3.0 NORTH AMERICA

Thomas Turpin President and CEO, Old Mutual Asset Management (US)
Chris Chapman CEO, US Life

Our activities in North America span annuities, life insurance and asset management.

Headquartered in Baltimore, US Life offers a diverse portfolio of annuities and life insurance products distributed through agents across the United States. Old Mutual (Bermuda), part of US Life, is an offshore business that develops and distributes investment products to non-US customers in a variety of markets around the world.

US Asset Management, based in Boston, comprises 20 investment boutiques offering high-quality, actively managed investment products in all the major asset classes and investment styles for individual and institutional customers.

3.1 US Life

Our US Life business consists of two businesses: US Life onshore, and our offshore, Bermudan, business. They serve different customer groups, offering different products to each as detailed in the relevant sections below.

We entered the US life insurance market in 2001 by acquiring several established insurance companies, the largest being Fidelity and Guaranty Life Insurance Company (now OM Financial Life Insurance Company).

Our Bermudan business enjoys a progressive regulatory environment. Bermuda is a major offshore financial centre with a reputation for high quality business. It offers a well-developed legal framework, providing certainty and effectiveness in accordance with international standards of best practice and offers a highly sophisticated infrastructure with efficient banking, trust, investment, accounting, custodial and legal services.

Performance in 2008

Highlights ($m)	2008	2007	% Change
Adjusted operating profit (IFRS basis) (pre-tax)	(679)	195	(448)
Return on equity	(50.0%)	5.9%
Adjusted operating (loss)/profit (covered business) (MCEV basis) (post-tax)	(1,112)	65	(1,811)
Return on embedded value (covered business)	(121.4%)	4.1%
Life assurance sales (APE)	519	671	(23)
Value of new business	(122)	63*	(294)
APE margin	(23.0%)	9.0%*
PVNBP	4,990	6,375*	(22)
PVNBP margin	(2.4%)	1.0%*
Net client cash flows ($bn)**	1.0	1.6	(38)
Funds under management ($bn)**	20.7	24.1	(14)

* Restated, as now reporting on an MCEV basis.
**Stated on a start manager basis as USAM manages funds on behalf of US Life.

Decrease in funds under management driven by unprecedented equity and credit market movements

Despite the turbulent markets, net client cash flows were four percent of opening funds under management. Funds under management ended the year at $20.7 billion, down 14 percent from the opening position primarily due to a 21 percent decrease in the market value of funds under management. The net unrealised loss on the fixed income portfolio increased by $2.3 billion to $2.6 billion and Old Mutual Bermuda (OMB) variable annuity separate account asset values decreased by $2.4 billion. The market value decrease was mainly the result of widening credit spreads in the bond markets and dramatic declines in global equity markets.

Sales driven by variable annuities

Total life sales on an APE basis were $519 million, down 23 percent from 2007. Sales by OMB were the largest contributor to APE. However as a consequence of the high cost of guarantees in the volatile environment, we withdrew products during the year and therefore the OMB sales in the last four months of the year were significantly lower.

Fixed indexed annuity sales, down 40 percent from 2007, were affected by difficult market conditions. However, fixed annuity sales of $60 million were up 216 percent from 2007, following the industry trend as customers seek fixed interest guarantees during this period of extreme equity market volatility and economic instability.

Value of new business (VNB)

VNB reduced by $185 million in 2008 compared to 2007, with a margin of negative 23 percent compared to nine percent in 2007. The decrease in margin was mainly due to (a) the reduction in swap rates which reduces the investment returns relative to guaranteed minimum crediting rates in US Life onshore; and (b) the additional provisions for non-modelled risks and higher guarantee costs in respect of the offshore variable annuity business.

Review of reserving basis

We continually monitor our assumptions and make adjustments based on experience as appropriate. During 2008 we lowered the mortality assumption for life contingent single-premium immediate annuities (SPIA), which increased the IFRS reserve and reduced embedded value. We modified the expected lapse rates for deferred and indexed annuities to reflect higher expected surrenders when the contracts exit the surrender charge period, which resulted in the unlocking of a portion of deferred acquisition costs (DAC). We also included a non-performance risk factor in discount rates used to determine the indexed annuity embedded derivative liability and the variable annuity guaranteed minimum accumulation benefit (GMAB) liability, which decreased the liabilities. Finally, we updated the variable annuity GMAB assumptions related to fund indices, mortality, free partial withdrawal utilisation, services fees and volatility, which resulted in a net decrease in the liability.

