TIDMOML
RNS Number : 7782H
Old Mutual PLC
15 March 2018
News release
15 March 2018
Ref: 137/18
Old Mutual plc results for the year ending 31 December 2017
Old Mutual plc today publishes its results for the year ending
31 December 2017, as well as an update on its managed separation
strategy which aimed to result in four strong separately listed
businesses. For the purposes of this report, references to Old
Mutual Emerging Markets (OMEM) and Old Mutual Wealth (OMW) relate
to the performance and corporate activity of those businesses prior
to the date of this report; references to Old Mutual Limited (OML)
and Quilter plc (Quilter) relate to the future actions of those
respective independent businesses following the completion of
managed separation.
Bruce Hemphill, Group Chief Executive, said:
"We are delivering on both of the commitments we made in March
2016 when we announced the managed separation. First, as these
results demonstrate, we have improved the performance of the
underlying businesses and set them up for continued future growth.
Second, we have carried out the preparation needed to give effect
to the managed separation.
"The process has already delivered significant value through
cost and debt reduction, and we are on track for material
completion of the managed separation with the listings of Old
Mutual Limited and Quilter within our expected timetable.
"A vast amount has been achieved over the past two years and I
would like to pay tribute to the hard work of all my colleagues for
getting us to this point. We are now focused on concluding the
final processes associated with the listings, securing the
shareholder and court approvals and addressing any remaining issues
for the final steps of managed separation."
Financial results ahead of expectations:
-- Pre-tax adjusted operating profit (AOP) of GBP2.0 billion up 22% (2016: GBP1.7 billion)
-- IFRS pre-tax profit for continuing operations of GBP617
million up 102% (2016: GBP306 million)
-- IFRS profit after tax attributable to equity holders of the
parent of GBP909 million up 59% (2016: GBP570 million)
-- AOP earnings per share (EPS) of 24.3p up 25% (FY 2016:
19.4p), basic EPS of 19.3p up 61% (2016: 12.0p)
-- 2017 second interim dividend of 3.57p per share up 5%; Full
year dividend of 7.10p per share up 17%
-- Adjusted Net Asset Value (ANAV) per share at 242.3p (2016: 228.6p)
All businesses have performed well:
-- Old Mutual Emerging Markets AOP R13.3 billion, up 5% (2016: R12.7 billion)
-- Nedbank reported AOP of R16.5 billion, up 4% (2016: R15.9 billion)
-- Old Mutual Wealth reported AOP GBP363 million, up 40% (2016:
GBP260 million), (including GBP101 million of net performance fees
from the single strategy business)
Delivering the managed separation on schedule:
-- Material completion of the managed separation on track for the end of 2018
-- Old Mutual Emerging Markets and Old Mutual Wealth ready for
independence with balance sheets finalised
-- On track to deliver c. GBP95 million savings annually in
central costs; detailed plans for wind-down of head office
-- Overall managed separation one-off costs in line with original estimate of GBP230 million
-- Improved quality of Residual plc NAV of GBP452 million (proforma at 31 December 2017)
Expected next steps to complete the managed separation and
unlock the conglomerate discount:
-- Finalisation of the regulatory and tax approvals, completion
of the administration processes and addressing any remaining issues
required to give effect to managed separation
-- Publication of shareholder documentation
-- Quilter and OML capital markets events
-- Meetings for Old Mutual plc shareholder votes to approve finalisation of managed separation
-- Court approval of the required steps, including a capital reduction
-- Quilter plc listing expected to be coupled with an intended
secondary offering of up to 9.6%: followed by OML listing
-- Anticipated distribution of majority of the stake in Nedbank
to OML shareholders targeted for approximately six months after OML
Listing. OML to retain 19.9% of Nedbank post-distribution
Update on standalone businesses:
OML:
OML has an ambition to become a premium financial services group
in Sub-Saharan Africa. It currently offers a broad spectrum of
financial solutions to retail and corporate customers across key
market segments in 17 countries. It is well-positioned in South
Africa, Africa's largest financial services market, and Southern
Africa while having exposure to key growth markets in East and West
Africa.
Targets (extracted from OML business outlook):
-- Results from Operations to grow at a CAGR of Nominal GDP + 2%
over the three years to 2020. Nominal GDP growth is defined with
reference to South Africa
-- Return on Net Asset Value of average cost of equity + 4%
-- R1.0 billion of pre-tax run-rate cost savings by end 2019, net of costs to achieve this
-- OML SAM ratio of 155-175% (post-Nedbank distribution);
OMLAC(SA) SAM ratio greater than 200%; OMLAC(SA) Insurance business
solvency ratio 180%-210%
-- Dividend policy: targeting FY ordinary dividends that are
covered by Adjusted Headline Earnings between 1.75 and 2.25
times.
Quilter:
A leading Wealth Manager in the UK and selected offshore
markets, providing advice-led investment solutions and access to
investment platforms to over 900,000 customers, principally in the
affluent segment. At Quilter's core is a multi-channel wealth
proposition and strong investment performance driving integrated
flows and long-term adviser and customer relationships.
Targets (extracted from Quilter business outlook):
-- NCCF (excluding Heritage) of 5% of opening AuMA per annum over the medium term
-- Subject to delivery of currently expected AuMA volumes and
business mix, Quilter's overall annual rate of revenue margin
decline should slow in the near-term and the revenue margin should
become increasingly stable
-- Operating margin, before interest costs, of 30 per cent for
the year ending 31 December 2020 before implementation of any
future optimisation initiatives
-- Dividend policy: targeting a dividend pay-out range of 40 to
60% of post-tax operating profit. The first dividend payment which
Quilter will make as a separately listed company is expected to be
the final dividend in respect of the year ending 31 December
2018.
Enquiries
Investor Relations
Patrick Bowes UK +44 20 7002 7440
Dominic Lagan UK +44 20 7002 7190
Media
William Baldwin-Charles +44 20 7002 7133
+44 7834 524 833
These materials do not constitute or form a part of , and should
not be construed as, any offer or solicitation or advertisement to
purchase and/or subscribe for Securities in South Africa, including
an offer to the public for the sale of, or subscription for, or the
solicitation or advertisement of an offer to buy and/or subscribe
for, securities as defined in the South African Companies Act, 71
of 2008 (as amended) or otherwise (the "Act") and will not be
distributed to any person in South Africa in any manner that could
be construed as an offer to the public in terms of the Act. These
materials do not constitute a prospectus registered and/or issued
in terms of the Act. Nothing in these materials should be viewed,
or construed, as "advice", as that term is used in the South
African Financial Markets Act, 19 of 2012, as amended, and/or
Financial Advisory and Intermediary Services Act, 37 of 2002, as
amended.
These materials are not an offer to sell, or a solicitation of
an offer to purchase, securities in the United States or in any
other jurisdiction. The securities to which these materials relate
have not been registered under the US Securities Act of 1933, as
amended (the "Securities Act"), and may not be offered or sold in
the United States except pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of the
Securities Act. There will be no public offering of the securities
in the United States.
These materials may contain certain forward-looking statements
with respect to certain of Old Mutual plc's, Quilter's and OML's
plans and their current goals and expectations relating to its
future financial condition, performance and results and, the
execution of the Managed Separation. By their nature, all
forward-looking statements involve risk and uncertainty because
they relate to future events and circumstances which are beyond Old
Mutual plc's, Quilter's and OML's control including amongst other
things, UK and South Africa domestic and global economic and
business conditions, market related risks such as fluctuations in
interest rates and exchange rates, the policies and actions of
regulatory authorities, the impact of competition, inflation,
deflation, the timing and impact of other uncertainties of future
acquisitions or combinations within relevant industries, the
delivery of the Managed Separation in accordance with the expected
timetable and cost projections, as well as the impact of tax and
other legislation and other regulations in the jurisdictions in
which Old Mutual plc, Quilter and OML and their affiliates operate.
As a result, Old Mutual plc's, Quilter's and OML's actual future
financial condition, performance and results may differ materially
from the plans, goals and expectations set forth in Old Mutual
plc's, Quilter's and OML's forward looking statements. Old Mutual
plc, Quilter and OML undertake no obligation to update the
forward-looking statements contained in these materials or any
other forward-looking statements it may make.
Notes to the financial summary on the front two pages of this
announcement
-- Old Mutual Wealth, Nedbank and Institutional Asset management
are classified as core continuing operations in determining the
Group's adjusted operating profit. For the IFRS consolidated income
statement these businesses are classified as discontinued
operations, and are therefore excluded from IFRS profit before tax.
Core continuing operations exclude the results of the Bermuda
business, which is classified as non-core.
-- Constant currency figures are calculated by translating local
currency prior-period figures at the prevailing exchange rates for
the period under review.
-- AOP is an Alternative Performance Measure (APM) used
alongside IFRS profit to assess underlying business performance. It
is a non-IFRS measure of profitability that reflects the Directors'
view of the underlying long-term performance of the Group. The
calculation of AOP adjusts IFRS profit for a number of items as
detailed in note C1 in the Old Mutual plc financial statements. The
adjusting items applied in calculating AOP seek to remove the
impact of strategic activities; short-term valuation movements;
IFRS accounting treatments that are not reflective of the operating
activity; and non-operating items. Due to the long-term nature of
the majority of the Group's business, management believes that AOP
is an appropriate alternative basis by which to assess the
underlying operating results of these businesses and the Group as a
whole and that it enhances the comparability and understanding of
the financial performance of the Group.
In the current year the amendments made to the AOP policy were
to include the results of core discontinued operations in AOP and
to exclude the impairment of investments in associated undertakings
from AOP.
In 2017, managed separation and business standalone costs
recognised in the IFRS income statement have been excluded from the
calculation of AOP on the basis that these items are one-off in
nature and are not reflective of the underlying operating activity
of the Group. Comparative information has not been restated.
The Group Audit Committee regularly reviews the use of
determining AOP to confirm that it remains an appropriate basis on
which to analyse the operating performance of the businesses. The
Committee assesses refinements to the policy on a case-by-case
basis, and where possible the Group seeks to minimise such changes
in order to maintain consistency over time.
In addition to IFRS profit, the Group uses a number of APMs to
assess the results of the business. Some measures are applicable to
the Group as a whole, such as AOP and Adjusted Return on Equity.
Others are more specific to the business lines within the component
businesses of the Group, for example Net Client Cash Flows and
Covered Sales. Definitions of the principal APMs adopted by the
Group and its businesses are included in pages 22 to 24.
-- Old Mutual plc ('the Company' or 'plc') is a company
incorporated in England and Wales and is the ultimate Parent
Company of the Group companies. Plc Head Office collectively refers
to the plc Parent Company and the other centre companies of the
Group, which typically own and manage the Group's interests.
-- The Group's reported segments are Old Mutual Emerging
Markets, Nedbank, Old Mutual Wealth, Institutional Asset Management
and plc Head Office (which includes the plc Parent Company and the
other centre companies of the Group).
-- References to Old Mutual Emerging Markets (OMEM) and Old
Mutual Wealth (OMW) relate to the performance and corporate
activity of those businesses prior to the date of this report;
references to Old Mutual Limited (OML), incorporated and registered
in South Africa and Quilter plc (Quilter), incorporated and
registered in England and Wales relate to the future actions of
those respective independent groups following the completion of
Managed Separation.
Notes to editors
A webcast of the presentation on the results and Q&A will be
broadcast live at 8:30 am UK time (10.30 am South African time)
today on the Company's website www.oldmutualplc.com. Analysts and
investors who wish to participate in the call should dial the
following numbers and quote the pass-code 81960004#:
UK/International +44 (0) 333 300 0804
US +1 631 913 1422
South Africa +27 21 672 4118
Playback (available for 30 days from 15 March 2018), using
pass-code 301219649#:
UK/International +44 (0) 333 300 0819
South Africa + 27 21 672 4123
Copies of these results, together with high-resolution images
and biographical details of the Directors of Old Mutual plc, are
available in electronic format to download from the Company's
website at www.oldmutual.com.
The following documents, containing financial data for 2017 and
2016, are also available from the Company's website.
-- Presentation slides
-- Appendix slides
-- Financial Disclosure Supplement
-- OMEM MCEV Supplementary information
Sterling exchange rates
FY 2017 FY 2016 Appreciation/
(depreciation)
of local
currency
against sterling
-------------- ------------- ------- ------- -----------------
South African
Rand Average Rate 17.15 19.93 14%
------------- ------- ------- -----------------
Closing Rate 16.76 16.96 1%
---------------------------- ------- ------- -----------------
US Dollar Average Rate 1.29 1.36 5%
------------- ------- ------- -----------------
Closing Rate 1.35 1.23 (10)%
---------------------------- ------- ------- -----------------
Chief Executive's review
Group Review and Business Model
Our strategy of managed separation aims to unlock and create
significant long-term value for our shareholders which is currently
trapped within the Group structure and to remove the costs arising
from it. This structure inhibits the efficient management and
funding of future growth plans for the individual businesses,
restricting them from reaching their full potential. We intend to
unlock value through the separation of the three underlying
businesses - Old Mutual Emerging Markets (OMEM), Nedbank and Old
Mutual Wealth (OMW), with OM Asset Management having already been
separated from the Group.
To effect the managed separation, we intend to list two separate
entities, on both the London and Johannesburg stock exchanges. One
will consist principally of the OMW operations and on listing will
be called Quilter plc (Quilter). The other will be the new South
African holding company, Old Mutual Limited (OML), which will
consist of OMEM, the Old Mutual holding in Nedbank and the residual
Old Mutual plc.
Once the managed separation is complete, each business will:
have its local regulator as its lead regulator; continued delivery
of enhanced performance and allow the market to value it
appropriately; be accountable directly to its shareholders for its
level of returns and cash generation from capital employed; and
have direct access to its natural shareholder base.
During the period of managed separation, our business model is
to actively manage the separation of the underlying businesses to
realise their full potential as standalone entities, in a manner
that creates value for shareholders over time. Our focus during
this period has been on three areas: ensuring the businesses are
ready for separation; executing the transactions needed for managed
separation and winding down the plc head office.
For the purposes of this report, references to OMEM and OMW
relate to the performance and corporate activity of those
businesses prior to the date of this report; references to OML and
Quilter relate to the future actions of those respective
independent groups following the completion of managed
separation.
Business Review
Challenging macro conditions continued
The challenging macroeconomic conditions in our largest market
of South Africa continued throughout 2017, with weakness in
consumer and business confidence creating a tough environment for
banking, long-term investment and savings. The South African
government's sovereign and local currency credit ratings were
downgraded in April and November, but markets rallied strongly in
the second half. In February 2018 Cyril Ramaphosa was sworn in as
the new President of South Africa. We expect that this will lead to
a recovery in sentiment and confidence over time despite stretched
public finances and governance challenges. In the UK the
macro-environment was characterised by strong equity markets but
weak currency, considerable political uncertainty around Brexit and
the general election; and legislative and regulatory developments
impacting financial services. In this context, our businesses have
delivered resilient operational performances demonstrating the
underlying strength of their franchises.
During the year, the average rand rate was 14% stronger against
sterling compared to 2016, while the average USD rate against
sterling was 5% stronger. The average of the FTSE 100 during the
year was 14% higher; in the US, the average of the Russell 1000
Value was 14% higher; and the average of the South African JSE All
Share was 6% higher.
Old Mutual's operating performance was ahead of our
expectations. Adjusted Operating Profit (AOP) in reported currency
was up 22% at GBP2.0 billion, up 7% in constant currency. AOP in
2016 was impacted by GBP31 million of MS costs which were not
included in 2017. The IFRS pre-tax profit was up 102% at GBP617
million, benefiting from a profit of GBP164 million from the sale
of OM Asset Management (OMAM) and the joint venture with Kotak in
India. AOP excluding the Institutional Asset Management segment
(consolidated for the first four months of the year until it was
sold) was GBP2.0 billion up 29% on the prior year (GBP1.5 billion)
on a reported basis and up 12% in constant currency.
Old Mutual Emerging Markets
OMEM seeks to become a premium African financial services group
that offers a broad spectrum of financial solutions to retail and
corporate customers across key market segments in 17 countries.
OMEM primarily operates in seven segments and its lines of business
include Life and Savings, Property and Casualty, Asset Management
and Banking and Lending. It distributes products and services to
customers through a multi-channel distribution network spanning
tied and independent advisers, branches, bancassurance, direct and
digital channels, and worksites.
IFRS profit after tax of R10.2 billion increased by 46% from
R7.0 billion in the prior year. This was driven primarily by higher
actual investment returns in South Africa and Zimbabwe. In the
context of a tough economic and political landscape across several
of OMEM's key markets for much of the year, including South Africa,
Zimbabwe and Kenya, the business delivered resilient financial
results with pre-tax AOP of R13.3 billion, up 5% on the prior year.
The improvement in AOP was driven by good progress at Old Mutual
Insure and Rest of Africa, reflecting signs of a turnaround.
Key adjusting items of AOP to IFRS profit include higher
short-term fluctuations on the long-term investment return of R2.2
billion (2016: negative R550 million) driven by Zimbabwe's equity
market performance and the profit on disposal of our joint venture
in India of R1.4 billion. This was partly offset by the one-off
managed separation and standalone costs totalling R237 million
(2016: Rnil); and goodwill impairments of R1.5 billion (2016: R1.3
billion) relating to East Africa and AIVA in Latin America.
OMEM's underlying IFRS operating and administration expenses of
R18.8 billion were up 4% on the prior year below SA inflation in
2017.
Gross flows of R214.4 billion were flat against the prior year,
with growth in the Mass and Foundation Cluster and in Wealth and
Investments. Life APE sales of R13.1 billion were 3% behind the
prior year, mainly due to lower group assurance and annuity sales
in Corporate. This was offset by strong corporate flows in the
Malawi business.
Net client cash flow (NCCF) of R14.5 billion was R2.5 billion
below the prior year, with a significant non-life outflow in
Corporate as well as a R3.3 billion outflow from the Namibian
government pension fund. NCCF in 2017 benefited from R3.0 billion
of the Old Mutual International flows that were previously reported
in OMW and comparatives have not been restated. Funds under
Management increased to R1.2 trillion, up 10% against the prior
year.
The Property & Casualty underwriting margin of 2.5% improved
from 1.5% in the prior year. This was driven by a turnaround in OM
Insure's underwriting result following an improvement in claims
experience despite catastrophe losses as well as an improvement in
the claims environment in East Africa following the remediation of
the loss-making business.
Nedbank
Nedbank ranks as a top-5 bank by capital on the African
continent and Ecobank, in which Nedbank maintains a 21.2%
shareholding, ranks within the top-10 banks by assets on the
African continent. Nedbank is South Africa's fourth-largest bank by
market capitalisation, total assets and headline earnings. It is
also a leading corporate bank and a market leader in commercial
property and renewable energy finance and has a strong position in
household motor finance, household deposits and card acquiring. It
operates a unique asset management model as part of an integrated
wealth management business. Through its own operations in SADC and
Rest of Africa, and through its pan-African banking alliance with
Ecobank, Nedbank provides the Group's customers access to Africa's
largest banking network.
Nedbank produced a solid performance in a macro and political
environment that has proved volatile and challenging. Headline
earnings, including losses in associate income from ETI of R744
million, increased by 2.8% to R11.8 billion. This translated into
an increase in DHEPS of 2.4% to 2,406 cents and an increase in HEPS
of 2.2% to 2,452 cents.
As in prior periods results are highlighted both including and
excluding ETI (referred to as managed operations) to provide a
better understanding of the performance of the business given the
volatility in ETI's results in 2016 and 2017. Managed operations
produced headline earnings growth of 7.8% to R12.8 billion, with
slower than expected revenue growth, more than offset by reduced
impairments and good cost management.
ROE (excluding goodwill) and ROE remained flat at 16.4% and
15.3%, respectively. ROE in managed operations (excluding goodwill
and ETI) also remained stable at 18.1%. ROA decreased 0.01% to
1.22% and excluding ETI, ROA in managed operations improved from
1.29% to 1.33%. Return on RWA increased from 2.23% to 2.30%.
Nedbank's CET1 and Tier 1 capital ratios of 12.6% and 13.4%
respectively, average LCR for the fourth quarter of 116.2% and an
NSFR of above 100%, are all Basel III compliant and are a
reflection of a strong balance sheet. On the back of solid earnings
growth in managed operations and a strong capital position, a final
dividend of 675 cents was declared, an increase of 7.1%. The total
dividend per share increased 7.1% to 1,285 cents, ahead of HEPS
growth of 2.2%.
Old Mutual Wealth
Old Mutual Wealth is a leader in the UK and in selected offshore
markets in wealth management, providing advice-led investment
solutions and investment platforms to over 900,000 customers,
principally in the affluent market segment. At the core of its
proposition is a multi-channel wealth offering driving Integrated
NCCF with leading advice and investment solutions.
OMW's IFRS post-tax profit was GBP99 million for 2017, compared
to a loss of GBP4 million in 2016, principally due to the
exceptional net performance fees in Single Strategy.
Reported OMW AOP of GBP363 million for 2017 was 40% higher than
prior year (2016: GBP260 million), and includes net performance
fees of GBP101 million in 2017 (2016: GBP26 million). Pre-tax AOP
on a standalone basis (reflecting the perimeter of the business
post-listing which excludes the results from the Single Strategy
business) was up 18% to GBP209 million (2016: GBP177 million, which
included a GBP27 million charge for restructuring Heritage
fees).
Key reconciling items between the IFRS profit and pre-tax
Adjusted Operating Profit (AOP) were UK Platform transformation
costs of GBP74 million (2016: GBP102 million), one-off costs in
2017 relating to Managed Separation of GBP32 million (in 2016,
these one-off costs were included within AOP), costs of GBP69
million associated with voluntary customer remediation in legacy
products, the combined effects of goodwill amortisation and the
impact of acquisition accounting totalling GBP103 million (2016:
GBP140 million), and movements in policyholder tax.
Reported NCCF performance was strong at GBP10.9 billion, up 110%
on prior year (2016: GBP5.2 billion) driven by buoyant market
conditions and robust investor confidence. Excluding the flows for
the Single Strategy business, the NCCF for the standalone business
was also strong, increasing 91% to GBP6.3 billion (2016: GBP3.3
billion).
Reported Assets under Management/Administration (AuMA) was
GBP138.5 billion, up 20% from the end of 2016 (31 December 2016:
GBP115.3 billion excluding our divested Italian business (GBP6.2
billion) and South African branches (GBP2.0 billion) which have
been transferred to OMEM). Of the 20% increase in AuMA, 10%
(GBP11.0 billion) is due to positive market performance, 9%
(GBP10.9 billion) resulted from positive NCCF and 1% (GBP1.3
billion) came from the acquisition of Caerus and Attivo.
The unaudited 31 December 2017 Solvency II ratio was 155%.
Adjusting for the GBP200m subordinated debt security issued in
February 2018 and the new term loan would result in a pro forma
Solvency II ratio of 171% at 31 December 2017 (before any impact of
the sale of Single Strategy).
We believe this includes sufficient free cash to complete all
committed strategic investments (including the UK Platform
Transformation Programme) and to allow for any further potential
costs associated with the FCA's Thematic Review, including for any
potential fine which may be levied by the FCA, in respect of which
no provision has yet been made. The impact of this prudent policy
is that Quilter expects to maintain a solvency position in excess
of its policy in the near-term.
Managed Separation
Delivery on schedule
When we unveiled the managed separation strategy in March 2016,
we said that we aimed for it to be materially complete by the end
of 2018. Subject to addressing the remaining issues, we are on
track to deliver the managed separation as planned.
As part of the listing of Quilter, we intend to hold a secondary
offering of up to 9.6% with the proceeds to be retained by Old
Mutual plc and its subsidiaries.
Work to wind-down the plc head office and remove circa GBP95
million of central costs is on track and progressing well. We
continue to expect managed separation one-off costs to remain in
line with our previous guidance. The quality of NAV has been
materially improved as we have converted uncertainties within the
assets into certain cash, and continue to manage contingent
liabilities and unwind complex arrangements which existed within
the Group structure. Subject to addressing the remaining issues we
have estimated a cash cost of GBP130 million for this work.
Progress
The managed separation of the Group is complex. However the
process has gained momentum and we achieved significant further
progress in the second half of 2017 through the conclusion of
numerous transactions and other actions to reduce the Group's
liabilities and exposures. Since reporting our 2017 interim
results, we have achieved a number of meaningful steps:
-- In October 2017, the sale of the Indian joint venture with
Kotak Mahindra was completed for net proceeds of GBP138 million
-- In November 2017, we sold the second tranche of shares of
OMAM to HNA Capital and the remaining 5.5% stake for combined
proceeds of $345 million
-- In November 2017, we reduced holding company debt by a further GBP548 million
-- In December 2017, we agreed the sale of Old Mutual Wealth's
UK Single Strategy Asset Management business to TA Associates and
Single Strategy management for a consideration of c. GBP600
million
-- In January 2018, we received approval from the Competition
Tribunal for OML to acquire Old Mutual plc - one of the key
regulatory approvals for the process to be successful
We have spent much of the past two years preparing the
underlying businesses for independence and working with the
management teams on improving the business performance. We have
taken steps to build strong foundations for the future OML and
Quilter entities and both of these businesses have good momentum,
competitive strategies and excellent future growth prospects. New
governance structures fit for listed companies have been
established at both businesses.
Their standalone balance sheets have now been finalised so as to
ensure both businesses are well capitalised to fund growth plans
and sustainable future dividend policies.
A strong Board has been formed for OML, under the Chairmanship
of Trevor Manuel. Eight new appointments have been made to
complement members of the OMEM and Old Mutual Group Holdings Board
(the holding company for OMEM and Nedbank which will be replaced by
OML) who will also serve on the OML Board. The OML Board will bring
a range of operational skills and listed financial services company
experience that will be invaluable once the business is listed. We
appointed a new Chief Executive, Peter Moyo, in June 2017 and the
new Finance Director (and OML Finance Director designate), Casper
Troskie, will take up his role on 1 April 2018. Until Casper
Troskie joins, Ingrid Johnson, Group Finance Director, has also
been acting as interim Chief Financial Officer of OMEM (and acting
OML Finance Director designate). We have improved the governance
structures of the business and worked with the business to ensure
it has appropriate functions to operate as an independently listed
entity.
OMEM conducted a review of its business strategy and
geographical footprint. It now has a much more focused strategy.
Going forward, OML has committed to improving the sustainable
returns from its cash generative businesses in sub-Saharan Africa
and creating value from its recently deployed capital in East and
West Africa. The new management team's initial focus will be on
three areas: consolidating and growing its positions in the South
African segments where it is already a leader; improving the
underperforming businesses of Old Mutual Insure, East Africa and
the Wealth and Investment cluster in South Africa; and building a
long term competitive advantage through winning the war for talent,
refreshing its technology offering and becoming a cost leader.
There has been good progress on these three areas already and OML
is committing to deliver R1 billion of pre-tax run rate cost
savings by the end of 2019, net of costs to achieve this.
In respect of Quilter, the executive management team and Board
have been reshaped and strengthened in preparation for life as a
listed standalone entity. Tim Tookey was appointed as Chief
Financial Officer in May 2017, Mark Satchel was appointed as
Corporate Finance Director in May 2017, and new appointments were
made in 2016 and 2017 to the roles of Chief Operating Officer,
Chief Risk Officer, Chief Information Officer and a new HR
Director. Glyn Jones was appointed Chairman of the Board in 2016
and a further six new non-executive directors have also been
appointed during late 2016 and 2017.
Quilter's business model is to be a modern, integrated wealth
manager. In September 2017, operations were restructured to create
a separate distinct multi-asset capability at the core of the
offering. In December 2017, agreement was reached to sell its
Single Strategy asset management business to the Single Strategy
management team and funds managed by TA Associates for
approximately GBP600 million. This value is subject to a number of
potential price adjustments depending on the net asset value of the
business and a number of other factors at the disposal date. This
transaction is expected to close in the second half of 2018.
Following completion of the disposal of the Single Strategy
business, Quilter will consider a distribution from the surplus
proceeds to its shareholders.
The functions needed for the business to be operating as a
standalone listed entity are now fully functional.
We are prepared for the final wind-down of the plc head office
in London. As part of this process, we expect around half of the
remaining c.130 head office staff to leave by the end of June, with
a further 40 by September and a skeleton staff remaining into 2019.
We are on track to achieve the stated operational cost savings of
c. GBP95 million per annum by the end of 2018. We have also reduced
Group exposures by de-risking the group pension scheme, mitigating
various contingent exposures and converting assets to cash.
Following the demerger, Old Mutual plc will become a subsidiary of
Old Mutual Limited alongside other operating subsidiaries. Old
Mutual plc will need to satisfy the UK Court that it will continue
to hold sufficient liquid, high quality assets to meet its
liabilities and deal with any contingencies, plus adequate
headroom, taking into account relevant insurances.
Next steps
After addressing the remaining issues, we expect that the legal
process of separation will include, inter alia, the issuance of
shareholder documentation in relation to managed separation, a UK
Court approved scheme of arrangement process - which will
facilitate the demerger of Quilter, the creation of Old Mutual
Limited as the holding company of Old Mutual plc, including its
residual assets and liabilities, and a reduction in the capital of
Old Mutual plc. Old Mutual plc will become a subsidiary of OML,
alongside the operating businesses. Quilter and OML will also hold
capital markets events.
The final step of the managed separation will be the anticipated
distribution of the majority of OML's holding in Nedbank Group to
its shareholders. The timing of the distribution will be determined
by the OML Board but it is expected to be within approximately six
months of the listing of OML. OML will maintain a holding of 19.9%
in Nedbank, forming part of Old Mutual Life Assurance Company of
South Africa's capital base. The 19.9% shareholding was determined
through negotiations with Nedbank and discussions with the South
African Reserve Bank in order to provide stability to the broader
financial system and the Nedbank and OML investor base during
managed separation, whilst also supporting our ongoing commercial
arrangements.
OML is committed to being a significant holder of Nedbank while
retaining a right to review its precise holding as appropriate from
time to time, in accordance with the terms outlined in a new
Nedbank Relationship Agreement, which is expected to be finalised
and executed in the coming weeks.
Capital management policy
In March 2016 we announced a new capital management policy for
the period of the managed separation. This policy has provided the
flexibility to balance the requirements of our multiple
stakeholders and our businesses as they prepare for managed
separation by enabling them to both continue to invest in order to
drive enhanced performance and strengthen their balance sheets in
preparation for being standalone businesses. In line with this
policy we have today announced a second interim dividend of 3.57p,
the rand equivalent is 66.50 cents. This will be paid on 30 April
2018. The total full year dividend for 2017 is 7.10p (2016:
6.06p).
The proposed future Capital Management Policy of the independent
Old Mutual Limited and Quilter businesses are presented in their
respective Business Reviews on pages 35 and 51.
