US Asset Management

We have built a leading asset management business in North America through a combination of acquisitions and strong organic growth. Our business model provides a strategic framework in which boutique asset management businesses thrive. We continue to enjoy the privilege of serving some of the largest and best-known institutions (e.g. universities, corporations, defined benefit plans, defined contribution plans, sovereign wealth funds) around the world. Our strict adherence to pure institutionalised investment processes, consistently strong investment performance and concentration on customer service provides long-term partnership with our customers.

Based in Boston, our business consists of 18 distinct boutique investment firms managing $261 billion across all major investment strategies for institutional clients, high net worth individuals and retail investors around the world; some 25% of our clients are non-US based. Our boutiques are headquartered predominantly in North America, with two in London. Dwight Asset Management, a fixed income manager, is the largest with 22% of our total funds under management. The next largest managers are Barrow, Hanley, Mewhinney & Strauss, a value equity manager (21%), Acadian Asset Management, an international equities manager (19%), and Rogge Global Partners, a global fixed income manager (14%).

Over time the largest firms in the business may change, depending on investment performance, market cycles and demand for particular investment styles. The sources of profits within the affiliate portfolio also change. However, the diversification of asset classes in our portfolio mitigates to some degree the risk of extreme earnings volatility, reflected in our positive operating earnings and competitive margins in the current difficult market environment. As markets grow, operating leverage provides for a degree of margin expansion.

Collectively, US Asset Management offers over 140 distinct investment strategies. We grow our marketable investment capacity and maintain diversification in our offerings by seeding strategies, recruiting investment talent and acquiring firms. Each member firm has its own vibrant, entrepreneurial culture of investment management capabilities focused on its particular area of expertise. The institutional approach of the member firms ensures consistency of style and process across market cycles.

We have a distinct competitive advantage in our ability to attract and retain talented investment professionals through a consistent approach to profit sharing and equity ownership structures - thereby ensuring the longevity of the investment firms and customer relationships. Most of the boutiques have profit-sharing arrangements in which they earn a percentage of operating profit. Most also have long-term equity plans. The combination of profit-sharing and equity plans ensures that each boutique's interests are closely aligned with those of our shareholders and customers. A thoughtful approach to succession planning, which provides an orderly transfer of ownership and management responsibilities to successive generations of investment talent, also contributes to the longevity of individual firms.

Business model

Our vision is to be a market-leading asset management firm delivering high-quality investment solutions to clients while providing exceptional business results. Our business is structured as an actively-managed holding company that fosters investment autonomy among its specialised boutique firms to achieve investment and operating excellence.

The operating model has five focus areas:

• Investment excellence: We present clearly articulated investment processes and solutions to clients through our 18 boutique investment management firms. These firms strive to exceed performance expectations through consistently applied investment processes. We recruit and retain top investment talent by offering investment autonomy and equity ownership.
• Customer service and distribution: The 18 boutiques provide high-quality service to support client objectives. Distribution professionals embedded in boutiques, as well as centralised distribution support, continually seek opportunities to meet evolving client and market demand.
• Diversification of investment solutions: Our experienced management team regularly reviews and positions the enterprise-wide offering of investment solutions to maximise value creation for clients and shareholders. It also aims to minimise volatility in funds under management and earnings, and to achieve diversification benefits, through effective management of the boutique portfolio.
• Global leverage: We use existing Old Mutual Group capabilities to grow a global portfolio of client relationships. We continue to pursue partnerships and leverage existing global infrastructure at Skandia, OMIGSA and other business units to drive profitable expansion.
• Financial and operational management: Our senior management team closely monitors financial and operational objectives to create and preserve value for shareholders aggressively. This close oversight is critical to the generation of free cash flow to provide strong returns and support growth opportunities. Effective risk management is the foundation of our business relationships and we proactively seek full compliance with internal controls and regulatory requirements.

We believe the current business model is best positioned to achieve our long-term strategic vision. It offers clear sources of competitive advantage, including:

• Attraction of deep investment expertise with entrepreneurial drive
• Low turnover of key investment talent
• Firm longevity
• Ability to source and integrate new investment capabilities
• Thought leadership in product development, packaging and distribution
• Diversity of boutiques, providing value and stability throughout market cycles
• Professional business management and a scaled infrastructure platform with shared services and robust governance.

Market overview

The current market environment presents both opportunity and challenge for the asset management industry. There is continuing pressure on earnings across the industry due to the volatility of change in asset levels, although recovery of global markets has provided a stronger asset base to finish the year. The action taken by most firms to reduce headcount and expenses will provide effective operating leverage as markets return to growth in line with historic averages. Firms operating from a position of capital strength will continue to focus on adding investment talent and acquiring complementary investment capabilities. As market volatility returns closer to normal there has been some consolidation, with leading companies acquiring firms to strengthen distribution and investment capabilities as well as build scale. As part of this process, several firms have sought external capital from the public markets to fund strategic growth plans - and more will follow.

