptly in the second half of the year, with resources down 46 percent relative to a -1 percent return from financial stocks. Compelling valuations in the financial sector meant that a number of OMIGSA boutiques were underweight resources and overweight financials from the last quarter of 2007. This positioning led to improved performance over the second half of 2008, with some of the ground lost since September 2007 regained. Performance in our fixed income area was very good. The Old Mutual Income Fund and Mining and Resources Fund won certificates for top straight performance in their respective categories for the three years ended 31 December 2008 at the Raging Bull Awards.

Investment performance across our diverse boutiques was mixed. Our relative fund performance across the majority of boutiques nevertheless ended the year better than at the end of 2007, albeit below our target levels. Over one year to the end of 2008, 57 percent of peer group funds outperformed the median (compared to 39 percent as at the end of 2007). Over three years to the end of 2008, we improved from 31 percent outperforming to the end of 2007 to 40 percent above median at end 2008, and similarly measured over five years improved from 36 percent to 54 percent above median. Compared to industry median, overall, 55 percent of unit trust funds were above median over one year, 35 percent over three years and 45 percent over five years to the end of December 2008.

On the benchmark performance front, the difficulty of beating inflation and cash-plus benchmark in an environment where growth assets are very negative, weighed heavily on the delivery of funds which are measured mostly against an absolute benchmark. At the end of 2008, 38 percent of funds measured against benchmark were outperforming over one year, compared to 50 percent at the end of 2007. However, over the longer term period of five years we improved slightly, with 55 percent of funds outperforming benchmarks compared to 50 percent for the five years to end 2007.

Marketing

Recognising the increasingly competitive environment and the need to reach new markets, we increased our marketing investment - improving our brand presence and product support, making progress in promoting the new OMIGSA boutique model, and reaching the previously under-serviced Foundation Market which we see as central to the success of the South African economy in years to come. We launched Max II, our recurring-premium product range, to meet new commission regulations. Our aim in product development is to exceed customer expectations: hence Galaxy Elite, an investment product that delivers excellent value for high net worth retail customers, and our Absolute Growth Portfolios product, which is now a market leader in the corporate segment.

We also used the uncertainty in the financial markets towards the end of the year to highlight the benefits of our smoothed bonus and guarantee products as well as our strong capital position and credit rating through the 'Certain friend in uncertain times' campaign.

This above-the-line activity supports our extensive face-to-face distribution in the retail and corporate markets.

Customer service

Customers are at the heart of our business. In 2008 we revitalised our retail sales and customer services branches. We set a new benchmark in convenient financial services by moving into retail shopping areas and opening 19 Greenzones - one-stop shops offering banking, assurance, insurance and investment products. We extended our reach by significantly growing tied distribution and increasing our activity in both the broker and direct markets. In the corporate segment, focus on relationships with consultants is building our pipeline and sales.

We have combined all customer servicing for our Retail Affluent, Mass Retail and Corporate customer-facing businesses into OMSTA. We continually drive service levels higher through LEAN process re-engineering methodology.

Customers and intermediaries are serviced via a combination of call-centres, web capabilities and the extensive branch infrastructure. By applying OMSTA's IT expertise we reduced servicing cost per policy while improving service levels and were voted No1 for after-sales service in the 2008 Ask Afrika Orange Index.

Principal risks and uncertainties

As we go into 2009 we face a number of risks from the economic environment. These include a weak equity market and the possibility of further equity falls adversely affecting our earnings, our embedded value and our sales (as customers avoid investment and savings products with equity content). In addition, increased terminations due to the current economic climate put more pressure on the net client cash flow position, earnings and embedded value. Lower sales may eventuate as a result of job losses and concerns about the global economic outlook. Further decline in longer-term swap yields and further increase in equity and swaption volatilities, which would increase the size of the Investment Guarantee Reserve.

Outlook for 2009

National Treasury expects growth in the economy for 2009 to be 1.2 percent. This growth rate is vulnerable to demand for South African exports from developed markets and how that will impact on manufacturing output as well as levels of commodity prices and their impact on our mining sector. Growth will continue to be supported by the Government's infrastructure drive.

The current economic environment has led to a significant decline in consumer confidence in the investment markets and increase in concerns about job security. There has been a shift in demand from investment vehicles with high levels of market exposure to more traditional smoothed bonus and guaranteed products, which will benefit OMSA. However, the overall pressure on the consumer will restrict sales growth until concern over the market settles and consumers start feeling the benefits of falling inflation and interest rates.

We have received notification to terminate early in 2009 the existing mandate to manage the Public Investment Corporation's (PIC) assets worth about R25 billion. This will adversely affect net client cash flows and reduce operating profit by approximately R21 million for 2009.