The capital management policy is intended to remain in place
until Old Mutual plc shares are no longer listed.
Adjusted plc NAV per ordinary share
The Adjusted Net Asset Value (ANAV) of Old Mutual plc was
GBP11,952 million at 31 December 2017 (31 December 2016: GBP11,271
million), equivalent to 242.3 pence per share (31 December 2016:
228.6 pence per share). The increase in the ANAV per share largely
reflects the OMEM covered business MCEV earnings (12.8p); the
impact of the constant currency change in the share price of
Nedbank (5.6p), reduced by the Old Mutual plc cash dividends paid
in the year (-6.9p).
Board changes
On 29 June 2017, we announced that Dr Nkosana Moyo was stepping
down from the Board of Old Mutual plc in order to pursue his
political interests. As a result, Dr Alan Gillespie, the Senior
Independent Director, joined the Group Audit Committee with effect
from 1 August 2017. Nonkululeko Nyembezi stepped down from the Old
Mutual plc Board on 31 December 2017. Ms Nyembezi joined the Old
Mutual plc Board in 2012 and had also served on the Board Risk and
Nomination and Governance Committees since 2013.
Following the finalisation of the managed separation, including
approval by shareholders and the court, the Boards of OML and
Quilter will have the primary responsibility for the governance of
their respective groups. Accordingly, the current governance
structure of Old Mutual plc will be replaced and the Board will
have fewer members. Until the managed separation transactions are
completed, the current Board will continue as presently
constituted, with the appropriate resolutions regarding the
Directors' annual reappointment being proposed at the Company's
AGM.
Outlook
The global economy is recovering which provides a positive
backdrop for all of our businesses. In our key market of South
Africa, we expect sentiment and confidence to improve following the
appointment of the new South African president and we expect
improved GDP growth in the coming year. In the UK, while there
remains uncertainty over the outcome of the Brexit negotiations,
the economy continues to grow. Global markets have performed
strongly which combined with geopolitical developments, means that
there are downside risks to our businesses.
Full outlooks for the three underlying businesses are given in
their respective business review sections of the annual report and
accounts. The following are extracts of current trading
commentaries from each:
OML's outlook: The OML Group's continuing operations have
started the year on a positive note. Results from operations are
trading in line with expectations since the 2017 year end. Nedbank
reported its annual results on Friday 2 March 2018, and further
details are available on its website.
Quilter: Quilter has continued to trade in line with
expectations since the year end. Overall, we continue to remain
confident in Quilter's prospects and it is anticipated that the
next trading update will be for the first quarter of 2018, which is
expected to be published in April 2018.
The managed separation process has already delivered significant
value through the reduction in plc debt and in central costs. We
believe that further value will be delivered once the managed
separation is completed through the following developments:
-- The removal of the conglomerate discount
-- c.GBP95 million of savings in central costs
-- Continued improvement in the performance of underlying businesses
-- Each business accessing its natural shareholder base and achieving appropriate valuations
-- Each business accountable to its shareholders for returns and
cash generation from capital employed
-- And will have its local regulator as its lead regulator
Old Mutual plc's next update will be at our Annual General
Meeting on 30 April 2018.
Bruce Hemphill
Group Chief Executive
Review of financial performance
Analysis of performance for the year ended 31 December 2017
2017 IFRS results
IFRS profit after tax attributable to equity holders was GBP909
million in 2017 compared to GBP570 million in 2016. This result
includes the GBP107 million benefit from the weakness in sterling
compared to the prior year. Excluding this impact, the IFRS profit
attributable to ordinary equity holders is up 34% reflecting higher
profits in Old Mutual Wealth, as a result of exceptional net
performance fees in its Single Strategy business and higher
investment returns in OMEM due to Zimbabwe's significant equity
market performance. Zimbabwean equity markets have fallen by more
than 10% in the first two months of 2018.
An overview of the financial performance of Old Mutual Emerging
Markets (OMEM), Nedbank and Old Mutual Wealth (OMW) is set out in
the Chief Executive Review. Detailed financial reviews of these
businesses are set out later in this document and an overview of
plc Head Office, taxation and non-controlling interests (NCI) is
included on page 11.
Alternative performance measures
In addition to IFRS profit, the consolidated Group uses a number
of Alternative Performance Measures (APMs) to assess the
performance of the business. Some are applicable to the Group as a
whole, such as Adjusted Operating Profit (AOP). Others are more
specific to the business lines within the component businesses, for
example Net Client Cash Flows (NCCF) and Covered APE Sales.
Definitions of the principal APMs, explanations of why they are
relevant, and details of the basis for calculating each measure are
included on pages 22 to 24.
The Group Finance Director's review includes a reconciliation
between AOP and IFRS profit for each of the Group's businesses.
Further details of the adjusting items between IFRS and AOP are
provided in the basis of preparation and Note C1 of the Old Mutual
plc Financial Statements.
2017 AOP Results
The 2017 pre-tax AOP for the year of GBP2,037 million was 22%
above the prior year (2016: GBP1,667 million).
The weakness in sterling during the year was responsible for
GBP241 million of this increase. During 2017 the average sterling
to rand exchange rate reduced to R17.15 (2016: R19.93). This had
the effect of increasing the sterling reported results of both OMEM
and Nedbank, which source the majority of their earnings from South
Africa.
During 2017, Old Mutual plc sold its shareholding in OMAM. As a
result, OMAM was consolidated in the Group's results for only four
months of 2017 (2016: consolidated for 12 months). Accordingly the
AOP of the Institutional Asset Management segment, which included
OMAM, reduced from GBP141 million in 2016 to GBP64 million in
2017.
Excluding Institutional Asset Management and the impact of the
weakness in sterling, pre-tax AOP was 12% higher than 2016. This
compares favourably with the nominal GDP growth of 6.6%(1) in South
Africa and 4.4%(2) in the UK.
Changes to the presentation between segments of AOP
The following changes have been made in 2017 to the presentation
within AOP.
- 2017 OMEM AOP now includes the long-term investment return
(LTIR) on excess assets previously shown as a separate item within
plc Head Office AOP. The LTIR on excess assets was GBP20 million in
2017 (2016: GBP20 million).
- Corporate costs are now shown before recharges to the
businesses, with the recharges included within other net
shareholders income/expenses (OSIE). The recharge in 2017 was GBP4
million (2016: GBP19 million).
Comparative information has been re-presented to be consistent
with the treatment of the items described above and does not alter
the consolidated AOP result as previously reported.
Old Mutual Wealth, Nedbank and Institutional Asset Management
are classified as core operations in determining the Group's AOP.
For the IFRS consolidated income statement these businesses are
classified as discontinued operations, and are therefore excluded
from IFRS profit before tax.
1 The South Africa nominal GDP rate is calculated as the average
Consumer Price Index rate of inflation during 2017 of 5.3% plus the
2017 real GDP growth rate in South Africa of 1.3%.
2 The UK nominal GDP rate is calculated as the average Consumer
Price Index rate of inflation during 2017 of 2.7% plus the 2017
real GDP growth rate in the UK of 1.7%.
The tables below summarise the AOP and IFRS results of the Group
in 2017 and 2016:
AOP analysis (GBPm) 2017 2016 Re-presented(1) % change
-------------------------------------------- ------ --------------------- ---------
Old Mutual Emerging Markets 777 639 22%
Nedbank 963 799 21%
Old Mutual Wealth 363 260 40%
-------------------------------------------- ------ --------------------- ---------
2,103 1,698 24%
Institutional Asset Management
(OMAM and Rogge) 64 141 (55%)
plc Head Office(2) :
Old Mutual plc finance costs (66) (88) 25%
Corporate costs (before recharges) (58) (79) 27%
Other net shareholder income/(expenses)
(OSIE) (6) (5) (20%)
-------------------------------------------- ------ --------------------- ---------
Adjusted operating profit before
tax 2,037 1,667 22%
Tax on adjusted operating profit (477) (398) (20%)
-------------------------------------------- ------ --------------------- ---------
Adjusted operating profit after
tax 1,560 1,269 23%
-------------------------------------------- ------ --------------------- ---------
Non-controlling interests - ordinary
shares (364) (319) (14%)
Non-controlling interests - preferred
securities (34) (22) (55%)
-------------------------------------------- ------ --------------------- ---------
Adjusted operating profit after
tax attributable to ordinary equity
holders of the parent 1,162 928 25%
-------------------------------------------- ------ --------------------- ---------
Adjusted weighted average number
of shares (millions) 4,776 4,773 -
-------------------------------------------- ------ --------------------- ---------
Adjusted operating earnings per
share (pence) 24.3 19.4 25%
-------------------------------------------- ------ --------------------- ---------
IFRS profit analysis (GBPm) 2017 2016 % change
Re-presented(3)
---------------------------------------- -------- ----------------- ---------
Core operations:
Old Mutual Emerging Markets 909 547 66%
Nedbank 967 737 31%
Old Mutual Wealth 173 113 53%
---------------------------------------- -------- ----------------- ---------
2,049 1,398 47%
Institutional Asset Management
(OMAM and Rogge) 29 133 (78%)
plc Head Office(2) (242) (176) (38%)
Non-core operations 26 (5) 620%
Consolidation adjustments (24) - n/a
Discontinued operations excluded
from profit before tax(3) (1,221) (1,043) (17%)
IFRS profit from continuing items
before tax 617 306 102%
Income tax expense (240) (142) (69%)
---------------------------------------- -------- ----------------- ---------
IFRS profit from continuing operations
after tax 377 164 130%
IFRS profit from discontinued
operations after tax 881 681 29%
---------------------------------------- -------- ----------------- ---------
IFRS profit after tax for the
financial year 1,258 845 49%
---------------------------------------- -------- ----------------- ---------
Attributable to:
Equity holders of the parent 909 570 59%
Non-controlling interests 315 253 25%
Dividends paid to holders of perpetual
preferred callable securities,
net of tax credits 34 22 55%
---------------------------------------- -------- ----------------- ---------
Profit after tax for the financial
year 1,258 845 49%
---------------------------------------- -------- ----------------- ---------
Weighted average number of shares
(millions) 4,633 4,635 -
---------------------------------------- -------- ----------------- ---------
Basic earnings per share (pence) 19.3 12.0 61%
---------------------------------------- -------- ----------------- ---------
1 AOP has been re-presented to report LTIR on excess assets,
which was previously reported as a separate item in plc Head
Office, within OMEM. In addition, corporate costs are now shown
before recharges to the businesses, with the recharges included
within other net shareholders income/expenses (OSIE).
2 Plc Head Office includes the Old Mutual plc parent company and
other centre companies.
3 Old Mutual Wealth, Nedbank and Institutional Asset Management
are classified as core operations in determining the Group's
adjusted operating profit. For the IFRS consolidated income
statement these businesses are classified as discontinued
operations, and are therefore excluded from IFRS profit before
tax.
Reconciliation of AOP to IFRS profit attributable to equity
holders of the parent:
plc
Year ended December Head Consolidation
2017 (GBPm) OMEM Nedbank OMW IAM Office Non-core adjustments(1) Discontinued(2) Total
--------------------------- ----- ------- ----- ---- ------- -------- --------------- --------------- -------
Adjusted operating
profit before tax 777 963 363 64 (130) - - - 2,037
--------------------------- ----- ------- ----- ---- ------- -------- --------------- --------------- -------
Goodwill, intangible
and associate charges (88) 7 (103) (2) - - - - (186)
Profit on business
disposals 81 - 24 - 92 - - - 197
Short-term fluctuations
in investment return 127 - (2) - - - - - 125
Returns on own debt
and equity (55) - - - - - (24) - (79)
Institutional Asset
Management equity
plans - - - (33) - - - - (33)
Dividends on preferred
securities - - - - 2 - - - 2
Credit-related fair
value losses on Group
debt - - - - (128) - - - (128)
One-off managed separation
and business standalone
costs (14) (3) (32) - (51) - - - (100)
Resolution of plc
pre-existing items - - - - (27) - - - (27)
OMW UK Platform
transformation
costs - - (74) - - - - - (74)
Voluntary customer
remediation provision - - (69) - - - - - (69)
--------------------------- ----- ------- ----- ---- ------- -------- --------------- --------------- -------
Total adjusting items 51 4 (256) (35) (112) - (24) - (372)
Non-core operations - - - - - 26 - - 26
Income tax attributable
to policyholder returns 81 - 66 - - - - - 147
Discontinued operations
included in AOP(2) - - - - - - - (1,221) (1,221)
--------------------------- ----- ------- ----- ---- ------- -------- --------------- --------------- -------
IFRS profit from continuing
operations before
tax 909 967 173 29 (242) 26 (24) (1,221) 617
--------------------------- ----- ------- ----- ---- ------- -------- --------------- --------------- -------
Tax on adjusted operating
profit (214) (244) (44) (18) 43 - - - (477)
Tax on adjusting items (19) (2) 36 12 19 - - - 46
Income tax attributable
to policyholder returns (81) - (66) - - - - - (147)
Tax on discontinued
and non-core operations(1) - - - - (2) - 340 338
--------------------------- ----- ------- ----- ---- ------- -------- --------------- --------------- -------
IFRS profit from continuing
operations after tax 595 720 99 23 (180) 24 (24) (881) 377
--------------------------- ----- ------- ----- ---- ------- -------- --------------- --------------- -------
NCI in adjusted operating
profit (27) (351) - (20) - - - - (398)
NCI in adjusting items 26 5 - 9 9 - - - 49
Discontinued operations(1) - - - - - - - 881 881
--------------------------- ----- ------- ----- ---- ------- -------- --------------- --------------- -------
IFRS profit attributable
to equity holders
after tax 594 375 99 12 (171) 24 (24) - 909
--------------------------- ----- ------- ----- ---- ------- -------- --------------- --------------- -------
plc
Year ended December Head Consolidation
2016 (GBPm) OMEM Nedbank OMW IAM Office Non-core adjustments(1) Discontinued(2) Total
--------------------------- ----- ------- ----- ---- ------- -------- --------------- --------------- -------
Adjusted operating
profit before tax 639 799 260 141 (172) - - - 1,667
--------------------------- ----- ------- ----- ---- ------- -------- --------------- --------------- -------
Goodwill, intangible
and associate charges (75) (50) (140) (6) (7) - - - (278)
Profit on business
disposals 3 (12) - 18 10 - - - 19
Short-term fluctuations
in investment return (27) - 1 - - - - - (26)
Returns on own debt
and equity (43) - - - - - - - (43)
Institutional Asset
Management equity
plans - - - (20) - - - - (20)
Dividends on preferred
securities - - - - 17 - - - 17
Credit-related fair
value losses on Group
debt - - - - (24) - - - (24)
OMW UK Platform
transformation
costs - - (102) - - - - - (102)
--------------------------- ----- ------- ----- ---- ------- -------- --------------- --------------- -------
Total adjusting items (142) (62) (241) (8) (4) - - - (457)
Non-core operations - - - - - (5) - - (5)
Income tax attributable
to policyholder returns 50 - 94 - - - - - 144
Discontinued operations
included in AOP(2) - - - - - - - (1,043) (1,043)
--------------------------- ----- ------- ----- ---- ------- -------- --------------- --------------- -------
IFRS profit from continuing
operations before
tax 547 737 113 133 (176) (5) - (1,043) 306
--------------------------- ----- ------- ----- ---- ------- -------- --------------- --------------- -------
Tax on adjusted operating
profit (170) (199) (47) (36) 54 - - - (398)
Tax on adjusting items 13 - 24 5 (4) - - - 38
Income tax attributable
to policyholder returns (50) - (94) - - - - - (144)
Tax on discontinued
operations(1) - - - - - - - 362 362
--------------------------- ----- ------- ----- ---- ------- -------- --------------- --------------- -------
IFRS profit from continuing
operations after tax 340 538 (4) 102 (126) (5) - (681) 164
--------------------------- ----- ------- ----- ---- ------- -------- --------------- --------------- -------
NCI in adjusted operating
profit (17) (288) - (36) - - - - (341)
NCI in adjusting items 30 32 - 4 - - - - 66
Discontinued operations(1) - - - - - - - 681 681
--------------------------- ----- ------- ----- ---- ------- -------- --------------- --------------- -------
IFRS profit attributable
to equity holders
after tax 353 282 (4) 70 (126) (5) - - 570
--------------------------- ----- ------- ----- ---- ------- -------- --------------- --------------- -------
1 Consolidation adjustments reflects Old Mutual plc shares held
by consolidated investment funds, which are treated as treasury
shares within IFRS.
2 Discontinued operations relate to Nedbank, OMW and
Institutional Asset Management earnings included within AOP; but
reported as discontinued operations within IFRS.
Explanation of adjusting items between AOP and IFRS
In determining the AOP of the Group for core operations, certain
adjustments are made to IFRS profit before tax to reflect the
Directors' view of the Group's long-term performance. Details of
these adjustments are provided in Note C1 of the Consolidated
Financial Statements, and in respect of tax in note D1. A summary
of significant adjustments is provided below.
Goodwill, intangible and associate charges were GBP186 million
in 2017 (2016: GBP278 million). In OMEM the charges for 2017
include goodwill impairment of GBP71 million recognised in the
first half of 2017 relating to the UAP-Old Mutual Group entity in
East Africa. This followed the simplification of the operating
structure of the Rest of Africa portfolio and the consequential
alignment of the routine goodwill valuation review in accordance
with accounting requirements. A further goodwill impairment of
GBP14 million was recognised in the second half of the year
relating to the AIVA business in Uruguay, as a result of weaker
than anticipated performance at the time of the impairment
review.
In OMW, goodwill, intangible and associate charges were GBP103
million (2016: GBP140 million). The charge was lower due to an
additional GBP46 million impairment of goodwill and intangibles in
2016 as a result of the anticipated sale of OMW Italy.
Profit on business disposals includes a GBP81 million profit in
OMEM on disposal of Kotak Mahindra Old Mutual Life Insurance
Limited (Kotak) and a GBP24 million profit in OMW on disposal of
OMW Italy. In the plc Head Office, the GBP92 million profit on
disposal results largely from the sale of our holding in OMAM.
Within AOP the investment return on shareholder funds is
calculated using a Long Term Investment Return (LTIR) rate. Any
short-term fluctuations between the LTIR in AOP and actual returns
are included in adjusting items. In 2017, the actual investment
return was higher than the LTIR assumed in AOP by GBP125 million
(2016: GBP26 million lower). This reflects the impact of the
significant growth in Zimbabwe's equity markets which resulted in a
short term fluctuation of positive GBP106 million. Following recent
political developments in Zimbabwe, the current macro-economic
situation remains fluid, and the market reaction remains volatile.
Zimbabwean equity markets have fallen by more than 10% in the first
two months of 2018.
Adjusting items include a GBP33 million expense (2016: GBP20
million) due to the revaluation of Institutional Asset Management
equity plans held by Affiliate key employees, and Landmark
acquisition related expenses.
Credit-related fair value losses on Group debt were GBP128
million in 2017 (2016: GBP24 million loss). In 2017 this includes
GBP102 million to reflect the difference between the cash paid to
repurchase and redeem debt securities during the year and the IFRS
book value of those debt securities at the date of repurchase.
In 2017, OMW UK Platform transformation costs were GBP74 million
(2016: GBP102 million). These costs relate to both the closure of
the previous programme and costs associated with the new
proposition supplied by FNZ.
New Adjusting items between AOP and IFRS in 2017
An expense of GBP27 million related to the resolution of plc
Head Office pre-existing items includes expenses of GBP20 million
for insuring and de-risking certain indemnities associated with
businesses previously owned by the Group. In addition costs of GBP7
million were incurred in disposing of the Group's captive insurance
entity which covered plc Head Office and subsidiary companies.
Further details of costs related to addressing plc Head Office
pre-existing items is provided on page 18.
One-off managed separation and business standalone costs were
GBP100 million in 2017. In 2016 these costs, which were included
within AOP, totalled GBP31 million. If the 2016 costs were excluded
from AOP, the growth in AOP pre-tax would reduce from 22% to
20%.
As part of OMW's ongoing work to promote fair customer outcomes,
product reviews consistent with the recommendations from the FCA's
thematic feedback and the FCA's guidance 'FG16/8 Fair Treatment of
long-standing customers in the life insurance sector' have been
conducted. Following these reviews, it has been decided to commence
voluntary remediation to customers in certain legacy products
within the Heritage book. As part of this, OMW have decided to cap
early encashment charges at 5% for pension customers under 55, to
refund all early encashment charges over 5% on pensions products
applied since 1 January 2009 and to refund certain paid-up charges
also since 1 January 2009.
A provision of GBP69 million has been made within the 2017
results for the aggregate of these remediation costs, and this has
been reported outside of AOP because it does not reflect the 2017
operating performance of Old Mutual Wealth and reflects operations
in the past.
In 2016 the AOP of Old Mutual Wealth included a GBP27 million
charge for the restructuring of Heritage fees. This was largely
related to changes to future charges for certain continuing
customers of the Heritage business. On the basis of the forward
looking nature of these charges the 2016 AOP was not adjusted for
this impact.
Discontinued and non-core operations
For IFRS reporting the results of Nedbank, Old Mutual Wealth and
Institutional Asset Management are discontinued operations because
they have been classified as held for distribution. These
businesses remain within AOP in 2017 reflecting our continued
management of these businesses, their contribution to the Group
result for the year and to aid comparability.
Non-core operations relates to Old Mutual Bermuda IFRS pre-tax
profit of GBP26 million (2016: GBP5 million loss). The increase in
profit largely reflects the favourable developments in the run-off
of this closed book of business.
Plc Head Office AOP
The plc Head Office represents the plc Parent Company and the
other centre companies of the Group, which typically own and manage
the Group's interests. The AOP of the plc Head Office is detailed
below:
Plc Head Office (GBPm) 2017 2016
------------------------------------------------- ------ ------
Old Mutual plc finance costs (66) (88)
Corporate costs (before recharges) (58) (79)
Other net shareholder income/ (expenses) (OSIE) (6) (5)
------------------------------------------------- ------ ------
Total plc Head Office AOP (130) (172)
------------------------------------------------- ------ ------
Old Mutual plc finance costs
Old Mutual plc finance costs reduced from GBP88 million in 2016
to GBP66 million in 2017, in-line with the guidance communicated at
our 2016 Preliminary Results. The reduction in finance costs
largely reflects the repayment of GBP112 million of senior debt in
October 2016 and the repurchase and redemption of GBP273 million of
perpetual preferred callable securities in February 2017.
Corporate costs before recharges
Corporate costs before recharges of GBP58 million in 2017 are
GBP21 million below the prior period (2016: GBP79 million).
The reduction in corporate costs reflects savings of GBP11
million as a result of retrenchment activity in 2016 and 2017 and
wider repurposing of the plc Head Office, including an over 50%
reduction in headcount compared with January 2016. These reductions
are in-line with our guidance provided at the 2016 Preliminary
Results announcement.
The reduction in corporate costs also includes the impact of
property and insurance costs of GBP10 million which were previously
incurred by plc, and therefore reflected in corporate costs, but
which are now directly incurred by the businesses.
Other net shareholder income / (expenses) (OSIE)
The table below sets out other net shareholder expenses of GBP6
million in 2017 (2016: GBP5 million):
OSIE (GBPm) 2017 2016
------------------------------------------------------------ ----- -----
Share based payment charges (9) (10)
Solvency II costs and other projects - (5)
Brand costs - (8)
Other net expenses (7) (7)
Recharge of plc Head Office costs 4 19
OSIE, excluding fx, seed capital gains and one-off MS cost (12) (11)
One-off managed separation costs - (22)
FX (losses)/gains (1) 20
Seed capital gains 7 8
------------------------------------------------------------ ----- -----
Total other net shareholder income/(expenses) (OSIE) (6) (5)
------------------------------------------------------------ ----- -----
In 2017 OSIE includes expenses related to share based payment
charges of GBP9 million (2016: GBP10 million). In 2016 Solvency II
and other project costs of GBP5 million and OMW brand costs of GBP8
million were also incurred. The on-going brand costs are now
incurred directly by OMW. The recharge of plc Head Office costs has
reduced significantly to GBP4 million (2016: GBP19 million) as
costs previously incurred by the plc and recharged to OMEM and OMW
are now incurred directly by these businesses.
One-off plc Head Office costs of managed separation were GBP22
million in 2016. These costs have been excluded from AOP in 2017.
Foreign exchange losses in 2017 of GBP1 million (2016: GBP20
million gain) were incurred on US dollar denominated cash and seed
investments.
In 2017 seed capital gains were GBP7 million (2016: GBP8
million), largely on funds managed by OMAM. The plc Head Office has
substantially reduced its seed portfolio as part of the managed
separation. At 31 December 2017 the plc Head Office held seed
investments of GBP6 million (31 December 2016: GBP148 million).
Tax
The AOP effective tax rate (ETR) for the Group is 23% (2016:
24%). The IFRS ETR is more volatile due to the inclusion of
policyholder tax, and one-off items which are typically not taxed
at the statutory rate. Analysis of the ETR in relation to AOP
therefore gives a more consistent means of understanding the Group
tax charge over the longer term. As the majority of the Group's
profits arise in OMEM and Nedbank, the tax borne by these
businesses has a significant impact on the Group ETR.
The AOP ETR for OMEM, calculated in sterling, has increased
slightly to the statutory rate of 28% (2016: 27%). The Nedbank AOP
ETR remained constant at 25%.
The ETR for the Old Mutual Wealth business is generally lower
than in the African businesses given lower headline corporate tax
rates in the UK and other markets in which its business operates.
Interest payments and corporate costs incurred by plc Head Office
in the UK are available to be offset against profits in the Old
Mutual Wealth business.
Non-controlling interests
AOP attributable to non-controlling interests increased from
GBP341 million to GBP398 million. The proportion of Group AOP
attributable to non-controlling interests has reduced from 27% in
2016 to 26% in 2017. This reflects the sell-down of OMAM during
2017.
Managed separation and business standalone one-off and
incremental recurring costs
The section below summarises the one-off and recurring costs
associated with managed separation and includes forward looking
estimates of these costs. These estimates are sensitive to how we
execute the managed separation, including the timing of execution
and are subject to stakeholder and market dependencies. By their
nature, forward-looking estimates involve risk and uncertainty
because they relate to future events and circumstances which may be
beyond Old Mutual plc's control. Following the managed separation
each business may adopt cost definitions different from the
Group-wide definition that is currently applied.
The tables below include the one-off costs related to plc
wind-down and business standalone costs and advisory costs. They
compare the costs incurred to date against the original estimates.
Costs are likely to be at the upper end of our estimates leaving
limited contingency remaining.
Removal and transition of plc Head Office operational costs
The managed separation will lead to the eventual closure of the
plc Head Office and elimination of its operational costs, which
totalled GBP123 million before recharges in 2015, the year before
the managed separation began. The table below shows the evolution
of these plc Head Office operating costs since 2015:
Plc Head Office operational costs before recharges(1) (GBPm) 2015 2016 2017 Estimated
by 2019
-------------------------------------------------------------- ----- ------ ----- ----------
Corporate costs before plc recharge 80 79 58 -
OSIE before plc recharge 43 24(2) 10 -
-------------------------------------------------------------- ----- ------ ----- ----------
123 103 68 -
-------------------------------------------------------------- ----- ------ ----- ----------
1. Plc Head Office operational costs are stated before recharges
of GBP23 million in 2015; GBP19 million in 2016 and GBP4 million in
2017.
2. One-off plc wind down costs of GBP8 million and transaction
advisory costs of GBP14 million are included in AOP in 2016. From
2017 these costs have been excluded from AOP.
An estimated GBP29 million per annum of plc Head Office
operational costs previously incurred by the plc Head Office will
ultimately be borne directly by OMEM and OMW. Given the 2015 cost
base of GBP123 million set out above, this will result in an
estimated net saving of GBP94 million per annum. The table below
shows the development in the costs of OMW and OMEM as they begin to
incur the plc Head Office operational costs directly:
Plc Head Office operational costs absorbed by OMW and OMEM (GBPm) 2016 2017 Estimated
after
MS
------------------------------------------------------------------------------------ ------ ----- ----------
Costs previously recharged and listing related costs now incurred directly by OMEM - 4 7
Costs previously recharged now incurred directly by OMW - 6 7
Listing related costs not recharged now incurred directly by OMW - 1 7
Brand costs not recharged now incurred directly by OMW - 7 8
------------------------------------------------------------------------------------ ------ ----- ----------
- 18 29
------------------------------------------------------------------------------------------- ----- ----------
Incremental recurring business standalone costs
In addition to the GBP29 million above, we estimate OMW and OMEM
will incur a combined incremental cost of GBP20 million per annum
as a result of being standalone businesses. The table below
illustrates the costs incurred to date.
Recurring business standalone costs (GBPm) 2016 2017 Estimated
after
MS
(annualised)
-------------------------------------------- ------ ----- --------------
Old Mutual Emerging Markets - 4 8
Old Mutual Wealth - 8 12
-------------------------------------------- ------ ----- --------------
- 12 20
--------------------------------------------------- ----- --------------
One-off plc wind down and business standalone costs
As communicated at the 2016 Preliminary Results announcement, we
estimate the one-off costs to unlock the GBP94 million of plc Head
Office run-rate savings to be in the region of GBP130 million. This
includes costs at the plc Head Office, which we expect to be at the
upper end of our GBP50 million to GBP65 million range, with the
balance to be incurred by OMEM and OMW. The table below sets out
the one-off costs that have been incurred to date:
One-off plc wind down and business standalone costs(1) (GBPm) 2016 2017 Total Total
to date estimated
over
MS
--------------------------------------------------------------- ----- ----- --------- -----------
Plc Head Office 8 31 39
Old Mutual Emerging Markets 1 12 13
Old Mutual Wealth 4 20 24
--------------------------------------------------------------- ----- ----- --------- -----------
13 63 76 130
--------------------------------------------------------------- ----- ----- --------- -----------
1. One-off plc wind down and business standalone costs are
included in AOP in 2016. From 2017 these costs have been excluded
from AOP. Comparatives have not been restated.
One-off advisory costs
We estimate one-off advisory costs of at least GBP100 million
during the period of implementing the managed separation. This
estimate is sensitive to how we execute the managed separation and
subject to stakeholder and market dependencies. These costs will
facilitate unlocking the current conglomerate discount to the
Group's value. The table below sets out the one-off advisory costs
that have been incurred to date:
One-off advisory costs(1) (GBPm) 2016 2017 Total Total
to date estimated
over
MS
---------------------------------- ----- ----- --------- -----------
Plc Head Office(2) 14 19 33
Old Mutual Emerging Markets 1 1 2
Old Mutual Wealth 3 11 14
Nedbank - 3 3
---------------------------------- ----- ----- --------- -----------
at least
18 34 52 100
---------------------------------- ----- ----- --------- -----------
1. One-off advisory costs were included in AOP in 2016. From
2017 these costs have been excluded from AOP. Comparatives have not
been restated.
