4.0 ASIA

Steffen Gilbert President, Asia

The Asia region consists of operations in two countries, China and India, which are managed through joint ventures. In 2008 the region also included operations in Australia but in March 2009 Old Mutual announced the sale of its Australian businesses.

4.1 Asia

China

Our business in China, Skandia:BSAM is a 50:50 life insurance joint venture established in 2004 with the Beijing State-Owned Asset Management Company (BSAM). It provides retail unit-linked assurance solutions for high net worth individuals and operates in Beijing, Shanghai, Jiangsu Province and Guangdong Province. Distribution is exclusively through third parties including banks, securities houses and brokers.

India

Kotak Mahindra Old Mutual Life Insurance Ltd, our joint venture with Kotak Mahindra Bank (one of India's leading financial services groups), was established in 2001 and is expanding rapidly. It has nearly 200 branches in 142 cities across India and more than 5,500 employees. It sells predominantly unit-linked investment policies and offers a complete range of traditional life assurance products. We currently own a 26 percent stake, with an option to increase this to 48 percent when legislation permits.

In July 2008 we established an office in Bangalore to support the development of wealth management and asset gathering opportunities in India under the Old Mutual brand.

Markets and products

China

In China, we sell retail unit-linked and universal life products through banks and independent advisers. We continue to expand our distribution footprint, geographically as well as by channel, and are broadening our product range.

India

Kotak Mahindra Old Mutual Life Insurance offers a full range of assurance products although, in common with the rest of the industry, most of its sales over the past few years have been unit-linked investment products. It distributes through multiple channels - a large tied-agency force, exclusive bancassurance relationships with local banks, and other alternative and direct channels.

Market overview

China

China's economy is already the world's second largest in terms of purchasing power parity. A number of studies have already predicted that Asia, particularly China, will significantly outpace the rest of the world in growth in GDP and power consumption. A recent Economist Intelligence Unit study forecast that by 2020, China's economy measured at purchasing power parity exchange rates will be on a par with the US and Asia's overall share of the global economy will rise to 43 percent from about 30 percent today.

China's industry assets under management (AUM) grew by 5.2 percent over the final quarter of 2008 to RMB1.94 trillion after three consecutive quarters of double-digit declines. This was however, well below the 2007 year-end AUM of RMB3.27 trillion.

India

India has one of the world's fastest growing economies, achieving over 8.5 percent GDP growth in both 2006 and 2007. In terms of purchasing power parity, it is the fourth largest global economy. It has a large and growing middle to upper income population and well-developed money, debt, foreign exchange and equities markets.

The Insurance Amendment Bill, which would increase the foreign direct investment limit from 26 percent to 49 percent, has already been introduced to Parliament - although its adoption remains uncertain.

Funds under management across the industry have shown compound annual growth of 47 percent over the past five years - consistently outgrowing the stock market index, indicating a significant flow of funds into the mutual fund industry.

Strategy for growth

Our strategy in Asia aims to maximise the performance and potential of our existing businesses and to seek new opportunities to extend our portfolio in India and the Greater China region.

Our existing businesses in India and China are making good progress but are still young and, like all start-ups, have some ground to cover before becoming significant contributors to the Group's overall profitability.

In India, we increased our KMOM business branch network with 197 branches now open across the country compared to 106 in 2007.

Performance in 2008

* This represents 100 percent of the businesses; OM owns 50 percent of Skandia:BSAM and 26 percent of KMOM. ** Includes Bermuda Asset Management (now included in USAM)

Results impacted by current market conditions

A combination of stock market volatility and increased competition resulted in tough business conditions for the year. Sales and net client cash flows were disappointing with total outflows of £1.6 billion, primarily as a result of the lower equity markets and the impact of large institutional client redemptions in Australia. Funds under management reduced accordingly, partially offset by the strengthening of local underlying currencies against sterling.

We incurred an adjusted operating loss (IFRS basis) for the year of £17 million. This was largely due to lower revenues which were impacted by weakened sales and significant market value depreciation caused by the market downturn. Non-recurring expenses relating to the new regional office set-up and the inclusion of costs for new initiatives contributed to the higher operating losses.

Marketing

Skandia:BSAM established a three-year branding strategy and launched a new investment education brand - SWV (Skandia Wealth Vision). We produced our first TV commercial for China. We enhanced the Company's brand influence and set up distribution marketing, investment marketing and product marketing functions which gave great support to both internal communication and external business. Following the Sichuan earthquake in 2008 we made a substantial donation to the affected areas.

Customer service

Throughout 2008, we won awards for customer service and staff engagement. In September we were recognised as one of the 10 Best Industrial Employers in China and in early December we were rated among the top five in the CIRC's 2008 Life Insurance Customer Satisfaction Survey.

Principal risks and uncertainties

As uncertainties in market and economic conditions persist, the market downturn may continue to impact on the growing economies of emerging markets. The Chinese local regulator, CIRC, has placed stricter regulations on the distribution of unit-linked products and has also suspended all new branch openings, new products and funds, placing further strain on business performance. Given that some of our businesses or investments in the region are with joint venture partners, our challenges remain on managing risks through adequate representation on the relevant boards, audit committees and working reports from internal and external auditors.

Outlook for 2009

Although we believe there is good long-term growth potential in the Asia Pacific region, we have decided for the foreseeable future to scale back our aspirations for this area. We have therefore reached an agreement to sell our Australian businesses (Skandia Australia and Intech Investments) and intend to rein back our expansion plans to focus on our established businesses in India and China.

Priorities for 2009

• Continue to support organic growth of our existing businesses in China and India
• Seek to distribute more Old Mutual products in India and capture a greater share of total assets under management
• Evaluate opportunities to extend our portfolio in the Greater China region.