How we are performing

Group Finance Director's report

Group results

1 The results of the Group's South African general insurance business, Mutual & Federal, are shown as a discontinued operation in these financial statements. The Group is currently in discussions with the investment group, Royal Bafokeng Holdings (Proprietary) Limited (RBH), which may or may not result in the sale to RBH of a controlling interest in Mutual & Federal.
2 The 2006 comparative has been restated from 157.2p as published at 31 December 2006 to reflect the value of own shares held in Employee Share Ownership Plans (ESOPs).
3 2006 comparatives restated to include acquired Skandia businesses on a pro forma 12 month basis.
4 Restated due to change in the calculation of US Life APE calculation to align with the value of new business calculation.
5 Restated to exclude Spanish Vida business sold in 2007.
6 Return on equity is calculated using adjusted operating profit after tax and minority interests on an IFRS basis with allowance for accrued coupon payments on the Group's hybrid capital. The average shareholders' equity used in the calculation excludes hybrid capital.

Our results reflect a healthy overall performance from around the Group. Funds under management grew by 18%, with operating profit benefitting from both a better than expected result from our Skandia acquisition and good progress in our other businesses.

Net client cash flows delivered through sustained investment performance

During 2007 the Group's net client cash flows were a very healthy £23.4 billion, representing 9.9% of opening funds under management, with good contributions resulting from business unit investment performance. Our US Asset Management business delivered excellent net inflows of £17.6 billion, while the Skandia businesses achieved £5.3 billion of net inflows. For OMSA, net client cash flows remained a challenge.

Solid sales

In Europe we continued to benefit from being the open-architecture leader in the UK with strong life assurance sales, whilst growth continued in ELAM with excellent unit trust sales. In Nordic, investment in the sales channel led to a turnaround from the decline in Annual Premium Equivalent (APE) sales experienced during the first half of the year. In the second half, sales in that region recovered, resulting in a 3% year-on-year increase overall. In the US, APE sales were up by 47% in US Dollar terms, driven by exceptional growth in Bermuda. South African life sales were 7% higher in Rand terms although 5% lower in Sterling.

Value of new business up 5%

The value of new business (VNB) grew to £266 million, driven by excellent sales in US Life and strong sales in the UK. The APE profit margin increased to 21% for the US Life business, compared with 18% in 2006. The UK APE margin of 10% was sustained during the period and it is expected that this business will meet its 11-12% target in 2008. In Nordic, the APE margin declined mainly due to increased costs from the new Liv-Link agreement, strengthened lapse assumptions, lowered charges and a different business mix, whereas in ELAM we exceeded our margin target. In OMSA, the margin declined slightly from the 2006 result largely due to operating assumptions and the VNB decreased slightly in local currency terms.

IFRS adjusted operating earnings per share 16.9p

In spite of the significant impact of Rand and US Dollar currency depreciation, and the full impact of additional shares issued in relation to the acquisition of Skandia, the Group produced a 12% increase over 2006 in its overall earnings per share.

Assuming constant exchange rates, 2006 adjusted operating EPS would have been 13.1p, with the currency impact being 1.5p and the impact of the increase in issued shares being 0.5p. 2007 EPS increased on this basis by 29%.

Adjusted Embedded Value per share 173.3p

The adjusted Group embedded value (EV) per share was 173.3p and Adjusted Group EV was £9.4 billion at 31 December 2007 (31 December 2006: £8.9 billion). This represents an increase from 161.1p7 at 31 December 2006. The movement in EV per share has largely been driven by the net impact of profit flows, particularly from non-covered business, strong investment market movements and a slight impact of currency appreciation. The EV per share is after dividend payments and has also been affected by a reduction in the share price of the listed subsidiaries. The share buyback programme to 31 December 2007 increased the EV per share by 0.2p.

7 Following the adjustment for the value of ESOP shares and furthermore allowing for the opening adjustment calculated now as part of the fair value balance sheet exercise, the adjusted Group EV at 1 January 2007 was £8.8 billion and the EV per share at 1 January 2007 was 159.9p.

Return on Equity continued to improve

Return on Equity for the Group improved to 13% from 12%, reflecting the improvement in the earnings run-rate compared to 2006, particularly for OMSA, Nedbank, US Asset Management and the UK. In addition, the long-term investment return improved, partly due to strong investment performance of the shareholders' equity in South Africa.

Group Highlights

Robust capital position

The Group's gearing level remains comfortably within our target range, with senior debt gearing at 31 December 2007 of 1.9% (5.9% at 31 December 2006) and total gearing, including hybrid capital, of 20.5% (21.4% at 31 December 2006).

In January 2007, the Group issued €750 million of Lower Tier 2 Preferred Callable Securities, the proceeds of which were used, in part, to finance the repayment of a €400 million senior Eurobond that matured in April 2007.

The Group has continued to develop its Economic Capital programme and a comfortable surplus exists within each of our South African, US and European regions, meaning that the Group is not reliant for its economic solvency on the need to transfer capital between geographies.

The Group is in compliance with the Financial Groups Directive (FGD) capital requirements, which apply to all EU-based financial conglomerates. Our FGD surplus was £1.7 billion at 31 December 2007 and we seek to maintain a FGD surplus of around £750 million to £1 billion.

Capital requirements are set by the Board, while recognising the need to maintain appropriate credit ratings and to meet regulatory requirements at both the Group and local business level.

Other

Our £350 million share buyback programme was announced at the beginning of October 2007 and we have so far repurchased approximately 184 million shares through the London and Johannesburg markets at a total sterling equivalent cost of £282 million.

Holding company cash generation

The table below shows the cash flows of the Old Mutual plc holding company and its satellite holding companies. We believe this provides a clear picture of the cash receipts and payments of the holding companies.

The Group's Return on Equity improved to 13% from 12%, reflecting an improvement in the earnings run-rate compared to 2006, particularly at OMSA, Nedbank, US Asset Management and the UK.

Total net debt within the holding company at the end of 2006 was £2,407 million. A total of £937 million of operational and capital receipts was received from business units during 2007. £220 million was invested in the businesses and £333 million was used to pay the 2006 final and 2007 interim dividends. In 2007, £177 million was spent on repurchasing shares. Total net debt at the end of 2007 was £2,420 million.

Taxation

The Group's effective IFRS adjusted operating profit tax rate has decreased to 26% from 27% in 2006. This reflects Mutual & Federal paying a lower special dividend in 2007 and reductions in the tax rates in the UK and Germany, partially offset by a changed profit mix in South Africa.

Dividend

The directors of Old Mutual plc are recommending a final dividend of 4.55p per share8 for the year ended 31 December 2007, to be paid on 30 May 2008. Together with the interim dividend of 2.3p per share paid in November 2007, this makes a total of 6.85p per share for the year, which represents an increase of 10% over 2006. The indicative Rand equivalent of this final dividend9 is 68.92c, making a total of 103.75c, an increase of 17%. The Board's policy on dividends is to seek to achieve steadily increasing returns to shareholders over time, reflecting the underlying rate of progress and cash flow requirements of Old Mutual's businesses.

8 The record date for this dividend payment is the close of business on Friday, 9 May 2008 for all the Exchanges where the Company's shares are listed. The last day to trade cum-dividend on the JSE and on the Namibian, Zimbabwe and Malawi Stock Exchanges will be Friday, 2 May 2008 and on the London Stock Exchange, Tuesday, 6 May 2008. The shares will trade ex-dividend from the opening of business on Monday, 5 May 2008 on the JSE and the Namibian, Zimbabwe and Malawi Stock Exchanges, and from the opening of business on Wednesday, 7 May 2008 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. Shareholders who hold their shares through VPC AB, the Swedish nominee, will be paid the equivalent of the dividend in Swedish Kronor (SEK). Local currency equivalents of the dividend for all five territories will be determined by the Company using exchange rates prevailing at close of business on Thursday, 17 April 2008 and will be announced by the Company on Friday, 18 April 2008. Share certificates may not be dematerialised or rematerialised on the South African branch register between Monday, 5 May and Friday, 9 May 2008, both dates inclusive, and transfers between the registers may not take place during that period.
9 Based on rates at 25 February 2008 (R15.1467 = £1).

Comparative information

The reporting format for Old Mutual plc for the 2007 reporting period is as follows:

• All Group comparative reporting information on earnings includes Skandia from the date of acquisition of 1 February 2006 (unless indicated otherwise).
• Within the financial statements the Europe division comparative information is from the date of acquisition of 1 February 2006.
• Where Europe information is shown within the Business Review, this has been adjusted on a pro-forma basis to reflect ownership from 1 January 2006.

Europe

Highlights

• Successful launch of Skandia Investment Group
• Nordic sales turnaround in the fourth quarter
• Launch of Selestia Investment Solutions in August 2007: a platform that will enable advisers to offer state-of-the-art financial planning advice to customers
• Launch of the new Skandia green brand visibly identifying Skandia as part of the Old Mutual Group

Europe

Old Mutual operates in Europe principally through Skandia, the financial services group acquired in 2006. Through Skandia, Old Mutual has an enlarged footprint in Europe with a strong franchise in many markets, and the potential to grow this further. Old Mutual's European team have responsibility for the Skandia operations in the UK & Offshore division, the Nordic division and the Europe and Latin America division.

Skandia has operations in 20 countries and serves many other markets through its offshore solutions, showing growth in the majority of these. The UK and Sweden are Skandia's principal markets, where a broad range of investment solutions is offered. Skandia is steadily increasing its presence in Continental Europe at the same time as it is experiencing a high degree of activity in its selected growth markets in Asia and Latin America.

Skandia uses the distribution channel judged to be best suited for the markets where it operates. Where there is a viable independent financial advice channel, distribution is primarily through this intermediated route. Skandia also has an in-house sales force in Sweden and Latin America. In the Nordic region Skandia operates SkandiaBanken, a highly successful internet bank that provides a further distribution channel for Skandia's products.

The majority of revenue is currently generated by unit-linked sales in the UK, Nordic and Continental Europe, with mutual funds being dominant in Latin America.

Skandia pioneered open-architecture, whereby a wide range of investment funds run by third-party fund managers can be accessed through its products. To reinforce this model, Skandia has built up an investment management capability that manages relationships with third-party fund managers and packages up investment fund solutions that can be used by advisers and investors. The open-architecture model is increasingly popular with customers and advisers as it gives access to a wide range of third-party funds in addition to Skandia's own funds. For Old Mutual, it is appealing as an investment model as it requires little capital.

Skandia continues to develop the significant talent it has in operating the open-architecture model. In 2007, Skandia Investment Group (SIG) was created as a global investment management function. This function leverages the expertise in all Skandia operations to build multi-manager portfolios, research selected funds and develop structured products. Additionally, SIG is responsible for sourcing third-party funds and agreeing terms with the fund management group in order that Skandia has premier open-architecture fund platforms.

Skandia has been title sponsor of Skandia Cowes Week, the world's oldest and largest regatta of its type, since 1995. With over 8,500 competitors, around 100,000 spectators and a media audience of millions, the sponsorship has been an excellent way of promoting the Skandia brand to our target audience. As well as providing significant brand exposure the sponsorship has also been highly successful in delivering on customer relationship-building and employee engagement objectives.

UK & Offshore

Skandia UK includes three business units: UK (Skandia Life and Selestia Investment Solutions), Skandia Investment Management (SIML), and Skandia International. With over a million customers and £42 billion of funds under management, Skandia is one of the fastest growing UK savings companies.

Skandia UK focuses on long-term savings. It offers unit-linked investments through an open-architecture fund platform enabling access to over 900 external funds and manager-of-managers solutions developed through SIML. In the UK, it distributes its products via independent financial advisers (IFAs), targeting affluent customers.

Skandia's success in the UK has been framed around a few key attributes: it has established a strong IFA franchise through excellent service and a distinctive proposition; it has excelled in the high-growth open-architecture segment of the UK market and it has consistently brought innovative ideas to market. In 2007, Skandia developed a new investment platform, Selestia Investment Solutions, and in doing so, has continued to set the industry standard in the UK savings market.

Skandia Life (SLAC)

Business profile
SLAC is the core of Skandia UK, accounting for approximately 45% (£19 billion) of Skandia UK's £42 billion of funds under management. SLAC operates in three product segments: pensions, investment bonds, and protection. Pensions and investment bonds comprise 97% of SLAC's sales on an APE basis.

Pensions
SLAC provides a range of pensions to meet the retirement-planning needs of individuals, employers and trustees, and also distributes a self-invested personal pension (SIPP). All of its pension products offer wide investment choice in funds, on a unit-linked basis. 80% of client assets are invested with third-party fund managers and 20% with Skandia's own manager-of-managers solutions. Approximately £10.5 billion is invested in pensions.

Investment Bonds
SLAC's MultiBond range comprises single premium investments which are tax-efficient for certain consumer segments. They provide unit-linked investments with the opportunity to make tax-efficient withdrawals of capital.

Protection
Skandia has decided not to participate in the mass-market, price-driven protection market, and instead offers solutions for the premium protection market. In this market, Skandia offers two main solutions: unit-linked whole life and critical illness cover. Average premium sizes are high and Skandia has a significant market share in these segments. Typical customers include the self-employed and entrepreneurs and also clients seeking protection linked to efficient inheritance tax solutions. Protection accounts for approximately 3% of SLAC's APE sales.

Selestia Investment Solutions

Business profile
Selestia Investment Solutions is the newly developed investment platform (often referred to as a fund supermarket) that combines the reputation and strengths of the Selestia business (owned by Old Mutual prior to the Skandia acquisition) and Skandia's MultiFUNDS platform. The investment platform gives advisers and their customers access to Individual Savings Accounts (ISA), PEP and Collective Investment Accounts, which are provided by Skandia MultiFUNDS Limited, Collective Retirement Accounts and Collective Investment Bonds which are provided by Selestia Life & Pensions Limited and an Offshore Collective Investment Bond, distributed by Skandia MultiFUNDS Limited for Old Mutual International (Guernsey) Limited.

