Old Mutual plc Interim results for the half year ended 30 June 2016

Old Mutual plc, currently separating itself into four standalone businesses, known as the managed separation, today publishes its results for the six months to 30 June 2016.

Bruce Hemphill, Group Chief Executive, said:

“The first six months of the year were characterised by volatile currencies and lower average equity markets but our underlying performance demonstrated the strength of our franchises and the positive momentum within each of our businesses.

“We are making good progress with our managed separation strategy we announced in March 2016 and which we expect to be materially complete by the end of 2018. At this stage, we are doing a lot of preparation work that will lay the foundations for the future and is critical for success. We are clear about the task at hand and we are absolutely confident that this is the right strategy to unlock value.”

Summary

• The macro-environment has been challenging with a weaker rand against the first half of 2015 and lower average market levels. Pre-tax adjusted operating profit (AOP) of £708 million down 9% in constant currencies, down 22% in reported currency;
• IFRS pre-tax profit of £608 million (H1 2015: £683 million);
• AOP earnings per share 8.0p down 11% in constant currencies, 22% in reported currency;
• First interim dividend of 2.67p; second interim dividend expected to be in the mid to upper end of the cover range of 2.5 to 3.5 times AOP;
• Adjusted NAV at 193.3p per share (FY 2015: 178.9p per share) boosted primarily by a strengthened rand and US dollar from year-end levels;
• NCCF of £3.5 billion (excluding Rogge), down 13% in constant currencies; FUM (excluding Rogge) at £342.7 billion up 4% in constant currencies and up 13% in reported.

Business performance

Business performance shown below is in the functional currency of each business. During the six months, each of our businesses experienced challenging conditions in their main markets.

• OMEM: solid operational performance, with a strong contribution from the South African life business:
o APE sales up 25%; VNB up 28%; ROEV up to 14.8% from 12.3%;
o AOP down 5% to R5.7 billion due to underwriting losses during a period of weak economic growth;
o IFRS pre-tax profit of R5.5 billion (H1 2015: R5.4 billion).

• Nedbank: very strong performance from its South African operations:
o Credit loss ratio reduced to 0.67% (H1 2015: 0.77%) whilst strengthening portfolio coverage ratios;
o Headline earnings growth of 2% to R5.4 billion including Ecobank Transnational Inc. (ETI), earnings up 20% excluding ETI;
o IFRS post-tax profit attributable to Old Mutual equity holders of R3.0 billion (H1 2015: R3.0 billion).

• OMW: good underlying momentum, although lower profits due to Heritage charges, operational challenges and tough markets:
o NCCF up 39% to £3.2 billion; benefits of vertical integration – Intrinsic provided 33% of Platform NCCF and 26% of OMGI NCCF;
o AOP down 31%, including a £21 million charge from changes to customer fees in Heritage book and lower operating margins;
o IFRS pre-tax loss of £(17) million (H1 2015: £(27) million), following disposal write-offs and IT expenditure.

• OMAM: Lower profits with negative net flows following hard asset disposals:
o Strategic delivery: acquisition of Landmark Partners (estimated to complete in August 2016); $400 million debt raising in July 2016;
o FUM of $218.8 billion up 3% (FY 2015: $212.4 billion); NCCF of $(0.5) billion providing positive $3.9 million of annualised revenue impact;
o AOP down 29% to $91 million, excluding exceptional performance fee earned in H1 2015 AOP down 17%;
o IFRS pre-tax profit of $97 million (H1 2015: $116 million).

Managed separation

The managed separation process, announced on 11 March 2016, is progressing well. As previously stated, implementation will require a balance to be struck between value, cost, time and risk and using the full flexibility of the capital management policy:

• Significant work is being undertaken to prepare the businesses for independence, which is critical for success of managed separation. Business readiness, particularly for OMEM and OMW, is the main determinant for the timing of the process;
• Redesign of the head office with new purpose of supporting managed separation: around 50% headcount reduction by year-end, leading to a £10 million run rate saving from 2017;
• Agreed to sell Old Mutual Wealth Italy to ERGO Italia (owned by Cinven) for a consideration of €278 million, completing OMW’s withdrawal from Continental Europe, expected to complete 2017;
• Accelerated monetisation from OMAM to plc of Deferred Tax Asset (DTA) and seed capital arrangements estimated at between $270-280 million on a fair value best estimate actuarial basis, between 2016-2018;
• Capital markets event to be held on 11th October 2016 in London, including presentations from each business.

Current trading and outlook

The second half of the financial year has started in line with management’s expectations. An uncertain environment continues in our three largest markets of South Africa, UK and US which may lead to further challenges, although:

• In the UK, OMW is in a strong position given its model of providing advice-driven investment solutions to financial advisers and customers via a vertically integrated, multi-channel business. Despite uncertainty over investor sentiment we have seen positive inflows of money since the EU referendum result, although we do not expect the first half’s strong NCCF to repeat in H2;
• OMEM expects economic conditions in South Africa to remain tough with consumers under pressure. However, the business is in good shape and we continue to focus on our customers by offering a broad and innovative product suite that meets their needs through all stages of the economic cycle.
• Nedbank expects growth in Diluted Headline Earnings Per Share (DHEPS) in 2016 to be positive but lower than the growth achieved in 2015 and the target;
• OMAM should benefit from its soon to be completed acquisition of Landmark, which has been successfully financed in the US bond market;

We announced a new capital management policy in March, the aim of which is to provide flexibility, recognising the need to balance complex considerations, including the background of volatile markets, costs associated with the managed separation and continued investment in the businesses while increasing their capital strength.

We are still at an early stage in the managed separation with significant variables ahead of us and therefore any dividend under consideration for the year ending 31 December 2016 is likely to be at the mid to upper end of the cover range of 2.5 to 3.5 times adjusted operating profit. The full effects of the capital management policy on the dividend will be felt in the second half.