New regulations on commission, implemented at the start of 2009, are revolutionising the retail market. Changes include minimum early termination values on long-term savings contracts and a move to spread commission over the term of a policy, rather than the current front-loaded structure. We have already launched a set of products that meet the new requirements and have been working with intermediaries to help them move to the new environment. The legislation presents us with opportunities as our infrastructure is well equipped to deal with changes of this magnitude.

The year ahead will challenge consumers, businesses and policymakers to adapt their thinking and behaviour to a changing and more challenging economic environment. OMSA's strong capital position, brand loyalty and dominant presence will allow us to compete more aggressively in a market with declining margins and capital restrictions. Our capital position, at 3.8 times the required level, and our AAA credit rating are the best in the long-term insurance industry. As a result, we still see opportunities for growth, albeit at lower levels than in the recent past.

Priorities for 2009

• Continue our transition from a traditional life insurer to a modern savings and investment business
• Continue to grow the business and net client cash flows
• Focus on growing distribution while improving investment performance, service levels and managing our costs.

Rest of Africa

Kenya

Launched eighty years ago, Old Mutual pioneered unit trusts and offshore investments in Kenya. We continue to lead the market in both asset management and unit trusts and have been the fastest growing life assurer in Kenya. We offer a diverse product set, ranging from unit trusts, group life cover and annuities, pension fund management and third-party administration in the corporate segment, to private wealth management, unit trusts, risk products and annuities in the Retail segments. We recently launched Kenya's first ever low-cost mass market risk product, ensuring that it remains relevant to this market's financial needs.

Malawi

The operation in Malawi was established in 1930. We are the market leader in asset management, life assurance, third-party asset management, pension fund administration and management, and property investment. Historically, we have focused on the corporate segment of the market and sell group life cover and annuities, pension fund management, credit life and funeral cover. We currently sell life cover to individuals in the retail segment and are developing additional products to meet the needs of this segment.

Namibia

Old Mutual Namibia was launched over 80 years ago and is the country's leading financial services company, dominating both the life assurance and asset management industries. We are a leader in pension fund administration and are developing the property investment side of the business. Our unit trust business offers solutions to both corporate and retail customers. We provide life, disability, retirement savings and investment products to individuals in the Retail market segment.

Zimbabwe

Our business in Zimbabwe has operated for just over 100 years and is the largest financial services company in the country, having captured the largest market share of the life assurance and asset management industries. We also own the country's largest building society. We provide life, disability, retirement savings and investment products for both corporate and retail customers.

Swaziland

We launched our business in Swaziland in May 2008. With ambitious plans, the business strives to be the leader in asset management, life assurance and property investment by providing relevant goal-based advice and value-for-money products. While the business launched with a focus on the retail segment of the Swazi market, solutions for the corporate market will be introduced in the near future.

2.2 Nedbank

Nedbank Group Limited (Nedbank) is a bank holding company 55 percent owned by Old Mutual. It is one of South Africa's four largest banking groups through its principal banking subsidiaries, Nedbank Limited and Imperial Bank Limited, in which Nedbank has a 50.1 percent interest. Its shares have been listed on the JSE since 1969.

Nedbank focuses on southern Africa, positioned as a bank for all. It offers a wide range of wholesale and retail banking services through four main divisions: Nedbank Corporate, Nedbank Capital, Nedbank Retail and Nedbank Business Banking - which separated from Nedbank Corporate in January 2009.

Nedbank is based in Sandton, Johannesburg, with large operational centres in Durban and Cape Town complemented by a regional network throughout South Africa. It also has facilities in other southern African countries which are operated through its 10 subsidiary and/or affiliated banks, and branches and representative offices in key global financial centres that exist to serve the international banking requirements of its South African-based multinational customers.

Markets and products

Nedbank Corporate

This comprises the Corporate Banking, Property Finance and Nedbank Africa businesses, and the specialist Transactional Banking and Corporate Shared Services businesses. These provide lending, deposit-taking and transactional banking services to Nedbank's Wholesale banking customers. Nedbank Corporate has a strong customer base and is well placed to take advantage of opportunities, both internally through cross-selling services offered by other divisions of Nedbank and the wider Old Mutual Group, and externally in the private and public sector markets.

Nedbank Business Banking

Business Banking focuses on businesses with turnover between around R7.5 million and R400 million. It provides a full spectrum of banking products and solutions as well as advisory services and specialist solutions. To make Business Banking easily accessible to its customers, its 14 regions and over 70 area offices are organised around four geographically defined business units run as decentralised, regional, customercentered businesses.