Underlying adjusted operating profit (IFRS basis) results

Adjusted operating profit (IFRS basis) decreased $874 million from the level at 2007 to a loss of $679 million for 2008. The 2008 loss reflects $436 million of additional mortality reserves related to life SPIAs, a $295 million charge in the fourth quarter for revisions to estimates of future gross profits which resulted in an 'unlocking' of the deferred acquisition cost asset (DAC), and $126 million of hedge losses related to variable annuity product guarantees. The latter was part of a total IFRS pre-tax and pre-DAC charge of $508 million relating to the variable annuity product with $382 million flowing through the short-term fluctuations line. Difficult credit markets resulted in higher impairment losses and volatile equity markets increased the costs associated with the guaranteed benefits on our variable annuity contracts.

Market Consistent Embedded Value (MCEV) results

Adjusted operating profit (MCEV basis) was significantly lower in 2008 than in 2007, mainly due to the large negative assumption changes made in 2008: strengthening of SPIA mortality reduced the VIF by $280 million, an increase in expense assumptions reduced the VIF by a further $291 million, and the strengthening of OMB GMAB reserves reduced the ANW by $126 million. Experience variances were also significantly adverse, due largely to higher than expected lapses and the impact of reinsurance deals which had been priced to be broadly cost-neutral on a real world basis. Other negative experience variances included lighter than expected SPIA mortality and an expense overrun, which resulted in the operating assumption changes already outlined.

Credit update

The markets finished the year on a slightly positive note, as credit spreads tightened from historical wide levels in November. Overall, the markets remained fragile as continued financial sector rescue and economic stimulus initiatives were required to boost economic activity and confidence. The recessionary environment projected for 2009-2010 depressed all market sectors.

US Life's fixed income portfolio aggregate credit experience continued to be affected by poor economic and financial market conditions. For 2008, impairments total $768 million on 43 securities with three of the 43 being subprime asset-backed securities and another 15 indirectly linked to sub-prime or monoline insurer exposures. 3.4 percent of US Life's fixed income portfolio has direct exposure to sub-prime mortgage collateral. The majority of the sub-prime exposure remains highly rated but has experienced several ratings downgrades. Of sub-prime holdings at 31 December 2008, 67 percent was rated AAA, 80 percent AA and higher, 93 percent A and higher with an aggregate 68 percent fair value-to-book value ratio.

Approximately 2.9 percent of US Life's fixed income portfolio has exposure to monoline insurers, of which $508 million (89 percent of the total exposure) is indirect (wrapped) exposure, with an 82 percent fair value-tobook value ratio, and $64 million is direct (unsecured) exposure, with a 56 percent fair value-to-book value ratio. The indirect exposures include $197 million of sub-prime asset-backed securities which are wrapped by monoline guarantees.

Many large, high profile financial firms suffered failures and regulatory interventions during the year, resulting in creditor losses, almost completely illiquid credit markets, dramatically wider credit spreads and lower bond prices in all sectors. In line with other US insurers, our fixed income portfolio aggregate credit experience and current unrealised loss position have been affected by these events and market conditions. US Life's fixed income portfolio recorded impairments of $237 million in the fourth quarter of 2008, contributing to total impairments of $768 million for the 2008 year. The main components of this were public fixed income security losses principally in respect of Washington Mutual ($78 million), Lehman Brothers ($50 million), three foreign financial institutions ($98 million), several structured securities ($165 million), three monoline insurers ($38 million) and losses on preferred stocks ($225 million) of which Freddie Mac and Fannie Mae was the majority ($151 million). US Life's net unrealised losses on the fixed income security portfolio was $2.6 billion at 31 December 2008 reflecting the market-wide repricing of credit spreads and continuing fallout from the sub-prime mortgage crisis. Actual defaults on our corporate bonds for the year were $158 million resulting in a default rate of approximately 1.3 percent on our corporate bond portfolio. The value of our US investment portfolio at 31 December 2008, after recognition of these impairments, totalled $20,347 million.

3.1.1 US Life onshore

Our US Life onshore business consists of OM Financial Life Insurance Company and its subsidiary, OM Financial Life Insurance Company of New York.

US Life's fixed income investments are managed by our US Asset Management business on a commercial basis. The majority of its administrative functions are outsourced to third-party service providers.

Markets and products

Implementation of our core product strategy was completed by the beginning of 2009. We have pared back the range of fixed annuity products we offer and stopped selling seven life products and our US variable annuity product, to focus our range on indexed annuities, fixed annuities including immediate annuities, and protection products such as indexed universal life and mortgage term life. These are designed to deliver higher profitability while providing customers with transparency and value-driven benefits.

Fixed indexed annuities (FIAs)

Our FIA product has been rated in the top five of its US product segment by LIMRA International for most of the past few years. It guarantees the policyholder no loss of principal due to market risk, with a return derived from the greater of a guaranteed fixed rate or a formula relative to equity market index movements. The potential equity index upside is hedged using equity index options and futures, enabling us to provide the potential for gains while managing exposure to loss of principal.