Selestia Investment Solutions offers a choice of over 900 funds from third party fund managers and from a suite of in-house manager-of-managers funds. It achieved solid performance in 2007, with net client cash flows of £1.4 billion. Growth was driven by a record ISA season, increased use of platforms across the industry and Skandia's strong proposition in e-commerce solutions. Platforms are increasingly core to advisers' business models and Selestia Investment Solutions is well placed to benefit from this transformation of the UK financial services industry.

Once the Selestia Investment Solutions platform has been completed, the Skandia MultiFUNDS business will be migrated on to the new platform. This is expected to be in the second half of 2008. In the interim, Skandia MultiFUNDS remains a standalone offer, primarily for existing customers.

Skandia Investment Management (SIML)

Business profile
SIML is a dynamic asset management company focused on providing innovative multi-manager funds to professional intermediaries. These leverage the investment research capability by creating 'blended' solutions of third-party managers with different styles and processes. Since SIML's launch in March 2003, funds under management have grown from around £750 million (including funds held on behalf of other Group companies) to £5.1 billion. The number of funds has expanded from ten to 42 within four years, leading to greater diversification and appeal to a wider client base.

The key to success has been innovation and fund quality. Since 2003, the business has been at the forefront of the UK fund management industry, introducing a number of innovative new funds to the market that have proven popular with advisers and investors. This focus on advisers and their clients has led Skandia to be named Best MultiManager at the prestigious Money Marketing Awards 2007 for the third consecutive year.

With the launch of the Global Best Ideas Fund in 2006, SIML's fund proposition has been taken to a new level. The funds, which are run by ten of the industry's best fund managers, who each select their ten best stock ideas, have continued to be positively received by the marketplace. In 2007, the launch of the UK Strategic Best Ideas Fund, which allows managers to benefit from both rising and falling share prices, was also well received.

SIML continues to work closely with advisers to stay at the forefront of the multi-manager industry and continues to explore further opportunities, particularly within the Best Ideas concept, to deliver innovative investment solutions to the market.

Skandia International

Business profile
Skandia International includes Royal Skandia, based in the Isle of Man, Skandia Life Ireland based in Dublin, Skandia Leben in Liechtenstein and Old Mutual International based in Guernsey.

Operating across the borders of over 20 countries, Skandia International is the offshore and cross-border function for the Skandia Group. Skandia International creates real value for Old Mutual, with 2007 results exceeding expectations. Significant growth during 2007 resulted in funds under management exceeding £12 billion by the year end.

The business has high growth potential and achieves better margins than domestic UK businesses. There is also further growth potential for this business through improved co-operation with Skandia's operations across Europe and the Nordic region and, longer term, across the wider Old Mutual Group.

Royal Skandia, based in the Isle of Man, provides products that allow UK and non-UK investors to enjoy tax-free growth. The Isle of Man is a leading offshore investment location with valuable client protection through tight regulation and policyholder compensation provision. Skandia Life International division also provides products into the Finnish domestic market.

In line with all Skandia UK products, the International range offers multi-manager choice and flexibility, with access to a range of funds run by third-party managers and through SIML. The flexibility of products and services enables clients not only to invest in virtually any fund in the market, but also via different currencies and trust arrangements.

Bankhall
Bankhall is a stand-alone business that reports into Skandia UK. It provides support services to directly-regulated financial advisers. The Compliance Consultancy element of the proposition is designed to deliver support to these advisers to meet everchanging regulatory requirements. Business Development Support, a business-to-business web-based portal, assists advisers to achieve profitable business growth. Bankhall has a clear model to demonstrate the value it provides for the advisers it serves, and this has enabled it to maintain a market-leading position and to improve its profitability during 2007.

Tour de Pologne, Poland

As sponsor of the Tour de Pologne, Poland's largest cycling event, Skandia's campaign promoted a new communication style based on the association of savings and investment with cycling. The main slogan in Polish expressed a connection to changing gear. The campaign was well received in the Polish market and the Skandia brand was further strengthened thanks to strong public recognition of this cycling event.

Performance during 2007

1 The 2006 numbers are stated on a pro-forma basis assuming ownership for 12 months rather than 11 months and have been restated to include the results of Old Mutual International.
2 From 2007 the treatment of Selestia deferred fee income has been harmonised with Skandia MultiFUNDS, reducing the 2007 result. The impact of policyholder tax has been smoothed from 2007.

Positive net client cash flows and strong growth in funds under management
Net client cash flows were £3.9 billion for the year, representing 11% of opening funds under management. While net client cash flows were down on 2006, they remained strongly positive, with 2006 being inflated by the post-A-Day effect and the exceptional institutional mutual fund business mentioned below. Good inflows, combined with favourable market movements during the first half of the year, drove an increase in funds under management during 2007 as a whole. In the second half, growth was constrained by volatile markets which affected investment performance and investor sentiment. This was partially offset by continued positive net client cash flows.

Pension sales higher
The increase in life assurance sales APE for 2007 was largely driven by UK pensions. Single premiums were the key driver, with sales of both Selestia's Collective Retirement Account and Skandia's Monocharge pension up by over 25%.

International business increased in the year, benefitting from strong portfolio bond sales into the UK in the first half and single premium business in Latin America and the Far East. A tail-off in offshore institutional short-term business following a tax change in the UK Budget was offset by higher regular premium business in the latter part of the year. Although this business has experienced increased competition, we believe the offshore market has good potential for growth.

Unit trust performance impacted by revised business mix
Although the year started very positively, the latter part of 2007 reflected the influence of increased uncertainty and volatility in equity markets. Unit trust sales were 30% down on 2006. This is largely accounted for by the low-margin institutional mutual fund business being significantly down in the year, with no recurrence of the exceptional business volumes experienced in the third quarter of 2006. The year concluded with Selestia Investment Solutions, our new market-leading open-architecture platform, experiencing increasing volumes and providing a solid base for future growth.

Strong growth in IFRS adjusted operating profit
IFRS adjusted operating profit increased by 29% to £173 million for the year. The improvement was driven by a significantly higher level of funds under management throughout the year as a result of positive net client cash flows being sustained well into 2007 as well as improved rebate terms. The effect of both of these factors was a rise in asset-based fees. In addition, there was a positive impact from growth in investment income. Both revenue and cost benefits continue to be derived from increased scale and synergies.

Higher EV adjusted operating profit (covered business)
EV adjusted operating profit before tax increased by 18% to £266 million. The value of new business improved 18% to £77 million. Expense synergies and improved mix across the business helped sustain the new business margin of 10%, with sales of single premium pensions being especially strong.

The EV adjusted operating profit includes £43 million post-tax of positive impact from operating assumption changes, largely due to a reduction in corporation tax assumptions from 30% to 28%. Operating experience for persistency and expenditure continued in line with expectations. Modest offsetting revisions were required, with positive impacts arising from improvement in the allowance for fee income following continuous commercial negotiations and increasing purchasing power.

Further innovative investment solutions
Skandia Investment Management (SIML)'s unconstrained Best Ideas range was expanded in September 2007 with the launch of UK Strategic Best Ideas. UK Strategic Best Ideas is the first multi-manager UK UCITS III fund to use long and short equity positions, and has gathered over £90 million in assets since its launch, despite the difficult market environment.

Skandia's risk-focused multi-manager funds have delivered strong absolute returns, typically with volatility far lower than that of its peers and, consequently, the majority of these funds have delivered better risk-adjusted returns.

Continued progress with integration activity
Integration activities remain on target to deliver the committed savings as well as providing significant revenue potential. The Selestia Investment Solutions platform was launched in August 2007, and its full benefits will flow through following migration of Skandia MultiFUNDS investors on to the new platform in the second half of 2008. We launched the Skandia Investment Group during the course of the year. This brings sharper focus and energy to investment product manufacturing and strengthens our multimanager business in a rapidly growing industry. It also improves revenue for divisions and shareholders through broadened and strengthened investment products and greater leverage of buying power with fund groups.

Market environment and outlook
Following regulatory changes in April 2006 designed to simplify the UK pensions regime (A-Day), the pensions market grew strongly during the first half of 2007, and was dominated by single premium transfers, an area of the market where Skandia is dominant. Sales did, however, slow in the second half of the year as the A-Day effect began to unwind.

Industry sales growth is likely to be more modest in 2008 as investor confidence continues to be affected by volatile equity markets. In addition, competition is intensifying as traditional players build their own open-architecture offerings. This is especially evident in the new partnerships that are being formed between fund platforms and traditional life companies. Looking forward, Skandia should marginally outperform the UK industry through its strong IFA franchise and multi-manager proposition.

Skandia responded positively to the FSA's review of the retail distribution market, supporting the proposal that there should be two types of distribution: an 'advice channel' and a 'no-advice channel'. Skandia has also supported the concept of 'customeragreed remuneration' and has suggested that individuals

interfacing with consumers should have appropriate qualifications and be members of appropriate professional bodies that require commitment to a code of ethics.

The Pre-Budget Report of October 2007 proposed a reduction in UK capital gains tax (CGT) to 18% for unit trust investments, without a similar reduction in CGT for insurance bonds. Investment bonds will continue to be tax-advantageous for certain consumer segments and there will continue to be demand for such solutions. However, total bond demand is likely to soften and we have already seen a material reduction in bond sales since November 2007. It is likely that such demand will switch towards collective investments, outside an insurance tax-wrapper, where it should be noted that Skandia UK has a market-leading position, albeit with lower margins than for investment bonds.

Skandia International's business is geographically diversified, with sales in Europe, the Middle East, the Far East, Africa and Latin America, as well as in the UK. Historically, non-UK business has been sourced predominantly from English-speaking expatriates, with some local nationals on a selective basis. Expatriate business is expected to continue, with higher growth from local nationals as economies develop and Skandia becomes an increasingly 'local' brand.

Risk management
Skandia UK's risk framework is common across all its business units. Risks are considered in the context of our business plan and are managed in accordance with Old Mutual Group's risk governance principles, which are described in more detail in the Directors' Report on Corporate Governance and Other Matters later in this document.

Skandia, Sweden

Swedish campaig n to promote our pension offering, the translation reads: Would you choose Skandia if you received SEK1.7 million more in pension capital?

Nordic

Skandia has operated in the Swedish market for over 150 years and its Swedish business offers a full set of financial products. Skandia and its mutual subsidiary, Skandia Liv, hold a leading position in the local life assurance market measured by new business, with a combined customer base of 1.9 million customers in their Nordic operations. We also have a growing unit-linked and life business, as well as a healthcare business, in Denmark. In Norway, we have a successful banking operation and also offer healthcare products. With a full range of product offerings - traditional life, unit-linked, banking, financial advisory, mutual funds and healthcare - we are well positioned in a growing savings market.

Business profile
Our vision is to have the most satisfied customers and to be the leading savings provider in the long-term savings market. The key challenge going forward is to build an offering that provides both end customers and distributors with advisory tools and top quality advice, innovative products, top-quartile returns and the market's best client service. The integration between Skandia, Skandia Liv and SkandiaBanken has continued during 2007. There are strong potential synergies in terms of scale, brand, cross-selling and administration. Skandia's products are widely distributed in Sweden, with sales through IFAs, brokers, its own sales force and online via the internet. During the coming years we will be improving and developing our customer interface, enriching our product offering and making our products available to customers via different channels.

Swedes are avid savers and 31% of net savings are invested in unit-linked products. Corporate pensions are the dominant segment of the Swedish life market, a sector where Skandia has traditionally been very strong. However, the corporate market is changing, with pressure on prices and collective agreement procurements which we have to take into consideration when we develop our strategies to increase sales in this segment. Strategies are in place to increase new sales in the private segment as well. Especially within unit-linked, we have seen mounting competition from online product providers, among others.

Skandia Liv offers life and pension insurance in the traditional life market. The company is a wholly-owned subsidiary of Skandia, but is a mutual company. It operates within a strict local legal framework that does not provide its holding company with power to control it in such a way as to access the benefits usually associated with share ownership (which instead accrue to Skandia Liv's policyholders). Consequently, Skandia Liv is not consolidated in the Group's accounts.

Unit-linked
Within unit-linked, Skandia offers a wide range of funds in various classes and with varying risk profiles. Funds, including those offered by Skandia's own fund companies, are managed externally and managers are selected and monitored using our unique evaluation process. In 2007, in order to be more responsive to client needs, we offered new investment opportunities which followed a more streamlined evaluation process. Client funds in the Nordic unit-linked business amounted to SEK96.8 billion at the end of 2007, of which 82% was invested in equities. We will continue to work with new investment portfolio products during 2008. During 2007 the Swedish unit-linked business received an award for the best three-year fund returns of all Swedish unitlinked companies. The Danish unit-linked business has had the best fund returns of all unit-linked companies in Denmark eight quarters in a row.

Traditional life
As the market's largest life company, Skandia Liv is active in both the private and occupational pensions segments of the Swedish traditional life market. Skandia Liv provides insurance products with a security profile featuring long-term savings with a guaranteed yield plus protection coverage. Traditional life products are an important part of the integrated product offering in the Swedish market. Skandia Liv has one of the highest solvency levels of any life company in the Swedish market. At 31 December 2007, this was 179% and funds under management amounted to SEK303 billion. During 2007 Skandia Liv was ranked top traditional life assurer by independent Swedish consultants and distributors.

Mutual funds
Skandia also offers mutual fund products via its banking subsidiary, SkandiaBanken. Skandia Fund Products' offering is accessible for unit-linked savings, direct savings, individual pension savings via SkandiaBanken and for premium pension savings via the national PremiePensionMyndigheten (PPM) system. Individuals decide personally how they wish their money to be managed by choosing from PPM's range of funds.

Banking
From having been a niche player in the Nordic banking market, SkandiaBanken is now established as a full-range online bank and is well positioned to take advantage of the growing demand for direct self-service solutions in the Nordic savings market. Its focus is to sell the division's non-insurance products and hence strengthen the offering to small enterprises and private individuals. The bank also serves as Nordic's direct distribution channel, targeting self-service clients with a full range of savings products through a new online platform. The bank has won several awards in Norway and Sweden for its outstanding service. During 2007 the savings offering was strengthened by widening the fund range and introducing discounted share trading. This was a major shift in strategic direction from a mortgage bank dependent on the capital market to a bank focused on long-term finance and day-to-day transactions.

