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Old Mutual plc - Sticking to their knitting

28 February 2006 Angelo Coppola

Strong numbers from Old Mutual and a commitment to stick to a basic algorithm.

Highlights

*Adjusted operating profit* up 30% to 1,244m (2004: 954m) and (IFRS basis):up 28% to R14,431m (2004: R11,254m)

* Adjusted operating profit (European Embedded Value (EEV) basis):up 23% to 1,387 m (2004: 1,124m) and up 21% to R16,067m (2004: R13,249m)

* Profit for the financial year attributable to equity holders of the parent (IFRS basis): 867m (2004: 559m) R10,041m (2004: R6,571m)

* Adjusted operating earnings per share* (IFRS basis): up 22% to 18.2p (2004: 14.9p) and up 20% to 211.2c (2004: 175.8c)

* Adjusted operating earnings per share (EEV basis):up 10% to 20.7p (2004: 18.9p) and up 8% to 240.0c (2004: 222.8c)

*Basic earnings per share (IFRS basis): 25.1p (2004: 16.3p), 290.5c (2004: 192.0c)

*Funds under management 183bn (2004: 140bn) an increase of 31%, R1,992bn (2004: R1,520bn) with record $26bn fund inflows in the USA. Selestia funds under management exceed 1.5bn

*Total life assurance sales, on an EEV Annual Premium Equivalent (APE) basis, of 648m, an increase of 10% (2004: 587m)

*Adjusted embedded value per share (EEV basis): 175.6p, 1,912c at 31 December 2005 (2004: 139.7p, 1,515c)

*Return on equity** 18.5% (2004: 18.8%)

*Return on adjusted embedded value** 15.6% (2004: 17.8%)

*Final dividend increased by 4% to 3.65p, 39.8 cents***

Strong numbers from Old Mutual and a commitment to stick to algorithm.

Julian Roberts, newly appointed CEO of the Skandia operation, was on hand, as outgoing financial director, in South Africa, together with Roddy Sparks, the SA life operational head, and M&F head Campbell, joining Jim Suffcliffe, the group CEO of Old Mutual in their results presentation, from London.

The presentation started late because the chief actuary was stuck in traffic in London. One wonders what that says about the assumptions that the chief actuary made when it comes to the life expectancy and mortality tables?

Roberts says that strong organic growth was a feature of the results last year. The acquisition of Skandia took up a significant portion of the years activity, and the deal also gives Old Mutual a footprint in China, to augment their Indian joint venture.

Looking ahead Roberts confirmed that they would be moving to a quarterly reporting period, as is required in their Swedish listing requirements.

This has been an important period says the international head, Jim Suttcliffe. This has also been a strong period in financial terms, and a year of delivery. The various asset managers had a big hand in the results, both in the UK and USA. While the Nedbank recovery also played a significant part, as did the SA operations of M&F, and Old Mutual, with the Nedcor recovery on track.

They have a simple approach to business, says Suttcliffe: Assets multiplied by margin, less expenses will result in profits a simple algorithm at its heart. Old Mutual is different to what it was last year There is now exposure to five large economies, with a broader risk exposure, and the vagaries of different currencies.

SA

According to Suttcliffe, Bob Head will work together with the local business heads in the year ahead (at Nedcor, M&F, Old Mutual) to co-operate in the market place and leverage to reduce costs, bring them closer together, and get them to sell each others products.

Looking backwards, the traditional excellent results from the SA operation also played their part, with the final dividend at 39c per share (Friday exchange rate). At the core of the results are the economic fundamentals showing that black disposable income now surpassing that of white people. Roberts says that 1500 new jobs are now created every day.

SA unit trust sales increased by 87%, although the impact may well be miscalculated as the unit trust sales locally are increasingly becoming single premium payments.

There were also improving results from the bancassurance sales up as well. M&F had excellent underwriting results, and Nedbank also returned good numbers. The recovery is progressing well, says Roberts. There is a new external focus in the business, he says.

On the SA front, he says that the BEE transaction was effective and sales in the discounted offering for PDI were in the region of 47 000 people, and R741m in deposits.

At Old Mutual Roberts confirmed that there was a R760m one-off charge in the period for settlement of the companys contribution to the minimum early termination settlement agreement reached between the life offices and the Minister of Finance.

Late last year, the group said that it would set aside R625m to R900m, with an additional R20m for people that fall outside the 2001 cut-off, which is the limit of the settlement.

There was a margin squeeze as they chased new business, on the life side, while sales force numbers increased by 10%. Cash flows were squeezed as the PIC took out R10bn. This undoubtably hurt the cash flow of the business.

In terms of the M&F business, its reviewing its capital requirements because of its strong position in the 2005 financial year.

The problems in the US business were due to the $40m adjustments in the reserve levels due to a miscalculation. Roberts says the group was disappointed about the results in the USA Life business, with the issue centred on the timing of profit reflection.

Suttcliffe says that the reserve issue, the company is three times larger than when it started. The systems review is in place, and there were a range of issues, including that of the statutory and GAP reserve differences.

He also reported that the Old Mutual Bermuda operation should good growth. Readers will remember that this was the basis of the old Sage business which was acquired for $1, a couple of years ago.

Editors thoughts:

The R20m set aside by the group for those hardship cases that fall outside the 2001 cut-off is a drop in the ocean. According to some industry insiders it seems to be more of a marketing ploy than any real attempt to address what was really an industry state of mind when the products in question were developed.

Quick Polls

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ANSWER

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