Nedbank Capital

Nedbank's investment banking business consists of divisions that together manage structuring, lending, underwriting, corporate finance, private equity and trading operations. It provides a full product range, from equity research to long-term project financing, enabling it to compete effectively in southern Africa and in niche areas throughout Africa. It seeks to provide seamless specialist advice, and debt and equity raising, execution and trading in all the major South African business sectors. Principal customers include a significant number of the top 200 domestic corporates, as well as public sector bodies, leading financial institutions, non-South African multinationals and customers undertaking major infrastructure and mining projects in Africa, and emerging Black Economic Empowerment consortia.

Nedbank Retail

This division provides transactional, credit card, lending, investment and insurance products and services to individuals and small businesses. It groups its customers into five primary segments: high net worth, affluent, middle, mass and small business. It is further organised around its principal product areas: card, home loans, personal loans, bancassurance and wealth, vehicle and asset-based finance, and transactional banking.

Imperial Bank

Imperial Bank focuses on motor vehicle finance, marketed through its Motor Finance Corporation brand. It also offers property, medical, aviation and supplier asset finance.

Market overview

South African banking is currently impacted by a slowing domestic economic cycle coupled with political change and the secondary effects of the global financial crisis. Increased infrastructure spending and moderate fiscal stimulus are expected to provide some opportunities for growth. The outlook for domestic inflation has improved, with the first interest rate cut of 50 basis points since April 2005 providing some relief for consumers.

Operating conditions have become increasingly difficult for Nedbank Retail, with signs of slowing growth extending to the small and medium size business sector. The tough trading conditions have also affected investment banking and debt and equity trading, resulting in lower earnings in Nedbank Capital.

The principal challenges for local banking come from pressure on margins due to the industry's reliance on wholesale funding; the increased cost of funding in international debt capital markets; rising non-performing loans and weaker recoveries in retail banking as household finances remain strained and house prices come under increased pressure; and sharply slower Retail advances, partly offset by robust Wholesale advances.

But there are also opportunities, driven by growth in the mass, black middle and SME markets; growth in Africa generally; growth in retail deposits and other funding; increases in transactional banking fees; and improving asset margins.

Strategy for growth

Nedbank's strategy is based on growing its share of economic profit in South African financial services and making the most of the increasing opportunities that emerge in selected African markets. It concentrates resources on the businesses best positioned to increase economic profit based on their capabilities and related industry growth. Businesses with lower economic profit characteristics are managed for value through strong focus on profitability. Initiatives across the various divisions include selectively growing assets, passing increased funding costs onto customers, managing risks, increasing cross-selling and transactional income, smart cost management and reacting flexibly and nimbly to opportunities.

Nedbank will also continue to investigate opportunities to expand into the southern African Development Community region. This work will be supported by its recently established regional offices in Angola and Kenya, along with its new strategic alliance with Ecobank which has operations in 25 countries mainly in Western, Central and Eastern Africa.

In addition, Nedbank will continue to grow its Retail franchise, strive for leadership in business banking, gain more public sector business and remain a top three player in the Wholesale banking market.

Performance in 2008

Highlights (Rm)	2008	2007	% Change
Adjusted operating profit (IFRS basis) (pre-tax)	8,800	9,220	(5)
Headline earnings*	5,765	5,921	(3)
Net interest income*	16,170	14,146	14
Non-interest revenue*	10,729	10,445	3
Net interest margin*	3.66%	3.94%
Cost to income ratio*	51.1%	54.9%
ROE*	17.7%	21.4%
ROE* (excluding goodwill)	20.1%	24.8%

*As reported by Nedbank in their report to shareholders as at 31 December 2008.

Banking environment

The local banking environment faced a number of challenges in 2008. These included, firstly, pressure on margins as the overall cost of longer-term funding increased. It was pleasing to note that, throughout the year, rand liquidity remained stable, with the interbank lending market continuing to operate efficiently. Local banks have been able to finance new assets in the normal course of business. Secondly, reduced capacity and increased cost of funding in the domestic debt capital markets. Thirdly, rising non-performing loans and lower levels of recoveries, especially in the Retail environment as household finances remained strained and asset prices came under pressure. This trend intensified in the second half of 2008 and has been increasingly affecting small and medium-sized businesses, and will undoubtedly also impact some larger corporates going forward. Finally, sharply slower retail advances growth, partly offset by reasonable Wholesale advances growth.

The progress made during the recovery programme and over the recent past to build a sustainable business continues to benefit Nedbank and has resulted in a number of factors including ongoing growth in the Retail Mass and middle-income segments and Corporate markets, solid growth in Retail deposits, pleasing growth in transactional banking volumes, improved margins on new advances through risk-based pricing and increased client activity in foreign exchange and interest rate markets as well as an intensified focus on improving client service levels.

The Competition Commission inquiry into bank charges issued a detailed report in December 2008. Industry stakeholders have been given an opportunity by National Treasury to comment on the recommendations contained in the report. This input will be discussed by National Treasury with the Department of Trade and Industry, the South African Reserve Bank and the Competition Commission and it is anticipated that the final outcome of the banking inquiry process and the impact on the banking industry will be finalised during 2009. Nedbank remains committed to an outcome that provides real benefit to consumers and ensures the ongoing competitiveness and stability of the financial services industry.