2. Includes costs related to Old Mutual Limited
One-off transaction costs
Transaction costs incurred as at 31 December totalled GBP19
million. This includes GBP16 million of costs related to the
sell-down of OMAM during 2016 and 2017, which were deducted from
proceeds in line with accounting policies and costs which were not
deductible from proceeds related to OMEM (GBP1 million); OMW (GBP1
million) and plc Head Office (GBP1 million). Further transaction
costs of GBP20 million to GBP25 million are estimated to be
incurred by the plc Head Office and the businesses, excluding any
costs associated with the intended secondary offering of
Quilter.
Return on Equity (ROE)
2017 (GBPm) AOP Average Return Average Return
(post- shareholder on shareholder shareholder on shareholder
tax & equity equity equity equity
NCI) excl. excl. incl. incl.
intangibles(1) intangibles intangibles intangibles
---------------------- -------- ---------------- ---------------- ------------- ----------------
Adjusted ROE(2) :
Old Mutual Emerging
Markets 536 2,293 23.4% 2,639 20.3%
Nedbank 368 2,222 16.6% 2,558 14.4%
Old Mutual Wealth(3) 319 990 32.2% 2,414 13.2%
---------------------- -------- ---------------- ---------------- ------------- ----------------
1,223 5,505 22.2% 7,611 16.1%
---------------------- -------- ---------------- ---------------- ------------- ----------------
Residual plc(4) (61) 2,430(1,5) n/a 324 n/a
---------------------- -------- ---------------- ---------------- ------------- ----------------
Adjusted ROE 1,162 7,935 14.6% 7,935 14.6%
---------------------- -------- ---------------- ---------------- ------------- ----------------
IFRS ROE 909 8,019 11.3%
---------------------- -------- ---------------- ---------------- ------------- ----------------
2016 (GBPm) AOP Average Return Average Return
(post- shareholder on shareholder shareholder on shareholder
tax & equity equity equity equity
NCI) excl. excl. incl. incl.
intangibles(1) intangibles intangibles intangibles
---------------------- -------- ---------------- ---------------- ------------- ----------------
Adjusted ROE(2) :
Old Mutual Emerging
Markets(6) 452 1,805 25.0% 2,150 21.0%
Nedbank 312 1,834 17.0% 2,094 14.9%
Old Mutual Wealth(3) 213 974 21.9% 2,475 8.6%
---------------------- -------- ---------------- ---------------- ------------- ----------------
977 4,613 21.2% 6,719 14.5%
---------------------- -------- ---------------- ---------------- ------------- ----------------
Residual plc(4) (49) 2,374(1,5) n/a 268 n/a
---------------------- -------- ---------------- ---------------- ------------- ----------------
Adjusted ROE 928 6,987 13.3% 6,987 13.3%
---------------------- -------- ---------------- ---------------- ------------- ----------------
IFRS ROE 570 7,237 7.9%
---------------------- -------- ---------------- ---------------- ------------- ----------------
1 The businesses figures exclude the plc share of 'Goodwill and
other intangible assets' as reported in the segmental balance
sheet; and these assets are included in Residual plc
2 Group Adjusted ROE is calculated as AOP (post-tax and NCI)
divided by average ordinary shareholders equity. Ordinary
shareholders equity excludes the perpetual preferred callable
securities, non-core operations and the decrease in value of equity
due to treasury shares held within consolidated investment
funds.
3 The intercompany loan of GBP566 million provided to Old Mutual
Wealth to acquire Quilter Cheviot has been equitised for the
purposes of calculating the average equity of Old Mutual Wealth.
The average shareholders equity including intangibles includes
GBP0.7 billion of goodwill on the acquisition of Skandia which is
allocated to Old Mutual Wealth. Excluding this goodwill the return
on equity of Old Mutual Wealth is 19%.
4 Residual plc includes the plc Head Office and the
Institutional Asset Management segments.
5 Includes plc portion of 'Goodwill and other intangible assets'
and excludes the perpetual preferred callable securities (31
December 2017: nil; 31 December 2016: GBP273 million) that were
repurchased and redeemed in February 2017 and non-core operations
(31 December 2017: GBP124 million; 31 December 2016: GBP68
million).
6 2016 OMEM AOP (post-tax and NCI) now includes the LTIR on
excess assets previously reported within the plc Head Office.
Adjusted ROE by business has been calculated in sterling in
order to give a shareholder view of returns in the reported
currency.
Old Mutual plc adjusted ROE increased from 13.3% in 2016 to
14.6% in 2017. This largely reflects a higher ROE in OMW, which
benefited from exceptional net performance fees in the Single
Strategy business in 2017.
The IFRS ROE of 11.3% (2016: 7.9%) has increased as a result of
the significant increase in IFRS profit attributable to equity
holders which benefited from higher profits in Old Mutual Wealth,
as a result of exceptional net performance fees in the Single
Strategy business and higher investment returns in OMEM due to
Zimbabwe's significant equity market performance.
Plc cash flows and liquidity
The plc Head Office cash position was GBP540 million as at 31
December 2017 (GBP743 million as at 31 December 2016). This is
invested in cash and near cash instruments, including money market
funds. The plc Head Office also has access to an undrawn committed
facility of GBP800 million (as at 31 December 2016: GBP800
million). The table below summarises plc Head Office cash flows in
2017 and 2016:
Plc cash flows (GBPm) 2017 2016
------------------------------------------------------------------ ------ ------
Opening cash and liquid assets at holding company at 1 January 743 750
Operational flows
Operational receipts from OMAM and OMW 74 84
Impact of foreign currency hedging (3) (6)
------------------------------------------------------------------ ------ ------
Operational receipts from OMAM and OMW after hedging 71 78
Operational receipts from OMEM and Nedbank 345 410
Impact of foreign currency hedging (14) (37)
------------------------------------------------------------------ ------ ------
Operational receipts from OMEM and Nedbank after hedging 331 373
Corporate costs before recharges (58) (79)
Other operational flows 34 (27)
Total operational flows 378 345
Servicing of capital
Interest paid (64) (72)
Preference dividends (15) (17)
Ordinary cash dividends (339) (451)
------ ------
Paid to northern hemisphere shareholders (128) (160)
Paid to southern hemisphere shareholders (211) (291)
------------------------------------------------------------------ ------ ------
Total servicing of capital (418) (540)
Capital movements
Debt repaid in the period (955) (112)
Capital contribution to OMW (200) -
Net proceeds from the sell-down of OMAM(1) 664 230
Net proceeds from the sale of OMW Italy(1) 210 -
Net proceeds from the sale of Kotak(1) 138 -
Return of seed capital 69 31
Resolution of plc Head Office pre-existing items (62) -
Plc wind-down and advisory costs (26) (9)
Other capital movements (1) 48
------------------------------------------------------------------ ------ ------
Total capital movements (163) 188
Closing cash and liquid assets at holding company at 31 December 540 743
------------------------------------------------------------------ ------ ------
1 Proceeds from the sell-down of OMAM and sales of OMW Italy and
Kotak are stated net of costs and foreign currency hedging
Operational flows
Our conservative capital management policy has provided the
flexibility to pay an appropriate dividend to shareholders during
the managed separation and enabled the unlisted OMEM and OMW
businesses to prepare for independence with strong standalone
balance sheets, improved quality of capital and future dividend
paying capacity.
Operational receipts from OMW and OMAM, after foreign currency
hedging, were GBP71 million in 2017 (2016: GBP78 million). For
OMAM, remittances of GBP7 million were received in 2017 (2016:
GBP19 million) and payments of GBP35 million were received pursuant
to the Deferred Tax Asset Agreement (2016: GBP32 million).
OMEM and Nedbank dividend receipts are available to meet the plc
dividend, consistent with the original terms of demutualisation and
in line with plc's capital management policy.
Other operational flows in 2017 include the impact of collateral
movements on foreign currency hedging of both operational and
capital inflows of GBP29 million (2016: GBP28 million outflow).
Servicing of capital
Dividend payments to ordinary shareholders of GBP339 million
(2016: GBP451 million) have been made in the year in relation to
the second interim dividend for 2016 of 3.39 pence per share
(second interim dividend for 2015: 6.25 pence per share) and first
interim dividend for 2017 of 3.53 pence per share (first interim
dividend for 2016: 2.67 pence per share). Of this, GBP211 million
was paid to shareholders on the South African and other African
registers (2016: GBP291 million).
Preference dividend payments in 2017 reflect interest on the
GBP273 million of perpetual preferred callable securities, which
were repurchased and fully redeemed on 3 February 2017. The payment
represents 11 months of the interest accrued up to the point the
security was redeemed.
Interest paid in 2017 was GBP8 million lower than 2016, due
largely to the repayment of GBP112 million of senior debt in
October 2016.
Capital movements
Debt repaid in 2017 includes GBP273 million of perpetual
preferred callable securities that were repurchased and fully
redeemed at a cost of GBP288 million in February 2017. In addition,
in November 2017 we repurchased and redeemed GBP389 million of Tier
2 subordinated 2025 securities, and GBP159 million nominal of Tier
2 subordinated 2021 securities for a total cost of GBP667 million,
net of interest rate hedging.
Old Mutual Wealth received GBP200 million of capital in May 2017
from Old Mutual plc with a consequential reduction in the RCF
provided by Old Mutual plc to Old Mutual Wealth from GBP200 million
to GBP70 million.
Cash flows from corporate activity in 2017 include proceeds net
of costs and foreign currency hedging of GBP664 million from the
sell-down of OMAM during the period, GBP210 million from the sale
of Old Mutual Wealth Italy and GBP138 million from the sale of
Kotak.
Costs to address plc Head Office pre-existing items largely
reflects GBP27 million paid into two legacy defined benefit pension
schemes to effect the buy-out of the benefits of the two schemes
and GBP20 million related to the costs of insuring and de-risking
certain indemnities associated with businesses previously owned by
the Group . In addition cash of GBP12 million to fund contingent
liabilities in the businesses; which was held on deposit at the plc
Head Office, was returned.
During 2017 GBP69 million (2016: GBP31 million) of seed capital
was returned to the plc, primarily from Rogge and OMAM.
Plc wind-down and advisory costs of GBP26 million were paid in
2017 (2016: GBP9 million). The amounts included within the IFRS
income statement also include accruals and provisions primarily
related to the wind-down of the plc Head Office.
IFRS balance sheet review
The analysis below summarises how equity attributable to
ordinary shareholders of the parent is invested in the net assets
of the component businesses including the plc Head Office. It also
sets out the composition of plc Head Office net assets. The
information is sourced from segmental analysis of the Group's IFRS
Balance Sheet in note B4 of the financial statements.
(GBPm) 2017 2016
Restated(1)
------------------------------------------------------------ ------ -------------
Equity attributable to equity holders of the parent 8,128 7,909
Plc perpetual preferred callable securities - (273)
------------------------------------------------------------ ------ -------------
Equity attributable to ordinary shareholders of the parent 8,128 7,636
------------------------------------------------------------ ------ -------------
OMEM 2,768 2,484
Nedbank 2,679 2,476
OMW 1,818 1,868
------------------------------------------------------------ ------ -------------
Total operating businesses 7,265 6,828
------------------------------------------------------------ ------ -------------
Residual plc NAV:
OMAM - 527
OM Bermuda 124 68
plc Head Office 902 358
------------------------------------------------------------ ------ -------------
Total Residual plc NAV 1,026 953
------------------------------------------------------------ ------ -------------
Consolidation adjustments(1) (163) (145)
------------------------------------------------------------ ------ -------------
Equity attributable to ordinary shareholders of the parent 8,128 7,636
------------------------------------------------------------ ------ -------------
1 Consolidation adjustments reflects Old Mutual plc shares held
by consolidated investment funds, which are treated as treasury
shares within IFRS. Comparative information in the consolidated
statement of financial position has been restated for this
treatment.
At 31 December 2017 equity attributable to ordinary shareholders
of the parent was GBP8,128 million (2016: GBP7,636 million). The
GBP492 million increase in equity attributable to ordinary
shareholders of the parent is principally due to GBP894 million of
IFRS profit after tax attributable to ordinary equity holders,
offset by dividends paid of GBP330 million and the impact of
translating the Group's non-UK operations to sterling of GBP87
million.
At 31 December 2017, of the total equity attributable to
ordinary shareholders, the equity of Old Mutual plc as a
stand-alone company was GBP6,509 million (2016: GBP5,369 million),
of which distributable reserves were GBP2,943 million (2016:
GBP2,059 million).
The Group is required to adopt two new accounting standards with
effect from 1 January 2018, IFRS 9: Financial Instruments ('IFRS
9') and IFRS 15: Revenue from Contracts with Customers (IFRS 15).
The estimated impact on the Groups' opening reserves (after tax) of
adopting IFRS 9 is GBP203 million, principally due to impact of the
adoption of the expected credit loss for impairments of GBP176
million and other items relating to classification and measurement.
IFRS 15 principally impacts the timing of the recognition of
revenue and the current estimated impact on opening reserves is
expected to be immaterial. All of these estimates represents
managements best estimate of the potential impact of adopting the
standards and this could change when the standards are implemented
by the Group. Further details are provided in Note A7 of the Old
Mutual plc Financial Statements.
Equity invested in OMEM, Nedbank and OMW
Over 80% of the Group's equity is invested in OMEM, Nedbank and
OMW. Under managed separation these businesses are expected to be
largely distributed to shareholders. This IFRS equity is shown
after deduction of intercompany funding of GBP782 million to OMW
from the plc Head Office.
Within OMEM, as at 31 December 2017, there was R5.9 billion
(2016: R9.7 billion) of outstanding intercompany indebtedness
between OMLAC(SA), Old Mutual Group Holdings (OMGH) and its
subsidiary Old Mutual Portfolio Holdings (OMPH). During the year,
R3.8 billion of this intercompany indebtedness was repaid to
OMLAC(SA), funded through greater cash retention.
We anticipate that the settlement of the remaining intercompany
indebtedness will largely be repaid with the transfer of Nedbank
shares to OMLAC(SA) up to the desired shareholding of 19.9%. Any
residual indebtedness will be settled in cash.
Residual plc NAV
Residual plc NAV consists of OM Bermuda, plc Head Office and
until its sale in November 2017, the value of its remaining shares
in OMAM. The Residual plc NAV has increased to GBP1,026 million in
2017 (2016: GBP953 million).
As part of the process of managed separation we have converted
Residual plc into certain cash, reduced contingent liabilities and
unwound complex arrangements which existed within the Group
structure.
Details of the component parts of the Residual plc NAV are
discussed below.
OMAM
The process of reducing our stake in OMAM completed in November
2017, following a number of market sell-downs and the sale of a
24.95% stake to HNA Capital. The gross proceeds from these share
sales totalled $879 million. Net of costs of GBP16 million and a
GBP3 million loss on foreign currency hedging, the proceeds were
GBP664 million.
OM Bermuda
OM Bermuda continues to execute its run-off strategy.
Approximately 50% of its Guaranteed Minimum Accumulation Benefit
(GMAB) reinsurance obligations matured in 2017 and the bulk of the
remaining maturities take place during H1 2018.
Downside risk associated with guarantee top-up payments is
managed using a put option programme. This was restructured to lock
in market gains to the end of October 2017 and therefore further
reduce downside market risks. Residual risks include basis risk and
a small portion of market and currency risks that remain
unhedged.
The reinsurance business remains well capitalised, with a
statutory capital coverage ratio of 6.2 times (31 December 2016:
1.8 times).
IFRS NAV increased to GBP124 million ($168 million) at 31
December 2017 (31 December 2016: GBP68 million), benefiting from
the GBP71 million ($92 million) reduction in GMAB reserves largely
as a result of favourable global equity market and currency
movements and the run-off of GMAB obligations over the period. This
is partly offset by the establishment of a liquidation provision of
GBP13 million ($18 million) to capitalise all anticipated future
operational losses as the business is no longer considered a going
concern.
Within the 31 December 2017 OM Bermuda IFRS NAV are GBP23
million ($31 million) of loan notes outstanding from the plc Head
Office to OM Bermuda.
Old Mutual plc Head Office
We continue to make progress with the financial wind down and
de-risking of the plc Head Office. The crystallisation of plc Head
Office NAV into cash allows us to maintain appropriate buffers to
manage risks and obligations during the period as a result of the
execution of managed separation and the wind down of the plc Head
Office. However, there are still actual and potential demands on
our cash and liquidity during this period. Cash utilisation will
continue not only as a result of the current plc structure, but
also to manage and meet the remaining managed separation and
business standalone costs across the plc Head Office and the
underlying businesses.
The table below shows the composition of the plc Head Office
NAV:
plc Head Office NAV (GBPm) 2017 2016
-------------------------------- ------ --------
Cash 540 743
Seed investments 6 148
Net intercompany funding 759 816
Third party debt(1) (461) (1,290)
Net sundry debtors/(creditors) 58 (59)
-------------------------------- ------ --------
plc Head Office NAV 902 358
-------------------------------- ------ --------
1 Includes plc preferred perpetual callable securities of GBP273
million in 2016.
Cash
The plc Head Office had cash balances of GBP540 million at 31
December 2017 (31 December 2016: GBP743 million).
At our 2016 preliminary results in March 2017, we highlighted
that we hold cash and liquidity buffers centrally to support the
plc under both normal and stressed conditions. These liquidity
buffers and cash will transition from plc Head Office where
appropriate as part of the preparations for the independence of the
relevant subsidiaries as part of managed separation. In an initial
step in preparing OMW's capital structure and in light of
regulatory changes, we contributed GBP200 million of capital into
OMW with a consequential reduction in plc's liquidity support and
centrally held liquidity buffers for OMW of GBP130 million to GBP70
million.
The plc early warning liquidity threshold ("EWT") is set
dynamically, in line with our underlying obligations to ensure
adequate liquidity resources are maintained and stood at circa
GBP330 million at 31 December 2017 (31 December 2016: circa GBP520
million). The lower EWT reflects the reduction in plc's liquidity
support for OMW and lower levels of plc Head Office debt.
Seed investments
At 31 December 2017 the plc Head Office held seed investments of
GBP6 million (31 December 2016: GBP148 million).
The plc Head Office has substantially reduced its seed portfolio
as part of the managed separation. During 2017 the plc redeemed its
remaining funds in OMAM and Rogge. The remaining seed investments
are held in OMEM funds.
Net intercompany funding
Other non-cash plc Head office assets includes net intercompany
funding of GBP759 million (31 December 2016: GBP816 million).
Intercompany funding to OMW is GBP782 million (31 December 2016:
GBP785 million), most of which was provided to support the
acquisitions of Quilter Cheviot and Intrinsic. Intragroup payables
represent GBP23 million of loan notes outstanding at 31 December
2017 from Old Mutual plc to OM Bermuda (31 December 2016: GBP58
million).
Intercompany funding in 2016 also included GBP85 million due
from OMAM, principally relating to the Deferred Tax Asset Deed.
Following cash receipts in 2017 and the uncertainty arising from US
tax reform the Deferred Tax Asset Deed is now a provision of GBP9
million. As a result of the sale of OMAM during 2017 this provision
is included in net sundry debtors and creditors.
Plc debt
The total IFRS book value of debt (excluding banking related
debt) of GBP903 million comprises plc holding company debt of
GBP461 million and emerging markets non-banking debt of GBP442
million.
Plc debt summary (1) 2017 2016
-------------------------------------------------------------------- ------- -------
Total gearing (gross of holding company cash) - IFRS basis(4) 7.4% 16.1%
-------------------------------------------------------------------- ------- -------
plc holding company book value of debt - IFRS basis (GBPm) 461 1,290
Subsidiary book value of debt (non-banking)(2) - IFRS basis (GBPm) 442 801
-------------------------------------------------------------------- ------- -------
Total book value of debt - IFRS basis (GBPm) 903 2,091
Total interest cover(3) 15.0 11.1
times times
Hard interest cover(3) 4.5 3.4
times times
-------------------------------------------------------------------- ------- -------
1 Excludes all banking-related debt.
2 For the purposes of calculating gearing, subsidiary debt
includes OMAM debt classified as non-current liabilities held for
sale (31 December 2017: nil; 31 December 2016: GBP319 million) and
non-banking inter-company borrowings (31 December 2017: GBP23
million; 31 December 2016: GBP25 million).
3 Interest cover is calculated based on the number of times AOP
before finance costs and tax covers finance costs.
4 2016 gearing has been recalculated to include the restatement
of Group equity
As at 31 December 2017, Old Mutual plc holding company debt
comprised of GBP341 million of Tier 2 debt maturing in June 2021
and GBP61 million of Tier 2 debt maturing in November 2025. The
IFRS book value of these was GBP400 million and GBP61 million
respectively leading to an aggregate IFRS value of Old Mutual plc
debt of GBP461 million. This excludes a derivative asset of GBP33
million, related to the remaining GBP341 million of Tier 2 debt
issued in June 2011.
The aggregate IFRS value of Old Mutual plc debt at 31 December
2017 is GBP829 million lower than at 31 December 2016 due to the
repurchase and redemption of the GBP273 million Preferred Callable
Securities on 3 February 2017. In addition GBP389 million of the
Tier 2 subordinated 2025 securities and GBP159 million nominal of
the Tier 2 subordinated 2021 securities were repurchased and
redeemed on 24 November 2017. Fair value movements account for the
remaining difference.
Gearing as at 31 December 2017
Gross gearing is based on non-banking debt of GBP870 million
(2016: GBP2,060 million), which is the IFRS book value of
non-banking debt net of the derivative asset of GBP33 million
(2016: GBP31 million) referred to above. Gross gearing of 7.4% is
calculated as the percentage of non-banking debt (GBP870 million)
over total Group equity plus non-banking debt (GBP11,817 million).
This has reduced since 31 December 2016, due largely to a decrease
in total debt arising principally from the sale of OMAM, the
repurchase and redemption of the plc GBP273 million Preferred
Perpetual Callable Securities, GBP389 million of Tier 2
subordinated 2025 securities and GBP159 million of nominal of Tier
2 subordinated 2021 securities. This has been partially offset by
the issue of R500 million of Subordinated securities by Old Mutual
Insure in November 2017. Net gearing reduces to 2.8% when taking
into account cash at the holding company.
Net sundry debtors / (creditors)
Net sundry debtors and creditors include both third party and
intercompany debtors and creditors that are not related to long
term funding. At 31 December 2017 net sundry debtors were GBP58
million (31 December 2006: GBP59 million creditor). The movement is
due mainly to the reduction in intercompany creditors in
preparation for the finalisation of managed separation.
Costs to resolve plc Head Office pre-existing items
At the 2016 Preliminary results announcement we estimated GBP130
million would be incurred to accelerate the resolution of
pre-existing Head Office items over the duration of the managed
separation. This estimate is subject to addressing any remaining
issues.
During the period, bulk annuity arrangements for two legacy
defined benefit schemes, the Old Mutual Staff Pension Fund and the
G&N Retirement Benefits Scheme, were agreed with Legal &
General Assurance Society Limited. The agreements resulted in the
full buy-out of the schemes into individual annuity policies in
October and wind-up of both schemes completed on 30 November 2017.
Old Mutual plc no longer has any liability in respect of these two
schemes, including administration and funding. Old Mutual plc had
previously been contributing GBP7 million of cash annually to fund
the two schemes.
In order to effect the transaction, Old Mutual plc made a
one-off contribution of GBP27 million into the two schemes. In
addition the IAS 19 surplus for the schemes of GBP24 million was
written off during the year and is recognised in the consolidated
statement of changes in equity.
Expenses of GBP20 million were incurred for the costs of
insuring and de-risking certain indemnities associated with
businesses previously owned by the Group. In addition cash of GBP12
million to fund contingent liabilities in the businesses, which was
held on deposit at the plc Head Office, was returned.
Costs of GBP7 million were incurred in disposing of the Group's
captive insurance entity which covered plc Head Office and
subsidiary companies.
Adjusted Net Asset Value
Adjusted Net Asset Value (ANAV) provides an alternative measure
to indicate the value of Old Mutual plc. The ANAV of Old Mutual plc
was GBP11,952 million at 31 December 2017 (31 December 2016:
GBP11,271 million), equivalent to 242.3 pence per share (31
December 2016: 228.6 pence per share). The increase in ANAV per
share largely reflects the OMEM covered business MCEV earnings
(12.8 pence) and the impact of the constant currency change in the
share price of Nedbank (5.6 pence), offset by the Old Mutual plc
cash dividends paid in the year (6.9 pence).
The ANAV uses an MCEV valuation basis for OMEM covered business
and the UK Heritage business in OMW as well as the market value of
listed subsidiaries and plc Head Office debt. Other businesses and
other assets are generally included at IFRS net asset value. A
reconciliation of the IFRS NAV to ANAV is provided in the tables
below:
Residual plc
NAV
------------------------------------- --------- -------- --------- ------------------------- --------- ---------
Old plc
Mutual Head OM
2017 (GBPm) OMEM Nedbank Wealth IAM Office Bermuda Other(2) Total
------------------------------------- --------- -------- --------- ---- -------- --------- --------- ---------
IFRS equity attributable to equity
holders of the parent 2,768 2,679 1,818(1) - 902 124 (163) 8,128
------------------------------------- --------- -------- --------- ---- -------- --------- --------- ---------
Life Fund investments in OM plc(3) 270 - - - - - 163 433
MV adjustments for listed businesses
and quoted debt(4) - 1,268 - - (15) - - 1,253
Uplift for excess shares held in
Trust, ESOP and BEE schemes(5) - - - - - - 86 86
Life Insurance - MCEV uplift(6) 1,921 - 146 - - - - 2,067
Other adjustments (16) - - - - 1 - (15)
Intercompany transfers(7) - - 566 - (566) - - -
------------------------------------- --------- -------- --------- ---- -------- --------- --------- ---------
Adjusted Group NAV attributable to
ordinary shareholders 4,943 3,947 2,530 - 321 125 86 11,952
------------------------------------- --------- -------- --------- ---- -------- --------- --------- ---------
Adjusted Group NAV per share (pence) 100.2 80.0 51.3 - 6.5 2.5 1.8 242.3
------------------------------------- --------- -------- --------- ---- -------- --------- --------- ---------
Residual plc
NAV
----------------------------- -------- ------------ ----------- ------------------------------ --------- -------
Old plc
2016 (GBPm) Re-presented Mutual Head OM
(2,8) OMEM(8) Nedbank Wealth(8) IAM Office Bermuda Other(2) Total
----------------------------- -------- ------------ ----------- ----- ------------ --------- --------- -------
IFRS equity attributable to
equity holders of the
parent 2,484 2,476 1,868 527 631 68 (145) 7,909
----------------------------- -------- ------------ ----------- ----- ------------ --------- --------- -------
Perpetual preferred callable
securities(9) - - - - (273) - - (273)
Life Fund investments in OM
plc(3) 258 - - - - - 145 403
Market value adjustments for
listed businesses and
quoted debt(4) - 1,151 158 (60) - - 1,249
Uplift for excess shares
held in Trust, ESOP and BEE
schemes(5) - - - - - - 101 101
Life Insurance - MCEV
uplift(6) 1,780 - 146 - - - - 1,926
Other adjustments (19) - - - - (25) - (44)
Intercompany transfers(7) - - 566 - (641) 75 - -
----------------------------- -------- ------------ ----------- ----- ------------ --------- --------- -------
Adjusted Group NAV
attributable to ordinary
shareholders 4,503 3,627 2,580 685 (343) 118 101 11,271
----------------------------- -------- ------------ ----------- ----- ------------ --------- --------- -------
Adjusted Group NAV per share
(pence) 91.3 73.6 52.3 13.9 (6.9) 2.4 2.0 228.6
----------------------------- -------- ------------ ----------- ----- ------------ --------- --------- -------
1 The Old Mutual Wealth IFRS equity of GBP1,818 million includes
goodwill of GBP663 million, held by Old Mutual plc and associated
with the Old Mutual Wealth business. This will cease to be
recognised on the de-merger of Old Mutual Wealth from the Old
Mutual plc Group.
2 Reduction to IFRS NAV of GBP163 million at 31 December 2017
and a corresponding restatement of GBP145 million at 31 December
2016, on identification in 2017 of Old Mutual plc shares held by
consolidated investment funds. These are treated as treasury shares
and eliminated on consolidation in IFRS.
3 Inclusion of group equity and debt instruments held in the
life funds (not included in IFRS equity).
4 Adjustment from IFRS to market value for listed subsidiaries
and listed debt.
5 An uplift related to excess Old Mutual plc shares held in
Trusts, ESOP and BEE schemes in OMEM which are eliminated on
consolidation in IFRS.
6 Remaining adjustment from an IFRS to MCEV basis for the Life
covered business.
7 Intercompany loan of GBP566 million provided to Old Mutual
Wealth to acquire Quilter Cheviot.
8 GBP29 million of net assets previously reported in the Old
Mutual Wealth segment have been re-presented within Emerging
Markets to reflect the transfer of management of Old Mutual Life
Assurance Company (South Africa) Limited offshore branches and
OMI-Guernsey to Emerging Markets.
9 Deduct the book value of the perpetual preferred callable
securities.
Capital management policy
In March 2016 we announced a new capital management policy for
the period of the managed separation. This policy has provided the
flexibility to balance the requirements of our multiple
stakeholders and our businesses as they prepare for managed
separation by enabling them to both continue to invest in order to
drive enhanced performance and strengthen their balance sheets in
preparation for being standalone businesses. In line with this
policy we have today announced a second interim dividend for the
second half of 2017 of 3.57p, the rand equivalent is 66.50 cents.
This will be paid on 30 April 2018. The total full year dividend
for 2017 is 7.10p (2016: 6.06p).
The 2017 second interim dividend will be the final dividend paid
by plc if the Managed Separation is delivered in line with our
expected timetable. The proposed future Capital Management Policy
of the independent Old Mutual Limited and Quilter businesses are
presented in their respective Business Reviews on pages 35 and
51.
The capital management policy is intended to remain in place
until Old Mutual plc shares are no longer listed.
Capital
Regulatory capital in accordance with Solvency II rules
The Group Solvency II surplus is GBP1.45 billion at 31 December
2017 (31 December 2016: GBP1.25 billion as reported to the
Prudential Regulation Authority (PRA)), representing a Solvency II
ratio of 123% (31 December 2016: 122%) calculated under the
standard formula.
The Group Solvency II ratio continues to be resilient as the
Group surplus excludes GBP1.6 billion of surplus from the South
African businesses (that remains available for local loss
absorption). The Solvency II information in this preliminary
results disclosure has not been audited.