Private Healthcare
Skandia offers companies and their employees private healthcare solutions as an adjunct to the national healthcare systems. Interest in complementary and alternative solutions to national healthcare systems remains great in the Nordic countries. However, competition in this area has intensified considerably. The healthcare business in Skandia is also a powerful support business to the unit-linked and traditional life business in Sweden and Denmark, adding value to the pension scheme products and also providing an opening to further business.

Performance during 2007

1 The 2006 numbers are a pro-forma result assuming ownership for 12 months rather than 11 months.

Strong market performance contributed to funds under management
Funds under management increased to SEK116.7 billion due to solid investment performance and continued positive net client cash flows. Volatile equity markets during the latter part of 2007 slowed asset growth, but closing funds under management were still up by 9% compared to 2006.

Sales performance improving
Life sales on an APE basis exceeded the prior year by 3%. The negative sales trend experienced in the first half of 2007 was finally reversed in the third quarter and continued to improve significantly during the fourth quarter with a consequent turnaround in market share. The unit-linked business in Denmark also contributed to this turnaround with a strong sales performance. The improvement achieved in Sweden was the result of broadening the product and fund ranges and a refocus of our sales initiatives through our tied sales force (up 47% comparing the fourth quarter of 2007 to the fourth quarter of 2006) and the broker channel (up 15% comparing the fourth quarter of 2007 to the fourth quarter of 2006). The tied sales force performance was driven by a greater focus on unit-linked products. From 1 February 2007 the tax advantages of the Swedish Kapitalpension product were removed following a change in regulations. This negatively impacted sales as Kapitalpension products accounted for 10% of sales in 2006.

Margins under pressure in the short term
Life new business margin was down from an exceptional 27% in 2006 to 13% in 2007. The decline can be attributed to a change in arrangements between Skandia AB and Skandia Liv (the Liv- Link agreement), the strengthened lapse assumptions, lowered charges (due to market competition), and a change in business mix in Sweden, particularly since Kapitalpension product tax advantages were removed.

In the medium term, the new business margin is expected to improve to reach the high teens. This will be achieved through continued growth in sales leading to economies of scale, product development and the introduction of a new more cost-efficient IT platform and other expense-led initiatives. During 2007, investment in IT commenced with the development of the new Investment Portfolio system, which enables an enhanced product offering.

Underlying IFRS adjusted operating profit solid
IFRS adjusted operating profit decreased by 19% for the year primarily due to the introduction of the Liv-Link agreement, which deals with the administration and distribution costs associated with jointly-marketed products.

EV adjusted operating profit impacted by market pressure
EV adjusted operating profit was down 56% on 2006 mainly driven by a net negative effect from assumption changes and recalibration of risk margin of SEK735 million in 2007. There was strong price pressure in the Swedish market and, in order to adapt to market conditions, fees were reduced for 'tick-the-box' collective agreements and tendered corporate business during 2007.

Persistency assumptions have also been strengthened, offset by capitalisation of future waiver of premium business profits, which was previously not valued. The drop in value of new business was another cause of the lower EV adjusted operating profit in 2007 compared to 2006.

Continued growth in banking business and increased focus
Both deposit and loan books at SkandiaBanken continued to increase in 2007. The growth in loans has slowed down, but the net interest margin was maintained at prior-year levels, despite stiff competition. Lending increased to SEK52.7 billion, up 20% on 2006, mainly due to good growth in Norway in both mortgage lending and car financing. The number of customers increased by 3% over 2006. SkandiaBanken's operating profit for 2007 was SEK191 million, 31% higher than 2006.

During 2007, SkandiaBanken started a major shift in strategic direction to focus on a broader range of long-term savings and client offerings. In October we announced the sale of SkandiaBanken Bilfinans, the vehicle finance business, to DnB NOR. The total book profit expected to be realised is SEK1 billion. The Danish banking operations were also sold during the third quarter of 2007 to strengthen profitability and to bring focus to the remaining businesses.

Putting the business on a sound footing for the future
The focus during the year was on improving operational efficiency and marketing activities and these efforts will be continuing in 2008. The investment programme and restructuring activities within Nordic reduced IFRS adjusted operating profit for the year by SEK81 million. However, we strengthened the savings offering during 2007 by widening the fund range of both Skandia AB and SkandiaBanken. The unit-linked products have been improved, with several new product offerings introduced during 2007 and further improvement underway.

Market environment and outlook
The Nordic economic environment was turbulent during the year, with increased inflation rates and a volatile equity market that delivered a negative performance in 2007. During the year, interest rates increased, albeit from low levels. This environment helped increase volumes in the banking business, but at the same time also increased pressure on interest margins.

In future years, the Nordic savings market is likely to be affected by a number of legislative changes that will affect tax neutrality between savings with and without an insurance wrapper, transfer rights, market competition and collective pensions agreements. The new pensions agreement is likely to bring an increased level of uncertainty about further development of the corporate segment among brokers, employers and insurance companies. However, with a full range of product offerings - traditional life, unit-linked, banking, financial advisory, mutual funds and healthcare - Skandia Nordic is well positioned to respond to any changes that do come about.

There is a growing need for intelligent savings solutions in the Nordic savings market. With the introduction of a new state pension (PPM) in 1999 as a starting point, public social security systems are now gradually changing. There is also a continuing trend to reduce the positive tax discrimination of insurances thereby reducing the incentive to save through insurance vehicles. These tax incentives have been a critical component in the private product offering. Transfer rights will be reinstated on the Swedish market on 1 May 2008, which will also impact the existing business, both in the private and corporate segment.

In 2006 a new ITP agreement was finalised, resulting in a pure 'tick-the-box' solution. The ITP agreement is a collective agreement for corporate pension savings for white-collar workers and includes approximately 700,000 salaried employees within the private sector. Strong focus on price pressure and collectively agreed solutions from the labour market parties in designing the new agreement have led to exclusion of all financial advisory services from external parties such as brokers or other advisers. Brokers and insurance providers are looking to shift their attention to solutions outside the collective agreements. Fierce competition, resulting from these changes is forcing Swedish brokers to shift their focus to individuals and investment returns. Brokers will now refocus on the individual segment with a more holistic advisory approach and strengthen their presence within small and medium-sized companies. To succeed, brokers are demanding improved advisory tools, with a core focus on financial allocation and expanded investment product ranges from insurance companies.

Skandia will strengthen its position with a strong investment offering aimed at delivering market-leading returns. These will be offered both with and without an insurance wrapper for individuals through direct, advised external and internal channels. Within the corporate segment an alternative to the collective agreements targeting corporate clients is key to success. This offering will consist of life assurance, health insurance and transaction services, among other things. The increased focus on savings, investment returns and open architecture gives Skandia an excellent opportunity to capitalise further on its banking platform to target the individual market.

Skandia Life Time, Austria

Campaign promoting Skandia's new flagship product within our unitlinked offering in Austria. The main characteristic of 'Skandia Life Time' is its flexibility where different elements of the policy can be adapted according to various stages of the customer's life.

Individuals in Nordic countries are mature internet users compared to most other European countries. Since the end of the 1990s, Nordic countries have been at the forefront of internet usage and in 2007 the trend was stronger than ever, with the number of services being placed on the internet increasing. Skandia's bank platform will pave the way for Skandia Nordic to offer products with and without an insurance wrapper both direct and to brokers and is thus a key component in Skandia Nordic's future success.

The increasing demand for advice and self-directed solutions, combined with strong growth in the individual market, are the major business opportunities that Skandia Nordic will focus on in the coming years. This approach includes a transition from the current position as a product supplier mainly offering insurance products to becoming a financial solutions provider.

The key focus going forward is building an offering which provides both end customers and distributors with advisory tools and top quality advice, innovative products, top-quartile returns and the market's best client service. There are strong synergies in terms of scale, brand and cross-selling and administration. The second half of 2007 marked a watershed for Skandia Nordic, particularly in Sweden, with renewed optimism founded on the appointment of a new Chief Executive, Bertie Hult, sales increases, product launches and much improved relations with Skandia Liv, the media and customers.

Risk management
Financial market risk
The unit-linked business model transfers most of the financial market risk to the policyholder and guarantees are low. However, the risks for Skandia consist of lower asset-based fees, lower retrocessions and lower new sales due to market sentiment. One way of managing this risk has been the introduction of the new commission model that is designed to reward policy persistency.

Europe and Latin America (ELAM)

Our Europe and Latin America division (ELAM) is a high-growth business providing market-leading long-term savings products, both unit-linked and mutual funds, through open-architecture platforms. We continue to implement our strategy as we focus on growing each business to scale and increased profit in the 13 markets in which we operate. Our approach is one of strong local focus, while benefitting from the combined scale of the Old Mutual Group, through cost containment and revenueenhancing activities.

Business profile
ELAM has operations in ten European countries (Germany, Austria, Italy, Spain, Switzerland, France, Poland, Portugal, the Czech Republic and Hungary) and three Latin American countries (Colombia, Mexico and Chile), while our portfolio also includes two asset management businesses, Palladyne (which operates in the Netherlands and the Middle East and North Africa regions) and Skandia Global Funds (which operates in Asia, Latin America and Europe).

We are a niche player in the long-term savings market in these countries and our positioning is based on service levels and innovation.

The entrepreneurial approach and leadership style has seen the business achieve strong growth since start-up in the late 1990s, with increased momentum over the last four years. Our businesses are in different phases of maturity, from true start-ups (Portugal and Chile) to more mature businesses (Germany and Colombia). The management challenges are therefore diverse and reflect the needs and environments of each business.

In Europe there is a strong dominance of unit-linked life products distributed via IFAs as well as via sales organisations and networks, while in Latin America most of the business is focused on individual and corporate pension savings, distributed via Skandia's tied financial planners. We follow a segmentation approach to distribution, understanding that each of these distribution channels has different needs, objectives and drivers.

Our client base consists largely of mid-to-high income retail clients in various life stages who are saving on a long-term basis. In addition, we also have a base of corporate clients through our pensions business. Our aim is to focus continuously on understanding our client base in order to provide products that fit its needs.

Unit-linked
Our product offerings include a wide range of funds in various asset classes. All funds are managed externally, with managers selected and their performance tracked by Skandia, using our '4P' (Philosophy, Process, People, Performance) process. We provide asset allocation through our managed funds in line with clients' risk profiles.

Unit-linked is sold both as regular premium products with optional top-ups (for example in Austria, Germany and Poland) and as single premium products (for example in France and Italy), based on demand factors. Regular premium products create a steady flow of lower-value premium amounts with a high embedded value, while single premium products create larger, albeit more volatile, net client cash flows.

Mutual funds
The mutual funds business is similar in approach to the unitlinked business, with product development undertaken Skandia and fund management occurring externally. The mutual funds business includes long-term pension business, which is similar to unit-linked in principle, but without an insurance wrapper. In addition, we offer medium-term savings products to complement the offering.

Performance during 2007

1 The 2006 numbers are restated on a pro-forma basis assuming ownership for 12 months and exclude the Skandia Vida business sold in 2007, except EV adjusted operating profit, which includes Vida.

Funds under management growing significantly
Net client cash flows during the year represented 17% of opening funds under management, or 23% of opening funds under management when adjusted for the divestiture of the Spanish institutional business, reflecting the continued growth of the business. Market movements for ELAM were positive for the first six months of the year, but experienced a downturn in the second half of the year following market trends across the world, to end the year broadly flat. Despite the market volatility created by the sub-prime mortgage crisis and credit crunch, as well as the closure of the Spanish institutional asset management business (which resulted in a €0.6 billion reduction in net client cash flows against 2006), funds under management increased 20% from the start of the year as a result of strong inflows.

Continuing growth in life sales (APE)
2007 was generally a tougher year for sales than 2006 in the majority of the ELAM countries. In many of the markets, unitlinked sales slowed down, recording negative net cash flows, and the tax-driven incentives which positively impacted some of the markets in 2006 were not repeated in 2007. Life sales on an APE basis rose 10% over the prior year, with strong growth in regular premium sales in Central Europe, partially offset by lower single premium sales in Southern Europe. Overall, we are satisfied with the progress that the business made in the ELAM territories, with increased market share evident in the majority of instances.

Mutual fund sales up strongly and margins improved
Mutual fund sales were up 40% over 2006, with strong contributions from our discretionary asset manager, Skandia Global Funds, and from Palladyne. Our Latin American pensions business performed well, supplemented by strong institutional inflows. Average margins on mutual fund business improved as funds placed in the low-margin institutional asset management business in Spain were replaced by funds in the higher margin discretionary asset management and long-term businesses. This led to a significantly improved adjusted operating result for the mutual fund portion of the business.

Value of new business increasing with profit margins exceeding the target range at 20%
The value of new business for the year was up slightly against the prior year. The post-tax new business margin of 20% achieved for the year exceeded the medium-term target range of 16-18%. During 2007, we reduced our margins on key products to maintain our competitive position and we expect that pricing pressure will continue in the future.

Skandia Green, Colombia

This internal advert to our tied sales force relates to the launch of the innovative investment product Skandia Green in Colombia. It encourages the sales force to bring their clients to the 'Skandia Green Lounge' in Skandia's office in Bogotá in order to present them the new product in an exclusive and green environment.

Continued strong underlying adjusted operating profit result
IFRS adjusted operating profit was in line with 2006, with the results for 2007 being constrained by costs of €7 million that were incurred to realise synergies. Growth was driven by the larger in-force book of business and by healthy net client cash flows. As a consequence, fund-based fees were up on the prior year, while premium-based fees were at approximately the same level.

Poland has grown strongly over the last 18 months and was a significant contributor to both new sales and ELAM's overall result. This reflects the efforts put into this business over recent years, with particular emphasis on growing distribution. In our Italian business, we renegotiated commercial terms with key distributor groups in order to secure the business model for the future. Colombia performed well in very difficult market conditions, growing market share considerably, while new business sales in Mexico increased markedly on the back of an increase in the financial planner distribution force.