Basel II was successfully implemented on 1 January 2008 and was used as a catalyst to enhance the management of risk and capital across the industry.

Financial performance

Given the turmoil in the global financial markets and the slower domestic economy Nedbank is currently adopting a more conservative approach across its operations. We have intensified our focus on increasing capital levels, growing deposits and liquidity, proactive risk management, selectively growing assets in businesses that are well positioned to increase economic profit, continuing to manage for value in those businesses that have lower economic profit profiles and managing down positions in riskier lines of businesses. At the same time we continue to invest for the future and we are not seeking to maximise short-term profitability at the expense of longer-term sustainability at this point in the cycle.

Adjusted operating profit (IFRS basis) was down five percent to R8,800 million with headline earnings down three percent to R5,765 million. Basic earnings grew by six percent to R6,410 million (2007: R6,025 million). Diluted headline earnings per share (EPS) decreased by two percent from 1,429 cents to 1,401 cents. Diluted EPS grew seven percent from 1,454 to 1,558 cents, driven largely by the R622 million after-tax profit on the sale of Visa shares in the first half of the year.

Nedbank's return on average ordinary shareholders' equity (ROE), excluding goodwill, decreased from 24.8 percent to 20.1 percent. ROE dropped from 21.4 percent to 17.7 percent for the year. These declines were caused by slightly lower headline earnings, mainly as a result of increasing Retail impairment levels that reduced the return on assets, together with higher capital levels as capital adequacy ratios increased during 2008.

Credit quality deteriorated throughout 2008 with Nedbank Retail's impairments worsening significantly, while the Wholesale banking portfolios showed a moderate deterioration in the second half of 2008. Overall impairments have increased, although the impact on earnings was partially offset by controlled cost growth. The momentum built from disciplined cost management over the past few years continued into 2008 and contributed towards the efficiency ratio improving from 54.9 percent in 2007 (54.3 percent excluding Bond Choice) to 51.1 percent in 2008 and the 'jaws' ratio growing to 7.5 percent (2007: 6.9 percent).

We continued to see a steady inflow of customer deposits, resulting in Retail deposits growing in line with Retail advances. Pressure on short-dated maturities has been partially alleviated by market expectations of decreasing interest rates and a strategy of increasing deposit duration, particularly in the second half of the year. Given our domestic focus and small foreignfunding requirements (foreign deposits are 1.3 percent of total Nedbank deposits), our funding and liquidity levels have remained sound with limited impact from the global financial crisis.

Net interest income (NII)

NII grew 14 percent to R16,170 million on the back of growth in average interest-earning banking assets of 23 percent. Nedbank's net interest margin for the year was 3.66 percent, down from 3.94 percent in 2007. The positive endowment impact of interest rate increases on capital and current and savings accounts was offset by a number of factors including liability margin compression, reflecting the higher cost of term funding, and asset margin compression from a changing asset mix. Asset pricing continues to be a key focus for improving margins, with higher margins being generated on new assets. Further offsets include the cost of holding additional liquidity buffers deemed prudent in the current environment; and debits relating to the accounting for historic structured-finance transactions with related credits offset in taxation.

Impairments charge on loans and advances

The credit loss ratio increased from 0.62 percent in 2007 to 1.17 percent for the year. The growth in advances and the increase in the credit loss ratio are reflected in a 123 percent increase in the impairments charge from R2,164 million to R4,822 million. Retail credit loss ratios have deteriorated since June 2008 and remain above expected through-the-cycle levels, largely as a result of continuing increases in defaulted advances in the Nedbank Retail Home Loan and Vehicle and Asset Finance divisions. Wholesale banking credit loss ratios remain below expected through-the-cycle levels, although the credit loss ratio in Business Banking increased as expected. The credit quality in the Corporate and Investment Banking books remains good but is expected to be impacted by worsening credit quality in the year ahead, resulting in increased credit loss ratios on these books. Notwithstanding seasonal effects, the unsecured Retail portfolio reflected encouraging signs of improvement in the latter part of 2008.

Defaulted advances increased by 75 percent from R9,909 million to R17,301 million and total impairment provisions increased by 29 percent from R6,078 million to R7,859 million.

Non-interest revenue (NIR)

NIR, excluding Bond Choice's commission and sundry income from the 2007 base, grew by nine percent on a like-for-like basis. Total NIR (including Bond Choice in the 2007 base) increased by three percent to R10,729 million.