Solvency
II
------------------------------------- --------------------------
Group regulatory capital (GBPbn) 31 December 31 December
2017(1) 2016(2)
------------------------------------- ------------ ------------
Own funds 7.67 6.84
Solvency capital requirements (SCR) 6.22 5.59
Solvency II surplus 1.45 1.25
------------------------------------- ------------ ------------
Group Solvency II ratio 123% 122%
------------------------------------- ------------ ------------
1 Based on preliminary estimates. Formal filing due to the PRA
by 29 March 2018.
2 As reported to the PRA as part of the Annual 2016 Solvency II
submission.
During the year the Group Solvency II ratio increased due to the
impact of corporate activity, in particular the sale of OM Wealth
Italy (+2pps), OMAM (+14pps) and Kotak (+3pps), and reduced due to
the redemption and repayment of qualifying debt during the year
(-13pps). Increased capital requirements in the South African
businesses and Old Mutual Wealth, including the impact of the
rating agency downgrade of South African sovereign debt during the
year reduced the Group Solvency II ratio. Other impacts were
largely offsetting and included the receipt of South African
remittances in lieu of the payments of the 2016 second interim
dividend and 2017 first interim dividend payments to UK
shareholders.
As we have previously guided, we will continue to manage the
Group regulatory capital position in line with our solvency risk
appetite, recognising that there is a trade-off to be considered
where we could accept the possibility of going below our early
warning threshold of 120% on a Solvency II basis as a result of
cash and capital demands arising from the plc wind down.
Composition of qualifying Solvency II capital
The Group own funds for Solvency II purposes reflect the
resources of the underlying businesses after excluding the
restricted surplus (mainly relating to the South African
businesses). The Group own funds include the Old Mutual plc issued
subordinated debt instruments that qualify as capital under
Solvency II. The composition of own funds by tier is presented in
the table below.
Old Mutual Group Solvency II own funds (GBPbn) 31 December 31 December
2017 2016(1)
------------------------------------------------ ------------ ------------
Tier 1(2) 7.3 5.7
Tier 2(3) 0.4 1.1
------------------------------------------------ ------------ ------------
Total Group Solvency II own funds 7.7 6.8
------------------------------------------------ ------------ ------------
1 As reported to the PRA as part of the Annual 2016 Solvency II
submission.
2 All Tier 1 capital is unrestricted for tiering purposes.
3 Comprises subordinated debt grandfathered under Solvency II
and, at 31 December 2016, Solvency II compliant subordinated
debt.
The Group SCR is covered by Tier 1 capital, which represents
117% of the Group SCR of GBP6.2 billion. Tier 1 capital represents
95% of Group Solvency II own funds. Tier 2 capital, comprising plc
holding company debt, represents 5% of Group Solvency II own funds
and 26% of Group surplus.
Solvency II capital in comparison to IFRS equity
The table below presents the reconciliation of differences
between IFRS equity net of NCI and Solvency II own funds (post
restriction).
IFRS compared to Solvency II own funds (GBPbn) 31 December 31 December
2017 2016
----------------------------------------------------------- ------------ ------------
IFRS equity attributable to equity holders of the parent 8.1 7.9
Removal of goodwill and other intangibles (net of NCI)(1) (2.2) (2.9)
Restatement of technical provisions(2) 2.7 2.6
Inclusion of Old Mutual plc subordinated debt(3) 0.4 1.1
Other(4) 0.3 (0.1)
Fungibility restriction(5) (1.6) (1.8)
----------------------------------------------------------- ------------ ------------
Total Group Solvency II own funds 7.7 6.8
----------------------------------------------------------- ------------ ------------
1 Goodwill and other intangibles are recognised under IFRS,
however, they are deemed inadmissible for regulatory purposes.
2 Solvency II uses a best estimate liability basis to measure
insurance liabilities which recognises future earnings within the
liabilities and results in an increase in own funds. This is
partially offset by the recognition of the risk margin which
replaces prudential margins allowed for in IFRS insurance
liabilities and deferred tax adjustments.
3 Old Mutual plc subordinated debt comprises Tier 2 debt
instruments in Old Mutual plc that qualify towards the Group's
Solvency II capital position.
4 Includes removal of IFRS deferred acquisition costs and
deferred revenue, sectoral adjustments for non-insurance entities,
out of scope entity adjustments and inclusion of OMEM subordinated
debt and Old Mutual plc shares held on behalf of policyholder
funds. At 31 December 2016 includes the de-recognition of the
Perpetual Preferred Callable Securities.
5 Restriction of Nedbank and OMEM's surplus when applying
Solvency II fungibility and transferability rules, restricting
entirely the surplus available from these businesses as a result of
the exchange controls and demutualisation agreement that apply to
remitting capital from South Africa, plus small amounts relating to
OMW and OMB. There has been a presentation change relating to the
OMW asset management entities at 31 December 2017, with the
previous fungibility restriction now incorporated in the SCR.
Solvency II sensitivities
The table below presents the estimated sensitivity of the Group
Solvency II ratio under certain standard financial stresses, which
are defined by reasonably possible individual movements in key
market parameters, while keeping all other parameters constant. The
effects impact both the own funds and capital requirements and
consequently the Group Solvency II ratio. In addition we have
included a non-financial stress assuming 10% of our insurance
business lapses immediately.
Group Solvency II capital ratio at 31 December 2017 (GBPbn) Capital Surplus Group Restricted
Requirements ratio surplus
------------------------------------------------------------- -------------- -------- ------- -----------
Base Solvency II position 6.2 1.5 123% 1.6
Equity markets fall by 25% 6.0 1.4 124% 1.4
Impact of 10% of business lapsing immediately(1) 6.0 1.4 123% 1.6
Interest rates rise by 100 basis points 6.2 1.4 123% 1.6
Credit spreads increase by 100 basis points 6.2 1.4 123% 1.5
ZAR:GBP exchange rate increases by 30% (R22:GBP1) 5.1 1.5 129% 1.3
ZAR:GBP exchange rate decreases by 10% (R15:GBP1) 6.8 1.5 121% 1.8
-------------------------------------------------------------- -------------- -------- ------- -----------
1 Insurance business lapse sensitivity for OMW and OMEM
only.
Solvency of individual businesses
Our individual businesses retain strong and resilient local
statutory cover and have sufficient capital to support normal
trading operations and withstand regulatory and internal stress
scenarios. The balance sheets, including action undertaken after 31
December 2017, will deliver appropriately capitalised standalone
businesses to the market. The individual entity balance sheets are
described in their respective Business Reviews.
Post year end transactions and development of Residual plc
The narrative within this section includes forward looking
estimates of the Residual plc and future potential developments of
other Group companies. These estimates are based on assumptions
regarding the steps employed for and timing of the managed
separation strategy which may change in the future. By their
nature, forward-looking estimates involve risk and uncertainty
because they relate to future events and circumstances which may be
beyond Old Mutual plc's control.
When we unveiled the managed separation strategy in March 2016,
we said that we aimed for it to be materially complete by the end
of 2018. We are on track to deliver the managed separation as
planned. These processes are, by their nature, unpredictable and
therefore the outcome and timing cannot be guaranteed.
On 13 March 2018, Old Mutual plc announced that The Travelers
Companies Inc. and St Pauls Fire and Marine Insurance Company have
lodged a claim in the United States District Court for the Southern
District of New York in relation to pre-existing plc Head Office
legacy items relating to previously disposed businesses.
The Group believes that this action is without merit and it will
be resisted accordingly.
Details of events after the reporting date are provided in Note
J8 of the Old Mutual plc Financial Statements.
Proforma 31 December 2017 Residual plc IFRS Net Asset Value
As part of the allocation of assets and liabilities of the
current Old Mutual plc holding company a number of transactions
have taken place since 31 December 2017.
On 31 January 2018 Old Mutual Wealth acquired the Skandia UK Ltd
group of entities from Old Mutual plc. As part of this transaction
GBP566 million of intercompany indebtedness between Old Mutual
Wealth and Old Mutual plc has been equitised.
On 28 February 2018, GBP200 million of intercompany indebtedness
between Old Mutual Wealth and Old Mutual plc was repaid from new
financing arrangements from Old Mutual Wealth. On the same date,
the existing GBP70 million revolving credit facility provided by
Old Mutual plc to Old Mutual Wealth was cancelled.
Outstanding Old Mutual plc Discount Notes held by Old Mutual
Bermuda at 31 December 2017 of GBP23 million ($31 million) were
cancelled on the 28 February 2018. In addition, cash of GBP44
million ($60 million) was repatriated from the business on the 7
March 2018 following approval from the Bermuda Monetary
Authority.
The table below illustrates the impact of these transactions on
the 31 December 2017 IFRS net asset value:
Acquisition
of Skandia
UK Ltd
by OMW Repayment
and equitizing of GBP200m Distribution Proforma
31 December i/co OMW intercompany of OM Bermuda 31 December
(GBPm) 2017 loan loan surplus 2017
----------------- ----------- --------------- ----------------- -------------- ------------
Cash 540 (11) 200 44 773
Seed investments 6 6
Net intercompany
funding 759 (582) (200) 23 -
Third party
debt (461) (461)
Net sundry
debtors 58 19 77
------------------- ----------- --------------- ----------------- -------------- ------------
Plc Head Office
NAV 902 (574) - 67 395
OM Bermuda 124 (67) 57
------------------- ----------- --------------- ----------------- -------------- ------------
Residual plc
NAV 1,026 (574) - - 452
------------------- ----------- --------------- ----------------- -------------- ------------
Impact of managed separation on Residual plc
As part of the managed separation it is proposed that certain
remaining operating subsidiaries of Old Mutual plc are transferred
to a new South African holding company of the group, Old Mutual
Limited. The steps implementing this transfer are anticipated to
include a court approved reduction in capital of Old Mutual plc
which will augment distributable reserves for Old Mutual plc. After
these steps Old Mutual plc will have no on-going businesses and
none of the operating companies in the current Old Mutual group
will be direct or indirect subsidiaries. Old Mutual plc will need
to satisfy the court that it will continue to hold sufficient high
quality liquid assets to meet its liabilities and deal with any
contingencies, plus adequate headroom, taking into account relevant
insurances. The assets within Old Mutual plc are expected to
largely consist of sterling denominated high quality fixed income
securities and cash or near cash instruments to match the maturity
profile of the debt obligations. The speed of release of any
surplus from Old Mutual plc is anticipated to be at the discretion
of the UK court in the context of the reduction of capital.
The separation of Quilter is expected to involve the listing and
the distribution of 86.6% of the total issued share capital of
Quilter to Old Mutual plc Shareholders, as well as the expected
divestment of up to 9.6% of its total issued share capital. The
remaining 3.8% of the total issued share capital of Quilter is held
by a JSOP Trustee and will continue to be held by a JSOP Trustee
after such distribution. The proceeds from the expected divestment,
or residual shares owned if any, would be retained within Residual
plc.
Future Development of Residual plc NAV
As part of the managed separation the Residual plc, which had an
IFRS net asset value of GBP452 million on a proforma basis at 31
December 2017, will become a subsidiary of Old Mutual Limited.
As at 31 December 2017 the Old Mutual plc holding company debt
obligations comprised two fixed interest debt instruments. The
first is a Tier 2 debt maturing in June 2021 paying a coupon of 8%,
with an IFRS book value of GBP400 million and nominal value of
GBP341 million. The coupon on the debt is circa GBP27 million per
annum on the current outstanding amount. The second is Tier 2 debt
maturing in November 2025 paying a coupon of 7.875%, with an IFRS
book value and nominal value of GBP61 million. The coupon on the
debt is circa GBP5 million per annum on the current outstanding
amount. On the adoption of IFRS 9, effective from 1 January 2018,
the Group has elected to designate this bond as Fair Value through
Profit and Loss.
We will continue to evaluate the merits of repurchasing and
redeeming outstanding Old Mutual plc debt, taking account of our
risk appetite, regulatory constraints and other stakeholders.
Old Mutual plc will continue to incur corporate costs in 2018
until the existing plc Head Office closes. Corporate costs before
recharges are estimated to be circa GBP50 million in 2018.
Significantly reduced recurring plc Head Office corporate costs are
anticipated beyond 2018, on the basis that the majority of plc Head
Office operations are expected to have ceased by December 2018.
The total one-off costs associated with the wind-down of the plc
Head Office are expected to be at the upper end of the GBP50
million to GBP65 million range that we originally estimated in the
2016 Preliminary Results announcement. At 31 December 2017 the plc
Head Office had incurred GBP39 million of these wind down costs. We
expect the majority of the remaining costs to be incurred in
2018.
Total one-off advisory costs are estimated to be at least GBP100
million, as communicated at the 2016 Preliminary Results. Total
costs incurred as at 31 December 2017 were GBP52 million. Of the
estimated GBP48 million still to be incurred, approximately GBP40
million will be incurred by the plc Head Office, largely during
2018.
In addition to the wind-down and advisory costs referred to
above, one-off transaction costs will be incurred by the plc Head
Office in relation to the managed separation. We estimate these
costs to be in the range of GBP15 million to GBP20 million,
excluding any additional costs associated with the intended
secondary offering of Quilter. Transaction costs will be deducted
from proceeds, where possible, in line with accounting policies and
past practices.
At the 2016 Preliminary Results announcement we estimated GBP130
million would be incurred to accelerate the resolution of
pre-existing Head Office items over the duration of the managed
separation. This estimate is subject to addressing any remaining
issues. As at 31 December 2017 GBP90 million had been incurred.
The obligations of OM Bermuda are running off, with the majority
of the policies underlying the reinsurance obligations due to
mature in the first half of 2018. The business will wind-up
activities during 2018 with the remittance of surplus to Old Mutual
plc, subject to the relevant regulatory approvals.
The second interim dividend of 3.57 pence per share will be paid
on 30 April 2018. The cost of this dividend will be GBP175 million,
of which circa GBP120 million will be funded from dividends
received from OMEM and Nedbank during 2018, net of our hedging
activities.
Performance measures
In line with statutory reporting requirements we report profits
assessed on an IFRS basis. Consistent with last year, we complement
IFRS reporting with additional disclosure on various alternative
performance measures (APMs).
APMs are not defined by the relevant financial reporting
framework (which for the Group is IFRS), but we use them to provide
greater insight to the financial performance, financial positions
and cash flows of the Group and the way it is managed.
Old Mutual plc
Summary information about the key APMs used by the consolidated
Group in our financial review is provided in the following
table.
APM Definition
------------------ ----------------------------------------------
Adjusted Operating AOP is a normalised profit measure
Profit (AOP) to reflect the underlying operating
profit of the Group. It therefore adjusts
IFRS profit for the impact of acquisitions
and disposals; short-term fluctuations
and IFRS accounting treatments that
do not fairly reflect the economics
of our operations. In addition, AOP
excludes the results of non-core operations.
The calculation of AOP adjusts the
IFRS profit for a number of items as
detailed in note C1 in the financial
statements.
Due to the nature of the Group's businesses,
AOP is an appropriate alternative basis
by which to assess the underlying operating
results. It enhances the comparability
and understanding of the financial
performance of the Group.
------------------ ----------------------------------------------
Adjusted Operating Adjusted Operating EPS is calculated
Earnings per as post-tax adjusted operating profit
Share (EPS) divided by the adjusted weighted average
number of shares (WANS) held by our
investors.
The calculation of Adjusted EPS is
detailed in note C2 in the financial
statements.
Adjusted Operating EPS is an indicator
of our profitability that measures
how much we earn for each share held.
------------------ ----------------------------------------------
Adjusted Return Adjusted ROE is calculated as AOP (post-tax
on Equity (ROE) and NCI) divided by average ordinary
shareholders' equity excluding the
perpetual preferred callable securities,
non-core operations and the decrease
in value of equity due to treasury
shares held within consolidated investment
funds.
It is a measure of the return generated
for shareholders over the reporting
period.
------------------ ----------------------------------------------
Adjusted Plc The ANAV uses a MCEV valuation basis
NAV per ordinary for OMEM covered business and the UK
share (ANAV) Heritage business in OMW as well as
the market value of listed subsidiaries
and plc Head Office debt. Other businesses
and other assets are generally included
at IFRS net asset value.
ANAV provides an alternative measure
to indicate the value of Old Mutual
plc.
------------------ ----------------------------------------------
Constant currency Constant currency figures are calculated
by translating local currency prior-period
figures at the prevailing exchange
rates for the period under review.
The exchange rates used to translate
the operating results, assets and liabilities
of key foreign business segments to
pounds sterling are provided in note
A1 in the financial statement.
This measure eliminates the effects
of exchange rate fluctuations when
calculating financial performance numbers
for various periods.
------------------ ----------------------------------------------
Old Mutual Emerging Markets
The following APMs are used by OMEM to provide greater insight
into the financial performance, financial position and cash flows
of the Group and the way it is managed. Metrics to be used by Old
Mutual Limited following the completion of the managed separation
are detailed in the OMEM business review.
APM Definition
------------------ -----------------------------------------------
Free surplus OMEM's free surplus generation provides
generation additional information on the cash generation
of the business that is available for
reinvestment or distribution to shareholders.
It is calculated in respect of covered
business using the free surplus component
of MCEV earnings and for non-covered
business as AOP post-tax and NCI adjusted
for short-term fluctuations in investment
return and movements in required capital
for Property and Casualty business.
------------------ -----------------------------------------------
Gross flows Gross cash flows received from customers
during the period by Group businesses
engaged in Life and Savings and Asset
Management.
------------------ -----------------------------------------------
Life APE sales The sum of new business recurring premiums
(annualised) and 10% of the new single
premiums written in an annual reporting
period. It is a standardised measure
of the volume of new life insurance
business written.
------------------ -----------------------------------------------
Net client The difference between gross flows and
cash flows cash returned to customers (e.g. claims,
(NCCF) surrenders, maturities) during the period.
------------------ -----------------------------------------------
Funds Under The total market value of funds managed
Management by OMEM at the point at which funds
flow into OMEM.
------------------ -----------------------------------------------
VNB The discounted value of expected future
profits arising from new life insurance
business sold in the reporting period.
------------------ -----------------------------------------------
VNB margin VNB divided by present value of new
business premiums ("PVNBP"), where PVNBP
is the discounted value of expected
future life insurance premiums from
new recurring premium business, plus
100% of new single premiums. It reflects
how much future profit is expected from
each future life insurance premium and
therefore measures the profitability
of new business sold.
------------------ -----------------------------------------------
Gross written The value of premiums that a property
premiums (GWP) and casualty insurer is entitled to
receive from its insurance business
in a period before adjustments for reinsurance
premiums. It is a measure of sales performance
in Group businesses engaged in Property
and Casualty
------------------ -----------------------------------------------
Underwriting Underwriting result as a percentage
margin of net premiums earned. It is calculated
for the property and casualty insurance
businesses across OMEM.
------------------ -----------------------------------------------
Loans and advances The balance of gross loans and advances
for Group businesses engaged in Banking
and Lending. The amounts are gross of
impairments on all performing, arrears
and default loans.
------------------ -----------------------------------------------
Net lending Net interest income plus non-interest
margin revenue minus credit losses, as a percentage
of average loans and advances over the
period
------------------ -----------------------------------------------
Nedbank
The key APMs used by Nedbank within their business review are
detailed below:
APM Definition
------------------ -------------------------------------------------------
Headline Earnings Headline Earnings is calculated with reference
per Share (HEPS) to Circular 2/2015 issued by the South
African Institute of Chartered Accountants.
Headline earnings is a way of dividing
the IFRS reported profit between re-measurements
that are more closely aligned to the operating/trading
activities of the entity, and the platform
used to create those results.
Headline Earnings is an earnings measure
that is required by the South African
listing authorities. It provides a basis
to compare South African listed peers.
------------------ -------------------------------------------------------
Efficiency Calculated as total expenses divided by
Ratio the sum of net interest income and non-interest
revenue.
The Efficiency Ratio measures the expense
efficiency of the business.
------------------ -------------------------------------------------------
Liquidity Coverage The Liquidity Coverage Ratio (LCR) aims
Ratio to ensure that a bank holds adequate unencumbered
High Quality Liquid Assets to cover total
net cash outflows over a 30-day period
under a prescribed stress scenario.
It provides a view of the short-term resilience
of the liquidity risk profile of banks.
------------------ -------------------------------------------------------
Economic Profit Calculated as headline earnings less the
cost of equity. The cost of equity is
calculated as the average ordinary shareholders
equity (excluding goodwill) multiplied
by the cost of equity.
It is a measure of the entity's ability
to generate earnings in excess of the
economic cost of the capital contributed.
------------------ -------------------------------------------------------
Detail on Nedbank's results and their APMs are available on the
website: www.nedbankgroup.co.za
Old Mutual Wealth
The key APMs used by Old Mutual Wealth within the financial
review are:
Normalised The difference between total income
operating profit and total operating costs. Excludes
pre-tax non-operational items, such as one-off
gains or losses from the sale of assets
or acquisition costs as per Operating
profit with additional normalisation
adjustments.
It is used to provide users of the
financial statements greater insight
into the long-term earning ability
of the OMW current business on a comparable
basis.
----------------- ----------------------------------------------
Revenue Margin Represents net management fee, including
policyholder tax divided by average
Assets under Management & Administration
(AUMA).
----------------- ----------------------------------------------
Operating margin Represents reported operating profit
from continuing operations divided
by total revenue, including policyholder
tax and adviser fees. Operating margin
excludes financing costs.
An efficiency measure that allows users
of our financial statements to assess
what percentage of net revenues that
become operating profit.
----------------- ----------------------------------------------
Net Client The difference between money received
Cash Flows from and returned to customers during
(NCCF) the relevant period for the Group (excluding
Quilter Life Assurance) or for the
business indicated.
This measure is a lead indicator of
reported net revenue.
----------------- ----------------------------------------------
Integrated Total NCCF that has flowed through
net inflows two or more segments within OMW.
It is a lead indicator of revenue generation
driven by an integrated business model.
----------------- ----------------------------------------------
Assets under Represents the total market value of
Management all financial assets managed and administered
& Administration on behalf of customers as at 31 December
(AUMA) of the financial year.
----------------- ----------------------------------------------
Average AuMA Represents the average total market
value of all financial assets managed
and administrated on behalf of customers
during the financial year ended 31
December. Average AuMA is calculated
using a 13-point average of monthly
closing AuMA.
----------------- ----------------------------------------------
Net Management Consists of revenue generated from
Fee AuMA, fixed fee revenues and policyholder
tax contributions, netted off by trail
commissions payable.
----------------- ----------------------------------------------
Other Revenue Represents revenue not directly linked
to AuMA (e.g. encashment charges, risk
result, adviser initial fees and adviser
fees linked to AuMA in Quilter Financial
Planning (recurring fees)).
----------------- ----------------------------------------------
Old Mutual Emerging Markets review
A resilient performance in a tough environment
I am very pleased with how well our business has performed
despite the tough economic and political environment. Consumer
spending in South Africa has been constrained by both modest
increases in disposable income and consumer efforts to address
their level of indebtedness. Further, business confidence was
dampened by the foreign and local currency credit rating downgrade
and political uncertainty.
Over the year, we focused on executing on our strategic
priorities and on the eight battlegrounds underpinning them to
drive sustainable profit growth and tight management of our
expenses. We are also re-engineering our businesses to meet
changing customer demands and develop new forms of
distribution.
We delivered pre-tax AOP of R13.3 billion, up 5% on the prior
year, following exceptional growth in Old Mutual Insure and our
Rest of Africa segment. IFRS profits (post-tax and non-controlling
interest) of R10.2 billion were up 46% due to profits arising from
the disposal of our joint venture with Kotak Mahindra Bank in India
of R1.4 billion and higher actual investment returns of R5.2
billion (2016: R2.4 billion) mainly in South Africa and Zimbabwe.
Zimbabwean equity markets remain volatile, having fallen by more
than 10% in the first two months of 2018.
The 2017 financial year was a tale of two halves for our
business, with good growth in gross flows in the Mass and
Foundation Cluster, Wealth and Investments and in Latin America
during the second half of 2017. We delivered full year NCCF of
R14.5 billion. Particularly pleasing was the Wealth and Investments
NCCF of R14.1 billion, compared to R1.8 billion at the half year.
This contributed to our funds under management closing at an
impressive R1.2 trillion.
Our business remains highly cash generative, with a robust
balance sheet and liquidity position, as well as a high quality
capital base. The estimated OMLAC(SA) SAM solvency ratio for 2017
was strong at 243%, subject to regulatory approval. We are
well-positioned in the right markets to drive added value from our
franchises, deliver sustainable profit growth and returns for our
shareholders as well as creating economic value for all our
stakeholders.
It has been a busy period as we prepare for the listing of Old
Mutual Limited (OML). As it relates to Nedbank, we have agreed the
heads of terms in the new relationship agreement with Nedbank,
which is expected to be finalised and executed in the coming weeks.
OML will be retaining a shareholding of 19.9% in its shareholder
funds, and it intends to distribute the remaining shareholding in
Nedbank to its future OML shareholders within approximately six
months of the listing. We also reached agreement with the Economic
Development Department regarding three critical public interest
issues: enterprise and supplier development, employment within our
ecosystem and BEE ownership.
Our Pre-Listing Statement will provide more information about
the OML Group, including its investment case, historic performance
and associated risks.
OML will be targeting compounded annual growth (CAGR) in our
Results from Operations of Nominal GDP + 2% over the three years to
2020 and a sustainable Return on Net Asset Value at our average
cost of equity (CoE) + 4%. To support this, we have also launched a
cost efficiency leadership programme designed to deliver R1.0
billion of pre-tax run-rate cost savings by the end of 2019, net of
costs to achieve this.
Exciting opportunities lie ahead for us as an independently
listed business and we look forward to contributing to the
societies in which we operate.
Peter Moyo
OMEM CEO, and OML CEO-designate March 2018
Key financial indicators 2017 2016 % change
(Rm) Restated
--------------------------- ------- ---------- ---------
IFRS profit (post-tax and
NCI)(1) 10,210 6,999 46%
AOP (pre-tax and NCI)(1) 13,326 12,731 5%
Adjusted Return on Equity
(%)(2) 20.6% 21.6% (1.0%)
Free surplus conversion
(%)(3) 74% 56% 18%
OMLAC(SA) SAM solvency
ratio (%)(4) 243% n/a -
--------------------------- ------- ---------- ---------
1 IFRS profit and AOP for 2016 were restated to include the
actual and long-term investment return (LTIR) on shareholder assets
above the capital requirement previously reflected in the Old
Mutual plc. The impacts on AOP and IFRS profit were R398 million
and R173 million respectively
2 Adjusted return on equity is AOP (post-tax and NCI) divided by
average IFRS shareholder equity
3 Free surplus conversion is free surplus generated divided by
AOP (post tax and NCI). Free surplus generated now reflects changes
in the capital requirements of non-insurance businesses as well as
fungibility considerations. Comparatives have therefore been
restated
4 Pro-forma at 31 December 2017. The Standard Formula allows
for, subject to regulatory approval, certain methodology elections
to be made. The estimated SAM solvency positions are presented on
the basis of the Group's preferred methodology which will, once the
SAM framework is implemented, be formally presented for Regulatory
approval. This is based on our current shareholding in Nedbank.
Strategic overview
Our vision is to become our customers' most trusted partner and
to help them reach their financial goals. This is underpinned by
our ambition to become a premium financial services group in
sub-Saharan Africa.
To deliver value in the medium term, our priorities are focused
on consolidating and growing our position in markets in which we
operate; improving key underperforming businesses; and building
long-term competitive advantage. These priorities are defined
through our eight battlegrounds:
- Defend South African market share in mass market and
corporate
- Defend and grow in the South African personal finance
market
- Improve the competitiveness of Wealth and Investments
- Continued turnaround of Old Mutual Insure
- Turnaround East African business and improve returns across
the Rest of Africa
- Win the war for talent
- Refresh the technology offering
- Cost efficiency leadership
OMEM operates through seven operational segments that
collaborate to serve our customers. We also manage a number of
central activities, assets and liabilities, collectively referred
to as "Other Group Activities".
We are well-positioned in key sub-Saharan African geographies
across multiple lines of business. Our business has an extensive
product and service offering delivered through our multi-channel
distribution network, with the largest reach compared to our
traditional South African peers.
Key business developments
We have commenced our journey in fundamentally shifting from
being a product-led business to becoming a customer-driven
organisation. To support this change, we have restructured our
leadership and reporting lines by ensuring that all customer-facing
managing directors form part of the Executive Committee. This has
sharpened our operational focus as we improve our customer service
and experience to meet their evolving needs.
The new operating model and fundamental multi-year
transformation of the finance function will commence with the
introduction of new cost, customer and capital allocation
methodologies from 2018. We believe that this will better reflect
the economics of each of the operational segments going forward.
However, year-on-year comparability of segmental performance in
2018 and 2019 will be affected, albeit with no impact on the
overall Group results.
We also announced the appointment of Casper Troskie as the
Finance Director of OMEM (and Finance Director-designate of OML)
effective 1 April 2018. His broad financial services expertise and
experience in the listed environment will be crucial to the
business as we prepare for the listing of OML.
During the year, a new Wealth & Investments segment was
established. This segment comprises Old Mutual Investment Group and
Old Mutual Wealth (South Africa), which previously formed part of
the Retail Affluent segment. Personal Finance, which was the other
part of Retail Affluent, is now managed as a standalone
segment.
We completed the sale of the 26% shareholding in Kotak Mahindra
Old Mutual Life Insurance in India, for net proceeds to Old Mutual
plc of circa.R2.4 billion (GBP138 million). We also completed the
transfer of the international branches of OMLAC(SA) that were
previously reported in Old Mutual Wealth (United Kingdom) to align
the reporting with the ownership structure.
We successfully completed our collaboration work with Nedbank to
unlock synergies in excess of R1.0 billion by the end of 2017. Of
this, circa.R0.6 billion accrued to OMEM, and we are fully
committed to working with Nedbank in delivering ongoing synergistic
benefits on an arm's length basis. Future synergies will be
underpinned by OML's 19.9% shareholding in Nedbank.
Performance highlights
OMEM delivered resilient earnings growth of 5% in pre-tax
adjusted operating profit (AOP) of R13,326 million. This result
reflects the momentum over the second half of the year as we
continued to make progress on our battlegrounds, despite the tough
macroeconomic environment.
Operating segments contributed R10,974 million to AOP, up 6% on
the prior year. This was driven by the significant improvement in
the underwriting result at Old Mutual Insure (up 290%) and growth
in the Rest of Africa (up 33%). We continued to allocate central
operating costs directly to the segments, such that only costs
incurred for the holding company would be reported centrally. This
resulted in R229 million being allocated directly to the segments.
Consequently, year-on-year segmental performance is not
comparable.
We delivered adjusted Return on Equity (RoE) of 20.6% compared
to 21.6% in the prior year. The decline largely reflects a 10%
increase in the IFRS shareholders' equity to R46.4 billion
following higher actual investment gains in South Africa and
Zimbabwe, and the profit on disposal of our 26% stake in Kotak.
