Financial Highlights Operating profit* increased by 38% to £911 million Asset management operating profit up 158% to £124 million Banking operating profit up 56% to £327 million Life assurance operating profit on continuing operations increased 12% to £478 million Underlying life assurance value of new business increased 16% to £72 million Operating earnings per share* increased 38% in Sterling terms to 17.0p Dividends per share increased by 18% to 4.7p Embedded value= up 3% to £5,553 million Embedded value= per share £1.56 Operating earnings per share Dividends per share 17.0p 12.3p 4.7p 4.0p 1999 2000 1999 (pro forma) 2000 * Operating profit and operating earnings per share are stated before goodwill amortisation and have been calculated using a long term investment return. = Embedded value represents the sum of the shareholders’ net assets (including listed subsidiaries at market value) and the present value of the future after tax profit from the life business written and in force at the valuation date, adjusted for the cost of holding appropriate solvency capital. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 1 Financial Highlights – Group Summary consolidated profit and loss account Existing operations Aquired operations Operating profit Life assurance Continuing operations Discontinued operations Banking Asset management General insurance Other shareholders’ income/(expenses) Operating profit based on a long term investment return before goodwill amortisation 478 325 67 44 (36) 878 – 2 57 – (26) 33 Goodwill amortisation Short term fluctuations in investment return Non-operating items Profit on ordinary activities before tax Tax on profit on ordinary activities Profit on ordinary activities after tax Minority interests Profit attributable to shareholders Dividends paid and proposed Retained profit for financial year £m 2000 Total 478 – 327 124 44 (62) 911 (54) (180) 356 1,033 (186) 847 (341) 506 (163) 343 £m 1999 Total 426 (50) 210 48 59 (32) 661 (5) 778 54 1,488 (165) 1,323 (257) 1,066 (69) 997 Rm 2000 Total 5,029 – 3,440 1,305 463 (652) 9,585 (568) (1,894) 3,746 10,869 (1,958) 8,911 (3,588) 5,323 (1,714) 3,609 Operating profit 2000 (before other shareholders' income/(expenses) General insurance 4% Funds under management 2000 Total £169 bn Banking 34% Life assurance 49% International 88% Asset management 13% South Africa 12% Operating profit 1999 (before other shareholders' income/(expenses) Funds under management 1999 Total £45 bn General insurance 9% Banking 30% Life assurance 54% South Africa 60% International 40% Asset management 7% O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 2 Financial Highlights – Business Life Assurance Return on capital allocated New business premiums Single Recurring Annual premium equivalent Underlying new business margin Value of new business Return on assets 2000 1999 £1,860m £2,092m £1,612m £1,852m £240m £425m 20% £75m 2.3% £248m £409m 22% £74m 2.1% 23% 20% 1999 2000 Asset Management Funds under management Operating income Operating profit before integration costs Operating profit after integration costs and before goodwill amortisation 2000 1999 £496m £192m £138m £48m £124m £48m £169bn £45bn 1999 2000 Banking – Nedcor Limited Return on equity 2000 1999 Return on average assets Cost to income ratio Non-interest revenue to total income Net interest margin Capital ratio – tier 1 2.10% 50.0% 47.6% 3.46% 11.5% 1.95% 51.7% 44.4% 3.64% 10.5% 25.3% 24.0% As reported by Nedcor 1999 2000 General Insurance – Mutual & Federal Insurance Company Operating ratio Net written premiums Operating profit 2000 1999 £305m £44m £258m £59m 99% 100% 1999 2000 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 3 Chairman’s Statement “WE HAVE MADE SIGNIFICANT PROGRESS “WE HA T H R O U G H C O N T I N U E D VE MADE SIGNIFICANT PROGRESS T H R O U G H C O N T I N U E D C O R E B U S I N E S S E S A N D , T H R O U G H D E V E L O P M E N T O F O U R C O R E B U S I N E S S E S A N D , T H R O U G H D E V E L O P M E N T O F O U R F O C U S E D A C Q U I S I T I O N S , W E H AV E E S T F O C U S E D A C Q U I S I T I O N S , W E H A A B L I S H E D A S T R O N G V E E S TA B L I S H E D A S T R O N G F O U N D AT I O N O N W H I C H T O F O U N D A B U I L D O U R B U S I N E S S E S F O R T I O N O N W H I C H T O B U I L D O U R B U S I N E S S E S F O R C U S T O M E R A N D S H A R E H O L D E R VA L U E I N C U S T O M E R A N D S H A R E H O L D E R V T H E Y E A R S A H E A D . ” A L U E I N T H E Y E A R S A H E A D . ” Mike Levett