Fixed annuities

Under these fixed-rate contracts we invest in a portfolio of bonds that earn a spread above the rate guaranteed to the policyholder. There are two main types of fixed annuities: one aims primarily to offer a tax-efficient way of saving money for retirement, and the other to provide an income stream for life.

Protection products

We offer two principal protection product lines: term life protection and fixed indexed universal life products. These provide flexible life assurance protection in the event of death or disability. Quick underwriting turnaround times and the introduction of product features such as return of premium benefits enabled these products to maintain market share in 2008 despite the rapidly declining housing market. The indexed universal life designs specialise in providing supplementary retirement income options for customers who use preferred loan features on a tax advantaged basis.

Our products are distributed through various channels. The majority of sales are generated through established groups of managing general agents (MGAs) who typically offer agents a range of annuity and life assurance products from various providers.

Market overview

Although the economic downturn has hit sales of high net worth and middle market products, US life insurance remains a fundamentally attractive market with significant prospects. Demographic and economic changes (increasing life expectancy and earlier retirement) will continue to generate new customers and new needs and to increase the average time people spend in retirement. The Baby Boomer generation represent a huge opportunity for the next 20 to 30 years as they head towards retirement and look for products with income and risk management features. While discretionary spending is likely to fall in 2009, 75 percent of middleincome consumers see life insurance and retirement savings as necessary.

US sales of individual annuities continued at a record pace in 2008, reaching $197.1 billion through the first three quarters. Variable annuities were down 18 percent on the previous year but fixed annuity sales rose dramatically, up 46 percent. Traditional fixed annuities saw the most dramatic increases (81 percent) while fixed indexed annuity gains were more modest (five percent).

Most fixed annuities are sold through independent agents and banking channels, but the channel mix is changing: bank sales in 2008 increased by 90 percent from the previous year while sales through independent agents increased by only 16 percent.

Although demand for the guarantees offered by insurance products is growing, the capital available to support them is not. This has led many significant insurance industry players to apply to buy regional banks so as to qualify for Troubled Asset Relief Program (TARP) funds. The difficulties insurance companies face in hedging guarantees has led many to restructure their products by repricing them and simplifying product features.

There is a push for federal regulation of the insurance business to assure consistency across the various states. This could offer companies and agents economies of scale in compliance; but a more onerous regime similar to that for securities dealers could drive out companies and agents that sell primarily or only fixed products and do not wish to entertain the expense (upfront cost and new business strain) involved.

A regulatory change that could reduce the viability of indexed life and annuity products is currently being challenged in the US Court of Appeals. In effect it would mean that indexed products would be treated like securities and could only be sold through agents who have securities licences.

Strategy for growth

We are well placed to take advantage of current demographic trends and are striving to develop innovative product solutions, deliver strong investment performance and enhance our retail presence.

In the fourth quarter of 2008 we launched a major transformation initiative to improve profitability and dramatically reduce our cost structure. We streamlined product offerings to focus on profitable core products, and revised sales targets downwards to achieve capital management and profitability goals.

The cost structure was re-engineered for lower sales volumes, with specific action to consolidate locations, comprehensively restructure the organisation and reduce headcount. With these changes made, the business is on a better footing to tackle the challenges ahead in 2009.

Performance in 2008

Highlights (US Life onshore) ($m)	2008	2007	% Change
Adjusted operating profit (IFRS basis) (pre-tax)	(425)	111	(483)
Life assurance sales (APE)	251	312	(20)
Value of new business	(21)	(13)	(62)
APE margin	(8%)	(4%)
PVNBP	2,307	2,778	(17)
PVNBP margin	(0.9%)	(0.5%)
Funds under management ($bn)	14.9	18.1	(18)

We are focused on transforming and scaling our business to improve performance by drawing back to reduced volume but more profitable sales, lowering new business capital strain and reducing operating expenses while creating a more efficient foundation for potential future business growth.

The key focus will be on the successful implementation of the business transformation strategy. The new product profile will be less capital intensive through streamlining the current product portfolio and eliminating unprofitable lines. The sales strategy will centre on core distribution partners to produce more effective relationships. In addition to the consolidation of locations and reduced headcount, a strong expense discipline will be employed throughout the organisation. We will embed a risk management framework that reinforces a conservative risk culture into the business operations.

An additional capital injection of $225 million was made in February 2009 to US Life onshore from the Group to maintain the Risk Based Capital in line with the operating target. The total capital injection for 2008 and early 2009 was $325 million, resulting in a RBC ratio of 305 percent.

Marketing

Throughout 2008, US Life collaborated with US Asset Management in a drive to make Old Mutual a household name in the US. Targeting key distribution segments, prospective partners and, for the first time, consumers, this integrated approach significantly increased visibility with the target audiences.