This was partially offset by the higher income tax expense in the
current period. The OMEM AOP effective tax rate of 27.4% was
marginally higher than 26.4% in the prior year, mainly due to an
increase in non-deductible expenditure incurred. This contributed
to AOP (post-tax and NCI) of R9,199 million, which was 2% above the
prior year.
Cost efficiency leadership
We continue to focus our efforts on cost optimisation
initiatives across the business. A cost base review was undertaken
in the second half of 2017 in order to identify opportunities that
enable the business to run more efficiently. We are therefore
targeting pre-tax run-rate cost savings of R1.0 billion by the end
of 2019, net of costs to achieve this. This will be based on the
2017 underlying IFRS run-rate cost base, and adjusted for inflation
and foreign exchange movements over 2018 and 2019.
The 2017 underlying run-rate cost base of R18.4 billion, is
adjusted for one-off project costs (e.g. regulatory and
IFRS-related projects) and recurring standalone and listing costs.
Below is the reconciliation from underlying IFRS operating and
administrative expenses:
Rbn 2017
------------------------------------- ------
Underlying IFRS operating
and administrative
expenses(1) 18.8
One-off project costs
(e.g. regulatory, IFRS-related,
etc.) (0.3)
Incremental recurring
standalone and listing
costs (0.1)
Underlying IFRS operating
and administrative
expenses on a run-rate
basis 18.4
------------------------------------- ------
1 Refer to Note D9 of the OM plc Group Financial Statements for
further detail.
OMEM's underlying IFRS operating and administrative expenses of
R18.8 billion were up 4% on the prior year, below South African
inflation. The growth in expenses largely reflects higher operating
costs associated with the expansion of MFCs branch footprint and
higher remuneration costs in Old Mutual Insure off a low base in
the prior year. This was partially offset by the tight cost
management initiatives across the business.
As previously indicated, we expect to spend up to R100 million
per annum in incremental recurring listing costs and between R100
million and R180 million per annum on other incremental recurring
standalone costs. During the year, we incurred R142 million of
recurring standalone and listing costs, including corporate
insurance and costs associated with setting up capabilities for a
listed company that previously did not exist, such as Investor
Relations. The reported 2017 level of costs do not yet fully
reflect the run-rate of these costs.
Win the war for talent
Our people strategy is focused on attracting, developing and
retaining the best talent available in the market. Our commitment
to ensuring diversity and inclusion across the workplace is partly
evidenced through having the most transformed executive leadership
team in South Africa's insurance industry in terms of gender and
race.
Our efforts to establish OMEM as the employer of choice were
recognised by the Top Employers Institute. OMEM was awarded the
accolade of Number 1 Top Employer in South Africa and Ghana, and
the industry leader in financial services and insurance for the
seventh consecutive year in South Africa. Our businesses in all
thirteen countries in which we operate throughout sub-Saharan
Africa were also certified as a Top Employer.
Refresh the technology offering
We are continually investing in our technology platforms so as
to maintain the relevance of our customer propositions and to
continue to meet evolving customer's needs. The primary focus of
recent initiatives has been on building protection solutions in the
Mass and Foundation Cluster (MFC) and Personal Finance segments
which are expected to be activated during 2019.
To date R1.9 billion has been spent on these initiatives; the
incremental income statement expense has been in the region of R300
million per annum, and the remainder has been capitalised.
As this technology comes on line in 2019, the commencement of
depreciation charges, together with continued IT investment in
further enhancing customer value propositions and developing
digital and analytics capability, is expected to lead to an
increase in the incremental recurring income statement expense.
This will however be tightly managed consistent with our targeted
growth and RoNAV objectives.
Operating environment
Global markets continued on their recovery in 2017, with the US
Federal Reserve signalling its intention to tighten monetary policy
and a weakening of the US dollar. Emerging markets continued to
grow faster than developed markets despite economic and political
challenges.
In South Africa, political uncertainty throughout the year
contributed to weaker business and consumer confidence. In
November, Standard & Poor's downgraded South Africa's local
government bonds to sub-investment grade following the Medium-Term
Budget Policy Statement. However, the year ended on an optimistic
note following the election of a new ANC president at the December
elective conference.
Equity markets rallied in the second half of the year, having
been relatively flat in the first half, with the JSE SWIX closing
17.7% ahead of 2016 at 13,292. Average JSE SWIX market levels were
up 5.7% on the prior year. The rand closed the year 9.8% up against
the dollar at 12.39, while bond yields eased back to below 9.2%,
albeit above 8.5% before the medium-term budget review. In this
context, our customers remain under significant financial strain,
which has constrained our top-line growth.
In our other key markets, economic growth was also adversely
impacted by political instability. In Zimbabwe, this culminated in
a change in government with Robert Mugabe stepping down as
president. Following an increase in cash shortages, the Zimbabwe
Stock Exchange closed 130.4% ahead of the prior year as a result of
investors moving funds into the equity market as an investment
alternative. The current macroeconomic situation in Zimbabwe
continued to be fluid, and the market reaction remains volatile.
During the first two months of 2018, Zimbabwe's equity markets had
declined by more than 10% since the 2017 year-end position.
On 9 March 2018, the Zimbabwean Government published its report
on the inquiry into the loss in value for certain policyholders and
beneficiaries upon the conversion of pension and insurance benefits
after the dollarisation of the economy in 2009. This is subject to
review by the president and cabinet.
We are reviewing the full report and its recommendations, and we
remain committed to treating our customers fairly. We are preparing
a preliminary evaluation of the potential impact on our operations.
However we are not yet able to establish whether the commission's
findings will have any impact on Old Mutual Zimbabwe.
In Kenya, economic growth was impacted by the protracted
presidential elections and drought conditions. However, economic
growth in 2017 remained strong at 5.0%.
IFRS profit (post-tax)
Reconciliation
of AOP to IFRS 2016
(Rm) 2017 Restated % change
------------------------ ------- --------- --------
AOP (pre-tax
and NCI) 13,326 12,731 5%
Total adjusting
items 892 (2,855) 131%
------- ---------
Goodwill, intangible
and associate
charges (1,502) (1,504)
Profit on business
disposals 1,390 63
Short-term fluctuations
in investment
return 2,176 (550)
Returns on own
debt and equity (935) (864)
Managed separation
and standalone
costs (237) -
------- ---------
Income tax attributable
to policyholder
returns 1,391 1,005 38%
------------------------ ------- --------- --------
IFRS profit
(pre-tax and
NCI) 15,609 10,881 43%
Income tax expense (5,377) (4,133) (30%)
Non-controlling
interests (22) 251 (109%)
------------------------ ------- --------- --------
IFRS profit
attributable
to equity holders
after tax(1) 10,210 6,999 46%
------------------------ ------- --------- --------
1 IFRS profit for 2016 was restated to include R173 million of
the actual investment return on shareholder assets above the
capital requirement previously reflected in the Old Mutual plc.
IFRS profit after tax of R10,210 million increased by 46% from
R6,999 million in the prior year. Key adjusting items of AOP to
IFRS profit include positive short-term fluctuations on LTIR of
R2,176 million (2016: negative R550 million). These were largely
driven by the significant growth in Zimbabwe's equity markets which
resulted in positive short-term fluctuations of R1,815 million
(2016: R312 million).
Profit on business disposals of R1,390 million relates to the
disposal of our 26% stake in Kotak Mahindra Old Mutual Life
Insurance Limited, which completed in October 2017.
In line with previous guidance, we expect to incur total one-off
costs of up to R300 million in 2017 and 2018 to establish local
standalone capabilities. During the year, we incurred R211 million
of one-off standalone costs. Further, we incurred R26 million of
one-off advisory and transaction costs.
'Goodwill, intangible and associate charges' includes goodwill
impairments of R1.5 billion (2016: R1.3 billion) relating to East
Africa and AIVA within LatAm & Asia. In the first half of 2017,
a goodwill impairment of R1.2 billion was recognised relating to
UAP-Old Mutual Group in East Africa. This followed the
simplification of the operating structure of the Rest of Africa
portfolio and the consequential change in operating segment. This
resulted in a change in the cash generating units to which goodwill
is allocated to and monitored for valuation purposes. Further, a
goodwill impairment of R0.3 billion was recognised in the second
half of the year relating to the AIVA business in Uruguay, as a
result of the tough business environment and the exit by Old Mutual
Wealth (UK) from the single strategy business.
Segmental performance
Adjusted operating 2017 2016 %
profit (pre-tax, Restated change
Rm)
--------------------- ------- ---------- --------
Mass and Foundation
Cluster (MFC) 3,165 3,058 3%
Personal Finance 3,151 3,421 (8%)
Wealth and
Investments(1) 1,623 1,592 2%
Old Mutual
Corporate 1,576 1,403 12%
Old Mutual
Insure 312 80 290%
Rest of Africa 1,074 806 33%
LatAm and
Asia(2) 609 611 -
Central expenses
and administration
costs (536) (662) 19%
--------------------- ------- ---------- --------
AOP (pre-LTIR
and finance
costs) 10,974 10,309 6%
LTIR(3) 2,974 2,951 1%
Finance costs (622) (529) (18%)
--------------------- ------- ---------- --------
Total AOP
(pre-tax and
NCI) 13,326 12,731 5%
--------------------- ------- ---------- --------
1 From 2017, Wealth and Investments AOP includes Old Mutual
International AOP of R60 million, previously reported in Old Mutual
Wealth (UK). Comparatives have not been restated
2 LatAm & Asia AOP includes India profits of R181 million
(2016: R177 million). India was sold during the 2017 financial
year, and included in the results for nine months to 30 September
2017
3 LTIR on assets in excess of regulatory required capital is now
reported in OMEM, previously reported in Old Mutual plc.
Comparatives have been restated (2016: R398 million).
Mass and Foundation Cluster
MFC continues to retain its leading position in the South
African mass market. We remain focused on evolving our customer
value proposition by investing in growing the branch network,
enhancing Money Account (our transactional offering), and rolling
out ATMs, whilst we also improve the efficiency of the
channels.
AOP of R3,165 million was 3% up on the prior year primarily
driven by higher new business profits, better cost management and a
more favourable product mix towards risk business. This was partly
offset by lower net positive actuarial provision releases compared
to the prior year.
Old Mutual Finance (OMF) AOP of R828 million was up 3% on the
prior year. This was due to growth in loan sales supported by an
increase in the number of branches, and better collections
experience as a result of an improvement in the risk profile of the
loan book.
Life APE sales grew by 3% to R4,091 million, which contributed
to good NCCF of R6.1 billion, which was up 9%. This was driven by
the growth in risk sales from higher adviser manpower and better
productivity in the second half of the year. The branch network now
contributes 29% to total MFC life APE sales (2016: 28%). VNB of
R1,236 million was up 17% following pricing reviews on risk
business, which led to a VNB margin of 10.6% (2016: 9.4%).
MFC grew its branch footprint by 31 to 323 branches and rolled
out 22 pilot ATMs. Free Wi-Fi was rolled out to all branches
allowing customers access to data connectivity, which has increased
the level of activation for Money Account holders. The branch
network, which remains key to providing seamless customer
experience, continues to deliver better persistency experience and
higher productivity than other channels.
Loans and advances of R12.1 billion declined by 20%, following
the write-off of long outstanding loans deemed to have low
recoverability (net of balance sheet impairment provisions), in
line with management's decision to review the credit quality
assessment used for calculating provisions within OMF. This now
takes into account recent payment behaviour in preparation for IFRS
9 - Financial Instruments, effective for annual periods beginning
on or after 1 January 2018.
This was partly offset by the reclassification of loans where
payment behaviour had improved. This treatment is in line with the
principles of the SARB directive 7/2015 and has resulted in a net
positive AOP impact of R113 million. This further contributed to a
lower net lending margin of 16.2% compared to 16.6% in the prior
year.
We allocated R470 million in additional funeral cover to our
existing MFC customers, at no extra cost to them. This was the
remainder of the R624 million that we had set aside for customers
from our 2014 mortality reserve release, to be allocated over a
5-year period. The release followed consistent positive mortality
experience, mainly due to effective anti-retroviral roll-out by the
South African government. Accelerating the remaining allocation had
a R20 million cost impact on MFC's 2017 AOP, while improving the
value to customers.
Personal Finance
Personal Finance remains focused on strengthening its position
in the middle income market, and driving growth through
digitally-enabled and innovative customer propositions. In
particular, we are targeting the black middle income markets and
refocusing our adviser footprint towards the Gauteng region. We
also continued to invest in alternative distribution channels over
the current period to meet evolving customer needs.
AOP of R3,151 million declined by 8% relative to the prior year,
with the legacy book contributing circa.38% (2016: 20%). The
decline in AOP was due primarily to significantly lower net
positive provision releases compared to the prior year.
Life APE sales of R2,502 million were 4% behind the prior year
largely due to lower Greenlight and conventional annuity sales. VNB
grew significantly by 35% to R366 million. This was attributable to
the change in methodology relating to the allocation of
distribution costs to life products and the annual rate increases
in Greenlight. As a result, the VNB margin improved to 2.4% (2016:
1.7%).
Personal Finance's open book recorded positive NCCF of R6.6
billion, offset by net outflows of R(9.4) billion from the legacy
book. Total NCCF of R(2.8) billion was R0.3 billion better than the
prior year due to lower maturities and disinvestments than
experienced in the prior period.
We expanded our digital offering through the successful launch
of iWYZE life, a direct channel providing underwritten life cover.
We also increased the number of digital offerings that are
available on the Old Mutual website, such as funeral cover,
stockbroking and retirement annuities. This resulted in an
increased contribution from these alternative channels to Personal
Finance's life APE sales from 6% to 9% in 2017.
In response to the level of indebtedness of middle income
customers, we continued to develop our online financial education
tool, Moneyversity, which helps users make the most of their money.
We also launched Find-an-Adviser, which helps customers in finding
a nearby adviser that is best placed to meet their investment
needs, using their geo-location. As at the year-end, over 700
advisers had registered on the platform.
In collaboration with OMF, there was a significant increase in
the take up of Money Accounts and debt consolidations. We have also
started working with Corporate to offer Home Solutions to Personal
Finance customers, resulting in a wider range of the customers'
needs being met.
Wealth and Investments
Wealth and Investments continues to capitalise on its focus in
the asset management boutique model, in accelerating global
capabilities and margin, leveraging the OMSFIN proprietary risk and
investment capability, and building an African alternatives
mega-manager in the unlisted space. It also seeks to maximise its
market leading capabilities in future fit areas of passive, smart
beta, alternatives and liability driven investments. Core to the
strategy is to refocus on the retail Independent Financial Adviser
market, growing in the wealth market, and further enhancing Old
Mutual's presence in the high net worth market.
In the context of relatively flat markets in the first half of
2017, the segment recorded 2% growth in AOP to R1,623 million. The
growth was largely attributable to base fee income on higher assets
under management, positive investment returns in Alternatives, and
the first time inclusion of profits from Old Mutual International
of R60 million. This was partly offset by lower origination income
and deal flow activity in both the specialised finance and the
renewables businesses, as well as higher operating expenses in the
asset management business.
The strong growth in gross flows in the second half of 2017
contributed to the NCCF of R14.1 billion for the year, which was
significantly up from R1.8 billion in H1 2017. This was due to
strong inflows into Wealth (SA), the Liability Driven Investment
boutique and a large mandate into the Alternatives boutique in Q4
2017.
Assets under management (AuM) grew 17% to R736.6 billion,
supported by better market performance in the second half of 2017
and the first time inclusion of R39 billion previously reported in
OMAM, which was sold by Old Mutual plc during the year. Included in
Wealth and Investment's AuM is R340.4 billion of funds that are
managed on behalf of other OMEM group entities.
The asset management business recorded strong investment
performance in 2017. In our core retail range, seven out of our ten
funds were top quartile over one year, with the flagship retail
Balanced Fund now top quartile over one, three, and five years, and
all four of the core retail Multi-asset funds attained 4-star
Morningstar ratings. The multi-manager multi asset funds are top
quartile over one, three, five, seven and ten years. The asset
management business remains focused on achieving long-term
investment growth for its clients.
In January 2018, Khaya Gobodo was appointed as the Managing
Director of the Asset Management business. Khaya brings a broad
depth of investment experience in running an independent investment
boutique as well as his global investment experience and
perspectives on aligning asset management, platforms and
distribution in South Africa.
During the year, a major Flexcube platform upgrade was completed
on time and within budget, with no material disruptions to the
Wealth business. The upgrade resulted in significant improvement in
the administrative capability, which is necessary to enhance
adviser and customer experience.
Old Mutual Corporate
Corporate remains well-positioned to retain its position as
industry leader in South Africa as it improves customer and
intermediary experience, continues to innovate its offering and
delivers sustainable growth.
AOP of R1,576 million was 12% ahead of the prior year largely
due to growth in asset-based fees and improved investment
performance. Group risk underwriting experience deteriorated in the
second half of 2017, despite the price remediation and process
improvements that took place throughout the year. Management
continues to drive actions to deliver improved group risk
underwriting experience.
Life APE sales of R2,719 million were 10% down on prior year
mainly due to lower group risk assurance, retail platform and
annuity sales. VNB of R254 million was lower than the prior year as
a result of expense allocation changes and lower sales volumes. As
a result, the VNB margin declined by 80 bps to 1.0%.
Negative NCCF of R(7.1) billion, R10.8 billion lower than the
prior year, was driven by higher outflows which included a
significant non-life outflow during the fourth quarter, albeit at a
low margin.
During the year, we launched the SuperFund annuity, underpinned
by member education, advice and communication. We also launched the
Nucleus Index Fund range on SuperFund, an enhancement to the
passive investment offering to provide increased investment choice
to customers. Further, we successfully completed the Compass
upgrade, which will provide us with improved stability of our
administration platform.
Corporate continued to drive its collaboration initiatives with
the retail segments. We established adviser presence at 65
additional worksites during the year, whilst retail segments
acquired circa.23,000 customers through the corporate worksites.
This is a key lever in order to improve retention of benefits and
funds under management as well as to provide cross-sell
opportunities for the retail channels.
OM Insure (previously Mutual & Federal)
OM Insure's turnaround strategy has been focused on the
commercial business. The turnaround of the retail business has now
been completed and we have made considerable progress in restoring
the quality of the commercial lines book. This was achieved through
the strengthening of skills to support disciplined underwriting and
claims management. Significant progress has also been made to
deliver on the growth strategy in iWYZE.
As a result, we recorded exceptional growth in the underwriting
result of R312 million, a 290% improvement, in a year of
unprecedented catastrophe events. The underwriting margin of 3.7%
(2016: 0.9%), reflects favourable claims experience (net of
reinsurance) in the Commercial and Personal Lines businesses and
the growth in iWYZE, which delivered underwriting profit of R20
million (2016: loss of R39 million). We continue to target an
underwriting margin of 4% - 6% in the near term.
P&C gross written premiums (GWP) of R12,481 million were 3%
ahead of the prior year. The constrained growth was attributable to
stricter underwriting criteria, lower policy volume growth
following the continued remediation of loss making business, whilst
generating strong premium growth of 15% in iWYZE. Net earned
premiums of R8,409 million were down 2% against the prior year
primarily due to changes in the reinsurance agreements at Credit
Guarantee Insurance Corporation (CGIC) in 2017.
The business strengthened its senior management team following
several key appointments during the year, including Nokuthula
Manyoha as Finance Director, Franklin Sibanda as Rest of Africa
General Insurance Executive, and Thabile Nyaba as Chief Risk
Officer. Further, Old Mutual Insure completed the sale of a 25%
equity interest in CGIC, the specialist corporate credit insurer,
to Atradius.
Rest of Africa
Our Rest of Africa operations span 12 countries across three
regions. The SADC region remains the largest contributor to Rest of
Africa profits, where the business seeks to retain its leading
market positions while capitalising on pockets of growth.
In East Africa, encouraging progress has been made in the
P&C turnaround, whilst further work remains in respect of the
property portfolio to alleviate the impact on adjusted RoE. In West
Africa, we continue to pursue a capital light strategy leveraging
our bancassurance partnerships. However, delays in bancassurance
regulations in Nigeria have adversely impacted our growth
ambitions.
The Rest of Africa segment delivered AOP (pre-LTIR) of R1,074
million which was 33% above the prior year (up 38% in constant
currency). This excellent result was primarily driven by higher
profits in Zimbabwe, East Africa, and Malawi.
SADC
AOP (pre-LTIR) of R1,520 million grew 6% against the prior
period (up 14% in constant currency). This was driven by higher
asset based fee income in Zimbabwe due to equity market
performance, growth in Malawi's group life underwriting results, as
well as good investment contract profits in Namibia.
Gross flows of R17.3 billion were up 11% driven by good non-life
sales in Zimbabwe and Namibia, whilst Malawi recorded exceptional
growth in the group life sales of its corporate business, albeit
off a low base. NCCF of R1.0 billion, was adversely impacted by a
R3.3 billion outflow from the government pension fund in Namibia
due to regulatory rebalancing requirements.
The P&C underwriting margin of 7.2% (2016: 12.5%) declined
primarily as a result of higher weather-related claims in the
region and the impact of higher central cost allocations. P&C
GWP increased by 1% in constant currency to R1,361 million driven
by growth in new business in Zimbabwe, despite clients reducing the
sums they have insured in the current macroeconomic
environment.
Loans and advances of R9.2 billion, were up 23% in constant
currency, reflecting growth in the mortgage and business loans
books in CABS (Zimbabwe). OMF (Namibia) loans and advances of R0.6
billion were consolidated into the results the first time during
the year. The lending margin of 11% declined by 55bps and was
further impacted by the introduction of interest rate caps in
Zimbabwe.
East Africa
Whilst we reported a loss (pre-LTIR) of R61 million, this was a
significant improvement from a loss (pre-LTIR) of R167 million in
the prior year. It followed good mortality experience on the Group
Life Assurance book and an improvement in the underwriting
experience in the P&C business.
Occupancy levels in our property portfolio continue to be low
given the political environment in both Kenya and South Sudan.
Consequently, property income remains under pressure in these
markets. However, management is focused on initiatives to improve
the occupancy levels.
The P&C underwriting margin (excluding the impact central
cost allocations) improved 320 bps to 4.4% following the
remediation on loss-making business and better claims experience.
P&C GWP declined by 31% in constant currency to R2,145 million,
as a result of our decision to exit loss making accounts in the
health business and a loss of government schemes in Tanzania
following regulatory changes.
Life APE sales of R100 million were 14% below the prior year in
constant currency as a result of the non-renewal of a few corporate
schemes, a slowdown of sales due to reduced manpower and lower new
business during the election period in Kenya.
Faulu loans and advances of R2.1 billion declined by 6% in
constant currency, largely reflecting stricter lending criteria
following the introduction of interest rate caps in 2016. The net
lending margin improved marginally to 12.8% (2016: 12.6%) due to a
reduction in funding costs. During the year, a new Faulu core
banking platform was implemented which is expected to improve
business transactional capabilities.
West Africa
The reported AOP loss (pre-LTIR) of R182 million, was broadly in
line with the prior year. In Ghana, growth was driven by increased
sales volumes, better retention and new corporate business. This
was offset by higher reinsurance costs in the P&C business and
weaker life underwriting experience in Nigeria.
Life APE sales of R116 million were up 7% on the prior year
driven by better corporate sales in Nigeria and good new business
growth in Ghana.
LatAm and Asia
LatAm AOP of R469 million was 1% lower than the prior year. In
constant currency, AOP was up 6% largely driven by higher
investment returns in Colombia.
Despite the goodwill impairment in AIVA due to the overall
underperformance, AIVA is making good progress in its
transformation from regular premium business to private wealth
management and is already delivering good sales.
Life APE sales of R570 million were 5% above the prior year in
constant currency mainly due to higher Crea Patrimonio sales in
Colombia. Funds under management grew 7% to R126.6 billion during
the period.
NCCF of R24.9 billion was R15.3 billion higher than the prior
year due to a few large Private Wealth flows towards the end of the
year, and good Old Mutual Global Investors flows through AIVA.
These are eliminated at an OMEM level as they are reported by Old
Mutual Wealth (UK) at an Old Mutual plc Group level.
In China, our joint venture is focused on distributing higher
margin risk products, which have lower regulatory capital
requirements following regulatory changes. As a result, life APE
sales of R300 million declined by 50%. Negative NCCF of R(1.3)
billion, was R1.0 billion better than the prior year due to lower
surrenders from the Universal Life products.
Central expenses and Other Group Activities
Central expenses and administration costs of R536 million were
19% better than the prior year. This was largely driven by the
impact of the ongoing refinement of the expense allocation
methodology to segments, mainly impacting the life operations in
the retail and corporate segments.
LTIR of R2,974 million was up 1% on the prior year. Rest of
Africa LTIR of R996 million, up 17%, was driven by a higher
shareholder asset base following exceptional equity market
performance in Zimbabwe. This was offset by a 7% decline in
OMLAC(SA)'s LTIR to R1,573 million due to a reduced shareholder
asset base. This followed the alignment of the Statutory Valuation
Methodology for investment contracts to the IFRS basis.
Finance costs of R622 million were up 18% on the prior year.
This follows the higher overall interest rates experienced in South
Africa over the last twelve months, given OMLAC(SA) has both fixed
rate and floating rate bonds in issue. The sovereign downgrade of
South Africa's credit ratings by Standard & Poor's, which
occurred late in 2017, did not have a material impact on finance
costs.
Embedded Value
OMEM reported a slight improvement in the VNB margin to 3.3%
(2016: 3.2%), despite a 3% decline in life APE sales. VNB increased
by 4% to R2,256 million mainly as a result of a more profitable mix
of business and the pricing reviews of the Personal Finance and MFC
protection books.
Boosted by the strong VNB, the Return on Embedded Value remained
strong at 13.8%. MCEV operating earnings (post-tax) declined by 3%
on the prior year to R8,133 million, mainly due to the positive
one-off impact of the elective transfer of the South African
protection book to the new tax fund in South Africa in the prior
year.
Experience variances remained positive at R146 million driven by
expense and risk experience, albeit lower than R452 million in the
prior year. Expense profits reflect tighter expense management
across the business in response to the challenging economic
environment. Lower experience profits on the prior year were due to
adverse persistency experience driven by higher benefit payments in
Corporate, which is indicative of the financial strain currently
faced by these customers.
Investment returns were higher than expected, particularly in
Zimbabwe, following the significant increase in the equity market
levels. The steepening of the South African bond curve over the
period had a further positive impact on earnings.
Cash and capital
OMEM adopts a disciplined approach to capital allocation
decisions and manages risks within its financial management
framework and related risk appetite. We continue to be a highly
cash generative business, with high solvency and a strong,
well-diversified and resilient balance sheet that is able to
withstand a number of economic shocks.
Free surplus generation and utilisation
Free surplus generated represents the available cash, after
allowing for capital invested into the business.
As we prepare for the implementation of SAM, we have undertaken
a review of the methodology used in calculating the free surplus
generation. Below is a reconciliation of the free surplus
generated:
Free surplus % change
generation (Rbn) 2017 2016
--------------------- ----- ----- --------
OMEM free surplus
- as previously
calculated 8.9 6.3 41%
Capital requirements
of non-insurance
business and
other(1) (0.1) (0.4) (75)%
Fungibility
constraints (2.0) (0.9) (122)%
OMEM free surplus
- restated 6.8 5.0 36%
--------------------- ----- ----- --------
1 Other adjustments include the removal of Kotak and adjustments
relating to the shift from AOP to Adjusted Headline Earnings.
The OMEM free surplus generation calculation now reflects
changes in the capital requirements of non-insurance businesses as
well as fungibility considerations where there are constraints in
remitting profits to the holding company. Local free surplus
generated reflects the cash available prior to fungibility
considerations
During the year, OMEM generated free surplus of R6.8 billion
(2016: R5.0 billion), after any fungibility considerations. This
represents a conversion rate of 74% of post-tax AOP (2016: 56%).
This was largely attributable to higher investment returns
particularly in South Africa and the significant improvement in Old
Mutual Insure's underwriting result together with the lower capital
requirements from a reduction in net earned premiums.
Currently, fungibility constraints primarily impact our
Zimbabwean operations, where profits are retained and reinvested to
grow the local businesses. The increase reflects abnormally high
investment returns particularly in Zimbabwe during the year. Equity
market performance in Zimbabwe remains volatile and as such we do
not expect to sustain the current level of returns.
The mature life business in South Africa, which has
traditionally generated strong returns, is the main contributor to
the strong free surplus generation. OMEM currently reinvests
circa.25% of the free surplus generation into new business
initiatives, the majority of which relate to the life business in
South Africa. We see this as sound investment in a market where we
have continued to demonstrate good returns and robust VNB
margins.
During the 2017 financial year, OMEM remitted R2.7 billion of
the free surplus generated to its shareholder (2016: R4.7 billion).
The lower dividend compared to the prior year enabled the business
to further strengthen its liquidity and solvency position in
preparation for Solvency Assessment and Management (SAM) and
standalone capital requirements as well as the repayment of
intercompany debt.
As at 31 December 2017, there was R5.9 billion (2016: R9.7
billion) of outstanding intercompany indebtedness between
OMLAC(SA), Old Mutual Group Holdings (OMGH) and its subsidiary Old
Mutual Portfolio Holdings (OMPH). During the year, R3.8 billion of
this intercompany indebtedness was repaid to OMLAC(SA), funded
through greater cash retention as mentioned above.
We anticipate that the remaining intercompany indebtedness will
largely be repaid with the transfer of Nedbank shares to OMLAC(SA)
up to the desired shareholding of 19.9%. Any residual indebtedness
will be settled in cash.
OMLAC(SA) solvency position
OMEM discloses solvency capital under the current regulatory
capital rules (South African statutory valuation method). As at 31
December 2017, OMLAC(SA)'s capital coverage was 3.0 times (2016:
3.2 times). The decline in the OMLAC(SA) solvency position was
largely driven by the increase in statutory capital requirement as
a result of new business book growth and year-end assumption
changes relating to expenses and morbidity.
We have adopted the provisional SAM basis for how we manage
capital, which is expected to become effective in mid-2018, upon
the implementation of the Insurance Act. It will impose more
stringent regulatory requirements on both long-term and short-term
insurers, requiring them to maintain adequate solvency capital
based on risks faced on a day-to-day basis. Based on our preferred
methodology which will be formally presented for regulatory
approval once the SAM framework is implemented, the OMLAC(SA) SAM
solvency ratio for 2017 was estimated at 243%.