Competition in North America remains strong, with each of our boutiques facing significant competition from other specialist providers. The immediate differentiating factors between firms are often investment performance and product capabilities. Our investment managers have a record of delivering excellent long-term performance and we have the ability to leverage the diverse styles of individual investment teams. As a result, we are able to seek targeted investment opportunities to broaden our product capabilities.

Investment firms with undiversified portfolios, dominant equity weightings or performance fees with high water marks are the most susceptible to earnings pressure. A significant number of asset management firms restructured in late 2008 and 2009 to alleviate anticipated margin pressure. However, many were careful not to reduce expenses any more than necessary in the short term, to avoid compromising their positioning for the next wave of growth. Global market recovery and strong performance will help to raise performance and transaction fees.

Regulation is materially impacting the asset management industry in response to significant losses by investors across most markets. The US Government expects to deliver continued change to the nation's financial regulatory framework, including asset management organisations and retirement plan sponsors. As a result, less-established investment managers may face additional risk management and market pressures. This will present opportunities for traditional asset management firms with strong governance to gather assets and acquire new investment capabilities.

Strategy

Our strategy directly supports four of the Group's five strategic priorities:

• Maintain and strengthen capital position: Our business continues to be a source of capital. We will continue to grow it prudently by reinvesting earnings in talent and strategic acquisitions that create shareholder value over time.
• Streamline the portfolio over time: We made progress in achieving operational efficiencies in 2009. Old Mutual Capital's retail platform was realigned to focus on the professionally-sold marketplace. We improved the boutique investment firms' earnings potential by closing an underperforming boutique as well as targeting general expense savings. Provision of shared central services to our affiliates is a key benefit of the multi-boutique model, delivering operational leverage across the business, supporting lift-outs and incubation of new teams, and allowing investment professionals to maximise their focus on customer service. One of our key initiatives for 2010 will be to review and enhance the current shared services structure to maximise potential for further value creation.
• Leverage scale in long-term savings businesses: We continue to seek ways to leverage scale across the Old Mutual Group and opportunities to work with Skandia Investment Group and OMIGSA to drive further synergies.
• Strengthen governance: We work closely with the Group on strategic business planning and positioning US Asset Management within the Group model for the future. We also continue to monitor our operations closely for financial and operational risk and openly participate in implementing Group-level finance transformation initiatives.

Our business is well positioned strategically to take advantage of market, demographic and related trends as we continue to develop innovative product solutions, deliver strong investment performance and grow our business. We maintain expertise in sourcing, cultivating and integrating investment talent and capabilities in our business. We have also placed emphasis on thought leadership in product development, packaging and distribution while enabling investment professionals to focus on investment management and delivering superior investment results.

Performance in 2009

Earnings grew strongly in the second half of the year as markets recovered

Overview

While market conditions during 2009 were challenging, it was a year in which we completed successfully a number of long-term strategic actions to reposition the business. These actions included realigning our retail platform to focus on the professionally-sold marketplace, integrating a cash-management team at Dwight, reorganising our central distribution structure and optimising our shared services model to deliver further economies of scale. Provision of central services to our affiliates is a key aspect of the multi-boutique model, delivering operational leverage across the business, supporting lift-outs and incubation of new teams, and allowing investment professionals to maximise their focus on managing money for customers.

Investment Performance

Long-term investment performance from our member firms remains strong. At 31 December 2009, 58% of assets had outperformed their benchmarks over the trailing three-year period and 50% of assets were ranked above the median of their peer group over the trailing three year period. Over the trailing five-year period, 61% of assets outperformed their respective benchmarks and 52% of assets were ranked above the median of their peer group. Value equity and global fixed-income continue to rank amongst our top performing asset classes. Recent challenges among our quantitative managers are showing signs of improvement as markets return to historical patterns of performance with a bias toward higher-quality investments.

IFRS AOP results

Strong market growth and a reduction in the expense base of the business drove significant earnings growth during the second half of the year, with IFRS adjusted operating profit of $84 million increasing 83% ($38 million) over the first-half result. IFRS adjusted operating profit of $130 million for the full year was down $51 million (28%), This was due largely to a decrease in management fees, driven by lower average funds under management as a result of market weakness in the first quarter and cyclical lows in performance fees. However the impact of lower revenues was partly offset by continued success in managing expenses. The result also includes $12 million in significant one-time restructuring costs related primarily to our retail business.

Operating margin and cost management

Operating expenses for 2009 were down 22% compared to the prior year, enabling us to experience significant leverage in 2010 from the recent and ongoing recovery in market levels. The full year operating margin of 18% was down 2% from 2008, driven by the pace and severity of market declines and lower revenues late in 2008 and early in 2009. The margin for the second half of 2009 was 21%, an improvement on our 2008 full year margin of 20%. This reflects the success of expense management actions taken by management in response to declining revenues. As previously indicated, expense reductions in our retail business will deliver $15 million to $20 million of annual expense savings from 2010.