Commission and fee income grew by 14 percent on a like-for-like basis (five percent including Bond Choice), mainly from volume growth and transactional price increases. Cheque processing fees continue to decrease with the NetBank electronic banking system now implemented for all Business Banking clients and a process of migration initiated for Corporate Banking clients. Cash handling fees and transactional banking volumes grew strongly due to the growth in customer numbers, reflecting the success of Nedbank's strategy to increase delivery channels, improve customer service and strengthen brand positioning. The sale of Bond Choice reduced commission and fee income by R578 million.

Trading income increased by 16 percent from R1,334 million in 2007 to R1,553 million in 2008, reflecting good trading activity in the foreign exchange and global market businesses, although equity and debt trading both had a disappointing year. Adjusting for the loss in the first six months of 2007 in respect of the Macquarie business alliance, trading income would be at similar levels year-on-year.

The sharp fall in equity markets resulted in historic unrealised gains in mark-to-market private equity positions reducing. In spite of these challenging markets Nedbank managed to record a positive NIR of R303 million from its private-equity portfolios on the back of revaluations, realisations and dividend income.

Expenses

Nedbank continues to invest in its franchise while maintaining a disciplined approach to expenses. Despite high inflation and the increased distribution footprint, expenses continued to be tightly controlled, increasing by two percent to R13,741 million (2007: R13,489 million). On a like-for-like basis, excluding Bond Choice, expenses increased by five percent.

Taxation

The taxation charge decreased by 25 percent from R2,336 million in 2007 to R1,757 million. The effective tax rate decreased from 26.3 percent in 2007 to 21.6 percent, mainly due to a reduction in the corporate taxation rate in South Africa from 29 percent to 28 percent, a change in tax legislation impacting investments held in private equity portfolios and increase dividend income.

Non-trading and capital items

Income after taxation from non-trading and capital items increased from R104 million in 2007 to R645 million for the year. The main contributions were the R622 million after-tax profit on the sale of Visa shares and the R15 million profit on the sale of 33.5 percent in Bond Choice.

Capital adequacy

Nedbank has strengthened capital ratios significantly, with a Tier 1 capital adequacy ratio of 9.6 percent (December 2007: 8.2 percent pro-forma Basel II) and a total capital adequacy ratio of 12.4 percent (December 2007: 11.4 percent pro-forma Basel II). These ratios are now above the Group's historic target ranges. The core Tier 1 capital adequacy ratio was 8.2 percent (December 2007: 7.2 percent pro forma Basel II). Nedbank currently holds a surplus of R9.5 billion against its regulatory capital adequacy requirements.

Advances and deposits

Total assets increased by 16 percent to R567 billion (2007: R489 billion). Growth in average interest-earning banking assets slowed to 23 percent (2007 growth: 29 percent). Advances increased by 16 percent, reflecting ongoing growth in Nedbank Corporate but slower growth from Nedbank Retail and a drop in advances in Nedbank Capital. Nedbank Capital's client loan book grew strongly, but this growth was more than offset by a reduction in the advances in the trading portfolio. Imperial Bank showed strong growth through most of the year.

Overall deposits increased by 21 percent from R385 billion to R467 billion at December 2008, with higher interest rates increasing demand for savings and investment products.

Despite strong growth in Retail funding, deposit growth was still largely concentrated in the Wholesale market. Management has remained focused on optimising the funding mix and profile of the Group through utilising alternate funding sources, concentrating especially on the Retail and Business Banking deposit bases, while pricing competitively for term deposits.

Nedbank's liquidity remains sound. The impact of the global financial crisis on South African markets has, to date, been largely limited to an increased cost of international funding as a result of the reduction in international liquidity. This decreased the bank's ability to access such funding and has led to an increase in the cost of - and decrease in appetite for - capital market debt. Given Nedbank's domestic focus, international funding has traditionally not been a large portion of the Group's funding base, while the increase in the pricing of capital market debt has increased the cost of rolling over conduit paper and new subordinated-debt issues, with volumes issued in this market also being lower.

During 2008 Nedbank successfully issued hybrid debt, raising R1.75 billion. In addition, to diversify the funding base, raise further foreign funding and lengthen the bank's existing funding profile Nedbank issued foreign syndicated club loans of $165 million and €165 million; registered a $2 billion European medium-term note (EMTN) programme; obtained a $100 million credit line from African Development Bank; and continues to focus on the Retail deposit base through competitive products and pricing.

Key performance indicators

The global economic crisis and cyclical downturn in the South African market prevented Nedbank from achieving some of its medium-term targets. The fact that it still met its targets relating to efficiency ratio, capital adequacy ratios and dividend cover reflects the conservative and risk-averse stance it has taken in these challenging times.