EV adjusted operating profit impacted by assumption changes
EV adjusted operating profit was impacted by three main items during the year. Firstly, net unfavourable assumption changes of €70 million were recorded in 2007. As reported during the year, we reassessed the operating assumptions in Italy, in particular the surrender assumptions, following unexpected surrender experience during the first half of the year. This review resulted in an adjustment to EV adjusted operating profit of €49 million, and changes to persistency assumptions in other countries were also undertaken that contributed further to a net unfavourable impact. Secondly, there were changes to divisional overhead capitalisation during 2007 following the changes made to the operating structures within Skandia since the acquisition. Finally, the current year EV adjusted operating profit result was positively impacted by changes to the tax rate in Germany.

Market environment and outlook
In Europe, ageing populations are placing strain on the public pension system, which provides strong opportunities for personal long-term savings. At the same time, there is a transfer of wealth to the next generation that creates further opportunities as people have surplus funds to invest. While market and government pension reforms are increasing the need for private savings, there are strong indications that tax benefits associated with long-term savings will decrease over time. The Latin American economies continue to grow and the additional personal income that this generates provides a strong opportunity for long-term savings.

The last 12 months have seen significant market volatility with falls in the first, third and fourth quarters of 2007, interspersed with upward creep. Impacts to the US and global economy are likely to continue to cause uncertainty among investors.

As far as distribution is concerned, the European IFA market continues to increase in relative importance, generally at the expense of tied sales forces. Proof of our business model is seen through traditional life insurance providers increasing focus on independently-advised offerings.

We continue to work on increasing transparency for customers, while implementing updated regulatory requirements as they are introduced, such as the Insurance Contract Law in Germany and the Markets in Financial Instruments Directive throughout Europe.

ELAM continues to be well placed to achieve further growth, as evidenced by rising market shares in most of the countries in which we operate. Product development and innovation remain at the heart of our offering, with close to 40 new products and product enhancements launched during 2007. Early indications are that innovative major new product launches in Austria and Switzerland have been well received in their local markets.

Our positioning of independently-advised, open-architecture provider in the long-term savings market remains valid, with our chosen market continuing to grow. This should result in further positive market development over the medium term.

In the short term, our outlook remains cautious as the effects of the sub-prime mortgage crisis and the credit crunch plays out in the market.

Risk management
Financial markets risk
The unit-linked and mutual fund business model transfers most of the financial market risk and reward to the policyholder. While this is our favoured model, some guarantees are offered, generally managed by external providers. Our risk mainly lies in lower assetbased fees, lower retrocession and lower new sales or surrenders due to market sentiment. ELAM's response to this risk lies in offering innovative and flexible products as well as investment options and asset allocation tools, to suit different demand patterns, thereby ensuring lower volatility in revenue streams.

Southern Africa

Highlights

• Launch of the Masisizane Trust
• Nedbank financial targets delivered
• Launch of the boutique structure, transition complete

Old Mutual South Africa (OMSA)

Business profile
OMSA's financial services business, comprising life and asset management operations, has at its core one of the largest advicebased distribution capabilities in the South African industry. This uses a combination of tied agents, independent financial advisers, bank broker distribution, corporate advisers and direct distribution to ensure that the business is accessible to a full spectrum of potential clients. OMSA's investment and risk products, as well as its strong links with other Group companies, position the business to meet a full array of client needs.

The business is supported by strong branding and a proven reputation for providing competitive long-term returns to customers. The Old Mutual brand enjoys a very high level of awareness, trust and loyalty among South African consumers across all market segments. Historically the most powerful life assurance brand in the country, it is now increasingly perceived as a leading savings and investment brand.

The breadth of this business, incorporating life, health and disability assurance, and investment and asset management in the retail, corporate and institutional markets, positions us well to extract value from our large number of well established client relationships in these sectors. Through the productive and growing tied distribution force in the high-, middle- and low-income markets, as well as through its relationships with independent brokers, OMSA is well positioned for future growth.

Retail business
Our Retail business covers both the Affluent Market and the Mass Market (formerly Group Schemes), offering life, disability and health insurance, retirement annuities, savings and investment products. We distribute our products through independent brokers (IFAs), bank brokers, tied distribution (personal financial advisers for the Retail Affluent segment and salaried sales force for the Retail Mass segment), a direct distribution channel, bank brokers and other retail partnerships. Our distribution through bank financial advisers and staff within Nedbank constitutes an important channel.

Our key Retail product offerings include Greenlight, a flexible and comprehensive range of life, disability, and future-needs cover. Flexible healthcare schemes for individuals are offered under the Oxygen brand. A range of retirement savings plans, annuities, investment and income products are provided through different wrappers - which include the Max, Investments Frontiers and Galaxy product ranges. Our customers in the Mass segment are offered savings, retirement and funeral cover products.

In line with international trends and the need to ensure products are appropriate for today's environment, a key feature of more recent investment and savings products is significantly lower charges (and capital requirements) and increased flexibility.

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

Old Mutual South Africa

OMSA launched its new brand line 'Invest in your success' reflecting the fundamental change in strategy and philosophy implemented by the business over the past few years.

Corporate business
Our Corporate business sells investment, retirement, insurance and structured products, and advisory services to corporate, institutional and parastatal 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 the benefit of their employees and by trade unions for the benefit of 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.

Investment products are customised depending on the investor's requirements. These include smoothed bonus portfolios, absolute return portfolios, structured solutions and annuity products, as well as third-party asset management. We offer other multi-managed 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
In response to the changing factors driving investment success worldwide, and in particular the demand for core and specialist asset management capabilities, Old Mutual Asset Managers (South Africa) was restructured in January 2007 into a new multi-boutique model under the renamed Old Mutual Investment Group (South Africa) (OMIGSA). This follows the success of the same model in Old Mutual's US Asset Management business. We believe this will assist us in delivering improved investment performance to customers and in gathering assets. In addition, links to Group businesses outside South Africa enable OMIGSA to offer international investment services to the corporate and institutional markets.

The investment boutiques provide a range of investment capabilities designed to meet the various needs of customers.

They include:

• a number of specialist equity and fixed-interest boutiques;
• an index-tracker capability in Umbono Fund Managers;
• a multi-manager capability through SYmmETRY, which creates portfolios for institutional investors blending best of breed asset managers across multiple asset classes, using sophisticated portfolio construction methods. The portfolios aim to maximise returns while controlling risk and diversifying managers;
• Old Mutual Property Group, which provides property management and property-related asset management services within OMSA; and
• Old Mutual Specialised Finance (OMSFIN), which is active in corporate advisory, corporate lending, securities lending and structured products.

Client service
We run a single back office to provide technology, administration and client service to all market segments. We continue to drive costs lower and service levels higher as we adopt LEAN manufacturing approaches to process re-engineering and exploit technology. Unit costs are being driven lower in real terms and for the Retail markets are lower than local and international benchmarks. Corporate unit costs are also being driven down aggressively in anticipation of future retirement fund reform legislation requirements. An increasing number of clients and most intermediaries are being serviced via the internet and call centres, although we have maintained a large national branch network.

Corporate Citizenship
Old Mutual has reported its 'triple bottom line' in South Africa through its Corporate Citizenship Report since 2001. In 2007, our social investment programme was boosted significantly by the launch of a number of new initiatives aimed at supporting small and medium enterprises, and delivery of infrastructure.

Performance during 2007

OMSA net client cash flows remained a challenge in 2007, primarily due to net outflows from institutional clients, notably from two multi-managers, following changes of portfolio managers and concerns about short-term performance in 2006. Inflows were lower as consultants and investors adopted a 'wait and see' approach because of uncertainty over the implications of the new boutique structure on performance. Investment performance for 2007 remained disappointing, with figures for the year showing 24% of funds outperforming benchmarks and achievement of the positions four and six in the Alexander Forbes Large Manager Watch over one and three years respectively. We deliberately took defensive positions in most portfolios in 2007 anticipating a market correction and this cost us performance for the year.

Life sales on an APE basis increased by 6% over 2006. Recurring premium sales grew strongly, up 14% on the back of an increased sales force in the Retail Mass Market business as well as competitive risk product and credit life sales in the Retail Affluent market. Life single premium sales were down 7% on 2006 primarily due to competitor margin pressure, and also, because we had a significant deal in our SYmmETRY multi-manager business at the end of 2006 which was non-recurring. The launch of the Absolute Return Fund and enhancements to the fixed bond rates on the lnvestment Frontiers product at mid-year helped improve sales in the second half of the year. We continued to gain market share in the Life retail sector.

Unit trust sales were up after including sales through Marriott Income Specialists (Marriott) for the full year in 2007. Excluding Marriott, sales were down 10% on 2006 because of residual concerns over portfolio manager changes and short-term investment performance on certain core funds (Dynamic Floor and Enhanced Income Funds). The new Stable Growth Fund was launched in July 2007 and has had good early sales.

IFRS adjusted operating profit was 23% higher than in 2006. Within this result, our long-term business adjusted operating profit increased marginally and the LTIR increased 69% after changes in calculation method to recognise the value of the shareholders' funds and the higher asset base more appropriately. The marginal increase in long-term business profit was a result of a continued switch to less capital-intensive, lower margin products. Positive contributions arose from an increase in the average level of policyholders' funds under management, driven by higher market levels and a significantly lower IFRS 2 share-based payments charge. These were offset by an increase in the investment guarantee reserve, which resulted from the adoption of a marketconsistent basis for the valuation of these reserves as well as the application of a discretionary margin.

Asset management adjusted operating profit was up 8% due to higher market levels. The good returns achieved also led to a good flow of performance-related fees, and higher property profits after the first full-year contribution from Marriott. However, the profit growth was tempered by additional advertising costs associated with the launch of the new boutique structure in OMIGSA, a review of incentive levels for fund managers and loss of fee income as a result of the withdrawal of client funds.

We declared strong bonuses in February 2008 on many of our with-profits products in spite of market volatility in early 2008. This reflects the good returns these products have generated. Our portfolios' bonus smoothing accounts remain in very strong positions following these strong bonus declarations.

Embedded Value (EV) was impacted by net capital transfers to Old Mutual plc of R5.9 billion during the year. Excluding these capital transfers, EV increased by 22% over the year and was positively impacted by market levels. However, the EV adjusted operating profit is lower than in 2006 because the prior year profit was boosted by the recalibration of the risk margin in the discount rate of R1,093 million (R711 million post-tax), while the 2007 profit was reduced by a substantial increase in the investment guarantee reserve to reflect the use of a market-consistent methodology, the switch to lower margin business of certain liabilities (which has resulted in lower capital requirements and improved ROC), and the reduction of certain margins in the Corporate segment aimed at providing better value for our customers.

Old Mutual South Africa

Arelia, a client story that was used as part of the OMSA's 'Invest in your success' campaign. Arelia used her policy to invest in her business.

Retail Mass Market

Retail Mass Market sales were up 23% on 2006. This result reflects the continued focus on growing the sales force, which at 31 December 2007 was 11% higher than at the beginning of the year. Excellent growth was also achieved in sales through the broker channel, which were up 106% on the prior year. There was, however, a small swing to lower-margin savings business.

VNB was 22% higher than 2006, with the new business APE margin constant at 30%, the latter benefitting from improved burial society results and a lower secondary tax on companies offset by an increase in the proportion of low-margin savings business. We responded to the shift in mix and the lower margins on savings business following the Statement of Intent, which sets minimum standards for surrender and paid-up values, by implementing changes to adviser remuneration and increasing minimum premiums for savings business. This had a negligible impact on mix, but did improve the profitability of the savings business slightly.

In 2007, we continued innovating and delivering financial solutions relevant to our customers. In October we launched the Domestic Workers Fund, in collaboration with the Presidential Working Group on Women, a fund targeted at extending retirement provisioning and risk benefits for domestic workers. In November we launched Pay-When-You-Can, an innovative flexible premium funeral product for the entry-level market, in Shoprite stores nationwide. In December we launched Zimele-compliant funeral plans (contributing to Financial Sector Charter scores), which also address the need for affordable products for the previously untapped entry-level market.

Retail Affluent

1 Includes non-life flows in respect of OMUT, Galaxy and Linked Investment Service Provider (LISP) sales on an APE basis.

Life recurring premium sales were 11% higher than for the prior year, driven by continued good sales of risk business, leveraged from enhancements to our Greenlight risk product range (17% higher) and good credit life sales (26% higher), reflecting the extension of personal credit through Nedbank. Recurring premium Max Investment savings business (both life and non-life wrappers) performed well, ending the year up 17% with significant growth (62%) in the non-life recurring option, but from a relatively low base.

Single premium life sales were 4% up on 2006. Single premium investment sales were flat as a result of perceptions about OMIGSA restructuring, key staff losses and OMIGSA investment performance in some of the flagship funds, principally our Dynamic Floor and Enhanced Income funds. These effects were offset by improved investment performance, the new Absolute Return Fund launch and enhancements to the fixed bond rates of the life product. In the last quarter there were large non-recurring inflows into the private equity fund of Investment Frontiers. Single premium sales of the offshore investment product through Old Mutual International continued to accelerate and were 56% up over 2006.

Life VNB was 14% higher than 2006, with the new business APE margin improving from 12% to 13%. The biggest driver of the improvement was the impact of increased volumes, particularly on the recurring premium book on the absorption of initial distribution costs, both at a product level and in the distribution channels.

Bancassurance sales through Nedbank continued to grow and were up 16% over 2006. The launch of a new, low cost, simple savings product through Nedbank branches was very well received. Credit life sales slowed following the introduction of the National Credit Act, but were offset by the new savings and risk product flows.

Corporate Segment

2 Includes non-life sales in respect of OMIGSA and Old Mutual Properties on an APE basis.
3 Includes net client cash flows for OMIGSA.

Net client cash flows in the Corporate market, although still strongly negative, were less severe than in 2006, and Employee Benefits net client cash flow was significantly better than in 2006. Termination experience, in particular, was very good and the impacts of the launch of the Absolute Growth Portfolios, as well as strong bonuses, were factors in this regard. Net client cash flows at OMIGSA were adversely affected by withdrawals following the loss of two key portfolio managers, clients switching from core and balanced mandates and residual concerns about short-term performance in 2006.