The two business units also teamed-up on several high profile sponsorships including the 2008 Tavistock Cup, 2008 Masters Champion Trevor Immelman and all the Triple Crown Thoroughbred events. These events doubled as hospitality opportunities for our key distribution partners, affiliates and strategic partners - and we achieved significant efficiencies by building milestone and planning meetings into the event timetables.

A US Life roadshow, which visited over 30 cities, allowed leaders from the sales and compliance areas to demonstrate best sales practices, dos and don'ts, suitability examples and motivational techniques. It attracted higher attendance by existing and prospective distributors than the previous two years' roadshows.

Customer service

A service platform that fosters exceptional customer experiences is the foundation for attracting and retaining customers.

Our 2008 operational initiatives aimed to provide an 'experience' rather than merely service for customers calling our service centres. Competitive benchmarking studies show that service levels have improved on average by 17 percent since 2007. Our reputation for treating all customers professionally and fairly continues to improve, and we are confident that this will aid the growth and retention of customers. At the same time, we continued to improve our monthly unit costs in respect of our one million in-force policyholders.

As part of enhancing the services we provide to our MGAs, we implemented online self-service capabilities for key distribution partners, allowing them to aggregate data from our systems and present a consolidated portfolio for their customers. Our distribution partners can now also contract and license new agents electronically via our secure internet portals.

Principal risks and uncertainties

US Life onshore is exposed to a number of risks, including the attraction and retention of key staff during the business restructure, retaining the capital required to meet target risk-based capital levels, funding and meeting product guarantees, and asset liability management, including the need to maintain sufficient liquidity to protect the bond portfolio from crystallising losses in the current volatile market. In addition, defaults, downgrades or other events impairing the value of our fixed maturity securities portfolio may reduce our earnings. Changes in market interest rates may significantly affect our profitability and a downgrade in our financial strength or credit rating could result in a loss of business. A further decline in equity markets or a sustained increase in volatility may adversely affect sales of our investment products and our profitability.

Outlook for 2009

Despite the economic conditions we remain optimistic about our core products, which offer customers guarantees, flexibility and transparency as we work with them to meet their risk and retirement needs.

Experience in previous recessions suggests that this economic downturn may have only a limited effect on sales in the life industry. During the last recession, total new premiums for individual life insurance dipped but were trending upward again before the recession ended.

We expect traditional insurance sales to small businesses to be strong as companies recognise the need for asset protection and indemnification and look for simpler solutions to meet their objectives.

We will continue working proactively to improve capital efficiency and investment portfolio performance. Measures to do this include the defensive restructuring of the asset portfolio, reducing the concentration of exposures to corporations in recession prone sectors, reducing financial credit exposures, upgrading commercial mortgage-backed security and sub-prime portfolios and increasing treasury and liquidity balances.

Priorities for 2009

• Continue the transformation of the business
• Maintain current risk-based capital levels, aided by the streamlined and less capital-intensive product profile
• Focus sales strategy on core distribution partners to build more effective relationships
• Consolidate locations, reduce headcount, and maintain strong cost discipline throughout the organisation
• Embed into the business a risk management framework that reinforces a conservative risk culture
• Continue to concentrate on the most appropriate markets and distribution channels to create a foundation for future growth.

3.1.2 Old Mutual Bermuda

Old Mutual Bermuda (OMB) provides investment products to international, non-US and non-US resident customers seeking a wide range of investment choices including fixed rate accounts and international mutual funds quoted in US dollars. A significant attraction for customers is the fact that the assets are held in segregated accounts and the investment plans are held within a trust structure outside their own country.

Our core competency lies in building and developing relationships with large financial institutions, meeting their needs by providing innovative and competitive products on an open-architecture platform.

Markets and products

We distribute through over 70 institutions, primarily international banks, as well as serving a range of private and institutional customers in over 150 countries. As a leading and innovative provider of investment products for international banks' high net worth and affluent customers, we focus on developing customised products. Customisation generally involves tailoring a proprietary product to each distributor's branding guidelines, giving it the look and feel of the institution's own products.

The current product mix comprises three investment plans:

• The Universal Investment Plan (UIP): an international investment plan which offers long-term growth potential with a variety of investment options including international equity, bond, hedge and money market funds, as well as fixed rate accounts. The plan also offers strategies to help protect and potentially grow the investment
• The Guaranteed Index Plan (GIP): an investment plan with index options that link returns to the values of the world's major indices, while guaranteeing a minimum of 105 percent of the amount invested. The plan provides investors with full participation in any upside subject to an annual cap
• The Guaranteed Rate Plan (GRP): an investment plan offering a fixed rate solution that allows control over maturity and flexibility of return. The plan enables investors to diversify by allocating into multiple guarantee periods.

Market overview

Record low levels of consumer and business confidence are creating a difficult operating environment with consumers switching their investments away from equity-based products into safer deposit options.

