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«10th August 2004 Johannesburg & London Old Mutual Interim Results – 10.08.2004 Jim Sutcliffe Good Morning Ladies and Gentlemen. And welcome to ...»

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Interim Results 2004

________________________________________________

10th August 2004

Johannesburg & London

________________________________________________

Old Mutual Interim Results – 10.08.2004

Jim Sutcliffe

Good Morning Ladies and Gentlemen. And welcome to Old Mutual’s presentation of

our 2004 Interim Results. As usual, and as you know, we are holding this event with a

satellite link between London and Johannesburg and we are also webcasting live. Here

in Johannesburg to support me I have Tom Boardman, Chief Executive of Nedcor, Roddy Sparks, Managing Director of our life company, Old Mutual South Africa, Bruce Campbell, Managing Director of Mutual and Federal, and I would like particularly to welcome Scott Powers who runs our US Asset Management business.

It’s great that Scott could come and join us here in Johannesburg. In London Julian Roberts is hosting the London part of this event. Can you hear us in London, Julian?

Julian Roberts Jim we can hear you very clearly. I have got a very wet audience here Jim, because there has been a torrential thunder storm that has just passed by our offices. I suppose I should say I hope that our results will bring some sunshine, but it doesn’t get much of a laugh here I am afraid. With me in the audience, we have got a full auditorium, are Mike Levett, our Group Chairman, and Guy Barker, who runs our US Life business.

Jim Sutcliffe OK, thank you very much, Julian. And I can assure you that the weather in Jo’burg is absolutely delightful. Let me turn now to the business of our event, Old Mutual’s results. The first part of 2004 was a strong period for Old Mutual. And our strategy has delivered very healthy results. Our South African insurance businesses have delivered very high ROEs and our international businesses are growing very strongly.

In fact each of our businesses has played its part in delivering earnings per share up to 21% over the comparable period last year at 6.8 pence per share, or in Rands, up 13% to 82.7 cents per share. Importantly Nedcor is now stable. The rights issue has been completed. The management team has been filled out. Head count has been cut and interest rates and currency risks reduced. Nedcor has a three year recovery programme ahead of it. And there is much to do. But the business is now able to concentrate on the future rather than the past. Most of our US businesses have grown very strongly and we have delivered record funds flow. In the life business annual premium equivalent sales has reached $251 million, and OMAM (US) the asset management business has delivered a sparkling $5.3 billion of net cash flow which includes $2 billion from ESEC lending, that’s cash management money from…at a relatively low margin. As a result group assets under management are 12% higher than they were a year ago, at £130 billion. Our embedded value is a key marker for many of our shareholders. At 30th June embedded value per share was 114 pence, which is up 9% since year end. And in Rands it was 12.86 Rand. We have delivered a return on equity in the first half of the year at a rate of 19% per annum, well above the comparable 16% that we achieved in the first part of last year. I think this number is very creditable and in particular it places us in the front range of international financial services companies, and reflects favourably on the work we have put in over recent years. On the strength of this performance the directors are pleased to be able to

Old Mutual Interim Results – 10.08.2004

declare an increased dividend of 1.75 pence per share which would translate at today’s exchange rate to about 20c per share for South African registered shareholders. In fact we have been building momentum all over the business. OMSA again produced as I say an excellent return on equity and remains a powerful profit engine. Group scheme sales grew strongly and our advisers sold more unit trusts in health business than they had done previously. However we did struggle in the broker market and in the lumpy employee benefit area. And overall sales of life insurance products were disappointing. And we are working hard to catch up some lost ground. We have reinforced our efforts to recruit more advisers and we have made changes to their pay plan. We have launched Masthead, the broker services organisation, to build our strength in this area, and we are playing close attention to the lumpy EB pipeline. Our key indicators for this business are life insurance, assets under management, grew 10% year on year, despite the sales issue. And as a result life operating profits grew 15%.

But overall the business in South Africa did continue to grow. As I have said, Nedcor has taken important steps to stabilise. There is a long way to reach that 20% ROE target. We have to get there as a run rate by the end of 2006 for delivery in 2007 but we are on the way. At M&F….M&F had the kind of period the property and casualty people dream about. They really were excellent results. An underwriting surplus in excess of 10% and premium growth of 19% were the best results for quite a while.

Great job done by Bruce Campbell and his team. And that produced a return on equity which really was exceptionally good at 27%. These results of course reflect our now 88% ownership. And the strength of M&F’s Balance Sheet and the strength of the results have allowed the directors to declare a special dividend which I think you all know about from M&F’s results two weeks ago. In the United States our life business not only had record sales but these were achieved at record margins. A helpful interest rate environment and the higher margins on our popular equity index annuity range were the main reasons. We were also pleased that our sales diversified. We in fact sold a great deal more life coverage products and also off-shore variable annuity. In the US Asset Management business last year’s cashflow, positive equity markets, and a strong delivery of transaction and performance fees, all contributed to profits soaring by 43%. And I think you will agree that that is an excellent result. In the United Kingdom, which of course remains the smallest of our operations, our capacity again extended. Selestia, the business that we have built off our South African IT, achieved sales of £197 million. That compared with £86 million for the same period last year.