Total Corporate sales were lower than in 2006, driven by lower sales of SYmmETRY (which had a very large deal in 2006), Annuities and Healthcare. There was strong performance in the second half of 2007 in the Guaranteed Products, where the launch of the Absolute Growth Portfolios was successful and has started to attract good new sales. Risk sales were also strong in 2007 compared to the prior year. Although Annuity sales were lower than in 2006, the pipeline for 2008 is strong and business was secured at the end of 2007 that should flow through in 2008.

Healthcare sales were below 2006 due to a declining market, with government employees moving to GEMS, and a somewhat reduced focus on Oxygen within the distribution channels. Appointments have been made to drive the distribution of Healthcare more effectively, especially in the Retail distribution channels.

The decrease in new business margins and VNB relative to 2006 was mainly a result of a reduction in the Platinum Pensions 2003 capital charge which was made so as to offer better value to customers and drive future sales, as well as lower volumes of highmargin annuity business towards smoothed bonus products. Lower sales volume in SYmmETRY and Healthcare also contributed. This had a knock-on effect, reducing the overall life new business margin.

Research

Old Mutual Investment Group South Africa's advertising campaign was designed to communicate its philosophy of Performance through Focus.

Old Mutual Investment Group South Africa (OMIGSA)

The implementation of the boutique structure in OMIGSA was a key feature of 2007. We continue to focus on stabilising the structure and increasing investors' confidence in individual boutique investment philosophies.

Non-life sales (OMIGSA) were significantly lower than the prior year as a result of the non-repetition of two very large deals in the first half of 2006 (R11.1 billion), and the smaller pipeline at the start of 2007. The investor and consultant concerns relating to OMIGSA's restructuring into a multi-boutique business and some areas of investment performance also contributed to lower sales. These have, however, started to improve.

2007 ended on a highly volatile note as the unravelling global sub-prime crisis dented investor confidence and global financial markets. Against this uncertain backdrop, the investment performance across our different boutiques was satisfactory. Although three-year performance slipped as poorer short-term equity performance fed through to the longer-term performance numbers, we had anticipated a market correction and generally the portfolios were defensively positioned. Overall, just over half of the funds outperformed their benchmarks over one and three years respectively to the end of December. For the peer cognisant institutional funds, 45% and 9% of mandates were above the industry median over one and three years respectively. More than half of institutional mandates outperformed their benchmarks over these same periods. The Macro Strategy Investments boutique's Profile Balanced Fund was ranked fourth over one year, sixth over three years and third over five years ended 31 December 2007 in the Alexander Forbes Global Large Manager Watch survey.

In 2007, half of the key unit trust funds, representing 69% of unit trust assets, were first and second quartile performers over one year, 69% were first and second quartile over three years and 64% over five years to the end of December 2007.

The boutiques with the most notable performance for the three years ending 2007 were the Absolute Return, Macro Strategy Investments, Fixed Income and Select Equity boutiques, with 100%, 99%, 95% and 76% respectively of their funds under management beating their benchmarks.

During the year, Marriott Income Specialists launched the Marriott International Income Growth Fund, OMIGSA Property launched Triangle, an industry-defining direct property fund, Umbono Fund Managers launched the RAFI 40 Index Fund and OMUT launched its Stable Growth Funds.

Market environment and outlook
Despite recent inflationary pressures, a tightening of monetary policy and the current electricity shortage, the South African economy remains robust, with prudent fiscal management and investment in infrastructure ensuring a continuation of the growth experienced in the past few years. This economic growth continues to drive demand for financial products, particularly those with exposure to the market rather than traditional smoothed bonus investments. However, the overall savings rate in South Africa remains low, with an increasing proportion of savings being channelled into non-financial investment vehicles such as residential property. This increases the competitive pressures between market participants.

The distribution of economic growth is also fuelling growth in the emerging middle and lower income market segments. OMSA continues to focus on improving the value offered to customers and the overall customer experience to meet the needs of these emerging segments. Its market-leading position in the middle and lower income market through its Retail Mass Market division makes it well placed to grow in this market segment.

OMSA is also working proactively with intermediaries to help transition them through the significant changes in commission regulations expected to come into effect during 2008.

The long-term outlook for savings and wealth management in South Africa remains positive, with the following points as key contributors:

• prudent fiscal and monetary policy is expected to return the economy to a robust growth path in the latter half of 2008;
• continued growth of black middle class and affluent markets arising from a growing economy and Black Economic Empowerment efforts;
• Government is formulating policy that would create a framework for mandatory retirement savings;
• strong growth in household incomes, enabling more people to start or increase savings for retirement;
• improvements in financial education and transparency of financial products enhancing accessibility.

In the short term, a slowdown in growth rates of both the economy and disposable incomes is expected as monetary policy is tightened to contain inflationary pressures and as global economic growth slows. Increased competition is expected for the flows into the market, and also for existing assets, especially for retirement annuities that have been transferable between funds from October 2007. In this environment distribution, superior investment performance and coverage of all asset classes will be crucial for success. Old Mutual is well placed to compete in this environment with our investment boutiques continuing to grow and the coverage of asset classes increasing, and we have the ability to leverage our large distribution network to deliver financial solutions to our advantage.

Nedbank Foundation

As part of the repositioning of Nedbank's brand, a campaign was run to draw attention to the valuable work done by the Nedbank Foundation with funds sourced from Nedbank's Affinity Programmes.

Risk management
Life Assurance
OMSA's overriding business objective is to create long-term customer and shareholder value. The business is actively focused on enterprise-wide risk management to take on agreed levels of risk and to mitigate risk outside agreed limits wherever possible.

OMSA operates a risk management framework that contains a robust risk governance structure, group-wide risk policies and methodologies that focus on identification, assessment, response, action and control plans, and the monitoring and reporting of risks.

The potential impact of HIV/AIDS is well managed in respect of lives assured, as demonstrated by the positive mortality experience variances that have been achieved as a consequence of prudent risk selection and product pricing. This is despite the high prevalence of infection within the general population. The business conducts HIV and other tests for voluntary cover above certain levels and, where there is no testing, generally has the ability to reprice regularly should experience be different to assumptions. Based on the models currently in use, calibrated against observed experience, it is believed that the prevalence of infection has peaked.

In line with other life assurers, OMSA manages underwriting risk through strictly controlled underwriting principles governing product-pricing procedures, which take appropriate account of actual and prospective mortality, morbidity and expense experience.

Certain products are underpinned by minimum guaranteed investment returns. Guaranteed annuity options were also previously offered on a book that is now closed to new business. The cost of minimum investment guarantees increases when investment markets decline, while the cost of guaranteed annuity options increases with declining interest rates. The risks posed by these guarantees are regularly quantified using appropriate actuarial models calibrated to market-derived assumptions. We have quantified the cost of minimum investment guarantees and guaranteed annuity options and have established adequate reserves to cover the expected cost in full. We are still evaluating the optimal asset allocation strategy for the assets backing this reserve, given that there are few financial instruments that provide a perfect hedge.

In respect of fixed annuities, market risks are managed by holding assets with appropriate duration and convexity to match liabilities to the fullest extent possible. Market risks on policies where the terms and conditions are guaranteed in advance and the investment risk is carried by the shareholders principally reside in the guaranteed non-profit annuity book. Other non-profit policies are also suitably matched through specific investment mandates. Market risks on with-profit policies, where investment risk is shared, are managed by appropriate investment mandates and bonus declaration practices.

Equity price risk and interest rate risk (on the value of securities) are modelled in line with the Group's risk-based capital practices, which require sufficient capital to be held in excess of the statutory minimum to allow the Group to manage significant equity exposures.

Credit risk is monitored across OMSA's activities by the OMSA Credit Committee, which has established appropriate exposure limits to individual issuers and within various segments of the business.

Asset management
The revenue of OMIGSA's asset management businesses varies proportionally to fluctuations in values of the assets managed on behalf of clients (both in-house and third-party). This is accentuated where performance fees apply if minimum performance hurdles are not met. Investment risk is borne by clients, due to the agency nature of the business. Compliance risks faced by these businesses are monitored and reviewed by compliance and risk committees established for this purpose. The risk of loss of key employees is managed by the use of appropriate remuneration policies including long-term incentive schemes aligned with shareholder value targets, and by competition restrictions in employment agreements.

Nedbank Group (Banking)

Business profile
Nedbank Group Limited, which is 53% owned by the Group, is a bank holding company that is one of the four largest banking groups in South Africa. It operates through its principal banking subsidiaries, Nedbank Limited (wholly-owned) and Imperial Bank Limited, in which Nedbank Group Limited has a 50.1% interest. Nedbank Group Limited's shares are publicly listed on the JSE.

Nedbank Group offers a wide range of wholesale and retail banking services through three main business clusters: Nedbank Corporate, Nedbank Capital and Nedbank Retail, as well as Imperial Bank, a joint venture with Imperial Holdings. Nedbank Group focuses on operating in southern Africa, with Nedbank positioned to be a bank for all - both from a retail and a wholesale banking perspective. The principal services offered by Nedbank are corporate and retail banking, property finance, investment banking, private banking, foreign exchange and securities trading. Nedbank Group also generates income from private equity, credit card acquiring and processing services, custodial services, collective investments, trust administration, asset management services and bancassurance.

Nedbank Group's head office is in Sandton, Johannesburg, with large operational centres in Durban and Cape Town. These are complemented by an extensive branch and support network throughout South Africa and facilities in Lesotho, Malawi, Namibia, Swaziland and Zimbabwe. These facilities are operated through Nedbank Group's eight subsidiary or affiliated banks, as well as through branches and representative offices in London and in the Isle of Man, to meet the international banking requirements of Nedbank Group's South African-based multinational and private clients. OMSA's full-time agents also distribute certain Nedbank products.

Nedbank Corporate
Nedbank Corporate comprises the client-focused businesses of Business Banking, Corporate Banking, Property Finance, Nedbank Africa and the specialist businesses of Transactional Banking and Corporate Shared Services. These businesses focus mainly on providing lending, deposit-taking and transactional banking execution services to the wholesale banking client base of Nedbank. Nedbank Corporate has a strong client base and is well placed to grow and optimise business opportunities, both internally through cross-selling services offered by other divisions of Nedbank as well as the wider Old Mutual Group, and externally in the private and public sector markets.

Nedbank Capital
Nedbank Capital is Nedbank Group's investment banking business. It consists of a number of divisions that together manage structuring, lending, underwriting, corporate finance, private equity and trading operations. It provides a full product spectrum in the South African market, with an offering that stretches from equity research to long-term project financing, enabling Nedbank Capital to compete effectively in the southern African market and in niche areas of specialisation throughout Africa. The division seeks to provide seamless specialist advice, debt and equity raising and execution and trading capability in all the major South African business sectors. Principal clients include a significant number of the top 200 domestic corporates, as well as parastatals, leading financial institutions, non-South African multinational corporates and clients undertaking major infrastructure and mining projects in Africa, and emerging BEE consortia.

Nedbank Retail
Nedbank Retail serves the financial needs of individuals and small businesses by providing transactional, credit card, lending, investment and insurance products and services. The division services the needs of clients grouped into five primary client segments, being high net worth, affluent, middle, mass and small business.

The division is further organised around the following key product areas: card, home loans, personal loans, bancassurance and wealth, vehicle and asset-based finance and transactional banking.

The Shared Services Division provides support services including human resources, finance, projects, strategic planning and product and client analytics. Retail Risk is responsible for the monitoring of compliance, credit and operational risk and providing legal services to the cluster. Retail marketing provides marketing support to the business divisions and assists in co-ordinating marketing activities across the broader Nedbank Group.

Imperial Bank
Imperial Bank Limited is an independently regulated bank, of which Nedbank owns 50.1%, with the remainder held by Imperial Bank Holdings Limited. Imperial Bank focuses mostly on motor vehicle finance. In addition, it also offers property, medical and aviation finance.

Performance during 2007
2007 financial targets achieved

1 As reported by Nedbank.

We are pleased with the balance we have achieved between delivering on our short-term performance targets and investing to build a platform for long-term growth. Although the financial performance is now benchmarking closer to that of Nedbank's peers, we aspire to improve further.

Headline earnings increased by 34% to R5,921 million. Basic earnings grew by 33% to R6,025 million.

Nedbank Group's headline earnings per share (EPS) increased by 34% to 1,485 cents (2006: 1,110 cents). Diluted headline EPS increased by 33% from 1,076 cents to 1,429 cents. Basic EPS grew by 33% from 1,135 cents in 2006 to 1,511 cents in 2007.

Nedbank Group's return on average ordinary shareholders' equity (RoE) improved from 18.6% to 21.4% for the year, exceeding the target of 20% that was set in 2004 at the start of its recovery programme. RoE, excluding goodwill, improved from 22.1% to 24.8%.

Net interest income (NII)
NII grew 29% to R14,146 million (2006: R10,963 million) due to strong growth in average interest-earning banking assets of 29%.

Nedbank's net interest margin for the year was 3.94%, unchanged from 2006. The margin benefitted from the endowment impact of interest rate increases on capital and current and savings accounts of 0.4%, and decreased from liability margin compression of 0.1% as deposit interest rates continued to price in upside risk and as the sector had to source a higher proportion of funding from the wholesale deposit market. In addition, the NII margin decreased from asset margin compression of 0.3% mainly as a result of strategic changes in the product mix of personal loans and competitive pricing behaviour particularly in home loans and commercial mortgages.

Impairments charge on loans and advances
The credit loss ratio increased from 0.52% in 2006 to 0.62% in 2007. The growth in advances and the increase in the credit loss ratio are reflected in a 46% increase in the impairments charge to R2,164 million. Impairment levels have risen in Nedbank Retail and Imperial Bank, while the credit loss ratios in Nedbank Capital and Nedbank Corporate have remained at lower than expected levels, assisted by active credit management and unusually high levels of recoveries. The effect of the deteriorating retail environment has been mitigated to some extent through tighter credit policies and an early focus on collection processes and systems. Nedbank has continued to apply stringent credit management policies and has tightened credit-granting requirements in the retail areas most affected by the worsening credit cycle over the last two years.