Debt as part of the capital structure
OMLAC(SA) has R3,475 million in fixed rate Tier 2 bonds and
R2,525 million in floating rate Tier 2 bonds. The fixed rate bonds
have first calls in 2019, 2020, 2022 and 2025, while the floating
rate bonds have first calls in 2019 and 2020. The Revolving Credit
Facility of R5,250 million was undrawn at the year-end. The
facility term runs until mid-2020, and we intend to negotiate a
roll-over of the facility leading up to the maturity date.
In November 2017, Old Mutual Insure issued a R500 million in
floating rate Tier 2 bonds, with a coupon rate of 9.157% (JIBAR +
2.09%). The first call date is 2022. The issuance will provide the
segment with an enhanced regulatory solvency position while also
producing economic benefits that will help the continued turnaround
of the segment.
Following Standard and Poor's rating action on the South Africa
local currency credit rating, effective 30 November 2017,
OMLAC(SA)'s Global Scale Rating was lowered to 'BB+ Stable' from
'BBB- Negative' and its long-term South African National Scale
Rating was lowered to 'zaAA+' from 'zaAAA'. Its short-term rating
was affirmed at 'zaA-1+' whilst its Issuer Credit Rating on the
Subordinated Deferrable Debt was lowered to 'zaA' from 'zaAA'.
Managed Separation update
We have made good progress to date on the managed separation
process and we remain on track for independence in 2018.
Since the appointment of Trevor Manuel as the Chairman of OMGH
(and Chairman-designate of OML), the governance structures above
senior management have been strengthened. The non-executive
membership of the reconstituted OMGH Board comprises nine directors
from the board of directors of OMEM and seven new non-executive
directors. This repositioning of the board has brought together
strong operational skills and listed financial services company
experience.
As a key step in the preparation for the listing of OML, we will
be publishing a Pre-Listing Statement. The Pre-Listing Statement
will include more detailed information in relation to the OML
Group, including its strengths, strategy and outlook. It will also
contain detailed risk factors and other key information relevant to
the business.
In line with our vision, and in accordance with our Responsible
Business principles, BEE ownership remains a priority as part of
our broader commitment to transformation. Under the Amended
Financial Services Charter (FSC), OMEM reported a Level 3 B-BBEE
contributor status and a reduced B-BBEE shareholding of 21.5% as at
31 December 2017, due to a change in the methodology used to
determine the value of the South African businesses. Subsequent to
the implementation of the Managed Separation, we anticipate an
increase in the effective B-BBEE shareholding (which will be
measured for the first time as at 31 December 2018), but may be
marginally below the current Amended FSC target of 25%. We will
have greater clarity on this once the OML Group's share register
has settled.
On 9 January 2018, we entered into a Framework Agreement with
the South African Economic Development Department in relation to
the South African aspects of the Managed Separation. Under this
agreement, we have committed to restore the B-BBEE shareholding, if
required, to at least 25% in 3 years from the listing date and to
be best in class when measured against comparable competitors
within 5 years (measured on the listing date). OML will consider
the form and extent of any appropriate B-BBEE transactions, should
they be required, to achieve these targets.
We have also undertaken to allocate an incremental amount of
R500 million to a ring-fenced Enterprise Supplier Development Fund.
It is envisaged that the fund will provide loan funding to small
enterprises on behalf of OML to promote enterprise and supplier
development, with the principal aim of creating additional jobs in
the OML ecosystem.
In January 2018, the Competition Tribunal in South Africa
approved the acquisition of Old Mutual plc by the newly
incorporated OML, subject to the commitments that OMGH has made in
the Framework Agreement.
Post the anticipated unbundling of Nedbank (within approximately
6 months of listing), the OML Group will principally consist of
OMEM and a 19.9% shareholding in Nedbank. The 19.9% shareholding
was determined through negotiations with Nedbank and discussions
with the South African Reserve Bank in order to provide stability
to the broader financial system and the Nedbank and OML investor
base during managed separation, whilst also supporting our ongoing
commercial arrangements.
OML is committed to being a significant holder of Nedbank while
retaining a right to review its precise holding as appropriate from
time to time, in accordance with the heads of terms outlined in the
new Nedbank Relationship Agreement, which is expected to be
finalised and executed in the coming weeks.
Other group activities of the OML Group will include the
positive net asset value Residual of Old Mutual plc, which largely
comprise the wind down of the plc Head Office and the remaining
operations in Bermuda that are expected to run off by mid-2018.
OML as a standalone business
This section summarises certain information on OML's operations,
including certain forward looking statements in relation to
operating performance expectations and targets. These should be
read in conjunction with all the information in the Pre-Listing
Statement when it is published.
Key financial 2017 2016 %
indicators Restated change
(Rm)
------------------- ------- ---------- --------
Adjusted Headline
Earnings 13,409 10,765 25%
Return on
Net Asset
Value (%) 22.3% 18.9% 3.4%
Free surplus
conversion
(%) 60% 57% 3%
SAM solvency
ratio (%)(1) 167% n/a -
------------------- ------- ---------- --------
1 Pro-forma at 31 December 2017. The Standard Formula allows
for, subject to regulatory approval, certain methodology elections
to be made. The estimated SAM solvency positions are presented on
the basis of the Group's preferred methodology which will, once the
SAM framework is implemented, be formally presented for regulatory
approval.
Pro-forma Adjusted Headline Earnings
Going forward, the OML Group's primary profit measure will be
Adjusted Headline Earnings. Results from Operations will be the
primary performance measure of the OML Group's operating segments,
which represents the segments' contribution to the OML Group's
results. Adjusted Headline Earnings excludes Residual plc and
discontinued operations.
Adjusted Headline Earnings is calculated as Headline Earnings as
defined by the SAICA Circular 2/2015 adjusted for items that are
not reflective of the economic performance of the OML Group.
"Results from Operations" is calculated as Adjusted Headline
Earnings before shareholder tax and minority interest, excluding
net investment return on shareholder assets.
Below is a reconciliation of AOP, Old Mutual plc's primary
profit measure, to Adjusted Headline Earnings, the future profit
measure:
Adjusted Headline
Earnings (Rm) 2017 2016 % change
------------------- ------- ------- --------
AOP (pre-LTIR
and finance
costs) 10,974 10,309 6%
Investment return
on insurance
funds 200 170 18%
Amortisation
of acquired
intangible assets
and acquisition
costs (221) (351) 37%
Impairment of
intangible and
fixed assets 23 67 (66%)
------------------- ------- ------- --------
Results from
Operations 10,976 10,195 8%
Shareholder
investment return 4,920 2,205 123%
Finance costs (622) (529) (18%)
Income from
associates (19.9%
of Nedbank) 2,346 2,282 3%
------------------- ------- ------- --------
Adjusted Headline
Earnings (pre-tax
and NCI) 17,620 14,153 24%
Shareholder
tax (3,723) (3,148) (18%)
Non-controlling
interest (488) (240) (103%)
------------------- ------- ------- --------
Adjusted Headline
Earnings 13,409 10,765 25%
------------------- ------- ------- --------
Investment return on insurance funds of R200 million (2016: R180
million), previously reported as part of LTIR, is now reported in
Old Mutual Insure's Results from Operations.
Amortisation of acquired intangible assets and acquisition costs
of R221 million (2016: R351 million) relates primarily to
intangibles following the acquisition of a controlling stake in OMF
in 2014 and African Infrastructure Investment Managers in 2016.
Shareholder investment returns are no longer smoothed. The
increase in actual investment returns was driven by both South
Africa and Zimbabwe's equity market performance as mentioned
earlier.
Detail on Nedbank's results is available on the website:
www.nedbankgroup.co.za
Below is a reconciliation of Adjusted Headline Earnings to
post-tax IFRS profit:
IFRS profit
(post tax and
NCI) (Rm) 2017 2016 % change
------------------------- ------- ------- --------
Adjusted Headline
Earnings 13,409 10,765 25%
Investment return
for Group equity
and debt instruments
in life funds (1,355) (864) (57%)
Impact of restructuring (54) 124 (144%)
Discontinued
operations 8,002 8,333 (4%)
Income from
associates (2,346) (2,282) (3%)
Residual plc (4,512) (3,062) (47%)
------------------------- ------- ------- --------
Headline earnings 13,144 13,014 1%
Impairment of
goodwill and
other intangibles (1,106) (1,783) 38%
Impairment of
investments
in associates 2,081 (557) 474%
Profit/(loss)
on disposal
of subsidiaries,
associated undertakings
and strategic
investments - 399 -
------------------------- ------- ------- --------
Profit after
tax for the
financial year
attributable
to ordinary
equity holders
of the parent 14,119 11,073 28%
Dividends on
preferred securities 253 278 (9%)
------------------------- ------- ------- --------
Profit after
tax for the
financial year
attributable
to equity holders
of the parent 14,372 11,351 27%
------------------------- ------- ------- --------
Investment return for Group equity and debt instruments in life
funds relates to investment returns on policyholder investments in
group equity and debt instruments held by the OML Group's life
funds.
Restructuring costs represents the elimination of material
non-recurring expenses, specifically related to business
restructuring costs such as Managed Separation costs, the costs or
income associated with completed acquisitions and the release of
acquisition date provisions. The 2016 financial year includes the
release of an acquisition reserve in MFC.
Consistent with our proposed 19.9% shareholding in Nedbank
following the anticipated unbundling of Nedbank, income from
associates reflects the proportionate headline earnings that would
have been earned from the investment in Nedbank. In accordance with
IFRS, the Nedbank shareholding of approximately 55% will be
classified as held for distribution.
Return on Net Asset Value (RoNAV)
The OML Group RoNAV is defined as Adjusted Headline Earnings
divided by average Adjusted IFRS equity. Adjusted IFRS Equity is
calculated as total Group equity attributable to ordinary equity
shareholders before adjustments related to consolidation of funds.
It excludes Residual plc and discontinued operations, and is
further adjusted to recognise the equity attributable to the
retained 19.9% shareholding in Nedbank. From the time of the
anticipated unbundling of Nedbank the equity attributable to
Nedbank will be adjusted to remove the one-off fair value
adjustment required under IFRS at the time of unbundling and the
same adjustment will be applied when calculating RoNAV on an
ongoing basis.
As a result, the pro-forma OML RoNAV was 22.3% (2016: 18.9%).
This was due primarily to higher actual investment returns in South
Africa with abnormally high growth in Zimbabwe, which contributed
to a 25% increase in Adjusted Headline Earnings and a corresponding
increase of 5% in average Adjusted IFRS equity over the period.
Capital management
The OML Group seeks to maintain a strong solvency and liquidity
position through disciplined management of capital resources and
risks. The backing of a financially sound group is important given
the security and peace of mind that it affords customers, advisors
and regulators.
Scenario analysis is undertaken regularly to ensure the
regulatory balance sheet could withstand severe and prolonged
periods of stress. Our solvency position remains resilient under
these stresses.
Solvency Assessment and Management (SAM)
The OML Group solvency position is calculated by aggregating the
results of the solvency calculations under SAM across the entities
that make up the Group. The estimated SAM solvency positions are
presented on the basis of the Group's preferred methodology which
will, once the SAM framework is implemented, be formally presented
for regulatory approval. This is based on our current Nedbank
shareholding.
The material South African insurance entities are aggregated
using the accounting consolidation approach which applies the SAM
Standard Formula, where capital requirements are calculated
assuming a 1-in-200 year event over a one year timeline, to the
consolidated balance sheet of these entities.
The remainder of the entities are aggregated using the deduction
and aggregation approach which sums the solvency position for each
entity after elimination of intercompany positions, with the basis
of inclusion depending on the nature of the entity:
- Other insurance businesses are included using the SAM Standard
Formula.
- Banks and other financial entities are included on a Basel III
basis.
- Other unregulated entities are included at their IFRS NAV.
In the OML Group calculation, the own funds in certain entities,
such as Zimbabwe, are restricted to the solvency capital
requirement of that entity (calculated on a SAM basis) due to
fungibility and transferability restrictions.
Currently, any benefit from Residual plc positive NAV is assumed
not to be fungible and therefore the surplus is excluded from the
SAM solvency ratio. Further detail on Old Mutual plc NAV is
provided in the Old Mutual plc Group Finance Director's report.
Based on the latest draft SAM prudential standards, it is
expected that the regulatory solvency will remain strong, with
appropriate capitalisation. As at 31 December 2017, the pro-forma
OML Group SAM solvency ratio is estimated to be 167%.
The lower 2017 solvency cover ratio at an OML Group level
compared to OMLAC(SA)'s regulatory SAM solvency ratio is mostly a
function of the elimination from OMLAC(SA)'s regulatory SAM
solvency ratio of the contribution made by Nedbank to OMLAC(SA)s
capital on a solo basis as it is included on a Basel III basis at
the OML Group level. In addition, banking and short term insurance
entities, in common with the industry tend to operate at lower
regulatory solvency levels compared to life insurers.
We expect the capital ratios to remain within their target
ranges under normal economic conditions for both OML and
OMLAC(SA).
OMLAC(SA) Insurance Business Solvency
In addition to the OMLAC(SA) SAM solvency ratio, the Group
manages the OMLAC(SA) Insurance Business solvency ratio to a target
range of 180% to 210%. This ratio excludes OMLAC(SA)'s holding in
strategic assets as the Group would not expect to rely on these to
support OMLAC(SA)'s solvency in stress conditions. Strategic assets
include the holding in Nedbank that will be retained after the
anticipated unbundling of Nedbank.
Free surplus generation
Below is a reconciliation of the free surplus generated for
OML:
Free surplus % change
generation (Rbn) 2017 2016
------------------ ---- ---- --------
OMEM free surplus
- restated 6.8 5.0 36%
Nedbank at 19.9% 1.2 1.2 -
------------------ ---- ---- --------
OML free surplus
generated 8.0 6.2 29%
------------------ ---- ---- --------
Nedbank's contribution to the free surplus generated is based on
the dividends received by the OML Group on its minority
shareholding. Nedbank's dividends represent approximately 50% of
its Headline Earnings. This also acts to reduce the reported
conversion rate of Adjusted Headline Earnings to free surplus
generation.
Based on the above, the pro-forma OML Group free surplus
generated was R8.0 billion (2016: R6.2 billion). This represents a
conversion rate of 60% of Adjusted Headline Earnings (2016:
57%).
Debt leverage/gearing
Based on pro-forma 2017 financial statements, the leverage of
the OML Group was 11.5% with interest cover of 29.3 times. These
ratios include only our subordinated debt. The subordinated debt is
expected to qualify, based on draft SAM provision, in contributing
towards the OML Group's solvency capital and is issued from
OMLAC(SA) at R6.0 billion, with a smaller quantum of R500 million
from Old Mutual Insure.
Senior debt held in our operating entities, debt raised by
Nedbank, and Residual plc debt are not included in the OML Group
leverage metrics.
We expect no more than GBP402 million of debt to be retained in
Residual plc. Further detail on Old Mutual plc debt is provided in
the Old Mutual plc Group Finance Director's report.
The OML Group also has a Revolving Credit Facility in place of
R5.25 billion which was undrawn as at 31 December 2017.
Overall, the current level of gearing on the OML balance sheet
is appropriate and we remain within our appetite under stress
testing.
Outlook for OML as a standalone business
The International Monetary Fund (IMF) expects global economic
growth to improve to 3.9% in 2018, with emerging markets and
developing economies growing by 4.9%. Sub-Saharan Africa is
expected to accelerate from 2.7% in 2017 to 3.3% in 2018.
In South Africa, economic growth estimates for 2018 have been
revised upwards to 1.4%, by the South African Reserve Bank.
Following the swearing in of Cyril Ramaphosa, the new President has
set out his intentions to restore confidence in the economy,
improving the fiscal situation, addressing corruption and reducing
the size of the cabinet. This was further reinforced by the
messages contained in the recent Budget Speech.
We therefore anticipate a boost in both business and consumer
confidence over the medium-term as the rand strengthens,
unemployment rates improve and the inflation rate remains within
the South African Reserve Bank target range of 3-6%.
In light of this, our targets for the OML Group are as
follows:
Returns
RoNAV of average cost of equity + 4%: OML will develop a 12
month weighted average CoE and referenced to where the capital is
allocated on a weighted basis. The COE will be published as part of
OML's public reporting cycle.
Growth
Results from Operations to grow at a CAGR of Nominal GDP + 2%
over the three years to 2020. Nominal GDP growth is defined with
reference to South Africa.
Cost efficiencies
R1.0 billion of pre-tax run-rate cost savings by end 2019, net
of costs to achieve this. This will be based on the 2017 IFRS
administrative cost base (as defined), and adjusted for inflation
and foreign exchange movements over 2018 and 2019.
Capital strength
- SAM solvency for OML: 155% - 175% post the anticipated
unbundling of Nedbank
- SAM solvency for OMLAC(SA): greater than 200%
- OMLAC(SA) Insurance Business solvency ratio: 180% - 210%
Dividend policy
We target full year ordinary dividends that are covered by
Adjusted Headline Earnings between 1.75 and 2.25 times. We target
an interim dividend at 40% of the current year interim Adjusted
Headline Earnings.
Any dividends will take into account OML's underlying local cash
generation, fungibility of earnings, targeted liquidity and
solvency levels, business strategy needs and market conditions at
the time. Dividends will be set using the full flexibility of the
range.
OML may, from time to time, distribute additional returns to
shareholders outside of the ordinary dividend cover, where it is
determined that there is excess permanent capital in the
business.
Current year trading
The OML Group's continuing operations have started the year on a
positive note. Results from operations have traded in line with
expectations since the 2017 year end.
Further, the recurring and one-off cost estimates in preparation
for listing remain unchanged from our previous guidance, with
incremental recurring standalone and listing costs reaching their
run-rate by the end of 2018, up to R280 million.
It is anticipated that the next trading update will be for the
first quarter of 2018, which is expected to be published in April
2018.
Nedbank review
A solid performance in a volatile and challenging domestic
environment
"Nedbank continued to create value for all our stakeholders in a
challenging political and economic environment. Our headline
earnings of R11.8 billion, up 2.8%, reflect a good performance from
our managed operations, with headline earnings growth of 7.8% and a
ROE (excluding goodwill) of 18.1%. Slower revenue growth was offset
by reduced impairments and good cost management, while our share of
the loss from our associate ETI following its Q4 2016 results
decreased in the second half of the year as the ETI business
returned to profitability.
"The achievements of the last few years have provided us with a
solid base and we continue delivering on our strategies and
building the capabilities that will enable us to meet the 2020
targets we have now set of an ROE (excluding goodwill) of greater
than or equal to 18% and an efficiency ratio of less than or equal
to 53%. We released exciting digital innovations such as the new
Nedbank Money app, the Nedbank Private Wealth app and Karri app,
chatbots and UNLOCKED.ME (an exclusive e-commerce marketplace for
millennials) and continued to gain share of transactional banking
clients in both our retail and wholesale businesses. We are
actively optimising our cost base, as reflected in cost growth at
5.1%, and maintained a strong balance sheet as evident in a CET1
ratio of 12.6%, above the top end of our internal target range. Our
strategic enablers are making a difference for our operations and
for our clients as we create a more agile, competitive and digital
Nedbank.
"Looking forward, 2018 started with positive changes to SA's
political and socioeconomic landscape and brought renewed prospects
for higher levels of inclusive growth. Nedbank is acutely aware of
the increased responsibility that we, and indeed all businesses,
have to work alongside government, labour and civil society to play
our part in improving the lives of all South Africans.
"Reflecting on the impact on the group of the greater levels of
business and consumer confidence evident in the early part of 2018,
an improving economic outlook, ongoing delivery on our strategy and
ETI's returning to sustained levels of profitability, our guidance
for growth in diluted headline earnings per share for 2018 is to be
in line with our medium-to-long-term target of greater than or
equal to GDP plus CPI plus 5%."
Nedbank highlights on a reported basis(1) 2017 2016 % change
---------------------------------------------------------------------------- ------- ------- ---------
IFRS profit after tax attributable to equity holders of the parent (Rm)(2) 6,411 5,617 14%
Reported AOP (pre-tax, Rm)(3) 16,522 15,925 4%
Headline earnings (Rm) 11,787 11,465 3%
Net interest income (Rm) 27,624 26,426 5%
Non-interest revenue (Rm) 24,063 23,503 2%
Net interest margin 3.62% 3.41%
Credit loss ratio 0.49% 0.68%
Efficiency ratio 58.6% 56.9%
Return on equity 15.3% 15.3%
Return on equity (excluding goodwill) 16.4% 16.5%
Common equity tier 1 ratio 12.6% 12.1%
---------------------------------------------------------------------------- ------- ------- ---------
1 As reported by Nedbank
2 IFRS profit after tax attributable to equity holders of Old
Mutual plc
3 As reported by Old Mutual Group.
Banking and economic environment
Economic growth in developed markets improved, despite ongoing
geopolitical tensions, supported by accommodative monetary policies
and stronger manufacturing production, and reinforced by increased
global trade. Emerging and developing economies also improved as a
consequence of better-than-expected growth in China and higher
global commodity prices. Emerging-market equity and bond markets
benefited from increased capital inflows as global investors search
for higher yields.
SA's slow economic recovery continued into the second half of
the year, with 2017 GDP growth estimated at 0.9%, driven mainly by
a recovery in agricultural production following good summer
rainfall and some improvement in mining production in response to
stronger global demand and firmer international commodity prices. A
revival in consumer spending added further momentum in the second
half of 2017 as households benefited from lower inflation and the
marginal reduction in interest rates in July. Despite this recovery
and reflective of weak business and consumer confidence, business
volumes in 2017 were generally lower than in the prior year, as
evident in client loan applications across multiple products and in
slower client trading activity.
The pace of economic activity picked up moderately in
sub-Saharan Africa, with agricultural and mining output recovering
on the upturn in global demand and international commodity prices,
and the prolonged El Niño-induced drought finally broke in many
countries. According to the International Monetary Fund (IMF),
sub-Saharan Africa is expected to record GDP growth of 2.6% in
2017.
Domestic inflation averaged 5.3% in 2017, significantly lower
than the 6.4% recorded in 2016, brought about mainly by sharply
lower food inflation given the strong summer harvest. Relatively
moderate and selective consumer demand coupled with a resilient
rand also helped contain price pressures during the course of the
year. After a year of volatile trade the rand ended 2017 2.5%
stronger against the trade-weighted basket of currencies. The
largest gains occurred near year-end as sentiment surged following
the election of Mr Cyril Ramaphosa as the new leader of the ruling
ANC in mid-December on expectations of a change in the country's
leadership, improved governance and structural reforms that are
likely to support investment and higher levels of inclusive
growth.
After cutting the repo rate by 25 bps to 6.75% in July, SARB's
Monetary Policy Committee left interest rates unchanged at both the
September and November 2017 policy meetings. The central bank's
more cautious approach was driven by concerns over the upside risk
that the rand posed to the inflation outlook at that time. Fears
mounted that SA's rand-denominated sovereign debt ratings could be
downgraded to sub-investment grade by all three major rating
agencies, given the escalation in political uncertainty and the
sharp deterioration in the country's fiscal position, as set out in
the Medium Term Budget Policy Statement.
In November 2017 Fitch affirmed the country's BB+ rating with a
stable outlook (one notch below investment grade). Moody's placed
SA's Baa3 foreign and local currency ratings on review for
downgrade, with the decision to follow the 2018 National Budget in
February. However, S&P Global downgraded SA's local currency
rating to BB+ (one notch below investment grade) and our foreign
currency rating to BB (two notches below investment grade), while
changing the rating outlook to stable. All three rating agencies
highlighted similar concerns, including weaker-than-expected public
finances, weak economic growth, ineffective government spending and
policies as well as the paralysing impact of political infighting
and poor governance.
Review of results
Nedbank produced a solid performance in a domestic macro and
political environment that has proved volatile and challenging.
Headline earnings, including losses in associate income from ETI of
R744 million, increased 2.8% to R11,787 million. This translated
into an increase in DHEPS of 2.4% to 2,406 cents and an increase in
HEPS of 2.2% to 2,452 cents. As in prior periods, we highlight our
results both including and excluding ETI (referred to as managed
operations) to provide a better understanding of the operational
performance of the business given the volatility in ETI's results
in 2016 and 2017. However, we will revert to group-level reporting
in 2019. Our managed operations produced headline earnings growth
of 7.8% to R12,762 million, with slower-than-expected revenue
growth more than offset by reduced impairments and good cost
management.
ROE (excluding goodwill) and ROE remained flat at 16.4% and
15.3% respectively. ROE (excluding goodwill) in managed operations
also remained stable at 18.1%. ROA decreased 0.01% to 1.22% and,
excluding ETI, ROA in managed operations improved from 1.29% to
1.33%. Return on RWA increased from 2.23% to 2.30%.
Our CET1 and tier 1 capital ratios of 12.6% and 13.4%
respectively, average LCR for the fourth quarter of 116.2% and an
NSFR of above 100%, are all Basel III-compliant and are a
reflection of a strong balance sheet. On the back of solid earnings
growth in managed operations and a strong capital position, a final
dividend of 675 cents was declared, an increase of 7.1%. The total
dividend per share increased 7.1% to 1,285 cents.
Cluster financial performance
Nedbank's managed operations generated headline earnings growth
of 7.8% to R12,762 million and delivered an ROE (excluding
goodwill) of 18.1%. CIB and Wealth were impacted the most by the
challenging operating environment, RBB made a strong earnings
contribution and RoA subsidiaries delivered an improved performance
off a low base.
CIB maintained an attractive ROE of above 20% and produced solid
results, driven by lower credit losses and good expense management.
Revenue lines were affected by slowing economic activity as clients
postponed projects and borrowed and transacted less. Early
repayments and managed settlements, together with slower drawdowns
resulted in weaker advances growth, although the pipelines remained
stable. Credit quality remained strong through proactive risk
management as we continued to monitor stressed sectors of the
economy, such as certain areas in retail and certain state-owned
enterprises, closely.
RBB delivered an improved ROE and good headline earnings growth,
underpinned by solid transactional NIR growth, lower impairments
and expense growth, and achieved PPOP growth of 4.0%. NII was
underpinned by solid growth in advances and strong growth in
deposits, offset by a lower NIM due in part to the impact of
prime-JIBAR squeeze. Lower expense growth reflects the initial
impact of optimising processes and operations, including headcount
reductions.
Nedbank Wealth maintained an attractive ROE, although headline
earnings were impacted by subdued markets and negative investor
sentiment, further compounded by entropic weather conditions and
the strengthening rand, as well the once-off profit from the sale
of our Visa share in the 2016 base.
RoA headline earnings were negatively impacted by the
fourth-quarter 2016 ETI associate loss accounted for quarterly in
arrear. The loss was reported on in our interim results and was
followed by subsequent quarterly profits from ETI up to 30
September 2017. Our subsidiaries grew headline earnings off a low
base, supported by the consolidation of Banco Único (included for
three months in 2016), notwithstanding continued investment in
infrastructure, systems and skills.
The improvement in the Centre was largely due to the R350
million release from the central provision, of which R150 million
was in the first half of the year, and fair-value gains on certain
hedging portfolios.
Financial performance
Net interest income
NII increased 4.5% to R27,624 million, ahead of average
interest-earning banking asset growth of 2.2% (adjusted for the
removal of the liquid-asset portfolio).
NIM expansion of 8 bps to 3.62% (2016: 3.54% rebased) was
largely driven by an endowment benefit of 5 bps and improved asset
mix changes of 8 bps. Asset pricing pressure, in part due to the
NCA interest rate caps, the narrowing of the prime-JIBAR spread and
the increased cost associated with enhancing the funding profile
each reduced NIM by 2 bps.
Impairments charge on loans and advances
Impairments decreased by 27.5% to R3,304 million. The CLR
declined by 0.19% to 0.49%, driven by lower specific impairments
mostly from resolutions and settlements in CIB. The decrease in
impairments reflects the quality of the portfolio across all our
businesses and we have specific coverage ratios levels of
36.2%.
Impairments in CIB declined by 82.4% to R193 million, driven by
lower specific impairments relating largely to resolutions of
historic client matters. Impairments are individually determined in
CIB and 84% of impairments are concentrated in approximately 10
counters. RBB impairments declined by 1.2% to R3.2 billion as a
result of ongoing lower risk origination strategies and an
improvement in collections. The decrease in unsecured lending and
home loan CLRs reflects the benefits of historic selective
origination improving the quality of the book over time and the
release of additional impairment overlays previously raised for
risks and events that did not materialise. Continued proactive
collection and resolution strategies within CIB and RBB contributed
to group write-offs decreasing 6.0% to R4,675 million and post
write-off recoveries increasing 5.8% to R1,224 million.
The group's central provision decreased to R150 million (from
R500 million at 31 December 2016 and R350 million in June 2017) as
a result of risks that had previously been identified but had not
materialised. The balance is retained for prudency in a volatile
macroeconomic environment. Excluding the central provision release,
the group CLR would have been 0.54%.
All business units successfully applied selective origination
strategies that enabled an overall de-risking of the advances
portfolio, leading to defaulted advances remaining flat at R19.6
billion. Lower defaulted advances in CIB resulting from positive
client resolutions were offset by increased defaulted advances in
RBB.
The decrease in specific coverage from 37.4% to 36.2% was
primarily due to lower specific coverage in RBB as well as
increased resolutions of various client issues in CIB resulting in
lower specific impairments. The lower coverage reflects increased
performing defaults in RBB and the recovery success in CIB. Nedbank
considers the coverage ratios appropriate given the higher
proportion of wholesale lending, compared with the mix of its
peers, high recovery rates and the collateralised nature of the
commercial-mortgages portfolio, with low loan-to-value ratios.
Portfolio coverage increased marginally from 0.69% to 0.70%,
reflecting the offsetting effects of higher portfolio impairments
due to stronger advances growth in RBB and the reduction of the
central provision and RBB overlays.
Non-interest revenue
NIR growth of 2.4% to R24,063 million reflects the impact of
weak business and consumer confidence levels.
Commission and fee income grew 4.0% to R17,355 million. RBB
reported good transactional NIR growth of 6.0%, notwithstanding an
increasing number of clients who are transacting within fixed-rate
bundles and spending less. CIB experienced lower corporate activity
off a high base the previous year.
Insurance income decreased 9.3% to R1,566 million as a result of
an abnormal number of significant weather-related claims, lower
homeowner's cover and credit life volumes, and an increase in
lapses.
Trading income increased 3.7% to R3,900 million, given muted
activity levels among wholesale clients, particularly in the second
half of the year, and avoidance of the potential negative impacts
in markets around event risks such as political changes and credit
rating downgrades.
Private-equity income, including positive realisations in the
Commercial Property Finance portfolio, decreased 23.7% to R708
million, given the high base in the comparative period.
Expenses
Expense growth of 5.1% to R29,812 million was below inflation
and in line with the guidance we provided for the full 2017 year
(being growth of mid-single digits), demonstrating disciplined and
careful management of discretionary expenses in an environment of
slower revenue growth. The underlying movements included:
- Staff-related costs increasing at a slower rate of 6.5%,
following:
-- an average annual salary increase of 6.5% and a 859 reduction
in staff numbers since December 2016; and
-- a 0.1% decrease in short-term incentives.