So it was more than double. The asset management business, OMAN (UK) grew its profits, and again delivered high quality investment performance. And as a result continued to attract hedge fund deposits. Now all of this is supported by investment performance. Most of our customers have at the bottom of their product some way or the other investment performance. Investment performance across the group continued to be the key to attracting new clients. And on a three year basis more than 75%...in fact I think the number was 84% of our US funds under management, and 57% of our South African third party asset management clients received returns above the benchmarks they had set us. And in the UK more than 70% of the unit trusts which we manage were in the top half of their comparative groups. So with that excellent investment performance underlying our products it wasn’t surprising that net fund flow from customers was healthy around the world and totalled £4 billion or 48 billion Rand, and it included of course that wonderful $5.3 billion from the US Asset Management business. So the first half of 2004 was a period of strong earnings delivery with some powerful trends in the US in particular helping us to deliver on our international strategy. I am going to hand over to Julian to go through the financials.

Julian.

Old Mutual Interim Results – 10.08.2004

Julian Roberts

Thank you, Jim. As usual I am going to run through the overall financial highlights, then go through the results business by business, and finally a look at the group capital position. The main points in this slide I would like to highlight are, earnings are up strongly, Nedcor is now contributing positively and there have been strong earnings growths in the USA and by Mutual & Federal. Adjusted operating profits are up 7% and adjusted earnings per share up 21% to 6.8 pence. The higher growth at the earnings per share level was driven primarily by a reclassification of taxes in Nedcor.

That of course has reduced….this reclassification of taxes has reduced the growth in operating profits so the EPS really reflects the true growth in operating profits.

Achieved profits EPS is up 23%, driven by the strengthening of the Rand, the volume of profitable new life business in the USA, the favourable experience variance in the South African life business, and a decrease in the effective tax rate. New business sales, particularly in our group business in South Africa, has been disappointing.

However, the strong sales in US life business have resulted in flat performance at £262 million, compared to last year. But due to the higher margins in the USA has generated a 43% increase in the value of new business at £53 million. Unfortunately the VNV is not included in this slide. With assets under management is £130 billion our businesses have benefited from higher market levels, and have seen assets under management and premiums grow, good investment performance and improving margins. And as Jim said, this strong performance and confidence for the full year has enabled us to raise the dividend 3% to 1.75 pence. In Rands the group’s results show an operating EPS up 13%. In addition, you will note that the dollar weakened by 17% against the Rand, reducing some of that 30% growth in our dollar profit when translated into Rand. This of course has also had the impact of reducing the growth on assets under management. This slide shows in summary format how the individual businesses performed in their local currency and then translates the results through into Sterling. OMSA continues to generate robust profits up 6%. Nedcor recovery has still a long way to go. Profits are down 46% but you can see significant recovery over the second half of 2003. M&F has delivered an outstanding set of results. The additional shares that we bought from the Royal Sun Alliance has been consolidated from 1st January, the time when the deal became unconditional and the M&F results therefore have increased by 55%. Overall the South African earnings were down 5% in Rand, but at £359 million, were up 2%, due to the strength of the Rand. The US businesses have generated a substantial increase in profits with both businesses contributing significantly. Overall the earnings in US dollars were up 30% at $150 million.

Converted into Sterling, this is a 14% growth, to £87 million. In the UK the only point I would like to raise is that debt and other income has benefited from reduced debt costs due to the Gerrard proceeds and also the impact of the preference bond.

So let’s move on and look at each of the results in a bit more detail, starting with South Africa. Overall as I said, OMSA continues to produce solid profit growth, with operating profits up 6%. You see on the slide that the South African life business rose 15% driven primarily by the higher level of average assets under management and positive experience variances. The long term investment return was down 5%.

Remember as a result of our additional investment in Nedcor and Mutual and Federal, the shareholder funds upon which the LTIR is calculated has been adjusted downwards to take into account those investments. In addition, there was a change in the mix of the shareholder assets, moving out of equities more into cash and fixed interest, which reduced the average rate from 13.4% to 13%. The full impact of these changes will

Old Mutual Interim Results – 10.08.2004

come through in the second half of the year. The 7% drop in the asset management business’s profits was driven in part by higher expense levels in OMAM as a result of accounting for incentive payments, offsetting good growth in income in that business, and also to a 13 million Rand lower trading profit in the unit trust company, due to the impact of the legislation changes made in 2003. Average assets under management in the life business, as Jim has said, which are a key driver of profit, grew by 10% to 211 billion Rand due largely to a rise in the JFC in the second half of 2003. Return on allocated capital increased to 26% from 22%, this increase driven by the profit growth and by lower average capital requirements resulting from the reduced equity exposure.

So moving on to sales. OMSA had a mixed first half for its life new business sales.

Overall, on an APA basis they were 14% lower, but this is heavily influenced by significantly lower group sales, with individual sales holding up much better. Let’s look first at the group business, the employee benefits business. The low premium level of new business is mainly due to a lack of significant large flows. This business, as Jim said, and we repeat each time we meet, is lumpy. What I would say though is, the pipeline is still significant and the EB sales team are working on a number of opportunities. In addition we are rolling out new product alternatives in the latter part of the year. However, due to the time taken to convert the pipeline, it is unlikely that large EB sales will land in the second half.

Moving back to the retail area. With the exception of the group schemes business which has been growing strongly, overall individual life sales have been disappointing, with both single and recurring premiums flat on the first half for 2003. But this has been compensated by the strong growth in the non-life sales of unit trusts and sales there and you can see we have included these unit trust sales on the slide. They grew by 28%...28% higher than the prior period. And of these sales of 4.1 approximately 50% are in the retail area. From an Old Mutual perspective we will continue to focus on having the products our customers need, and with a return on capital which is even higher for unit trust business, are happy to provide products, in either the shape of life or non-life wrappers.

Moving to new business margin, total new business margin is 19% up from the 18% in the equivalent period last year. Individual margins are up 18% from the 15% due to business mix, with a higher proportion of group schemes business, which is higher margin business, and also to higher levels of green life business and to a reduction in distribution costs.



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