Nedbank has no direct exposure to US sub-prime mortgages. The group is indirectly exposed in that it does have some banking relationships with institutions with sub-prime exposure. These are relatively small and are not currently expected to lead to any losses in the Nedbank Group.

Nedbank Retail raised an additional Incurred But Not Reported (IBNR) provision of R167 million in December 2007 to anticipate the effect of the current higher interest rates not yet evident in the historic data used for provisioning calculations.

Nedbank

The repositioning of the Nedbank brand. The key message of this campaign is 'personal achievement' by banking with Nedbank.

Non-interest revenue (NIR)
NIR for the year increased by 10% to R10,445 million.

This growth in NIR was driven primarily by commission and fee income growth of 15% and an increase in private equity revaluations, realisations and dividend income.

This growth was partially offset by weak trading results as reported in the first half. This was mainly due to poor trading within the business alliance with Macquarie, the competitive pricing structure for transactional products adopted in Nedbank Retail, where fees have been reduced by an average of 19% since mid-2006, and a continuing move from cheques to electronic channels by business banking clients.

Expenses
Expenses continue to be tightly managed, increasing by 14% to R13,489 million. The 'jaws' ratio continued to improve throughout the year, with total revenue growth of 20% being 6% above expense growth of 14%, resulting in the efficiency ratio improving from 58.2% for 2006 to 54.9%.

Growth in operating expenses slowed, as anticipated, while staff expenses increased, reflecting the investment Nedbank has made in client-facing staff and an increase in variable pay as a result of the continued improvement in operating performance. Marketing costs increased as planned as Nedbank continued to invest in repositioning the Nedbank brand.

Expenses included the costs for the integration of Old Mutual Bank into Nedbank, Bond Choice's expenses and the IFRS 2 charge in respect of Nedbank Group's BEE transactions.

Advances and deposits
During 2007 advances grew 21% to R374 billion, with average interest-earning banking assets increasing by 29% to R359 billion.

As a result of the strong advances growth, total assets increased 15% to R489 billion. Growth in higher risk areas, such as personal loans, slowed as the group tightened credit criteria and focused on higher quality, lower margin personal loans. Deposits increased by 18% from December 2006 to R385 billion at December 2007.

Nedbank's liquidity remains sound in an overall liquidity environment that was made more challenging by negative international liquidity developments. Contagion of South African markets has been limited, with little direct exposure by local banks to the US sub-prime markets. The primary impact has been limited to a reduction in international liquidity, which has traditionally not been a large portion of the funding base, and an increase in the cost of capital market debt. This has had a small negative impact on the cost of rolling over conduit paper and new subordinateddebt issues.

During 2007 Nedbank successfully launched its inaugural auto loans and residential mortgage-backed securitisation programmes, raising R1.7 billion and R1.87 billion respectively. These programmes have diversified the funding base and added tenor to the bank's existing funding profile. In addition, Nedbank issued a further foreign syndicated loan of $500 million in February 2007, raising additional foreign funding and creating further funding diversification.

Market environment and outlook
The slowdown in consumer spending, the increase in consumer credit stress, continuing electricity shortages and sustained dislocation in credit and equity markets are likely to make the year ahead significantly more challenging for the South African economy and the banking sector.

Nedbank Group's management currently believes that performance in 2008 is likely to be influenced by:

• growth in retail advances remaining robust, but slowing, together with ongoing growth in wholesale advances;
• continued market pressure on retail funding volumes;
• an endowment benefit in the margin from historic interest rate increases;
• a slight worsening of the impairment charge following signs of increased levels of credit stress in parts of the retail environment, together with fewer impairment recoveries from Nedbank Capital and Nedbank Corporate;
• continuing effects of the Nedbank Retail price reductions and industry fee pressure;
• pressure on revenues and costs associated with the introduction of the National Credit Act;
• momentum from transactional banking mandates received by Nedbank Corporate and a strong pipeline built up by Nedbank Capital;
• lower positive property private equity revaluations;
• additional operating efficiencies;
• investment in retail distribution and continued marketing spend on the new brand position;
• finalisation of Basel II; and
• asset securitisation and continuing capital management activities.

While the general banking environment will be much tougher than in previous years, Nedbank is confident of continuing to improve its performance based on the solid platform built over the past four years. Nedbank's focus is now on working towards its vision of becoming southern Africa's most highly rated and respected bank.

The main focus areas for Nedbank in 2008 include building on its transformation journey, and growing its retail distribution network, transactional banking market share, relevance in the public sector, business banking franchise and mass-market strategy.

In addition, Nedbank is focused on being involved in social and community projects, managing the credit cycle, disciplined expense management, ongoing capital management activities, continuous improvement in all operations and applying economicvalue- based management. From 2008 economic profit (EP) replaces RoE as the primary internal financial performance measure in the Nedbank Group. EP is a best-practice measure since it incentivises an appropriate balance between return and growth, and better aligns with shareholder value creation.

Risk and capital management
Risk management has been a major component of Nedbank Group's transformation over the past few years, using its comprehensive Basel II programme as a major catalyst. A vision to be 'world-class at managing risk' has been engrained in the organisational risk culture of the group together with a clear understanding that Nedbank's core business activities involve taking financial risks and that these and other key risks, for example operational risk, must be measured, managed and optimised as a core competency.

Nedbank has successfully implemented its Basel II blueprint. This is in line with the revisions to the South African Banks Act and the new internationally-based Basel II banking regulations introduced by the South African Reserve Bank (SARB), which were effective from 1 January 2008. The main purpose of Basel II is to promote significant enhancement and sophistication of risk and capital measurement and management, thereby further strengthening the safety and soundness of the banking industry.

Nedbank has received formal approval from SARB for an Advanced Internal Ratings-Based (AIRB) approach to credit risk for its principal operations in South Africa, while Imperial Bank and the African subsidiaries have adopted the standardised approach. Nedbank's risk and capital management capabilities allow it to optimise the risk/return trade-offs equation and grow the businesses profitably within a clearly established risk appetite.

During the year Nedbank continued to actively manage its capital:

• the expensive NED2 R4 billion bond was redeemed on its call date in July 2007;
• several Tier 2 subordinated-debt issues totalling R6.77 billion were executed, thereby continuing to build a smooth and diversified subordinated debt maturity profile. (A highlight of this was a R2 billion inaugural Tier 2 investment in a South African bank by the International Finance Corporation and the African Development Bank);
• a R1.7 billion Imperial Bank asset securitisation and a R1.87 billion Nedbank Retail home loan securitisation were completed; and
• R364 million of Tier 1 perpetual preference shares were issued.

Certain hybrid capital instruments now qualify as Tier 1 regulatory capital under Basel II and Nedbank is well advanced in planning its inaugural hybrid Tier 1 issue.

Nedbank Group, Nedbank Limited and Imperial Bank Limited all received ratings upgrades from Moody's and Fitch during 2007. This was very pleasing and recognises the successful turnaround of Nedbank over the past few years.

Nedbank expects to issue further Tier 2 capital and hybrid forms of Tier 1 capital in 2008. Nedbank is committed to improving its profile as an issuer in the debt capital markets and this should result in a more robust subordinated debt yield curve.

Economic capital
Economic capital is a scientific, consistent measurement and allows comparison of risk across business units, risk types and individual products or transactions. Economic capital is now embedded in the management and performance culture of Nedbank Group, and is fundamental in the assessment of risk/return at all levels.

Nedbank's economic capital framework also satisfies a major component of Basel II, namely the requirement for an Internal Capital Adequacy Assessment Process (ICAAP). This involves the group's ongoing assessment of its internal capital adequacy on a true economic basis.

In addition to economic capital, Nedbank Group calculates regulatory capital requirements developed by the Basel Committee on Banking Supervision - both under the current Basel I Accord and the new revised Basel II Accord. Nedbank Group will always aim to hold the greater of regulatory capital and economic capital for capital adequacy purposes, but primarily uses its internal economic capital assessment for managing the business as this represents a better overall assessment of the true economic risk/return relationship.

Nedbank, Power to the People

During the year Nedbank unveiled two solar billboards. The first panel generated electricity for a kitchen at MC Weiler Primary School in Alexandra Township in Gauteng, enabling meals to be cooked for more than 1,400 children every day. This initiative led to Nedbank winning the Grand Prix Award at the Cannes Advertising Awards.

Key performance indicators
After successfully achieving the short-term targets of a 20% RoE and 55% efficiency ratio in 2007, Nedbank Group has set the following key medium-term targets:

In the medium term Nedbank aims to meet or exceed the comparable performance of its peers.

Risk appetite
Risk appetite is an articulation of the risk capacity or quantum of risk Nedbank Group is willing to accept in pursuit of its strategy, duly set and monitored by its board of directors and integrated into its strategy and business plans.

Nedbank measures risk appetite in terms of quantitative risk measures, which include earnings-at-risk (or earnings volatility), economic and regulatory capital adequacy and risk limits. Qualitatively, Nedbank expresses risk appetite in terms of policies, procedures and controls designed to limit risks that may or may not be quantifiable.

Capital management
Nedbank Group's Capital Management Framework is designed to meet its external stakeholders' needs, both those more focused on the return or profitability of the group relative to the risk assumed (or risk versus return) and those more focused on the adequacy of the group's capital in relation to its risk profile (or solvency). The framework is based on world-class risk and capital management, integrated with strategy, performance measurement and incentives, and intended to fulfill one of the group's twelve key strategic objectives, namely to optimise risk and capital.

Nedbank Group's board approves a comprehensive Strategic Capital Plan, which is driven by and in turn integrated into the group's three-year business plans. Included in this plan is the group's strategic and tactical response to Basel II, economic capital, risk appetite and financial targets (including risk-adjusted return on capital), long-run (three-year) capital planning and various proposed capital optimisation actions.

Basel II
Basel II is mandatory in South Africa from 1 January 2008. Nedbank Group was well positioned for the introduction of Basel II and the group's estimated Basel II capital requirements have for some time been integrated into its three-year business plans and its long-run capital planning within the strategic capital plan.

Overall, no material impact is expected on the capital levels of Nedbank Group after the full implementation of Basel II in 2008.

Mutual & Federal (General Insurance)

Mutual & Federal Insurance Company Limited (Mutual & Federal) shares are publicly listed on the JSE. The Group currently owns 75% of the company, but has indicated its intention to exit general insurance and accordingly Old Mutual plc is in discussions with community-based investment group, Royal Bafokeng Holdings (Proprietary) Limited (RBH), which may or may not result in the sale by Old Mutual to RBH of a controlling interest in Mutual & Federal. If the potential offer proceeds, RBH would make an offer for all of the issued share capital of Mutual & Federal and Old Mutual would undertake to accept it in relation to a minimum of 60% and a maximum of 70% out of its overall stake in Mutual & Federal.

Business profile
Mutual & Federal provides insurance services to the personal, commercial and corporate markets in South Africa, Namibia, Botswana and Zimbabwe through professional and highly experienced brokers who are able to offer clients personal service and advice when purchasing policies, and practical assistance in the event of a claim. The business manages its insurance operations in three broad segments, which reflect the markets within which clients are serviced.

Commercial division
The Commercial division provides a comprehensive portfolio of insurance services, including domestic and export credit risk, insurance against fire, accident and motor risk and crop insurance services to a diverse range of customers from small and mediumsized businesses to large corporations including mining and heavy industrial companies. Where clients require specialist insurance expertise such as engineering, marine and agricultural knowledge, these are also provided by this division.

Personal division
The Personal division provides domestic household, motor, and allrisks short-term insurance products to individual clients through white-labelled intermediary-branded and in-house products. One of the in-house products, Allsure, offers clients lower premiums by combining household goods and motor insurance into one policy. The division also offers hospital cash plans and various forms of personal accident policies. Allsure is supported by intermediaries throughout South Africa, providing customers with excellent value, supported by a fair and fast claims-settling service.

Risk Finance division
The Risk Finance division has a dominant position in the South African market. The division continues to enjoy a highly positive profile within the industry and is one of the largest suppliers of risk financing solutions in Africa. The division offers facilities to clients on a 'rent-a-captive' basis, as well as through independent cells owned by third parties.

Performance during 2007
Solid performance in a challenging year

1 As reported by Mutual & Federal.

Mutual & Federal maintained solid results in the context of a highly competitive trading environment and a gradual decline in the underwriting cycle following the record results achieved in 2004 and 2005.

The underwriting result for the year was adversely impacted by an increase in the severity and frequency of large claims, particularly industrial fires. Severe weather conditions experienced in South Africa also negatively affected the results. In addition, despite strong rating adjustments and underwriting interventions, results in the motor account continued to be negatively impacted by an increase in claims emanating from high levels of accidents on South African roads.

Motor Claims Advertising

The Motor Claims campaign ran from 22 November to 13 December 2007 before the majority of South Africans went on holiday. Radio - Mutual & Federal sponsored live traffic reports on national and regional stations during peak hours. These were supported by a 30-second radio commercial that advised policyholders to use the call centre number in the event of an accident. Print - Mutual & Federal ran three different English and Afrikaans advertisements in leading newspapers countrywide advising policy holders to use the call centre number in the event of an accident.

Gross premiums
Gross premiums in Risk Finance grew by only 2%, but the Personal and Commercial portfolios grew 9% and 13% respectively, giving an overall increase of 9% against the prior year. This was achieved despite the cancellation of certain uneconomical blocks of business within the Personal division. Mutual & Federal does not accept risks at sub-economic rates and has diligently followed prudent underwriting practices.

Combined ratio weakens
Mutual & Federal generated an underwriting surplus of R366 million (2006: R455 million), or a ratio of 4.6% to earned premiums (2006: 6.1%), which is above our long-term objective of 4%. The estimation methods used in providing for claims and other technical liabilities were further refined and this released R96 million (2006: R215 million) into the underwriting result. If these adjustments are excluded, the underwriting result improved over the previous year by R52 million.

The trading environment remains conducive to producing an improved underwriting profit in 2008, with signs of a hardening of rates in certain sectors. Recent electricity load-shedding has created substantial inconvenience to Mutual & Federal, but is unlikely to impact the underwriting account significantly.