- Computer-processing costs increasing 3.8% to R4,201 million
off a higher base the previous year.
- Fees and insurance costs being 7.8% higher at R3,277 million,
due mostly to additional regulatory-related costs.
The group's growth in expenses exceeded total revenue growth
(including associate loss) of 2.1% (3.2% in managed operations),
resulting in a negative JAWS ratio of 3.0% and an efficiency ratio
of 58.6%, compared with 56.9% in 2016. Excluding associate income,
our efficiency ratio was 57.8%. Expense growth, excluding RoA where
we continued to invest in distribution, technology and new-product
rollouts, was 4.3%.
Earnings from associates
The loss of R838 million in earnings from associates was
attributed largely to ETI's loss of R1,203 million in the fourth
quarter of 2016 (announced on 18 April 2017), partly offset by the
profit of R459 million reported by ETI for the nine months to 30
September 2017, in line with our policy of accounting for ETI
earnings a quarter in arrear. The total effect of ETI on the
group's headline earnings was a loss of R975 million, including the
R321 million impact of funding costs.
Accounting for this associate loss, together with Nedbank's
share of ETI's other comprehensive income and movements in
Nedbank's foreign currency translation reserves, resulted in the
carrying value of the group's strategic investment in ETI declining
from R4.0 billion at 31 December 2016 to R3.3 billion at 31
December 2017. Since the introduction of the new foreign exchange
regime by the Central Bank of Nigeria on 21 April 2017, confidence
has improved and the Nigerian banking index has increased by 73%.
In line with this ETI's quoted share price - albeit illiquid -
increased by 65% during 2017 which resulted in the market value of
the group's investment in ETI increasing during the year to R3.6
billion at 31 December 2017 and R4.1 billion at 28 February 2018.
While risks remain, the actions taken to improve ETI's financial
position and governance, along with an improving macroeconomic
environment, is expected to drive an improved financial performance
from ETI in 2018.
As required by IFRS, the R1 billion impairment provision
recognised at 31 December 2016 was reviewed at 31 December 2017 and
it was determined that currently no change to the provision was
required.
A R96 million associate loss was incurred due to operational
losses in an associate, which is the cash-processing supplier to
the four large banks.
Statement of financial position
Capital
The group continued to strengthen its capital position, with our
CET1 ratio of 12.6% now above the top end of our internal target
range of 10.5-12.5%, following organic capital generation through
earnings growth, lower asset growth and some RWA optimisation.
In the current environment of slower advances growth, capital
generation has been stronger following lower credit RWA growth and
continued refinement of Basel models. This was partially offset by
the impact of the rand strengthening at the back end of 2017, which
adversely impacted foreign currency translation reserves and led to
higher credit valuation adjustment RWA. Higher levels of equity
exposure resulted in increased equity RWA. As a result overall RWA
increased 3.7% to R528.2 billion.
The group's tier 1 ratio improved to 13.4% and includes the
issuance of R600 million of new-style additional tier 1 capital
instruments during the year, offsetting the progressive
grandfathering of old-style perpetual preference shares as we
transition towards end-state Basel III requirements. The group's
total capital ratio has improved to 15.5% and includes the issuance
of R2.5 billion of new-style tier 2 capital instruments during the
year, partially offsetting the redemption of R3.0 billion in
old-style tier 2 capital instruments.
Funding and liquidity
Optimising our funding profile and maintaining a strong
liquidity position remain a priority for the group, especially in
the current environment.
The group's three-month average long-term funding ratio was
27.0% for the fourth quarter of 2017, supported by growth in
Nedbank Retail Savings Bonds of R5.7 billion to R24.9 billion and
the successful capital market issuances of R3.5 billion senior
unsecured debt, R2.5 billion new-style tier 2 debt and R1.0 billion
in securitisation notes.
The group's quarterly average LCR of 116.2% exceeded the minimum
regulatory requirement of 80% in 2017 and 90% effective from 1
January 2018. The group maintains appropriate operational buffers
designed to absorb seasonal and cyclical volatility in the LCR.
Further details on the LCR are available in the table section of
the Securities Exchange News Service (SENS) announcement.
Nedbank's portfolio of LCR-compliant HQLA increased by 0.6% to a
quarterly average of R138.2 billion. Notwithstanding the low growth
in HQLA, the LCR still increased year-on-year as a result of a
decrease in LCR net cash outflows attributable to a positive tilt
in our deposit mix towards proportionally more Basel III-friendly
deposits in the form of RBB and Wealth deposits together with
market share gains in commercial deposits. The HQLA portfolio,
taken together with our portfolio of other sources of
quick-liquidity, resulted in total available sources of quick
liquidity of R195.4 billion, representing 19.9% of total
assets.
Nedbank has maintained the NSFR at above 100% on a pro forma
basis and is compliant with the minimum regulatory requirements
that are effective from 1 January 2018.
Loans and advances
Loans and advances increased by 0.5% to R710.3 billion, driven
by solid growth in RBB offset by a decline in term and other loans
in CIB.
RBB loans and advances grew 5.3% to R305.2 billion, with MFC
(vehicle finance) increasing by 8.6% as new-business volumes
improved despite the contracting vehicle sales market. RBB's growth
was achieved across all asset classes by increasing the
contribution from lower-risk clients in line with risk appetite and
prudent origination strategies. We take comfort in the quality and
overall performance of the unsecured-lending portfolio based on the
conservative rules we apply to consolidation, restructuring and
term strategies. Home loans grew at below-inflation levels, but
market share was maintained.
CIB loans and advances decreased 3.8% to R356.0 billion due to a
combination of unexpected early repayments and managed sell-downs,
which allowed for the diversification of risk. Demand for new loans
was weak as a result of muted client capital expenditure in a
competitive market in the subdued economic climate.
Commercial-mortgage loans and advances grew by 6.5% to R161.6
billion, maintaining our leading share of the SA market. The
portfolio contains good-quality collateralised assets with low
LTVs, underpinned by a large secure asset pool and a strong client
base, and is managed by a highly experienced property finance
team.
Deposits
Deposits grew 1.3% to R771.6 billion, with total funding-related
liabilities increasing 1.2% to R823.2 billion, while the
loan-to-deposit ratio improved to 92.1%.
Through the active management of the RBB franchise, deposits
grew 8.5% to R295.3 billion, resulting in household deposits market
share gains increasing year-on-year to 18.9% from 18.7%, supported
by Nedbank's strong market share in household current account
deposits of 19.1%. Through the growth in current accounts, savings
and fixed deposits and other structured deposits Nedbank has
successfully reduced the proportion of funding from negotiable
certificates of deposit as well as more expensive foreign currency
funding used in the general rand funding pool.
This positive tilt towards more Basel III-friendly deposits
achieved across RBB, Nedbank Wealth and RoA and through market
share gains in commercial deposits has resulted in lower HQLA and
long-term funding requirements as well as a stronger LCR in terms
of ensuring cost-effective regulatory compliance and a strong
balance sheet position.
Group strategic focus
During 2017 we continued to focus on delivering on our five
strategic focus areas designed to make Nedbank a more agile,
competitive and digital bank, and underpin sustainable earnings
growth and improving returns.
Delivering innovative market-leading client experiences
We launched various market-leading innovations such as the new
Nedbank Private Wealth mobile app. This was one of the first
products delivered through our Digital Fast Lane capability. It
ranked joint sixth in the global Mobile Apps for Wealth Management
2017 survey and was placed third among 600 apps in the Best
Enterprise Solution category at the MTN Business App of the Year
Awards. The new Nedbank Money app, which makes banking more
convenient for our retail clients, was downloaded more than 300,000
times since November 2017. We launched UNLOCKED.ME, an exclusive
e-commerce marketplace for millennials.
Karri, our mobile payment app that enables users to make
cash-free payments for school activities quickly, securely and
hassle-free, has been rolled out to more than 100 schools across
the country. In Nedbank Wealth we piloted geyser telemetry, an
innovative smart home solution that reduces electricity
consumption. As far as our integrated channels are concerned, we
have converted 55% of our outlets to new-image branches to date,
and our investment in distribution channels over the next three
years (until 2020) will result in 73% of our retail clients being
exposed to the new-image branch format and self-service
offerings.
The introduction of chatbots and robo-advisors will continue to
enhance client experiences through our contact centre and
web-servicing capabilities. We launched NZone, our digital
self-service branch at the Sandton Gautrain station, as well as
Africa's first solar-powered branch to enable banking in deep-rural
communities. The foundations put in place through Managed Evolution
(our core systems and technology platform transformation), digital
enhancements and New Ways of Work will lead to ongoing incremental
digital benefits and enhanced client service.
In 2018 Nedbank will bring further exciting digital innovations
to market to enhance client experiences and drive efficiencies.
Some of these include a refreshed internet banking experience in
line with our mobile banking apps, the ability to sell an unsecured
loan bundled with a transactional account, simplified client
on-boarding with convenient, FICA-compliant account opening from
your couch, a new and exciting loyalty and rewards solution, and
further rollout of chatbots, robo-advisors and software robots
(robotic process automation).
Growing our transactional banking franchise faster than the
market
Nedbank's RBB franchise grew its total client base 1.6% to 7.5
million, with 6.0 million clients having a transactional account
and 2.8 million main-banked clients supporting retail transactional
NIR growth of 6.0%. Our main-banked client numbers remained flat as
slower transactional activity caused some of our existing clients
to fall outside our main-banked definition, particularly in the
youth segment, while the middle-market, professional and small
business client segments continued to increase. The newly launched
Consulta survey estimates Nedbank's share of main-banked clients at
12.7%, up from the 10.1% recorded through the 2015 AMPS survey
(using a similar methodology) as we aim to reach a share of more
than 15% by 2020. Our integrated model in CIB enabled deeper client
penetration and increased cross-sell, resulting in 26 primary-bank
client wins in 2017.
Being operationally excellent in all we do
Cost discipline is an imperative in an environment of slower
revenue growth. We have ongoing initiatives to ensure this, such as
having reduced our core systems from 251 to 129 since inception of
the Managed Evolution programme, with us being well on our way to
reaching a target end state of less than 60 core systems by 2020;
and the reduction of floor space in RBB by more than 30,000 m(2) by
2020; of which 24,485 m(2) has been achieved to date. We worked
with our sister companies in the Old Mutual Group to deliver
synergies of just in excess of R1 billion, R393 million of which
accrued to Nedbank. Good progress was also made with our target
operating model (TOM) initiatives, which aim at generating R1.0
billion pre-tax benefits for Nedbank by 2019 (and R1.2 billion by
2020) and are linked to our long-term incentive scheme. Most cost
initiatives have been identified in RBB and we delivered savings of
R621 million in 2017, which includes TOM savings.
During the year we reduced headcount by 859 (mostly through
natural attrition), optimised our staffed points of presence by
closing 32 in-retailer and 53 personal-loan outlets (while
maintaining our coverage of the bankable population at 84%). We
achieved efficiencies through the recycling of cash through our
increased footprint of Intelligent Depositor devices. Four
client-servicing functions, previously only accessible through
branches, as well as the new Nedbank Money app were launched during
the fourth quarter of 2017, while another 33 are planned for
deployment across our digital channels by March 2018. We
implemented 50 software robots (robotic process automation) to
enhance efficiencies and reduce processing errors in
administrative-intense processes, with more than 200 planned for
rollout in 2018.
Managing scarce resources to optimise economic outcomes
We maintained our focus on growing activities that generate
higher levels of EP, such as growing transactional deposits and
increasing transactional banking revenues, with commission and fees
in RBB up 5.3%, and achieved earnings growth of 6.9% in RBB and
5.0% in CIB. Our selective origination of personal loans, home
loans and commercial-property finance has proactively limited
downside risk in this challenging operating climate, enabling a CLR
of 0.49%, below the bottom end of our TTC target range. At the same
time our balance sheet metrics remain strong and we continue to
deliver dividend growth above the rate of HEPS growth.
Providing our clients with access to the best financial services
network in Africa
In Central and West Africa ETI remains an important strategic
investment for Nedbank, providing our clients with access to a
pan-African transactional banking network across 39 countries and
Nedbank with access to dealflow in Central and West Africa. We have
made good progress in working with ETI's board and other
institutional shareholders to strengthen its board and management.
We have increased our board representation and our involvement in
the group as Brian Kennedy joined Mfundo Nkuhlu on ETI's board.
Mfundo was appointed Chair of the ETI Risk Committee and Brian was
appointed to the Remuneration and Audit Committees. Risk management
practices are being enhanced and the audit of ETI's 2017 interim
results provides comfort that the risk of another fourth-quarter
loss as in 2015 and 2016 has decreased. We are pleased that ETI
reported a profit for the nine months to 30 September 2017. We
remain supportive of ETI's endeavours to deliver an ROE in excess
of its COE over time. While risk remains, economic conditions in
Nigeria and other economies in West Africa are improving and ETI
should provide a strong underpin to Nedbank Group's earnings growth
in 2018.
In SADC we continue to build scale and optimise costs. Our core
banking system, Flexcube, which was successfully rolled out in
Namibia in 2016, was also implemented in Lesotho, Malawi and
Swaziland in 2017 and we plan to roll it out in Zimbabwe during
2018. We also launched a number of new digital products and we
continue to grow our distribution footprint. As a result, clients
increased 14% and online digital activations were up 22%. The
acquisition of a majority stake in Banco Único in 2016 continued to
deliver value and positioned Nedbank well to leverage off higher
levels of economic growth in Mozambique. In 2018 we will rebrand
MBCA in Zimbabwe to Nedbank while completing the last of our core
banking system implementations in our subsidiaries.
Old Mutual plc managed separation
On 1 November 2017 Old Mutual plc announced that the strategic
minority shareholding to be retained in Nedbank Group by Old Mutual
Limited (OML) to underpin the ongoing commercial relationship
between the companies has been agreed at 19.9% of the total Nedbank
Group ordinary shares in issue, as held by shareholder funds. This
followed the 11 March 2016 announcement by Old Mutual plc about the
Old Mutual managed separation, and the subsequent communication on
25 May 2017 in which Old Mutual plc stated that the new SA holding
company, to be named OML, would retain a strategic minority
shareholding in Nedbank Group after the implementation of the
managed separation. The 19.9% shareholding will be held by OML,
which will have a primary listing on JSE Limited and a secondary
listing on the London Stock Exchange. OML will be listed at the
earliest opportunity in 2018, following the publication of Old
Mutual plc's 2017 full-year results.
The decrease in OML's shareholding in Nedbank Group will be
achieved through the unbundling of Nedbank Group ordinary shares to
OML's shareholders. This will result in OML, immediately after the
implementation of unbundling, holding a 19.9% strategic minority
shareholding in Nedbank Group. The unbundling will occur at an
appropriate time and in an orderly manner, after the listing of OML
and allowing suitable time for the transition of the OML
shareholder register to an investor base with an SA and
emerging-market focus and mandate. After the unbundling, Nedbank
Group is likely to see an increase in the number of its shares held
by emerging-market-mandated index funds, which will adjust
according to the improved free float (from about 45% before
unbundling to about 80% after unbundling) and a normalisation of SA
institutional shareholding (some of which are currently underweight
on a straight-market-capitalisation basis given some Nedbank Group
holding through the Old Mutual plc shareholding). As part of this
process Nedbank Group will continue to market itself as an
attractive investment for local and international investors.
Nedbank Group will continue business as usual and the managed
separation will have no impact on our strategy, our day-to-day
management or operations, our staff and our clients. Our
engagements have been at arm's length and overseen by independent
board structures. Old Mutual operates predominantly in the
investment, savings and insurance industry, which has little
overlap with banking, even though we compete in the areas of wealth
and asset management and personal loans. Our technology systems,
brands and businesses have not been integrated.
As noted before, our collaboration with Old Mutual to unlock
synergies by the end of 2017 was successful. Future synergies will
continue to be underpinned by OML's strategic shareholding in
Nedbank Group. We are fully committed to working with OML to
deliver ongoing synergistic benefits at arm's length.
Economic and regulatory outlook
While structural challenges remain, 2018 has started with
renewed optimism that these will be addressed and that improving
business and consumer confidence should lead to a cyclical upturn
off a low base. The SA economy is forecast to grow about 1.6% in
2018 as a resilient world economy and relatively firm international
commodity prices are expected to provide further support to
domestic production and exports. Business and consumer confidence
should also improve from very weak levels in 2017, boosted by newly
elected SA President Ramaphosa's promises to restore good
governance, take immediate action against corruption and state
capture, and make changes to many cabinet portfolios. Moderate
growth in consumer spending and credit are forecast for 2018, while
fixed investment, as well as government consumption and capital
expenditure, is forecast to remain subdued.
The recovery in sub-Saharan Africa is expected to gather pace in
2018, underpinned by the ongoing global commodity price upswing as
well as improved government finances and structural reforms in some
African countries. The International Monetary Fund expects
sub-Saharan Africa to grow faster at 3.4% this year.
Domestic inflation is forecast to recede moderately in the early
part of 2018, before edging higher towards the end of the year,
averaging about 5.1% over the year as a whole. Early in the year a
stronger rand, coupled with easing food and fuel prices, should
help contain inflation off the higher base that prevailed at the
start of 2017. The rand remains the key risk to the inflation
outlook. High expectations of political, policy and fiscal reforms
have been built into the rand's recent rally. If the new ANC
leadership fails to deliver, especially on the fiscal concerns, SA
still runs the risk of being downgraded to universal sub-investment
grade status, which could place the rand under pressure and alter
the inflation outlook for the year. Given these uncertainties, the
anticipated rise in US interest rates, the gradual tapering of
quantitative easing programmes by other major central banks and the
expected upturn in the domestic inflation cycle towards year-end,
the SARB's Monetary Policy Committee is forecast to keep interest
rates unchanged at current levels throughout 2018 and into
2019.
Fitch indicated that a failure to implement credible fiscal
consolidation and any further economic deterioration could trigger
another rating downgrade. S&P will act if both the economy and
standards of public governance weaken further, while Moody's will
downgrade the country if the measures to address the fiscal funding
gap lack credibility or the chosen structural reforms fail to
encourage investment and growth.
Overall economic conditions should improve off a low base and,
despite the many challenges faced by the SA economy, the SA banking
system remains sound, liquid and well capitalised.
Prospects
Our guidance on financial performance for the full year 2018 is
currently as follows:
- Average interest-earning banking assets to grow in line with
nominal GDP.
- NIM to be slightly above the 2017 level of 3.62%.
- CLR to increase into the bottom half of our target range of 60
to 100 bps (under IFRS 9).
- NIR to grow above mid-single digits.
- Associate income to be positive (ETI associate income reported
quarterly in arrear).
- Expenses to increase by mid-single digits.
Given the loss in associate income from ETI in the 2017 base and
continued delivery on the Nedbank strategy, our financial guidance
is for growth in DHEPS for the full 2018 year to be in line with
our medium-to-long-term target of greater than or equal to GDP +
the consumer price index + 5%.
The outlook for our medium-to-long-term targets in 2018 is as
follows, and we have now set ourselves specific 2020 targets of ROE
(excluding goodwill) of greater than or equal to 18% and cost to
income of lower than or equal to 53% as a pathway to ongoing and
sustainable improvements in the key metrics that support
shareholder value creation.
Change Headline ROE (excluding
Cluster performance earnings goodwill)
(Rm)
---------------------------- ------- ---------------- -----------------
2017 2016 2017 2016
---------------------------- ------- ------- ------- -------- -------
CIB 5% 6,315 6,014 20.7% 21.1%
RBB 7% 5,302 4,960 19.1% 18.9%
Wealth (10%) 1,068 1,192 27.5% 35.2%
RoA subsidiaries 90% 165 87 3.3% 2.1%
Centre 79% (88) (414)
------------------------------ ------- ------- ------- -------- -------
Nedbank managed operations 8% 12,762 11,839 18.1% 18.0%
(>
ETI 100%) (975) (374)
------------------------------ ------- ------- ------- -------- -------
Group 3% 11,787 11,465 16.4% 16.5%
------------------------------ ------- ------- ------- -------- -------
Credit loss ratio by cluster % banking 2017 2016 Through-the-cycle
(%) adv target
ances ranges
------------------------------ ---------- ------ ------ ------------------
CIB 47% 0.06% 0.34% 0.15%-0.45%
RBB 46% 1.06% 1.12% 1.30%-1.80%
Wealth 4% 0.09% 0.08% 0.20%-0.40%
RoA 3% 1.02% 0.98% 0.65%-1.00%
-------------------------------- ---------- ------ ------ ------------------
Group 100% 0.49% 0.68% 0.60%-1.00%
-------------------------------- ---------- ------ ------ ------------------
Basel III (%) 2017 2016 Internal Regulatory
target minimum(1)
range
--------------------- ------ ------ ------------ ------------
CET1 ratio 12.6% 12.1% 10.5%-12.5% 7.25%
Tier 1 ratio 13.4% 13.0% > 12.0% 8.75%
--------------------- ------ ------ ------------ ------------
Total capital ratio 15.5% 15.3% > 14.0% 10.75%
--------------------- ------ ------ ------------ ------------
(Ratios calculated include unappropriated profits.)
1 The Basel III regulatory requirements are being phased in
between 2013 and 2019, and exclude any idiosyncratic or
systemically important bank minimum requirements.
Nedbank Group LCR 2017 2016
-------------------------- -------- --------
HQLA (Rm) 138,180 137,350
Net cash outflows (Rm) 118,956 125,692
Liquidity coverage ratio
(%)(2) 116.2% 109.3%
Regulatory minimum (%) 80.0% 70.0%
---------------------------- -------- --------
2 Average for the quarter.
Loans and Advances (Rm) Change 2017 2016
(%)
------------------------- ------------------- -------- --------
CIB (4%) 356,029 370,199
------------------- -------- --------
Banking activities (3%) 324,673 335,113
Trading activities (11%) 31,356 35,086
------------------- -------- --------
RBB 5% 305,198 289,882
Wealth 3% 29,413 28,577
RoA 5% 20,541 19,582
Centre(3) 27% (852) (1,163)
-------------------------- ------------------- -------- --------
Group 0% 710,329 707,077
-------------------------- ------------------- -------- --------
3 Intercompany eliminations.
2017 performance Full-year 2018 Medium-to-long-term
Metric outlook target
---------------------- ------------------ ------------------ --------------------
ROE (excluding 16.4% Improves, but 5% above COE(4)
goodwill) remains (>= 18% by 2020)
below target
---------------------- ------------------ ------------------ --------------------
Growth in DHEPS 2.4% >= consumer > consumer price
price index index + GDP
+ GDP growth growth + 5%
+ 5%, supported
by ETI recovery
---------------------- ------------------ ------------------ --------------------
CLR 0.49% Increases into Between 0.6%
the bottom and 1.0% of
half of our average banking
target range advances
(under IFRS
9)
---------------------- ------------------ ------------------ --------------------
NIR-to-expenses 80.7% Improves, but > 85%
ratio remains below
target
---------------------- ------------------ ------------------ --------------------
Efficiency ratio 58.6% Improves, but 50-53% (<= 53%
(including associate remains above by 2020)
income) target
---------------------- ------------------ ------------------ --------------------
CET1 capital 12.6% Within or above 10.5-12.5%
adequacy ratio target
(Basel III)
---------------------- ------------------ ------------------ --------------------
Economic capital Internal Capital Adequacy Assessment
Process (ICAAP):
---------------------- ------------------------------------------------------------
A debt rating, including 10% capital
buffer
---------------------- ------------------------------------------------------------
Dividend cover 1.91 times Within target 1.75-2.25 times
range
---------------------- ------------------ ------------------ --------------------
4 The COE is forecast at 13.2% in 2018.
Reconciliation of AOP (pre-tax) Change
to Nedbank's headline earnings 2017 2016 %
-------------------------------------- ------ ------ --------
Headline earnings(5) 11,787 11,465 3%
Exceptional items (73) 2 (3,750%)
Amortisation of Wealth Joint Ventures 86 74 16%
Credit spread (profits) / loss - - -
Non-capital trading items (166) (128) (30%)
Tax as reported by Nedbank 4,209 3,986 6%
Non-controlling interests as reported
by Nedbank 679 526 29%
-------------------------------------- ------ ------ --------
Adjusted operating profit per Old
Mutual (Rm) 16,522 15,925 4%
-------------------------------------- ------ ------ --------
Analysis by cluster
Corporate & Investment Banking 7,963 7,763 3%
Retail & Business Banking 7,330 6,903 6%
Wealth 1,417 1,614 (12%)
Rest of Africa (683) (281) (143%)
Centre 495 (74) 769%
-------------------------------------- ------ ------ --------
Adjusted operating profit (Rm) 16,522 15,925 4%
-------------------------------------- ------ ------ --------
Analysis by line of business
Banking 15,361 14,587 5%
Asset management 425 395 8%
Life & Savings 485 567 (14%)
Property & Casualty 251 376 (33%)
-------------------------------------- ------ ------ --------
Adjusted operating profit (Rm) 16,522 15,925 4%
-------------------------------------- ------ ------ --------
Adjusted operating profit (GBPm) 963 799 21%
-------------------------------------- ------ ------ --------
5 As reported by Nedbank.
Old Mutual Wealth review
Strong results, good progress and ready to list
"I am delighted with our business performance in 2017. The
continuation of sustained strong investment performance and buoyant
market conditions is delivering good customer outcomes. We have
attracted very high levels of net flows, and our business model is
proving a huge success in providing what customers want. I'm
particularly pleased that we have been able to maintain
profitability and achieve a 29% operating margin for 2017 for the
go-forward business, while still investing significantly in the
business. All of this makes me confident of our future prospects
and growth, with further opportunities to come from the
optimisation initiatives which we intend to pursue
post-listing.
"During the year, we have implemented a number of important
strategic developments towards achieving our goal of becoming the
UK's leading wealth manager. We agreed terms for the sale of the
Single Strategy business, which simplifies our business and allows
us to focus more on our integrated wealth management offering which
is serving customers so well. We have further grown our
distribution capabilities through the acquisition of Caerus. A key
project for us, and one which will significantly enhance our
offering to advisers and their customers, is our UK Platform
Transformation Programme and I am very pleased that this remains on
track and on budget.
"Following comprehensive product reviews of our legacy business,
we are starting voluntary remediation to customers in certain
legacy products within the Heritage book. Our core business
philosophy is to do the right thing by our customers, and this
product review is part of putting this into action.
"We have a strong balance sheet, a strong capital and liquidity
position and we are financially independent from Old Mutual plc. We
have completed our separation activities and we are ready to list
as Quilter plc. We expect to publish a Quilter Prospectus in
connection with that listing. This will provide shareholders, who
will become Quilter shareholders at the time separation completes,
with a more detailed overview of the Quilter business and its
performance over the last three years. It will also set out what we
believe is an attractive investment case for Quilter as a
standalone business, and, of course, explain the key risks
associated with our business. I would urge you to read that
document when it is published.
"2017 was a proving year for our business. 2018 will be a
defining one and we are excited about the opportunities ahead."
Old Mutual Wealth highlights on a reported basis 2017 2016 %
change
---------------------------------------------------------------------------------- ------ ------ --------
IFRS profit/(loss) after tax attributable to equity holders of the parent (GBPm) 99 (4)
Reported AOP (pre-tax, GBPm)(1,2) 363 260 40%
NCCF (GBPbn) 10.9 5.2 110%
NCCF, excl. Heritage (GBPbn) 12.2 5.7 114%
NCCF/Opening AuMA (excl. Heritage)(5) 12% 6%
AuMA (GBPbn) 138.5 123.5 12%
Pre-tax operating margin(3) 36% 32%
Revenue margin (bps)(4) 60 64
RoE 19% 13%
---------------------------------------------------------------------------------- ------ ------ --------
1 Reported AOP includes Single Strategy of GBP152m
in 2017 (2016: GBP60m), of which performance fees
were GBP101m (2016: GBP26m). From 2017, the SA branches
are reported within Old Mutual Emerging Markets
and the 2016 profit of the SA branches was GBP8m
2 In 2016, Head Office costs were allocated to the
business. In 2017, these are shown separately and
exclude the one-off costs incurred to prepare the
business for separation from Old Mutual plc
3 Includes performance fees, all of which arise
in Single Strategy
4 This includes the results of Single Strategy but
excludes performance fees
5 NCCF as a % of opening AuMA excludes Italy and
SA branches for 2016 and 2017.
For the purposes of this report, references to Old
Mutual Wealth refer to the reported results above,
which include Single Strategy. References to Quilter,
including those in the table below, refer to the
future standalone business, excluding Single Strategy.
------------------------------------------------------------------------------------------------------------
`Quilter highlights on a standalone basis 2017 2016 %
change
---------------------------------------------------------------------------------- ------ ------ --------
Operating profit as a standalone business (pre-tax, GBPm)(1) 209 177 18%
Normalised operating profit (pre-tax, GBPm)(1) 209 208 -
NCCF (GBPbn) 6.3 3.3 91%
NCCF, excl. Heritage (GBPbn) 7.6 4.2 81%
NCCF/Opening AuMA (excl. Heritage)(2) 9% 6%
AuMA (GBPbn) 114.4 98.2 16%
Pre-tax operating margin 29% 32%
Revenue margin (bps) 56 59
Integrated flows (GBPbn) 4.8 1.8 167%
---------------------------------------------------------------------------------- ------ ------ --------
1 A detailed reconciliation of Reported AOP to operating profit
as a standalone business to normalised profit can be found within
the Performance highlights section
2 NCCF as a % of opening AuMA excludes Italy and SA branches for
2016 and 2017.
Strategy
Our vision is to be the UK's leading wealth manager. We are a
purpose-built, full service wealth manager delivering good customer
outcomes. We have leading positions in one of the world's largest
wealth markets, and our multi-channel proposition and investment
performance are driving integrated flows and long term customer
relationships. Together this has delivered attractive top-line
growth and there is the opportunity for improved operating leverage
following our intended listing as Quilter plc.
In 2017, alongside sustained strong investment performance, we
have attracted very high levels of net flows, and our business
model is proving a huge success in providing what customers want.
This has enabled us to maintain our profitability while still
investing in the business ahead of listing, and we achieved a 29%
operating margin for 2017 for the go-forward business. We have
further grown our distribution capabilities through the acquisition
of Caerus, and we remain on track and on budget with our UK
Platform Transformation Programme. We have a strong balance sheet,
strong capital and liquidity positions and we are financially
independent from Old Mutual plc. We have also now completed our
separation activities and we believe that we are ready to list.