	Medium- to long-term financial target	Performance in 2008
Return on shareholders' equity (excluding goodwill)	10% above monthly weighted average cost of ordinary shareholders' equity (New target: 5% above)	20.1%
Efficiency ratio	Maintain ratio below 55% (New target: below 50%)	51.2%
Fully diluted headline earnings per share (HEPS)	Growth in fully diluted HEPS of at least average CPIX plus GDP growth plus 5%	(1.7%)
Impairment charge	Between 0.55% and 0.85% of average advances	1.17%
Capital adequacy ratios	Tier 1: 8.0% to 9.0% Total: 11.0% to 12.0% (New targets: Core Tier 1: 7.5%-9.0%; Tier 1: 8.5%-10.0%; Total: 11.5%-13.0%	Tier I: 9.6% Total: 12.4%
Economic capital adequacy	Adequately capitalised to a 99.9% confidence interval on economic capital basis (target debt rating A- including 10% buffer)	A-
Dividend cover	2.25 to 2.75 times cover	2.29 times

Marketing

Nedbank supported its positioning as a bank for all through soccer sponsorship and expanded further into the mass market by locating over 60 percent of all new ATMs and branches in previously under-serviced areas. It continues to be the most affordable bank at the lower end of the market as a result of fee cuts in 2005 and 2006.

To attract more deposits, it launched a new deposit account for individuals and small businesses Park-It, offering extremely competitive interest rates and short-term accessibility.

Nedbank's positioning as a caring brand is important to its commercial success. It continued to demonstrate this aspect of the brand through its Local Heroes programme - through which it supports causes that its customers and staff are involved in - and its Ask Once service promise ("You only have to ask once. The person you talk to will take responsibility for ensuring your request is resolved").

Customer service

Initiatives such as the Nedbank Retail Ask Once service promise are helping to position Nedbank as a leader in customer service. To ensure that it is equipped to deliver on its promises, it has employed Client Management Assessment Tool (CMAT) methodology since 2006. This framework allows it to benchmark its capability against some 700 other organisations using CMAT worldwide, and to identify and address weaknesses. In 2008 its CMAT scores remained in the top quartile for financial services companies worldwide - and for the second year running Nedbank was ranked number one among South African banks for customer service in the 2008 Ask Afrika Orange Index.

The move to a more decentralised decision-making process in Business Banking is also being appreciated by customers: customer satisfaction surveys showed upward trends in relationship quality and loyalty.

Principal risks and uncertainties

The appropriate level of capital for a bank is a function of its strategy, individual risk appetite and risk profile. This aligns with one of the key objectives of Basel II which is to differentiate capital requirements and capital buffers above the regulatory minimum, to reflect the unique risk profile on a bank-by-bank basis, rather than following the "one-size-fits-all" approach that Basel I engendered.

Nedbank has cultivated and embedded a prudent and conservative risk appetite, primarily focused on the basics of banking in southern Africa. This is illustrated by reference to a number of factors including having neither direct exposure to US sub-prime credit assets nor associated credit derivative transactions and having conservative credit underwriting practices which have culminated in a high-quality, well-collateralised Wholesale book and further tightening of credit criteria in our Retail book since 2007 in anticipation of the economic downturn and resulting from the introduction of the National Credit Act. We have reasonable credit concentration risk levels in relation to the South African market, with counterparty credit risk being restricted to non-complex, vanilla banking transactions. We have a strong, well-diversified funding deposit base (including a strong retail deposit franchise) and limited offshore funding, low securitisation risk exposure compared to global banks, low leverage ratio compared to global banks and higher ratio of risk-weighted assets to total assets ratio than that of peers, indicative of our appropriately conservative measurement of risk. In addition, we have a low level of assets and liabilities exposed to the volatility of IFRS fair value accounting, our small market trading risk in relation to total bank operations, we have a low interest rate risk in the banking book and we have low equity (investment) risk exposure, having successfully completed our non-core asset disposal strategy in 2007. We have low currency translation risk and an optimal offshore capital structure. Our earnings streams across our full commercial banking activities are well-diversified and our welldiversified subordinated debt profile has maturities of existing Tier 2 regulatory capital until 2011. We undertake comprehensive stress and scenario testing to confirm the adequacy of our capital ratios and accompanying capital buffers.

Against this background, we believe that capital levels (both regulatory capital and internal capital assessment, based on economic capital) and provisioning for credit impairments are appropriate and conservative, and that Nedbank and its subsidiaries are appropriately capitalised relative to our business activities, strategy, risk appetite, risk profile and the external environment in which we operate. Additionally, Nedbank is currently not holding excess capital for acquisitions.

Outlook for 2009

The global financial crisis and resultant recessionary conditions will place more pressure on an already slowing domestic economy. Weaker international trade, lower commodity prices and continued volatility on major financial markets are expected to restrict corporate activity. Consumer finances are likely to remain strained as a result of continued pressure on disposable income, falling asset prices, increasing unemployment and the weaker rand. Lower economic activity is also placing increasing strain on corporates.