Weak equity markets, lower bond yields and higher volatility have reduced variable annuity (VA) profitability in the marketplace - highlighting that companies have not been effectively hedging all risks associated with associated guaranteed rider products.

The largest unhedged risk that companies providing such products are facing is that of policyholder behaviour. As expected, there has been an increase in the use of guaranteed withdrawals to help distressed customers meet their cash needs.

Lower equity markets and yields, coupled with increased hedge costs, are likely to lead to significant changes to VA pricing and product design. This could significantly change the competitive landscape and weaken overall consumer demand. Trust needs to be rebuilt through leadership, with a clear focus on delivering the right products to meet changing market needs.

Strategy for growth

While falling asset values and actions to de-risk the existing book have adversely affected sales and funds under management in the short-term, we believe our open-architecture platform and distribution capability place us in a strong position for the future.

We have a number of strategies for building our market presence and enhancing profitability. We aim to rebuild distribution with a more customer-centred focus on increasing sales to institutions. Increased use of index funds and fixed income options, as well as the introduction of asset allocation and/or volatilitycontrolled funds, will enable effective hedging and help us to provide cost-effective guarantees. Our newlydeveloped multi-currency capability will allow customers to invest in currencies other than the US dollar, and we are introducing products specifically designed to meet retirement needs. We are also undertaking a range of cost management initiatives.

Performance in 2008

Highlights ($m)	2008	2007	% Change
Adjusted operating profit (IFRS basis) (pre-tax)	(254)	84	(402)
Life assurance sales (APE)	268	359	(25)
Value of new business	(101)	76	(233)
APE margin	(38%)	21%
PVNBP	2,683	3,597	(25)
PVNBP margin	(3.8%)	2.1%
Funds under management ($bn)	5.8	6.0	(3)

During the year, continuing market volatility and significant strengthening of the US dollar led to further increases in guarantee reserves in respect of variable annuity contracts. In 2008, we recognised a total loss in respect of this business of $508 million, of which $126 million was recognised in adjusted operating profit. Cash of $582 million was transferred to OMB during 2008; it now has a significant excess to the minimum Bermuda regulatory capital requirement.

The Universal Guarantee Option (UGO), launched in January 2007, was an optional benefit connected to the Universal Investment Plan (UIP). It provided a Guaranteed Minimum Accumulation Benefit (GMAB), guaranteeing that the policyholder's account value would grow by at least five percent over five years (i.e. if the fund is below 105 percent of the initial premium, we would "top it up") and by 20 percent over 10 years. There was also in some cases a Highest Anniversary Value (HAV) guarantee on death and/or maturity. The UGO was withdrawn from the Hong Kong book in May, and from the rest of the market on 15 August 2008.

The death and living benefit guarantees, which are embedded within the variable annuity products issued by OMB, mean that OMB bears the risk associated with market downturns. In addition, since the guarantees are defined in US dollars but are backed by funds that are invested in foreign currency denominated securities, OMB bears foreign currency exchange risk in connection with these exposures. The funds backing the guarantees are not directly hedgeable, and therefore linear combinations of liquid market indices are used to proxy the return of every fund in a technique known as fund mapping. For effective hedging, the correlation between the funds and the chosen set of hedgeable indices should be as high as possible.

The turbulent economic conditions and failure to fully hedge certain risks, coupled with hedge ineffectiveness, meant that the cost of providing the guarantees increased substantially in 2008. This resulted in swift and decisive action in the second half, including senior management changes, the withdrawal of the UGO, strengthening of governance and risk management practices, the adoption of more conservative assumptions, implementation of improved fund mapping and the launch of the "Accelerated Universal Guarantee Option (UGO)" offer.

Improved fund mapping has enabled us to have a much clearer understanding of our exposures in terms of the guarantees we have offered. Whilst it is not possible to eliminate risk entirely, we have been able to improve significantly hedge effectiveness, from around 75 percent measured over the full year, to around 92 percent in the fourth quarter of 2008. We have also taken action which has given us a better understanding of the sensitivity of our reserves to changes in the underlying markets. As a general guidance: a one percent decrease in equity markets results in a loss of approximately $10 million; a one percent strengthening in the US dollar results in an adverse impact of around $4 million; and a one percent parallel increase in volatility costs approximately $15 million.

Better asset and liability management of the margin and bank accounts was instituted in the fourth quarter of 2008 to help increase yields, reduce counterparty exposure and minimise unintentional currency exposure. As market turmoil increased worldwide, we introduced 24-hour monitoring and trading in October 2008 to improve our reaction time. We enhanced our valuation methodologies to ensure assets and liabilities are calculated on a consistent basis, reducing unnecessary profit and loss volatility. A new product development process has been implemented, which includes the sign-off of products by the Group Chief Actuary, as well as the sign-off of the hedging strategy and hedge cost by the Chief Investment Officer and risk tolerance by the Chief Risk Officer.