Solvency ratio
The solvency ratio has decreased from 49% to 42% following the payment of a special dividend of R2 per share in December 2007.

Strong growth in adjusted operating profit and return on capital exceeding target
The adjusted operating profit includes R262 million arising from a change in the long-term investment return rate from 11.1% to 15.6%. This, together with special dividends of R8 per share paid in 2006 and R2 per share in 2007, has contributed to an increase in the return on capital from 27.5% in 2006 to 31.7% in 2007. This is well ahead of our targeted return of 20%.

Market environment and outlook
The southern African general insurance market remained extremely competitive during 2007. Premium rates increased, but growth in premiums was more than offset by poor claims experience from weather-related claims and the motor book. More positively, the buoyancy of the economy has resulted in pockets of new markets and customers and the black middle class continues to drive the bulk of economic activity in South Africa.

There has been strong growth in the direct channels, driven by a growing preference of customers to deal with direct channel insurers. The motor books of most broker-based insurers have either been unprofitable or marginally profitable, and remain a strong challenge for insurers.

A gradual decline in the value of the Rand threatens to increase claims costs.

The vision of management remains to be the strongest and most successful short-term insurer in its chosen markets, being all classes of general insurance except those that carry long-term claims liabilities. In order to achieve this, management focuses on profitability, growth from new and existing markets and channels, new regions and acquisitions, as well as new products. Management plans to rejuvenate the brand to meet the challenges of the current and future market. Operational efficiencies will be achieved through new business processes and technology. In addition management is seeking to improve employee satisfaction and to realise significant transformation in the workplace.

Real growth in units will be achieved through new product development and exploration of alternative distribution channels and emerging markets. The business continues to focus on its key financial targets of sustaining a long-term average underwriting ratio of 4% and delivering a return on capital in excess of 20%, while maintaining service excellence to intermediaries and policyholders.

The loss ratio is expected to remain reasonably steady following the return to more normal claims patterns and the correction of certain underperforming accounts.

Risk management
Underwriting risks are controlled through a formal system of parameters within Mutual & Federal that is only deviated from following approval by senior management. Reinsurance cover is set at conservative levels and is in place for losses arising from catastrophic events such as hurricanes, earthquakes, tornadoes, severe hail, floods and fires, with retentions set at conservative levels. The business does not provide cover against losses from terrorist attacks, a risk that is underwritten by the South African Government.

Management has set a number of financial objectives for the Group in pursuit of Mutual & Federal's corporate mission. The following performance against these was achieved during the year:

• an underwriting surplus of 4.6%, which was in excess of the long-term objective of 4%;
• general expenses increased by 9.0%, which was broadly within inflation levels and in accordance with the corporate objective;
• a return on capital in excess of 20%;
• following the payment of the special dividend, a solvency margin of 42% was achieved (it is expected that the ratio will be managed to a new target range of 30% to 35%), while the company maintained a level of 80% of shareholders' funds invested in listed equities.

The target for premium growth of inflation plus growth in Gross Domestic Product plus 2% was not achieved because of the highly competitive market, which made the pursuit of business inadvisable where this would have led to deterioration in profitability.

United States

Highlights

• Gross life sales of $6.1bn, up 58% on the prior year - Driven by Old Mutual Bermuda, which now represents 25% of Funds Under Management
• Asset Management net client cash flows of $35.2bn, 13% of opening funds under management - Driven by continued strong investment performance
• Life business achieves capital self-sufficiency - Dividend paid by the US business for the first time during 2007
• Long-term equity plans implemented at several affiliates - Half of our affiliates now have equity in the hands of employees

New thinking

Old Mutual's intermediary and first-ever US direct-to-consumer brand advertising campaigns. The campaigns focused on 'new thinking' and name recognition.

Old Mutual has built significant asset management and life assurance businesses in the United States through a number of acquisitions as well as strong organic growth over the past seven years. Our US businesses are well placed strategically to take advantage of demographic and other related trends as we continue to seek to develop innovative product solutions, deliver strong investment performance and grow our retail presence. Substantial investment was made during 2007 in a co-ordinated branding initiative aimed at financial intermediaries as well as individual retail consumers, focused on 'new thinking' and name recognition. In the fourth quarter, we commenced a campaign of television and radio commercials and online advertising plans. The campaign is a finalist for both an American Advertising Federation Addy Award (the world's largest advertising competition) and Fund Action's Ad Campaign of The Year.

Risk management
As a member of the financial services industry, both the US Life and Asset Management businesses are subject to certain risks. Additionally, each of these businesses contains risks specific to its own industry. Below are the risks inherent to both businesses.

Market and credit risk
Overall market and economic conditions, which are beyond the businesses' control and cannot be predicted with great certainty, generally have a direct impact on client asset valuations and the businesses' proprietary holdings. A diversified group of product offerings is maintained to mitigate underperformance across the business in a uniform manner. However, in an environment of adverse or uncertain market or economic conditions, the business could experience decreased fee-based and performance-based revenue, investment losses and decreased profitability.

Competition risk
The financial services industry has been, and is likely to continue to be, intensely competitive. The businesses compete with companies having greater financial resources and with companies offering other financial services. The businesses generally compete on the basis of their strong reputation, quality advice and superior service, performance, quality of employees and product offerings. In the event that the businesses are not able to compete successfully on one or more of these factors, they may face a reduction in market share, a reduction in revenues and/or a reduction in profitability.

Reputation risk
As participants in the financial services industry, the businesses must maintain a high-quality reputation in order to attract and retain clients and employees. If the businesses fail, or appear to fail, to deal properly with the various issues (for example, potential conflicts of interest or customer privacy), that could potentially harm their reputation and they could experience adverse effects to their operations and financial results.

Litigation risk
The businesses are subject to claims and lawsuits in the ordinary course of their activities, which can result in settlements and awards. It is inherently difficult to predict the ultimate outcome of these matters, particularly in cases in which claimants seek substantial or unspecified damages, and a substantial judgment, settlement, fine or penalty could be material to the businesses' operating results for a particular future period, depending on the results for that period.

Regulation risk
The businesses are subject to extensive regulation in the United States and around the world. Violation of applicable laws or regulations could result in fines, temporary or permanent prohibition from engagement in certain activities, reputation harm, suspension of personnel or revocation of their licences, suspension or termination of investment adviser or insurance registrations, or other sanctions, which could cause earnings to decline. Additionally, the businesses may be adversely impacted by regulatory and legislative initiatives imposed by various US and non-US regulatory and exchange authorities. Accordingly, the businesses maintain a disciplined compliance and legal infrastructure to ensure appropriate application of rules and regulations in conducting their business.

Operations risk
The businesses rely on their respective systems, operational processes and infrastructure to help process numerous transactions on a daily basis across various different markets. In the event of a breakdown in an operational process (for example, human error or employee misconduct), a malfunction of the businesses' systems or the third-party vendors' systems, or external events beyond the businesses' control such as a natural disaster that could impact both the operational processes and systems, the businesses could suffer business and financial losses and be subject to litigation and regulatory sanctions.

Client guideline risk
When clients retain one of the businesses to manage assets or provide products or services on their behalf, they specify guidelines or contractual requirements that the business is required to observe in the provision of its services. Failure to comply with these guidelines or contractual requirements could result in reputational damage or to the clients seeking to recover losses, clients withdrawing assets or terminating their contracts, any of which could cause earnings to decline.

US Life

Business profile
The US Life business comprises OM Financial Life Insurance Company and its subsidiary, OM Financial Life Insurance Company of New York, which are marketed under the name of Old Mutual Financial Network (OMFN) and Old Mutual Bermuda.

We commenced operations in the US life market in 2001 through the acquisition of several established insurance companies, the largest being OM Financial Life Insurance Company (formerly known as Fidelity and Guaranty Life Insurance Company). The business is headquartered in Baltimore, with a sales office in Atlanta, and offers a diverse portfolio of annuities and life insurance products to individuals in the United States.

Our operations were further strengthened in 2003 with the acquisition of Old Mutual Bermuda (formerly known as OMNIA Life (Bermuda)). This offshore variable annuity business has been positioned within private bank channels, one of the main sources of business for the international insurance market, and has provided significant sales growth since acquisition.

The US Life business has experienced strong new business growth since its acquisition, backed by Group capital injections in prior periods. US Life remitted a dividend to the Group in 2007.

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

While our OMFN products are distributed through various channels, the majority of sales are generated through established groups of managing general agents (MGAs), with the MGAs typically providing agents with access to a range of annuity and life assurance products from different suppliers.

Fixed index annuities (FIA)
Our FIA product has been consistently placed in the top five in the US product segment over the past few years. Under this product, the policyholder is guaranteed not to lose principal, with a return that is based on some participation in equity index movements. The potential equity index upside is covered using equity index options and futures, enabling us to provide the potential for gains while managing exposure to loss of principal.

Fixed annuities
These are fixed-rate contracts that involve the business investing in a portfolio of bonds that earn a spread above the rate guaranteed to the policyholder. There are two main types of fixed annuities, the principal purpose of one being to offer a tax-efficient way to save money for retirement, and the other to provide an income stream for life.

Variable annuities
The variable annuity products sold through our offshore business, Old Mutual Bermuda, are investment products targeted at non-US citizens residing outside the United States. The variable annuity product is essentially a unit-linked investment plan which provides various guarantees with distribution primarily through private banks.

2007 marked the launch by OMFN of our first onshore variable annuity. This product packages guarantees that provide offsetting risks to the business, which in turn results in pricing advantages to policyholders. The product is primarily sold through independent insurance agents. A second-generation product will soon be launched, designed for distribution through registered investment advisers.

Protection products
Our US Life business offers two principal protection product lines, term mortgage protection and universal life products, which provide flexible life assurance protection in the event of death or illness. Through the introduction of some product features such as partial return of premium benefits, and quick underwriting turnaround times, our products have grown rapidly in this traditional life segment.

New thinking

The second advertisement in a campaign focused on 'new thinking' and name recognition for Old Mutual's US direct-to-consumer brand.

Performance during 2007
Continuing strong international variable annuity sales add to diversity of earnings

1 Restated due to change in ROE methodology.
2 Restated due to change in US Life APE calculation to align with the volume of new business calculation.

Growth in funds under management
Funds under management of $24.1 billion at year end were up 9% due to positive net client cash flows of $2.4 billion, primarily driven by strong Old Mutual Bermuda variable annuity sales, partially offset by increased surrenders on the Multi-Year Guaranteed Annuity block of business and a 1% decrease in the fair value of invested assets.

The business returned cash in 2007, while exceeding targeted risk-based capital ratios in the operating entities including OM Financial Life Insurance Company and Old Mutual Bermuda.

Excellent sales growth in international variable annuity business
Total life sales were $6.1 billion on a gross basis, up 58% over 2006. Total life sales APE was $671 million, a 47% increase over 2006. Sales by Old Mutual Bermuda were the largest contributor to the increase over the prior year.

Old Mutual Bermuda increased sales on an APE basis by 201% to $360 million compared to 2006, representing 54% of APE sales in the US Life business. The increase in sales was due to a new product launch in April 2007 and new distribution agreements in Asia. Bermuda now represents 25% of total funds under management. Universal life sales were up over the comparative period by 28% as part of a shift from a term life-focused distribution to a more balanced life portfolio. Continued demand for fixed indexed annuities was also a contributing factor. We have an attractive and diverse mix of product offerings including variable annuities, fixed indexed annuities, term life and universal life.

Value of new business and healthy margins driven by strong offshore variable annuity sales
VNB for the year of $144 million was up 73% due to the higher volume of Bermuda variable annuity business. The new business margin of 21% was at the high end of our longer-term expectations primarily driven by Bermuda variable annuity business. The overall business continues to benefit from good investment performance and enhanced distribution. Our co-ordinated retail distribution strategy has made good progress.

Underlying results solid
IFRS and EV adjusted operating profit and returns decreased in 2007 compared to 2006. This was due to assumption and modelling changes recorded during 2007 and non-recurring net investment income in the first half of 2006 of $18 million. As indicated at our interim results, we strengthened our annuitant mortality assumptions and adopted a more conservative approach to future assumed spreads. These changes resulted in a $277 million ($186 million post-tax) adjustment to Embedded Value, of which $195 million ($131 million post-tax) was in respect of annuitant mortality assumptions included within EV adjusted operating profit and a $60 million adjustment to pre-tax IFRS adjusted operating profit. Excluding these impacts, IFRS adjusted operating profit was up 20%, driven by higher average asset levels.

Credit update
3% of US Life's fixed income portfolio of $21 billion has direct exposure to sub-prime debt and this helped US Life weather the market turbulence during the second half of 2007. The sub-prime exposure is highly rated (86% is AAA, 99% is AA and higher, and 100% is A and higher), concentrated in first mortgages without rate-reset risk, and owner-occupied, rather than investor properties.

Approximately 2.3% of US Life's investment portfolio has exposure to monoline insurers, of which $493 million (85% of the total exposure) is indirect (wrapped) exposure, with a 95% fair value-tobook value ratio, and $90 million is direct (unsecured) exposure, with a 87% fair value-to-book value ratio. Of the 15% that represents the unsecured exposure, most is being recapitalised, or has sufficient funds to go into run-off mode, if necessary.

However, US Life was not fully immune to the unfavourable credit conditions and recorded $64 million of impairment provisions during the fourth quarter. For IFRS adjusted operating profit, the impairment provision did not impact the long-term investment return in 2007.

The investment portfolio's aggregate credit experience remained within expectations and is in line with long-term assumptions.

Market environment and Outlook
2008 will see the continued expansion and development of US Life's product portfolio across all of its product platforms in concert with its independent distribution partners. For the fixed annuity line, launches are planned of an indexed-linked guaranteed investment contract, a vesting bonus-type product, as well as several more traditional fixed annuity products. In January 2008 the domestic variable annuity range was augmented with the launch of an innovative zero-commission product, Beacon Advisor. This product is targeted at the growing fee-based planner community. During 2008 the domestic US variable annuity group will be launching a bank-focused distribution capability. Old Mutual Bermuda will continue to build on its extensive bank-focused distribution and plans to enhance its product line during 2008.