Further interest rate cuts are anticipated during the course of 2009. The benefits of these would be expected to impact positively on the South African banking environment only in 12 to 18 months' time. In the short term the decrease in interest rates will have a negative endowment effect on banking interest margins, while impairments are likely to continue to deteriorate.

Priorities for 2009

• Focus on liability growth and the bank's strong depositor franchise
• Slow down growth in advances and focus on more profitable business
• Increase capital levels to the top end of the target ranges
• Price for risk and increased cost of funding
• Refine credit and risk parameters
• Focus on growing primary customer and transactional income
• Strengthen cross-selling
• Emphasise smart cost management
• Stay agile and alert to opportunities.

2.3 Mutual & Federal

Old Mutual plc owns 74 percent of Mutual & Federal Insurance Company Limited (Mutual & Federal), whose shares are publicly listed on the JSE.

Mutual & Federal is one of the leading insurance companies in southern Africa, providing tailored short-term insurance services to the personal, commercial, corporate and agricultural markets in South Africa, Namibia, Botswana and Zimbabwe.

The business has three main portfolios: Commercial, Personal and Risk Finance. The Commercial portfolio comprises Large Corporate, Credit and Agricultural accounts.

Markets and products

Mutual & Federal offers insurance products and advice to individual and corporate customers, mainly via brokers. Our professional and highly experienced brokers offer customers personal service and advice on purchasing policies, and practical assistance with claims.

Commercial

The Commercial portfolio provides comprehensive insurance services - including domestic and export credit risk, insurance against property, accident, marine, engineering, liability and motor risks and crop insurance services - to a diverse range of customers for smalland medium-sized businesses to large corporations.

Personal

The Personal portfolio provides domestic household, motor, and all-risks short-term insurance products to individual customers through white-labelled intermediary-branded and in-house products. One of our in-house products, Allsure, offers comprehensive cover by combining homeowners, household goods, personal accident and motor insurance into one policy. The portfolio also offers hospital cash plans and personal accident policies. For the budget end of the personal market it offers policies covering livestock and informal dwellings.

Risk Finance

The Risk Finance portfolio has a significant position in the South African market. It continues to enjoy a positive profile within the industry and is one of the largest suppliers of risk financing solutions in Africa, providing all types of alternative risk transfer products.

Market overview

The southern African short-term insurance market remained competitive during 2008. There was strong growth in the direct channels, driven by individuals' and small companies' growing preference for dealing with direct channel insurers. Broker-based insurers lost business to this channel, albeit more slowly than in previous years. Growth in the overall insurance market was reduced by a slowdown in economic activity, particularly in the sale of new motor vehicles. Lower sales of furniture and other luxury items meant that the personal market in particular did not keep pace with inflation.

Overall underwriting returns reduced slightly for the third year running, after the record levels achieved in 2004 and 2005. Although current levels have allowed participants to deliver satisfactory returns overall, a number of sectors of the industry remain substantially underrated. Significant remedial measures and rate increases are required to return these portfolios to profitability and it is hoped that 2009 will see a return to responsible underwriting standards.

The motor books of most broker-based insurers have been either unprofitable or marginally profitable, and correction of the motor book remains a strong challenge for insurers. An increase in the number and severity of large corporate fires has made this portion of every insurer's portfolio unprofitable: fire risks remain underrated and correction will be required in 2009.

Strategy for growth

Our vision is to be the strongest and most successful short-term insurer in our chosen markets. These include all classes of general insurance except those that carry long-tail claims liabilities. To achieve this, we are focusing on profitability while pursuing growth through new and existing markets and channels, new regions and acquisitions, and new products.

We remain committed to continued development of the intermediary channel and the further development of relationships with brokers.

We will continue to focus on our key financial targets of sustaining a long-term average underwriting ratio of five percent and delivering a return on capital above 20 percent, while maintaining service excellence to intermediaries and policyholders. To enhance underwriting profit we will apply responsible underwriting standards in setting rates commensurate with risks. We will be rigorously disciplined in managing expenses and will carefully control claims costs through strict monitoring and management of the claims supply chain. The operational improvements following the restructuring of operations during 2008 will help us meet these goals.

Performance in 2008

Highlights (Rm)	2008	2007	% Change
Adjusted operating profit (IFRS basis) (pre-tax)	1,169	1,256	(7)
Gross premiums*	9,159	9,323	(2)
Earned premiums*	7,669	7,948	(4)
Claims ratio*	67.1%	65.8%
Combined ratio*	96.1%	95.4%
Solvency ratio*	41.0%	42.0%
Return on capital* (3 year average)	33.9%	31.7%

*As reported by Mutual & Federal in their report to shareholders as at 31 December 2008.