Many customers who had opted for UGO guarantees had seen their initial investments fall substantially as a result of market falls. In November we offered to accelerate these guarantees for direct customers (i.e. excluding the Hong Kong book, on which OMB is the reinsurer). The offer was to restore their account value to 85 percent of their initial investment, less any subsequent redemptions. In return, all guarantees would be terminated and the associated fees would no longer be charged. In little over three weeks, 14 percent of policyholders receiving the offer accepted. This was a further step in de-risking the business. It resulted in a cash payout of $94.5 million, and a release of reserves of $133.4 million.

We also delivered significant operational improvements, including the development of a multi-currency facility and the implementation of process improvements that will substantially eliminate breakage (costs arising from a mismatch in the pricing contractually agreed with a customer and the actual price achieved, resulting from inefficiency of systems and/or processes).

Looking forward, further action will be taken on a number of fronts, including restructuring the business to further improve governance, risk management and accountability; further de-risking the existing book through improved hedge performance and regular monitoring of fund performance and the soft closing of funds that exhibit poor hedging characteristics. Further action will also be taken in the development of new investment and insurance products that meet customers' needs, such as Shariah compliant funds and guaranteed funds based on quoted indices, asset allocation models or volatility-controlled funds that facilitate effective hedging.

Marketing

We continue to target international bank customers interested in wealth accumulation, wealth preservation, estate planning and trust management, primarily through our relationships with global banks and financial intermediaries.

We are also committed to serving the needs of our distribution partners: partnering with them enables us to deliver our promise of creating innovative products aimed at meeting the needs of international investors.

Customer service

We made major service improvements during the year, including the enhancement of websites catering for seven languages, and the offshore hosting of our production web portal in Geneva.

Having confronted the challenges of 2008 we are able to return to our global bank partners who have, themselves, been addressing the consequences of the global economic crisis with new offerings that provide the security of confidential investment in a wide selection of underlying assets. One of the benefits of our approach is that accumulated investments can be passed on from generation to generation, with guarantees that can be delivered whatever the economic environment.

Principal risks and uncertainties

OMB is primarily exposed to risks which include basis risk, being the risk that customers' investments in the underlying mutual funds underperform relative to the liquid market indices used to hedge the exposure, or the assumptions as to currency exposure prove to be inaccurate; and credit risk in connection with its fixed account assets. Another risk is an increase in the cost of hedging as a result of increased market volatility. OMB does not currently hedge volatility, but would look to hedge on a strategic basis, should this be deemed appropriate. One further risk is that of further reductions in terms of fee income should the value of the assets under management upon which the company earns fees continue to fall.

Outlook for 2009

In 2009, we aim to rebuild our position as a leading distribution platform while maintaining high levels of customer service.

A return to more normal market conditions and the launch of a range of new hedgeable products will underpin a good recovery in profitability, although we still expect some modest volatility in earnings in the medium term.

Priorities for 2009

• Restructure to further improve governance, risk management and accountability
• Further de-risk the existing book through better hedge performance, supported by improved fund mapping, regular monitoring of fund performance and the soft closing of funds that exhibit poor hedging characteristics
• Develop new investment and insurance products that meet customers' needs, such as Sharia-compliant funds and guaranteed funds based on quoted indices, asset allocation models or volatility-controlled funds, which facilitate effective hedging.

3.2 US Asset Management

We have built a significant asset management business in North America through acquisitions as well as strong organic growth over the past seven years. We have created an environment in which unique, entrepreneurial asset management boutiques can thrive.

US Asset Management, based in Boston, consists of 20 distinct boutique firms, including asset managers who specialise in high-quality, active investment strategies for institutional customers, high net worth individuals and retail investors around the world. Our boutiques are located mainly throughout North America, with two in London. Dwight Asset Management, a fixed income manager, is the largest with 27 percent of total funds under management. Barrow, Hanley, Mewhinney & Strauss, a value equity manager accounts for 19 percent and Acadian Asset Management, an international equities firm, holds another 18 percent. Over time, the size rankings within the business may change, depending on the market environment and investment styles in favour at the time.

Collectively, we offer over 100 distinct investment strategies. Individually, each boutique has its own vibrant, entrepreneurial culture and capabilities focused on its own area of expertise.

Our structure combines the investment focus of boutique managers with the stability and resources of a large, international firm. This delivers significant benefits - for example, offering a diversity of investment styles which minimises exposure to the changing preferences of investors. It provides the efficiency savings that come from central capabilities in product development, infrastructure and distribution. The boutiques themselves are free to focus on delivering strong investment performance and customer service.