Net Client Cash Flows

Net client cash flows of ($7.1 billion), (3%) of opening funds under management, were broadly in line with the average of our peer group for the year. The result was driven primarily by outflows at Acadian, Barrow Hanley and Dwight, partially offset by strong inflows at Heitman, Campbell and Thompson, Siegel and Walmsley. Despite the challenging environment nearly half of our managers experienced net cash inflows for the year.

Funds under management

Funds under management increased 9% ($21 billion) during 2009 with a 16% market uplift offset in part by asset outflows. Growth and diversification through international distribution remains a key element of our strategy, with non-US clients comprising 25% of total funds under management at the end of the period.

Affiliate developments

As previously announced, equity plans were implemented at five affiliates during 2009, and we will complete the rollout for the remaining firms during 2010. Alignment of the interests of affiliate management was a key factor in the success of our cost management initiatives during 2009 and remains a vital component of our long-term strategy, critical to talent retention and positioning the business for sustainable long-term growth.

Retail developments

Efforts to reposition Old Mutual's US retail platform in 2009 were successful. A strategic assessment of the business was completed and resulting recommendations executed by the end of 2009. Actions taken during the second half of 2009 provided a refreshed and more focused product offering aligned with the best of Old Mutual's institutional investment capabilities. Retail distribution will more specifically target Registered Investment Advisors (RIAs), Family Offices, and Bank Trust channels which are among the fastest growing segment of the financial services industry. The traditional and alternative investment expertise of Old Mutual's distinct institutional boutiques aligns well with the needs of the professional buyer market. Overall, retail efforts provided a reduction in spending and increased margins for the business while preserving a valuable retail shareholder base with significant opportunity for growth in an important distribution channel for the future.

Marketing

We re-organised our distribution structure by appointing internal candidates as heads of the US and non-US institutional channels and hiring a third senior executive to focus on the professional buyer channel - which encompasses Registered Investment Advisors (RIAs), family offices and bank trusts. We also hired three additional distribution specialists to support these new roles. The reorganisation is intended to add depth to individual boutiques' sales efforts without encroaching on their independence.

People

We will achieve competitive advantage through the strength and capability of our people. A continuing goal in 2010 is to sustain a work environment that manifests our core values and attracts and retains the best people. Additional goals are to implement strategies for building on the existing talent pool, refining our talent assessment and management process, and reinforcing a culture of pay for performance that will drive key talent commitment and motivation. We will also continue monitoring potential legislation to ensure that current incentives are in line with future requirements. All these efforts are vital in an increasingly competitive asset management industry.

Risk

We continue to manage our risks and develop our Risk Management capabilities in alignment with the Group's Enterprise Risk Management framework. Refer to Risk and Responsibility section for details relating to Group Risk Management.

Priorities for 2010

For 2010 and beyond we have five strategic priorities:

• Maximise the value of our client proposition by delivering consistently high-quality investment performance, innovative solutions and best-in-class service
• Ensure excellence in distribution and service by supporting boutiques' distribution efforts
• Continue to diversify the marketable capacity of our investment management capabilities
• Continue to leverage best practice in managing boutique investment firms around the Group and driving greater global distribution for our existing boutiques
• Achieve all the above within a framework of strong financial and capital management.

Outlook

We remain cautiously optimistic on the recovery of global markets in 2010. However, there may be a wider dispersion of growth rates between regions and historically high volatility throughout the year. Difficulties within financial institutions have created significant opportunities for investment businesses with strong balance sheets to position for the next growth cycle and win the war for investment talent within the US. Market volatility has widened the gap between top quartile and bottom quartile performers with an expectation that clients will continue to increase the rate of replacement for underperforming managers and asset classes. While we have a number of accounts at risk at certain affiliates, our overall new business pipeline is robust and we expect to remain in the top half of our peer group in terms of net client cash flows.

Prior to the current market troubles, customers were migrating asset allocation decisions toward international, global and alternative strategies and we believe these trends will continue in 2010, Churn of underperforming managers in traditional domestic equity and fixed income mandates will present opportunities to gain new client funds to manage. Search activity steadily increased in the second half of 2009 with the winners being those investment firms that are truly institutional quality and offer risk management, continuity of firm personnel, strong ownership structures and transparency of investment process with longevity of performance.

Our efforts to reposition the business and the recovery in capital markets in 2009 position us well for growth in 2010. In the absence of a continued recovery in global equity markets, future earnings growth for US Asset Management will be restricted. However, our track record of investment performance and global business focus has positioned us well relative to our competitors, and our diversified asset/client mix will continue to help us weather market volatility.