Profits impacted by financial turmoil in the investment environment negatively impacting investment returns

Adjusted operating profit (IFRS basis) declined following the lower underwriting margin, but was partially offset by the impact of a higher LTIR. This added R57 million to our Adjusted operating profit. The profit attributable to equity shareholders declined 117 percent, primarily as a result of a reduction in the value of listed equities. The underwriting surplus for the year declined by 18 percent but the 2007 result was positively impacted by the release of R96 million from reserves following refinements to estimation methods. Without this adjustment, underwriting profit increased by 11 percent. Although there were further increases in the frequency and severity of industrial fire claims in the first half of the year, trading conditions improved during the second half. This, together with corrective measures on the underperforming group schemes portfolio resulted in satisfactory levels of underwriting profitability being achieved for the full year. Gross premium income declined by two percent as growth in the commercial portfolios was offset by the cancellation of a number of personal group schemes and a contraction in the risk finance portfolio.

Investment income reduced sharply during the year following a decline of approximately 27 percent in the value of listed equities which was in line with the JSE. Whilst dividend income declined slightly, interest income increased strongly as a result of higher levels of cash holdings during the year and higher interest rates.

Restructuring undertaken during the year

During the year Mutual & Federal undertook a substantial restructure to promote customer service and operating efficiency. Staff numbers declined by more than 600 as a result of the restructure and R55 million in retrenchment costs were paid. A further non-recurring expense of R147 million was incurred from the closure of a channel development project. This project was undertaken to seek growth opportunities from a number of different channels but was prudently abandoned when it proved to be too ambitious and ill-timed.

Solvency margin in the target range

As a result of the decline in the value of investments, the net asset value per share declined by 13 percent during the year to R10.92 at 31 December 2008. The solvency margin (being the ratio of net assets to net premiums) declined to 41 percent at 31 December 2008 but remains in the target range adopted by Mutual & Federal.

Marketing

Our business restructuring aimed to provide better service to customers, more customer-facing sales staff and cost efficiencies that allow us to price more competitively. We have been working to make significant inroads into specialist insurance markets, and appointed two new underwriting agencies specialising in classes of business that we had previously not underwritten.

We appointed a new advertising agency, which also took over the Company's PR function. An entirely new advertising strategy has been devised with the intention to enhance Mutual & Federal's brand profile in the market. Work began on refreshing the Company brand for launch in 2009 and 2010.

We also established a dedicated team to grow our share of the growing black consumer market.

Customer service

A specific goal of the business restructuring was to enhance customer service and shorten turnaround times for settling claims and issuing policies. New business processing systems introduced in 2008 are moving us rapidly towards becoming paperless, and in 2009 a state-of-the-art underwriting system will further enhance our service levels.

Principal risks and uncertainties

There are two main risks and uncertainties facing the business. The first is operational risk and the second is a credit risk item. Operational risk arises from the introduction of a new computer system across all operations and branches taking place in 2009. A smooth transition and introduction of the new operating environment is critical to the future profitability and success of the business, to the degree that some business may be lost if the conversion fails. While the re-insurance panel of the Company is graded on average 'A' and above (Standard and Poors), the failure of a re-insurer could cause significant solvency strain and going-concern problems to the business.

Outlook for 2009

The impact of the turmoil experienced at the end of 2008 in Europe and the United States is expected to be felt in South Africa in 2009. Economic growth will be challenged as commodity prices continue to fall. This will further dampen South African consumer spending in 2009 and inevitably inhibit growth in the short-term insurance industry. While Government infrastructure spending and the anticipated 2010 FIFA Football World Cup may provide some growth opportunities, much of this business is inadequately rated and will decline. As consumers are stretched, we are unlikely to see meaningful growth in existing personal portfolios.

If commodity prices stay low the local currency will remain weak, particularly if the Reserve Bank follows the example of Europe and the United States with aggressive interest rate cuts. Any decline in the value of the rand threatens to increase claims costs because of the large imported component in motor vehicles and replacement plant and equipment.

Despite these factors, we remain committed to producing underwriting profits in 2009 and, although the economic downturn may subdue growth, our streamlined structure should provide us with a competitive advantage.

Priorities for 2009

• New products and exploration of alternative distribution channels and emerging markets
• Profitable premium growth; cancel persistently unprofitable portfolios
• Evaluate opportunities in the direct insurance market, where we do not currently compete. Growth in this market has outpaced the broker-based market in recent years, and margins are higher as direct insurers can select risks more rigorously and apply policy conditions more strictly
• Achieve operational efficiencies through new business processes and technology: our new systems and revised structure should significantly reduce the cost of delivering products and time taken to implement new products
• Improve employee satisfaction and realise significant transformation in the workplace
• Rejuvenate the brand to meet the challenges of the current and future markets.