Most of the boutiques now operate under profit-sharing arrangements under which we pay them a percentage of operating profit, after overheads and salaries. Long-term equity plans have also been implemented within most of them, with final implementation planned for 2009. This model differentiates us from competitors and the combination of profit-sharing and equity plans ensures that the interests of the boutiques are closely aligned with those of our shareholders and customers.

Markets and products

Institutional accounts

We offer actively managed investment products in all the major asset classes and investment styles. Our investment capabilities span US and global equities, fixed income, property and alternative asset classes. Separate accounts and actively managed commingled accounts are offered across a range of asset classes and investment strategies. We have been a pioneer in 130/30 and similar strategies that seek to enhance the alpha produced through active management. Several of our affiliates manage assets in this fastgrowing area for investors, where products typically command higher fees. Our customer base is now diversifying, with a significant proportion of our net client cash flows coming from investors outside the US.

Retail accounts

The Old Mutual Advisor Funds offered through our retail distribution arm (Old Mutual Capital) allow individual investors access to institutional-quality management in a mutual fund format.

We offer individual mutual funds in a wide range of asset classes and investment styles. Funds are offered as single-strategy mutual funds, or alternatively as diversified asset allocation funds under the Pure Portfolio brand. We currently offer single-strategy mutual funds in US equities, fixed income, international equities, emerging markets, property investment trusts and money markets. In addition, we offer multi-strategy funds that draw on the capabilities of our boutiques as well as those of selected outside managers.

Market overview

The current market environment presents significant challenges for the asset management industry. Earnings pressure exists across the industry due to the steep drop in asset levels resulting from depressed global markets. Few indexes have remained positive and most of the major indexes have had negative three- and five-year returns as a result of 2008 market performance. A general lack of confidence and liquidity continues to inhibit recovery.

Investment firms with undiversified portfolios, heavy equity weightings or performance fees with high thresholds are the most susceptible to earnings pressure. A significant number of asset management firms restructured during the fourth quarter of 2008 to alleviate anticipated margin pressure. But many are wary of cutting deeper than necessary in the short term and so risking their market positioning for the next wave of growth.

Competition in North America is strong, and each of our boutiques faces significant competition from other specialist providers. The differentiating factors between firms are often investment performance and product capabilities. Our investment managers have a record of excellent long-term performance, and by applying the diverse styles of our individual firms we can target new investment opportunities to broaden our product offering.

The significant losses incurred by investors as a result of hedge fund strategies are prompting pressure for tougher regulation of the asset management industry. The new US Presidential Administration is expected to push for a significant overhaul of the US financial regulatory framework. As a result, fringe strategies and non-transparent hedge strategies are experiencing great market pressure - which presents opportunities for traditional asset management models to gather assets and institutionalise alternative offerings for clients.

Strategy for growth

We are focused on optimising the multi-boutique investment management model to deliver high-quality investment solutions to our customers, grow profitably and deliver exceptional returns to shareholders. Our business is well placed to take advantage of market, demographic and other related trends as we continue working to develop innovative products, deliver strong investment performance and grow our business. We continue to maintain expertise in sourcing, cultivating and integrating investment talent and capabilities within our business. We have also concentrated effort on delivering thought leadership in product development, packaging and distribution while enabling our investment professionals to focus on investment management and delivering superior investment results for customers.

Performance in 2008

Highlights ($m)	2008	2007	% Change
Adjusted operating profit (IFRS basis) (pre-tax)	181	324	(44)
Return on capital	7.2%	11.3%
Operating margin	20%	27%
Unit trust/mutual fund sales	1,892	3,782	(50)
Net client cash flows ($bn)	(5.2)	35.2	(115)
Funds under management ($bn)	240.3	332.6	(28)

Investment performance strong through a difficult investing environment

Aggregate long-term investment performance from our boutiques remained strong. Over three years, 53 percent of institutional assets had outperformed their benchmarks and 54 percent of institutional assets were ranked above the median of their peer group over the trailing three-year period. These numbers represent significant improvement from the third quarter and demonstrate that our affiliates' disciplined investment processes, based on sound valuation and business fundamentals, continue to deliver for clients.

Net flows and funds under management impacted by market turbulence

Net client cash flows for the year were a solid $1.5 billion. Including securities lending at Dwight Asset Management, which we suspended in the third quarter, total outflows were $5.2 billion. Given the difficult market conditions and the net outflows being experienced across the industry, our result for the year was encouraging and compares favourably to our peers. Our track record of investment performance coupled with our diverse multi-boutique model positions us well to continue to attract net inflows despite the current market climate.

Funds under management ended the year at $240.3 billion, a 28 percent decrease from 2007. $89 billion (96 percent) of the reduction was due to negative market returns. Our diversified asset mix helped to lessen the impact with fixed income and alternatives being less volatile and uncorrelated in periods of market instability. Such asset classes represented over half of the total funds under management at year end. On 1 July 2008, Rogge Global Partners acquired ING Ghent, which contributed $1.5 billion to funds under management during the year.