Driving towards a more balanced product portfolio will be a core emphasis including the build-out of both indexed universal life and traditional fixed universal life products. OMFN will continue to focus its efforts on expanding its en Español channel to meet the needs of the US Spanish-speaking market and maintain a leading position in the term insurance market.

The retail and brand strategy will evolve as we seek to expand our retail capability with a focus on affluent and middle-market baby-boomers by providing solutions that address people's needs during the life-cycle of accumulation, protection, retirement income and care.

Risk management
Underwriting risk
Underwriting risk is carefully controlled through underwriting principles governing product repricing procedures and authority limits. The underwriting process takes into account prospective mortality, morbidity and expense experience, with a large proportion of the mortality and morbidity risk reinsured to highly rated companies. In the event that such processes are not adequately designed or operating effectively to project experiences, the business may assume variances to expected earnings levels.

Policyholder option risk
Fixed annuity policyholder option risk is managed by investing in fixed securities with durations within a half year of the duration of the liabilities, with the exception of our longest duration liabilities, which are managed within a year of the liability duration, and cash flows in any period are closely aligned to ensure mismatches are minimal. Extensive interest rate scenario-testing is undertaken, as required by regulatory authorities, to ensure that the amounts reserved are sufficient to meet the guaranteed obligations.

Additionally, the guaranteed returns provided in relation to the fixed index annuity and variable annuity products are hedged to manage the matching of option payoffs to liability growth, with hedging positions reviewed and re-adjusted as necessary. In the event that misalignments of assets and liabilities occur, adverse impacts could result in a decline in earnings.

US Asset Management

Through our US Asset Management business, we combine the investment focus of boutique managers with the stability and resources of a large, international firm. We have created an environment where unique, entrepreneurial asset management boutiques can thrive and the investment professionals within them can do their best work for our clients. We have capitalised on our economies of scale and brought best-practice risk management, technology, legal and distribution capabilities to our affiliates. Our firms are free to focus their time and resources on delivering strong investment performance.

New thinking

The third advertisement in a campaign focused on 'new thinking' and name recognition for Old Mutual's US direct-to-consumer brand.

Business profile
Our US Asset Management business, based in Boston and established through the acquisition of UAM in 2000, now consists of 20 distinct boutique firms, including asset managers who specialise in high-quality, active investment strategies for institutional clients, high net worth individuals and mutual fund investors. Collectively, the Asset Management business offers over 100 distinctive investment strategies. Individually, however, each member firm has its own vibrant, entrepreneurial culture of investment managers focusing on their particular area of expertise.

The business has benefitted strongly from its affiliate structure, offering a diversity of investment styles, minimising exposure to the changing preferences of investors, and benefitting from efficiency savings resulting from the centralisation of compliance and distribution capabilities.

The business's asset mix is weighted towards value equities, fixed income and non-US Dollar-denominated international assets. While the business consists of a diverse range of affiliates, Acadian Asset Management, an international equities firm, is the largest manager with 25% of total funds under management, having nearly tripled in size since December 2005. Dwight Asset Management, a fixed income manager, accounts for 21% of total funds under management. Barrow, Hanley, Mewhinney & Strauss, a value equity manager, holds another 20% of the firm's assets. Over time, the largest firms within US Asset Management may change, depending on the market environment and investment styles currently in favour.

Most affiliates now operate under profit-sharing arrangements, with a certain percentage of operating profit, after overheads and salaries, paid to the affiliates as variable compensation. Long-term equity plans have also been implemented during 2007 at Acadian Asset Management, Analytic Investors and Thompson, Siegel and Walmsley. Half of our affiliates now own equity in their businesses, and additional implementations are planned for 2008. This model differentiates us from our competitors and, in conjunction with the profit-sharing arrangements, ensures that the interests of our affiliates are closely aligned with those of our shareholders.

US Asset Management's product range includes the following:

Institutional accounts
Actively managed investment products are offered in all the major asset classes and investment styles. The business's investment capabilities span US and global equities, fixed income, real estate and alternative asset classes. Separate accounts and actively managed commingled accounts are offered across a range of asset classes and investment strategies. Our US Asset Management business has been a pioneer in the market for 130/30 and similar strategies, which seek to enhance further the alpha produced through active management. This is a fast-growing area for investors, and these products typically command higher fees. Five of our affiliates (Acadian Asset Management, Analytic Investors, Thompson, Siegel & Walmsley, Thomson Horstmann & Bryant, and Dwight Asset Management Company) manage assets in this market. Acadian and Analytic in particular have established excellent five-year track records. We are also seeing a diversification of our client base, with a significant proportion of our net client cash flows coming from investors outside the United States.

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.

Individual mutual funds are currently offered in a wide range of asset classes and investment styles. Funds are offered as singlestrategy mutual funds, or alternatively as diversified asset allocation funds under the Pure Portfolio brand. In addition, multi-strategy funds are offered that leverage the capabilities of our firms as well as these of selected outside managers.

Single-strategy mutual funds are currently offered by our affiliates in US equities, fixed income, international equities, emerging markets, real estate investment trusts and money markets.

We achieved exchangeability between our two retail platforms during 2007, providing investors with the ability to trade in and out of the funds across the platforms, and we have also recently restructured our Asset Allocation funds into a fund-of-funds structure, enhancing our flexibility as well as helping to achieve scale in many of our single-strategy funds. A fund rationalisation exercise has also recently been initiated, aimed at consolidating or closing underperforming funds during the first half of 2008.

Performance during 2007
Another year of strong investment performance and asset growth

1 2006 comparative information has been restated to include OMAM (UK) (transferred from the Skandia UK segment to the US Asset Management segment), and to exclude fund flows related to eSecLending, which was sold in 2006.

Investment performance drives growth in funds under management
Strong investment performance at our affiliates continued to attract new funds during a volatile year in global equity markets. At 31 December 2007, 83% of assets had outperformed their benchmarks and 83% were ranked above the median of their peer group over the trailing three-year period. A pleasing $35.2 billion of net client cash flows, 13% of opening funds under management, were up 14% on 2006 with Rogge, Acadian, Barrow Hanley and Dwight the largest contributors. Market appreciation of $22 billion and the acquisition of $3 billion in assets at Ashfield Capital Partners contributed to an overall increase in funds under management of 22% to $332.6 billion at 31 December 2007.

Retail sales growth continues
Old Mutual Capital's gross mutual fund sales increased 3% from 2006 to $1,408 million despite the impact of volatile markets during the second half of the year. At year end, 14 of Old Mutual Capital's mutual funds carried four- or five-star rankings by Morningstar. OMAM (UK)'s unit trust sales increased 38% over 2006 to $2,374 million, benefitting from investments made during 2006 to enhance the product offering and distribution capabilities of the business.

IFRS adjusted operating profit increases 25%
Adjusted operating profit for the year was up 25% compared to the prior year, primarily as a result of increased funds under management and higher performance fees. The operating margin remained in line with the prior year, dampened during 2007 by expenses associated with long-term equity plan implementations. The loss of margin was offset, however, by above-average net client cash flows. Aligning the interests of our affiliates and shareholders through equity plans is critical to setting us apart in this regard.

Market environment and outlook
Competition in the United States is strong, with each of Old Mutual's Asset Management firms facing 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 delivering excellent long-term performance and, through our ability to leverage the diverse styles of our individual firms, we are able to seek targeted investment opportunities to broaden our product capabilities.

Institutional business remains the anchor of our portfolio, and in the near term is expected to continue to provide the majority of our asset growth, as well as support further expansion of our retail business, which will continue to be a focus in 2008. We will also continue to seek opportunities to develop our portfolio of asset managers as circumstances evolve.

Global equity markets have had a poor start to 2008, and in the absence of a recovery this will restrict earnings growth for our US Asset Management business over the coming year. However, our track record of excellent investment performance has positioned us well relative to our competitors, and our diversified asset mix between equities and fixed income will help us weather market volatility.

Risk management
Key employee risk
The business's employees are its most important assets, and competition for qualified employees is strong, especially for investment professionals. We mitigate the risk of loss of key employees through the use of long-term incentive schemes aligned with shareholder value targets, and through competition restrictions embedded in employment agreements. If the business cannot continue to attract and retain quality employees, or if the costs to attract and retain quality employees rise due to the competition for such employees, operations and financial performance could be adversely impacted.

Other Key Performance Indicators - US Asset Management

1 2006 comparative information has been restated to include OMAM (UK), and excludes fund flows related to eSecLending, which was sold in 2006.

Kotak Mahindra Old Mutual

Life Insurance

An outdoor, print media and radio campaign for Kotak's Unit-Linked Child Plans, Headstart Child Plans.

Asia Pacific and other

Highlights

• Strong growth in sales
• Continued geographical and distribution expansion
• Healthy new business margins consistent with those of listed competitors
• Pursuing market entry strategy for further expansion

Business profile
Operations in Skandia Group Australia include retail mutual funds and institutional investment funds. They are structured along two complementary business lines:

• Retail: trading as Australian Skandia Limited, focusing on the delivery and administration of investments and superannuation solutions for retail investors. The platform is used by licensed financial advisers.
• Institutional: currently operating under the Intech brand, providing institutional and corporate clients with multi-manager investment solutions.

Old Mutual's business in China, Skandia:BSAM is a 50:50 joint venture established in 2004 in conjunction with the Beijing State-Owned Asset Management Company (BSAM). It provides unit-linked assurance solutions for high net worth individuals and has licences to operate in Beijing, Shanghai, Jiangsu Province and Guangdong Province. Distribution is exclusively through third parties including banks, securities houses and brokers. China's unit-linked market is at an early stage of development and has promising potential in the longer term.

In India, Kotak Mahindra Old Mutual Life Insurance offers a range of individual and group life assurance products. Old Mutual currently owns a 26% stake in this joint venture with the Kotak Mahindra Group, with an option to increase this to 49% when applicable local legislation permits.

Performance during 2007

1 Skandia businesses included in the 2006 numbers have been adjusted on a pro-forma basis assuming ownership for 12 months rather than 11 months.
2 This represents 100% of the businesses; Old Mutual owns 50% of Skandia:BSAM and 26% of Kotak Mahindra Old Mutual Life Insurance (KMOM).

In January 2008 we announced the appointment of Steffen Gilbert as Regional Head of Asia Pacific and also the establishment of our Asia Pacific headquarters in Hong Kong. This will form the base from which we intend to expand our existing operations in the region.

Australia
After breaking even for the first time in 2006, the business generated an operating profit of AUD7.8 million (£3.3 million) in 2007. At 31 December 2007, funds under management were AUD14.5 billion (£6.4 billion), up 2% from AUD14.2 billion (£5.7 billion) at 31 December 2006. This was made up of institutional funds of AUD8.7 billion and retail funds of AUD5.8 billion. Integration of the institutional business, acquired in late 2006, is now complete and on track to generate the expected cost savings. The 2007 John West Platform awards in Australia named Australian Skandia Limited as the rising star for having above-average platform funds under management growth.

China
Skandia:BSAM, now in its third full year of operation, continues to show strong sales growth (gross premiums for the year were over three times the prior year). Despite its recent entry into the market, of the 24 foreign-owned joint venture insurance companies in China, Skandia:BSAM had, for 2007, the eighth largest gross premium flows (up two places compared to 2006). Our unit-linked product range was granted 'the most welcome financial product' award at the Shanghai Financial Expo 2007. New business margins are just over 25%, which is higher than our long-term expectations.

India
Kotak Mahindra Old Mutual Life Insurance Ltd continues to show steady progress. The business now operates in 74 cities, with 106 branches across India. Gross premiums for the calendar year were £163 million, up 51% from £108 million for the prior year. In September we agreed to boost the venture with a capital injection of INR1.5 billion (approximately £19 million) in order for the business to extend its office network and increase its workforce. New business margins are healthy and are consistent with those of listed competitors in the country.

Market environment and outlook
Old Mutual continues to see Asia Pacific as a very attractive growth region characterised by high levels of economic activity and rising disposable income and personal wealth well suited to quality protection and savings products.

Markets within the region are diverse and unsuited to a 'one size fits all' business model. In developing our businesses in the region our plans reflect different stages of economic development, as well as varying cultures, languages, legal and regulatory frameworks.

Australia continues to be an attractive market in the Asia Pacific region for asset gathering activities given the high level of funds under management, strong growth and market maturity underpinned by Government superannuation legislation. While this is a highly competitive and regulated market, we continue to see good opportunities for growth.

Our key Asia Pacific objective is to develop a credible operation in terms of both size and profitability. As well as building and widening our presence in existing markets, we will develop opportunities for geographic expansion.

We will continue to provide working capital to our Indian and Chinese joint ventures to support their further expansion and expect our Australian business to continue to grow profitably in 2008.

Risk management
In addition to many of the risks faced by the other Old Mutual businesses, Asia Pacific has to contend with the challenges of operating in emerging markets with developing economies and regulatory environments. Our management teams have to face these challenges in small, dynamic, fast growing businesses. Accordingly management of risk is a key priority.

Jonathan Nicholls
Group Finance Director
27 February 2008

Forward-looking statements
This Business Review contains certain forward-looking statements with respect to certain of Old Mutual plc's plans and its current goals and expectations relating to its future financial condition, performance and results. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances that are beyond Old Mutual plc's control, including, among other things, UK domestic and global economic and business conditions, market-related risks such as fluctuations in interest rates and exchange rates, policies and actions of regulatory authorities, the impact of competition, inflation, deflation, the timing and impact of other uncertainties or of future acquisitions or combinations within relevant industries, as well as the impact of tax and other legislation and regulations in territories where Old Mutual plc or its affiliates operate.

As a result, Old Mutual plc's actual future financial condition, performance and results may differ materially from the plans, goals and expectations set forth in Old Mutual plc's forward-looking statements. Old Mutual plc undertakes no obligation to update any forward-looking statements contained in this Business Review or any other forward-looking statements that it may make.

Asia Pacific - Skandia

Values posters used by Skandia:BSAM based on the Group's values.