Group Finance Director's Review
Business Review
GROUP RESULTS
H1 2005 Adjusted EPS up by 22% to 8.4p
The Old Mutual Group has had a positive start to 2005, with a 29% increase in adjusted operating profit before tax to £554 million. Adjusted operating profit after tax and minority interests increased by 24% from £256 million for the period ending 30 June 2004 to £317 million for the first six months of 2005, leading to an increase in adjusted operating earnings per share to 8.4p for the period ending 30 June 2005, from 6.9p for the comparative period in 2004. The basic earnings per share is 11.2p, representing a 173% increase.
Profit for the financial period attributable to equity holders increased to £387 million during the first half of 2005 compared to £141 million during the first half of 2004.
Funds under management and fund flows
During 2005, funds under management increased by 13% from £140 billion as at 31 December 2004 to £158 billion at 30 June 2005. Our international diversity has delivered strong net cash inflows of £9.6 billion, an increase of £5.6 billion when compared to the first half of last year, as strong performances by our US and UK businesses more than offset weak flows in South Africa.
Embedded Value (EV) - profits
Old Mutual published its 2004 embedded value figures restated in accordance with EEV principles on 20 June 2005. The same approach has been taken to the calculation of our June 2005 figures, and all 2004 comparatives are on the restated EEV basis. The Group's adjusted operating profit on an EEV basis of £638 million increased by 28% from £497 million at June 2004. Adjusted operating profit for life assurance of £345 million was up 3% from £334 million at June 2004, with African profit being down 7% and North American profit being up 57%. The reduction in adjusted operating profit for Africa is mainly due to lower expected return on capital and a provision for the expected cost of the offer to policyholders that has been announced in respect of paid-up retirement annuities. The increase in adjusted operating profit for North America is mainly due to a significant increase in the value of new business sold in 2005 and the consequential effect of new business sold in 2004.
Adjusted embedded value per share down by 2%
Adjusted embedded value (EV) (adjusted for own shares held in policyholders' funds and to bring listed Group subsidiaries to market value) of £5,303 million at 30 June 2005 decreased by 2% from £5,384 million at 31 December 2004. Good Rand growth in African life embedded value (aided by good investment returns) was partially offset by the depreciation of the Rand, good US dollar growth in North American embedded value (driven by new business growth) was enhanced by the strengthening of the US dollar, and a decline in the share prices of Nedbank and Mutual & Federal was exacerbated by the weakening of the Rand.
Adjusted EV per share at 30 June 2005 was 137.5p representing a decline in EV per share of 2% over the 2004 result of 139.7p.
Capital
The Group's gearing level remains favourable, with senior debt gearing at 30 June 2005 of 7.9% (10.8% at 31 December 2004) and total gearing, including hybrid capital, of 19.0% (16.9% at 31 December 2004). Hybrid capital excludes hybrid debt from banking activities and includes the $750 million of Guaranteed Cumulative Perpetual Preferred Securities issued during 2003 that are reported as part of minority interests in the financial statements and the £350 million of Perpetual Preferred Callable Securities issued in March 2005 that are reported as part of equity holders' funds.
Senior debt gearing is defined as senior debt over senior debt plus adjusted embedded value on an EEV basis. Senior debt excludes debt from banking activities and is net of cash and short-term investments, which are immediately available to repay debt, and derivative assets relating to swaps associated with senior debt, so as to reflect debt valued on effective currency and interest rate positions. Total gearing is similarly based, but includes hybrid capital instruments within debt.
On 2 May 2005 the Group's $636 million of outstanding 3.625 per cent Convertible Bonds matured and were repaid in full at par value.
Old Mutual's Group-wide Economic Capital (EC) Programme is progressing according to plan. Once completed, it will significantly improve the Group's ability to measure risk and shareholder value creation. The early results show the Group's available financial resources to be well above the EC required for our target external agency rating.
The Group exceeds the minimum capital resources requirement under the Financial Groups Directive, which applies to UK-based financial conglomerates.
Taxation
The Group's effective tax rate (based on the tax charge excluding income tax attributable to policyholder returns as a proportion of adjusted operating profit) for the period ended 30 June 2005 of 24% decreased from 25% for the corresponding period in 2004. This was primarily as a result of the recognition of a previously unrecognised deferred tax asset in the US. Excluding the impact of this adjustment, the tax rate would have increased to 27% as a result of a decrease in the proportion of tax advantaged investment income earned in the period.
BLACK ECONOMIC EMPOWERMENT
Over the past few years Old Mutual plc has been actively addressing various aspects of Black Economic Empowerment (BEE). We believe that Black Economic Empowerment (BEE) is a key requirement for the promotion of sustainable economic growth and social development in South Africa and is therefore fundamental to the interests of our employees, clients and shareholders. Earlier this year we proposed three separate, but independent transactions designed under a common set of principles, which introduce new broad-based black ownership into each of our South African subsidiaries. These transactions have now been completed and have resulted in the introduction of direct black ownership worth 12.75% of the value of Old Mutual plc's South African businesses, with the total value of black shareholding being R7.1 billion. The financial impact of these proposals will be incorporated into the Group's results for the second half of 2005.
Our BEE deal is very broad based and our South African employees now have share interests in our companies with the incentivisation that share ownership provides. Uniquely, many of our clients and distributors have also acquired an interest in our shares, which supports our strategy. We believe that our black business partners will add value to our businesses and are extremely pleased to have the Wiphold and Brimstone Consortia as shareholders in our businesses, as well as Mtha at Mutual & Federal. The transformation deal secures future returns for all our stakeholders.
DIVIDEND
The directors have declared an interim dividend of 1.85p per share for the six months ended 30 June 2005, to be paid on Wednesday, 30 November 2005.
The record date for this dividend payment is the close of business on Friday, 21 October 2005, for all the Exchanges where the Company's shares are listed. The last day to trade cum-dividend on the JSE Securities Exchange South Africa ("JSE") and other African Exchanges will be Friday, 14 October 2005. The shares will trade ex-dividend from the opening of business on Monday, 17 October 2005 on the JSE and the other African Exchanges and from the opening of business on Wednesday, 19 October 2005 on the London Stock Exchange.
Shareholders on the South African, Zimbabwe and Malawi branch registers and the Namibian section of the principal register will be paid the local currency equivalents of the dividend under the Dividend Access Trust arrangements established in each country. Local currency equivalents of the dividend will be determined by the Company using exchange rates prevailing at close of business on Thursday, 6 October 2005 and will be announced by the Company on Friday, 7 October 2005.
Share certificates may not be dematerialised or rematerialised on the South African branch register between Monday, 17 October and Friday, 21 October 2005, both dates inclusive, and transfers between the registers may not take place during that period.
Julian V F Roberts
Group Finance Director
10 August 2005