Retail sales challenges

Like most of our competitors, retail sales faced a challenging year in 2008. OMAM UK unit trust sales and Old Mutual Capital mutual fund sales for the year were $1.1 billion and $831 million, respectively, down a combined $1.9 billion (50 percent) from 2007. At 31 December 2008, 12 of Old Mutual Capital's mutual funds carried four- or five-star rankings by Morningstar, and we remain confident in the competitiveness of the underlying products we offer.

Adjusted operating profit (IFRS basis) down 44 percent

Adjusted operating profit for the year was down 44 percent from 2007. The decrease was primarily a result of lower management fees as well as performance fees, both of which were negatively impacted by the volatile markets. In addition, while we recorded $11 million in realised gains on seed investments in 2008, we also recorded $35 million of unrealised losses in adjusted operating profit. The operating margin, which is calculated inclusive of minority interest expense, also declined from 2007. Actions were taken to reduce costs across the business in the fourth quarter, and we remain committed to managing expenses through the current operating climate.

Continued focus on product development and distribution

We remain committed to the delivery of unique and innovative investment options. Recent product focus has included asset allocation and risk-adjusted return objectives which have positioned us well in the current market environment. Specifically, we recently launched Old Mutual Target Plus Portfolios, the only targetretirement mutual funds with three risk-specific asset allocation strategies. These funds enable Old Mutual to capitalise on the trend of target date funds as retirement plan default options.

To capitalise on the movement of asset flows towards both global and alternative products we launched the following strategies: Copper Rock International Small Cap Growth (managed by a newly acquired team), Barrow Hanley International Value, Thompson Siegel & Walmsley Global Equity, Acadian Emerging Market Debt, 2100 Managed Futures, and 300 North Capital Long/Short.

In addition to our continued focus on product quality we have begun to build out the next generation distribution model adding several new team members covering Alternatives, Defined Contribution Investment Only, and Wall Street and Global Distribution. This is an example of our commitment to grow the business and bring in talented experienced people to serve the evolving needs of our customers.

Marketing

In addition to partnering with US Life on a number of sponsorships, we hosted industry events showcasing our boutiques' investment capabilities in key market areas. We hosted a 130/30 conference in February to showcase several of our boutiques and emphasise our leadership in this field. We also continued to seed new investment strategies to broaden our capabilities in areas of high demand and support continued growth.

Customer service

Our boutiques enhanced their customer service and took extra steps in communicating with customers during the market volatility. The success of these efforts is evident in our net client cash flows relative to our peers.

Principal risks and uncertainties

The broad market downturn had, and will continue to have, an impact on the US asset management business (OMAM). The exposure to current market fluctuation continues to impact assets under management, revenues and earnings targets, thereby affecting our ability to execute against the overall business strategy. In addition, given activities over the last year, there is a high likelihood of regulatory reform across the financial services industry. In aggregate, these factors create an environment that could result in OMAM facing continuing pressure on earnings as well as higher than normal levels of litigation and reputational risks.

Outlook for 2009

We see good potential both in the US and globally. Difficulties within financial institutions have created a significant opportunity to attract investment talent within the US. Market volatility also creates opportunities for managers to provide outperformance for customers at a time when the gap between the top and bottom quartile performers has widened.

Before the current market difficulties, client cash flows were driving asset allocation decisions towards international, global and alternative strategies. We believe these trends will continue in 2009, but many customer searches have been halted given the recent volatility. Search activity should return with client cash flow as the volatility in the financial markets subsides, but customers will remain wary. They will put a premium on companies that are truly institutional in quality and offer effective risk management, continuity of staff, strong ownership structures, transparency of investment process and longevity of performance.

Until global equity markets recover, our earnings growth will be restricted. However, our investment track record has positioned us well relative to competitors, and our diversified asset mix will continue to help us weather market volatility.

Priorities for 2009

• Maximise the value of the multi-boutique portfolio and maximise its value by delivering consistently highquality investment performance and retaining assets with consistently active management
• Maintain a co-ordinated strategy aimed at managing the portfolio of companies to meet the changing demands of the market
• Continue to build on existing global success by sharing best practice in managing boutique investment firms and driving greater global distribution for our existing boutiques
• Continually energise excellence in our distribution and customer service model by supporting the boutiques' distribution efforts; augment those efforts for products - such as investment-only defined contribution - or distribution channels that are not easily serviced by traditional institutional asset management firms
• Continue to diversify the core of our business, which is based in institutional asset management, by sourcing investment teams and firms, identifying new distribution channels and creating innovative products
• Achieve all this within a framework of strong financial and capital management focused on cost management, prioritising efficient capital spending, and our seed capital programme.