Business developments
On 2 September 2017, Old Mutual Wealth announced that it would
develop the Multi-Asset and Single Strategy businesses within Old
Mutual Global Investors as separate, distinct businesses. On 19
December 2017, we announced that we had agreed to sell our Single
Strategy asset management business ('Single Strategy') to the
Single Strategy management team and funds managed by TA Associates
(together 'the Acquirer') for an expected total consideration of
c.GBP600 million. This value is subject to a number of potential
price adjustments depending on the net asset value of the business
and a number of other factors at the disposal date. Once the
transaction completes, economic ownership of Single Strategy will
pass to the Acquirer effective from 1 January 2018 with all profits
and performance fees generated up until 31 December 2017 for the
account of Old Mutual Wealth.
For the purposes of this report, references to Old Mutual Wealth
refer to the reported results, which include Single Strategy.
References to Quilter refer to the future standalone business,
excluding Single Strategy.
Completion of the transaction is subject to various regulatory
approvals (UK FCA, Hong Kong and Switzerland) and it is anticipated
that completion will take place in the second half of 2018. In
addition to regulatory approvals, there are additional conditions
precedent to the completion of the transaction. The conditions to
completion of the transaction include certain steps to separate the
retained Multi-Asset business. These steps include the
reorganisation of the management of certain funds and the transfer
of certain assets that form part of the Multi-Asset business into
new funds separate from Single Strategy. The completion of these
steps depends, in part, upon regulatory approvals and on the speed
with which certain third party suppliers are able to take actions
required to establish these funds and implement these transfers.
Upon completion, Transitional Service Agreements between the Single
Strategy and Multi-Asset businesses will be in place. This will
allow for the respective provision of services between the two
businesses for a period of up to three years on a cost basis.
As previously announced, on listing, we intend to have two
operating segments: Advice and Wealth Management, and Wealth
Platforms. The Advice and Wealth Management segment will include
Intrinsic, which we intend to rebrand to Quilter Financial
Planning; the multi-asset solutions business ('Multi-Asset'), which
will become Quilter Investors; and, Quilter Cheviot. The Wealth
Platforms segment will include the UK Platform business, which will
become Quilter Wealth Solutions; our International business, which
will become Quilter International; and, our Heritage life assurance
business, which will become Quilter Life Assurance.
On 9 January 2017, we completed the sale of Old Mutual Wealth
Italy to Phlavia Investimenti. The results for Old Mutual Wealth
Italy have been excluded from the 2017 results.
Caerus Capital Group was acquired on 1 June 2017. Throughout
2017, we have continued to acquire advice businesses within Old
Mutual Wealth Private Client Advisers, creating 'hubs' around the
UK, by careful targeting and acquiring advice businesses that match
our target customer profiles and Quilter Cheviot's geographical
footprint, where appropriate.
On 15 November 2017, we announced that we were closing our
Institutional life business within Heritage to new business. This
had AuMA of GBP4.9 billion at 31 December 2017. It is not core to
our strategy and it is very low margin business.
Performance highlights
Net client cash flow (NCCF)
NCCF performance for Old Mutual Wealth was strong at GBP10.9
billion, up 110% on prior year (2016: GBP5.2 billion) driven by
buoyant market conditions and robust investor confidence. This was
12% of opening AuMA, excluding the Heritage assets (which includes
the Institutional life business), demonstrating very strong growth,
and well ahead of our annualised target growth of 5% over the
medium term.
Within this, Quilter NCCF was also strong, increasing 91% to
GBP6.3 billion (2016: GBP3.3 billion). Excluding the Heritage
assets, Quilter NCCF was GBP7.6 billion and, on this basis, was 9%
of opening AuMA.
The Advice and Wealth Management segment contributed total NCCF
before intra-group eliminations of GBP4.4 billion (2016: GBP1.6
billion). Our Multi-Asset business, which is a core part of our
ongoing proposition and wealth management strategy, received GBP3.3
billion (2016: GBP0.8 billion) of these net flows in 2017 driven by
robust flows into the Cirilium and WealthSelect fund ranges.
NCCF for the Wealth Platforms segment of GBP4.3 billion was up
95% from 2016 (GBP2.2 billion). UK Platform net flows were GBP4.5
billion, up 61% on 2016 due to strong flows into pension
propositions as customers continue to consolidate existing
pensions. As a result, sales into the pension propositions
accounted for 61% of total UK Platform sales. Transfers by
customers from their defined benefit pensions into defined
contribution schemes accounted for gross sales of GBP1.8 billion in
2017, representing 20% of gross platform sales and 6% of total
gross sales. Net Heritage outflows were primarily due to expected
Institutional business outflows. International flows more than
doubled to GBP1.4 billion with strong net flows from Latin America,
the Middle East, UK and Europe. In the International business, we
benefited from certain large single premium inflows which, due to
their size, have been made at a discount to our usual charging
structures.
In total, Quilter integrated flows grew 167% from GBP1.8 billion
in 2016 to GBP4.8 billion in 2017 (GBP5.2 billion excluding
Heritage outflows). The restricted channel of Intrinsic accounted
for GBP1.2 billion (27%) of UK Platform net inflows in 2017 (2016:
GBP0.9 billion; 32%) and GBP2.5 billion of net flows into OMGI's
Multi-Asset solutions business in 2017, principally into the
Cirilium fund ranges. Integrated net inflows from Intrinsic into
Quilter Cheviot amounted to GBP0.2 billion, over half of which was
through OMWPCA.
Assets under management/administration (AuMA)
Old Mutual Wealth AuMA was GBP138.5 billion, up 20% from the end
of 2016 (31 December 2016: GBP115.3 billion excluding our divested
Italian business (GBP6.2 billion) and South African branches
(GBP2.0 billion) which have been transferred to OMEM). Of the 20%
increase in AuMA, 10% (GBP11.0 billion) is due to positive market
performance, 9% (GBP10.9 billion) resulted from positive NCCF, and
1% (GBP1.3 billion) came from the acquisition of Caerus and
Attivo.
Quilter AuMA, excluding Single Strategy, was GBP114.4 billion,
up 16% from GBP98.2 billion as at 31 December 2016, also driven by
positive market performance and strong NCCF.
IFRS post-tax profit
GBPm 2017 2016
-------------------------- ------ ------
Adjusted operating
profit before
tax 363 260
Goodwill and intangible
charges (103) (140)
Profit on disposals 24 -
Short-term fluctuations
in investment
return (2) 1
Managed Separation
and business standalone
costs (32) -
Platform transformation
costs (74) (102)
Voluntary customer
remediation (69) -
-------------------------- ------ ------
Total adjusting
items (256) (241)
Income tax attributable
to policyholder
returns 66 94
-------------------------- ------ ------
IFRS profit before
tax 173 113
Tax on adjusted
operating profit (44) (47)
Tax on adjusting
items 36 24
Income tax attributable
to policyholder
returns (66) (94)
-------------------------- ------ ------
IFRS profit/(loss)
attributable to
equity holders
after tax 99 (4)
-------------------------- ------ ------
Old Mutual Wealth's IFRS post-tax profit was GBP99 million for
2017, compared to a loss of GBP4 million in 2016. This improvement
was driven by the higher adjusted operating profit, principally
resulting from the exceptional net performance fees in Single
Strategy. Key reconciling items between the IFRS profit and pre-tax
Adjusted Operating Profit (AOP) were UK Platform transformation
costs of GBP74 million (2016: GBP102 million), one-off costs in
2017 relating to Managed Separation of GBP32 million (in 2016,
these one-off costs of GBP7 million were included within AOP),
costs associated with voluntary customer remediation in certain
legacy products described below, the combined effects of
intangibles amortisation and the impact of acquisition accounting
totalling GBP103 million (2016: GBP140 million), and year-on-year
movements in policyholder tax.
On 3 March 2016, the UK Financial Conduct Authority ('FCA')
issued a report detailing the findings of its industry-wide
thematic review on the fair treatment of long-standing customers
invested in closed-book products sold by the life insurance sector
(TR 16/2) ('Thematic Review'). As part of our ongoing work to
promote fair customer outcomes, product reviews consistent with the
recommendations from the FCA's thematic feedback and the FCA's
guidance 'FG16/8 Fair Treatment of long-standing customers in the
life insurance sector' have been conducted. Following these
reviews, it has been decided to commence voluntary remediation to
customers in certain legacy products within the Heritage book. As
part of this, we have decided to cap early encashment charges at 5%
for pension customers under 55 going forward, to refund all early
encashment charges over 5% on pensions products applied since 1
January 2009 and to refund certain paid-up charges incurred since 1
January 2009.
A provision of GBP69 million has been made within our 2017
results for the aggregate of these remediation costs, and this has
been reported outside of Adjusted Operating Profit, firstly because
of the significant and historical nature of the cost, and secondly,
because it does not reflect the underlying performance of Old
Mutual Wealth during 2017.
Also on 3 March 2016, the FCA announced that it was initiating
an investigation into a number of firms, including Old Mutual
Wealth Life Assurance Limited (OMWLA), a subsidiary of Old Mutual
Wealth reported within Heritage, in relation to potential breaches
of the FCA's standards relevant to the matters covered by the
Thematic Review. We continue to cooperate and work openly with the
FCA in connection with their investigation following the Thematic
Review. No provision has been made for any potential fine that may
be levied by the FCA.
Adjusted Operating Profit ('AOP') - Reconciliation to result on
a standalone basis
AOP (GBPm) 2017 2016 %
change
-------------------- ------ ----- --------
Reported AOP 363 260 40%
Corporate
activity(1) - (35)
Reversal of
smoothing
shareholder
investment
returns (2) 4
Managed Separation
and standalone
costs (one-off) - 7
Deduction
to exclude
Single Strategy
business (152) (60)
Other - 1
-------------------- ------ ----- --------
Operating
profit pre-tax
on a standalone
basis 209 177 18%
Heritage fee
restructure - 27
Other - 4
-------------------- ------ ----- --------
Normalised
operating
profit pre-tax
(on a standalone
basis) 209 208
-------------------- ------ ----- --------
1 Corporate activity includes Old Mutual Wealth Italy (sold in
January 2017) and South Africa branches (transferred to Old Mutual
Emerging Markets), consistent with the presentation shown in the
Capital Markets Showcase in November 2017.
Reported adjusted operating profit
Reported Old Mutual Wealth AOP of GBP363 million for 2017 was
40% higher than prior year (2016: GBP260 million), and includes net
performance fees of GBP101 million in 2017 (2016: GBP26
million).
Pre-tax AOP for the Single Strategy business increased to GBP152
million, up 153% from prior year of GBP60 million, driven by the
unprecedented level of net performance fees of GBP101 million
(2016: GBP26 million), of which GBP84 million was generated in the
six months to December 2017. The net performance fees for 2017 are
substantially ahead of the previous year and are considered to be
at an unusually high level reflecting exceptional performance from
a narrow range of funds in favourable market conditions. As
announced on 19 December 2017, under the terms of the transaction
agreement, Old Mutual Wealth will not benefit from performance fees
which may be earned by Single Strategy in 2018.
Operating profit pre-tax on a standalone basis
Operating profit pre-tax on a standalone basis is intended to
reflect the perimeter of the business as it will be after listing,
and after the completion of the sale of Single Strategy, and
therefore the results of Single Strategy have been removed from
both 2017 and 2016. In addition, the results of Old Mutual Wealth
Italy and the South African business have been removed from the
comparative period. On this basis, the operating profit pre-tax for
2017 was up 18% to GBP209 million (2016: GBP177 million).
GBPm 2017 2016 2016(2)
restated(1)
-------------------- ----- ------------- --------
Advice and
Wealth Management 82 59 55
Wealth Platforms 158 166 139
Head Office (31) (17) (17)
-------------------- ----- ------------- --------
Operating
profit on
a standalone
basis 209 208 177
Heritage fee
restructure - 27
Other - 4
-------------------- ----- ------------- --------
Normalised
operating
profit 209 208 208
-------------------- ----- ------------- --------
1 Based on normalisation adjustments being allocated to
segments
2 As presented at Capital Markets Showcase in November 2017.
Normalised operating profit
Normalised profit adjusts the comparative period 'operating
profit on a standalone basis' to eliminate the impact of the
changes to Heritage fees in 2016, and other normalisation
adjustments as presented at the Capital Markets Showcase. No
adjustments have been made in 2017. This form of presentation is
consistent with the analysis presented during the Company's Capital
Markets Showcase held in November 2017.
The 2017 normalised operating profit of GBP209 million compared
to prior year (2016: GBP208 million) is particularly pleasing given
that, in recent periods, profits have been invested to grow
distribution and to prepare the business to operate on a standalone
basis. The consistent profit pattern is evidence that the business
model is proven and that the business has reached scale ahead of
its planned listing.
Pre-tax normalised operating profit for the Advice and Wealth
Management segment increased to GBP82 million, up 39% from prior
year of GBP59 million. This was driven by significantly increased
contribution from the Multi-Asset business as a result of
increasing revenues, driven by strong flows generated by other
business areas and good investment performance.
Pre-tax normalised operating profit for the Wealth Platforms
segment decreased to GBP158 million, down 5% from prior year of
GBP166 million. In 2016, the restated profit of GBP166 million
included the adjustment to exclude the Heritage fee restructure
charge of GBP27 million which impacted the segment.
Revenue and revenue margin
Old Mutual Wealth's reported revenues increased by 21% to GBP1.0
billion due to higher average AuMA, driven by positive market
performance, strong NCCF and net performance fees. On the same
basis, the revenue margin decreased by 4bps during the year from
64bps to 60bps.
On a standalone basis, Quilter revenues increased by 13% to
GBP728 million comprised of net management fee revenue of GBP591
million and other revenues of GBP137 million.
GBPm 2017 2016 Variance
---------------- ----- ----- ---------
Net management
fee 591 524 13%
Other revenue 137 122 12%
---------------- ----- ----- ---------
Revenue on
a standalone
basis 728 646 13%
---------------- ----- ----- ---------
The net management fee revenue principally comprises fund-based
revenues including fixed fees. Other revenues include advice fees
generated in Intrinsic and income generated within the protection
business in Heritage. The revenue margin for the standalone Quilter
business reduced from 59bps in 2016 to 56bps in 2017.
Expenses
Old Mutual Wealth's reported expenses increased by 13% to GBP638
million. Single Strategy expenses are GBP119m in 2017, up from
GBP95 million in 2016 driven by an increase in variable incentives
in line with performance, increased headcount and regulatory
compliance costs. Old Mutual Wealth Italy and South Africa branches
together accounted for GBP23 million of costs in 2016 (2017: nil).
Consistent with the treatment in prior periods, bonuses on gross
performance fees are deducted from those performance fees which are
reported, on a net basis, within revenue.
Quilter expenses on a standalone basis increased by 18% to
GBP519 million.
GBPm 2017 2016 Variance
--------------------- ----- ----- ---------
Underlying
administration
expenses 402 363 39
Variable incentives 78 64 14
Investment
in business
initiatives 23 11 12
Standalone
costs (recurring) 16 - 16
--------------------- ----- ----- ---------
Expenses on
a standalone
basis 519 438 81
--------------------- ----- ----- ---------
The main components of the increase in Quilter expenses on a
standalone basis are:
- The increase in underlying administration expenses of GBP39
million reflects a focussed increase in technology spend (GBP13
million) linked to improving the resiliency of our IT
infrastructure; changes in regulation including compliance with
GDPR, MIFID II requirements and FSCS costs (GBP10 million); adverse
year-on-year movements in provisions (GBP6 million); and other
organic and inflationary costs (GBP10 million).
- Variable incentives in 2017 amounted to GBP78 million, an
increase of GBP14 million on 2016 in line with performance. This
reflects higher levels of funds under management in the multi-asset
business and Quilter Cheviot and higher senior headcount due to the
strengthening of senior management ahead of listing.
- Investment in new business initiatives principally reflects
the costs of expanding Old Mutual Wealth Private Client Advisers
and the inclusion of Caerus Capital Group, the acquisition of which
completed on 1 June 2017.
- Managed Separation and standalone costs of GBP16 million
include GBP9 million to reflect the strengthening of the business
and other recurring standalone costs. 2017 was a transitional year
for the business, and the incremental recurring costs of GBP16
million for 2017 do not yet reflect a full-year run-rate of such
costs.
- Consistent with previous disclosures, separation is estimated
to increase the standalone cost base by GBP25-30 million per annum
compared to 2016, and therefore additional recurring costs beyond
the GBP16 million incurred in 2017, are expected to be incurred in
2018. In line with information provided previously, this increase
excludes the impact of the costs for the proposed new long-term
incentive plan, and future debt financing costs. Details of future
debt financing costs are set out within our cash and capital
disclosures.
We currently expect one-off costs in 2018 of c.GBP36 million in
respect of the completion of the Managed Separation from Old Mutual
plc. These comprise a mixture of standalone, advisor and other
transaction costs, and will be charged outside of operating profit
to reflect their one-off nature. Of these, c.GBP12 million are
expected to be in respect of the rebrand of the business from Old
Mutual Wealth to Quilter.
Operating margin
The Old Mutual Wealth operating margin was higher than prior
year at 36%, driven by higher net performance fees more than
offsetting the impact of increased expenses. Including Single
Strategy, but excluding net performance fees, the operating margin
is unchanged at 29%.
On a standalone basis, the Quilter operating margin declined to
29% compared to 32% in 2016 principally as a result of the increase
in operational costs and investment in business initiatives ahead
of listing.
The increasing proportion of revenues from advice fees, which
are largely matched by costs of advisers and investment in the
advice model itself, has contributed to the reduction in operating
margin.
UK Platform Transformation
The contracts with IFDS related to the UK Platform
Transformation came to an end by mutual agreement effective as of 2
May 2017. At the same time, we announced that we had contracted
with FNZ to deliver our UK Platform Transformation Programme.
We continue to plan for a soft launch of the enhanced customer
and adviser proposition supplied by FNZ by late 2018 or early 2019
with migration of existing advisers and customers to follow swiftly
thereafter.
Of the estimated UK Platform Transformation Programme costs of
GBP120-160 million announced in May 2017, GBP21 million had been
incurred by 31 December 2017. We currently anticipate spend of
c.GBP75 million in 2018 with the balance arising in 2019. The
project remains on time and within budget and excellent progress
has been made with all key deliverables to date being within our
planned timelines.
Delivering good customer outcomes
During 2017, we established a dedicated Retail Customer
Solutions function to focus specifically on those 'end-to-end'
customers whom we serve through our model of financial advice,
investment solutions and platform services. The objective of this
team is to further improve customer orientation in our proposition.
In addition, the team will actively analyse industry trends to
enable us to create stronger integrated propositions.
Regulatory developments
There are a number of studies and thematic reviews currently
underway by the UK regulators. These include the FCA's Asset
Management Review, the findings of which were published on 28 June
2017, and the Investment Platforms Market Study, the terms of
reference for which were announced on 17 July 2017 and more
recently, in February 2018, the Discussion Paper considering
"Effective competition in non-workplace pensions". The FCA also
published its "Approach to Customers" in November 2017, informed by
the Financial Lives Survey, the results of which were published
last October. We are very supportive of the FCA's work in these
important areas, and believe the outcomes of these will serve to
increase the confidence and credibility of the wealth management
industry in this country, ensuring that it provides fair outcomes
for all customers, whatever stage in life they are at.
Managing conflicts of interests
We combine our knowledge and capabilities across the businesses
to gain an understanding of our clients and their needs. It is this
knowledge that allows us to deliver products and solutions that
meet those needs. Suitable investment solutions are central to
providing good customer outcomes. We aim to blend peer-leading
capabilities across our business, but the decision about which
investment solutions are right for each client remains with the
financial adviser, where client suitability decisions will always
remain sacrosanct.
As part of managing potential conflicts of interest, each part
of the business has strong governance in place, with each business
being a separate regulated entity that seeks to deliver fair
outcomes and good value for its customers.
Return on equity ('ROE')
Strong operating performance across our business in 2017 has
increased reported ROE to 19% (31 December 2016: 13%). Excluding
Single Strategy, the ROE was 13%.
At the time of the acquisition of Quilter Cheviot, it was
announced that the transaction was expected to generate annual
synergies of GBP15 million by 2017. As at 31 December 2017, the
total achieved synergies were GBP14 million. Beyond these
synergies, the return on our investment is reflected in Quilter
Cheviot's contribution to our overall wealth management proposition
and in the growth of assets under management from GBP17.4 billion
at 28 February 2015 to GBP23.6 billion at 31 December 2017. As a
result, the overall return is considered to be in excess of the
cost of capital.
Cash and capital
In 2017, Old Mutual Wealth generated free surplus of GBP293
million (2016: GBP179 million), representing a conversion rate of
92% of AOP post-tax (2016: 84%). The free surplus generated was
used to fund the Platform Transformation Programme, the costs
associated with the Managed Separation, and the investment in new
business initiatives including the expansion of Old Mutual Wealth
Private Client Advisers and the acquisition of Caerus Capital
Group.
At 31 December 2017, Old Mutual Wealth had an unaudited 155%
Solvency II ratio after a 14% adjustment for the impact of the
European Insurance and Occupations Pensions Authority ('EIOPA')
update described below and adopted with effect from 31 December
2017. The impact of the EIOPA update is economically neutral and
has no impact on the absolute Solvency II surplus but reduces the
Solvency II ratio.
The EIOPA has recently published updated guidance regarding the
treatment of the Individual Capital Guidance ('ICG') requirements
in investment firms subject to the internal capital adequacy
assessment process ('ICAAP') regime. This guidance, which is
non-mandatory, applies when calculating the Solvency II capital
ratio on a consolidated basis for groups comprising both ICAAP and
Solvency II regulated entities. According to the EIOPA guidance,
the solvency capital requirement ('SCR') under Solvency II for
ICAAP regulated entities should include both the capital
requirement from the ICAAP and any requirement imposed by the
regulator. The previous methodology used by Old Mutual Wealth
included the Pillar 1 capital requirement for the ICAAP regulated
entities within the Solvency II capital requirement, with the
balance between this and the total capital requirement being
excluded from both the Solvency II Own Funds and the SCR. On a pro
forma basis, the change in treatment would have increased both Own
Funds and the SCR by GBP0.2 billion as at 30 June 2017, which would
have reduced the reported 177% ratio to 163% on a pro forma
consolidated basis.
Old Mutual Wealth Management Limited has been given an issuer's
default rating from Fitch of A-. The financial strength of Old
Mutual Wealth Life Assurance Limited (our Heritage life assurance
business) is rated A by Fitch.
Managed Separation and Board developments
We made good progress with our programme of activity as we work
towards independence as part of the Managed Separation from Old
Mutual plc. By the end of 2017, all functions had materially
delivered all changes necessary to be standalone.
To ensure our organisation is fit for purpose as a listed,
standalone entity, we have continued to reshape and strengthen our
executive management team and our Board. During 2017, Tim Tookey
was appointed as Chief Financial Officer and Mark Satchel assumed
the role of Corporate Finance Director. Paul Hucknall was appointed
as HR Director and joined the executive committee on 1 January
2018.
Rosie Harris, George Reid and Jon Little joined the Old Mutual
Wealth Board as Independent Non-Executive Directors during H1 2017.
On joining, Rosie was appointed Chair of the Board Risk Committee.
George Reid has been appointed Chair of the Board Audit Committee,
and Moira Kilcoyne, who was appointed to the Board at the end of
2016, has been appointed Chair of the Board IT Committee. Old
Mutual Wealth intends to comply with the UK Corporate Governance
Code and the arrangements to achieve compliance are well
advanced.
We have also strengthened the boards of our principal regulated
subsidiaries by increasing the level of independence on those
boards, including through additional representation from the
Non-Executive directors on the Old Mutual Wealth Board.
Funding and future capital structure
Quilter plans to maintain a strong solvency and liquidity
position through disciplined management of capital resources and
risks. The backing of a financially strong group is important given
the security and peace of mind that it affords customers and
advisers.
Quilter will maintain a disciplined approach to capital, in
order to balance its current and anticipated liquidity, regulatory
capital and investment needs, with a view to returning excess
capital to shareholders as appropriate. As part of its disciplined
approach to capital, the Group has a prudent capital management and
liquidity policy.
On 28 February 2018, we entered into, and fully drew down, a
senior unsecured term loan of GBP300 million with a number of
relationship banks. This term loan will be repaid in full using
proceeds from the sale of Single Strategy following the completion
of that transaction. In addition, we have entered into a GBP125
million revolving credit facility, which is currently undrawn and
is expected to remain undrawn during 2018.
Also on 28 February 2018, we issued a GBP200 million
subordinated debt security in the form of a 10-year Tier 2 bond
with a one-time issuer call option after five years to J.P. Morgan
Securities plc, paying a semi-annual coupon of 4.478%. Including
the impact of amortisation of bond set-up costs, the issuance of
this security will increase operating expenses in the Corporate
Head Office segment by approximately GBP11 million on an annual
basis. The debt security is currently undocumented and unlisted and
has a Fitch instrument rating of BBB-. We intend to finalise a
prospectus and obtain a listing for the bond on the regulated
market of the London Stock Exchange, with a view to a potential
remarketing and secondary placement of the security in due
course.
The subordinated debt security, the new term loan and the
revolving credit facility have been issued to ensure that Quilter
has sufficient capital and liquidity to maintain strong capital
ratios and free cash balances to withstand severe but plausible
stress scenarios. These include, despite it being considered to be
a remote event, the sale of Single Strategy failing to
complete.
Adjusting the 31 December 2017 Solvency II ratio of 155% for the
GBP200m subordinated debt security and the new term loan would
result in a pro forma Solvency II ratio of 171% at 31 December 2017
(before any impact of the sale of Single Strategy).
Whilst this pro forma ratio does not include the expected
Solvency II benefit arising on completion of the sale of Single
Strategy, we believe it includes sufficient free cash to complete
all committed strategic investments (including the UK Platform
Transformation Programme) and to allow for any further potential
costs associated with the FCA's Thematic Review, including for any
potential fine which may be levied by the FCA, in respect of which
no provision has yet been made. The impact of this prudent policy
is that Quilter expects to maintain a solvency position in excess
of its policy in the near-term.
The Solvency II impact of the completion of the sale of Single
Strategy would have increased the pro forma 31 December 2017
solvency ratio by c. 40 percentage points before any potential
distribution of surplus proceeds to shareholders.
Subsequent to the year end, and as part of a series of internal
transactions, GBP566 million of intercompany indebtedness to other
companies within the Old Mutual plc group has been equitised, with
the effect of the intercompany indebtedness being cancelled and
replaced with equity in the form of share capital and a merger
reserve. The remaining GBP200 million intercompany indebtedness was
repaid in full from the new facilities referred to above and from
existing cash resources on 28 February 2018. On the same date, the
GBP70 million revolving credit facility with Old Mutual plc was
cancelled.
Outlook for the Quilter business as a standalone business
Quilter has continued to trade in line with expectations since
the year end. Overall, we continue to remain confident in Quilter's
prospects and it is anticipated that the next trading update will
be for the first quarter of 2018, which is expected to be published
in April 2018.
As a key step in the preparation of Quilter to be a separately
listed business, we will be publishing a Prospectus (the
"Prospectus") in relation to our business. The Prospectus will
include more detailed information in relation to Quilter's
business, including its strategy and outlook. It will also contain
detailed risk factors and other key information relevant to our
business.
This section summarises certain information on Quilter's
business, including certain forward looking information in relation
to operating performance expectations and targets which will be set
out in detail in the Prospectus, and these statements should be
read in conjunction with all the information in the Prospectus when
it is published.
NCCF
We believe that the positive structural growth dynamics in the
UK wealth market and our leading market positions and full service,
multi-channel model position Quilter for continued success. As a
result, we will target NCCF (excluding Heritage) of 5 per cent. of
opening AuMA per annum over the medium term. Should market
conditions remain supportive, we expect Quilter to exceed this
target in 2018.
Revenue margin
Subject to delivering currently expected AuMA volumes and
business mix, we believe Quilter's overall annual rate of revenue
margin decline should slow in the near-term, and that the revenue
margin should become increasingly stable.
Operating margin
In the second half of 2018, management will review the Quilter
standalone cost base and operating model to identify long term
optimisation initiatives to improve overall business efficiency.
However, at this stage, the initiatives, potential efficiency
savings and restructuring costs to achieve this optimisation have
not yet been scoped.
Our operating model is designed to capture operating leverage
from the growth in assets. We currently intend to continue to
invest in growing our business over the coming years, and in 2018
and 2019 we will bear the full impact of a standalone cost base as
a listed company. In the near term, this is likely to lead to a
small decrease in our operating margin, before interest costs,
below that reported in 2017. We expect the operating leverage
benefits will develop thereafter, and we are targeting a Quilter
operating margin, before interest costs, of 30 per cent for the
year ending 31 December 2020 before we implement any future
optimisation initiatives from management's review.
Aside from normal operating expense movements as the business
grows, this operating margin target incorporates the following
considerations:
- the operating profit impact of potential selective investments
in advice distribution;
- additional staff costs in 2018 and later years arising from
long term incentive plan ("LTIP") awards under the new Quilter
share plans; and
- in line with previous statements, Quilter expects up to GBP30
million per annum of additional fixed costs above 2016 operating
expense levels as a consequence of the Managed Separation and its
need to operate on a fully standalone basis. Of the additional
expenses, approximately GBP16 million on an annual basis were
reflected in 2017 year-end reported results, and therefore up to an
incremental approximately GBP14 million of annual expenses will be
incurred during 2018.
Solvency II impact of sale of Single Strategy
Following the completion of the sale of the Single Strategy
business, we expect to report that Quilter's net asset value will
increase by c.GBP360 million based on current consideration
expectations and before allowing for the costs of disposal. In
addition, we expect to record a restructuring charge of c.GBP 20
million in respect of the establishment of the standalone
multi-asset business.
Dividend policy
Our dividend policy will be to target a dividend pay-out range
of 40 to 60 per cent of post-tax operating profit, with the split
of interim and final dividends to be approximately one-third and
two-thirds respectively. Any dividends will take into account
Quilter's underlying cash generation, cash resources, capital
position, distributable reserves and market conditions at the
time.
The first dividend payment which Quilter will make as a
separately listed company is expected to be the final dividend in
respect of the year ending 31 December 2018. Quilter currently
expects this dividend to be determined by a pay-out ratio at the
lower end of the target range and to reflect the expected interim /
final dividend split.
Following the completion of the sale of Single Strategy, and
outside the above dividend policy, Quilter will also consider a
distribution from the surplus proceeds to its shareholders. In
determining the size of any potential return, a number of factors
will be taken into account, including: (i) the repayment in full of
the senior unsecured term loan, (ii) the costs associated with the
sale of Single Strategy, and (iii) the costs associated with the
establishment of the standalone Quilter Investors multi-asset
business.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR UVVURWVAOARR
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March 15, 2018 03:01 ET (07:01 GMT)
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