Chairman and Chief Executive Dear Shareholder issuer rating from Moody’s Investor Service in I am pleased to present our results for the year ended November. This rating is important to the Group in 31 December 2000. This past year has seen the Group optimising its capital structure through appropriate move rapidly to develop its core businesses and build use of debt finance. an international presence through acquisitions in the United Kingdom and the United States. Our Life Assurance acquisitions of Gerrard Group in March 2000 and of Operating profit at our continuing life operations was United Asset Management Corporation (UAM) in £478 million, an increase of 20% in Rand terms and September 2000 have strengthened our international 12% in Sterling terms from the previous year, even platform to complement our formidable base in the though the comparative figures for 1999 included a South African financial services market. number of one-off positive effects arising from the very Our operating profit for 2000 of strong investment market in that year. £911 million has grown by 38% from The underlying value of new business on an embedded 1999 levels, with our newly acquired value basis increased 16% to £72 million, after taking companies contributing £33 into account the impact of the new tax regime in million (net of financing costs) in South Africa and demutualisation effects. the periods of 2000 for which their results were consolidated. Operating earnings per share have also increased by 38% to 17.0 pence and embedded value increased 3% to £5,553 million. The Group was delighted to obtain an A2 senior unsecured The Group reorganised its individual life operations in South Africa into three segments this year to improve service and the quality of products offered to customers. We have also successfully launched a number of individual and group product ranges and bancassurance initiatives, and managed costs effectively to enhance shareholder value. Internationally, the Group entered into a joint venture in life assurance with Kotak Mahindra in India, in September. We have recently announced the acquisition, subject to regulatory consent, of Unified Life, which will provide a platform for Old Mutual to sell a suite of annuity and term products in the US through brokers. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 4 Asset Management development. Following the successful flotation of The operating profit of our asset management Dimension Data Holdings plc on the London Stock businesses increased by 158%, to £124 million, from Exchange, Nedcor restructured its holdings in the £48 million in 1999. Our asset management business took a significant step forward following the acquisition of UAM for US$2.9 billion in September. This acquisition added some US$200 billion of funds under management. As part of our ongoing review of the business, we have commenced the restructuring of UAM’s operations, forming Old Mutual Asset Managers (US) from seven affiliates who, together with Pilgrim Baxter, have entered into new arrangements designed to allow full earnings participation rather than operating in accordance with the revenue-sharing arrangements previously in place. We are delighted with the way the management of these enterprises have endorsed these initiatives. Dimension Data group, retaining an 8% interest in the listed company. This restructuring resulted in a gain of £356 million being recorded in the profit and loss account as a non-operating item. General Insurance The contribution of Mutual & Federal Insurance Company, our 51% owned general insurance subsidiary, to the Group’s operating earnings benefited from a marked improvement in underwriting results in the second half of 2000, as well as from its £106 million acquisition of CGNU’s South African business during the fourth quarter. Investment return was lower as a result of the impact of assets realised to fund special dividends. Mutual & Federal has maintained its position as one of the leading general insurers in Our private client business has undergone significant South Africa. change this year, following completion of the acquisition of Gerrard Group plc for £529 million in Market factors March 2000. Greig Middleton and Capel Cure Sharp The Group’s presentation of operating earnings, using have been relaunched under the Gerrard name and a long term rate of investment return, smoothes out are now under one management. As with any large the volatile effects of market movements on the integration, there are some hurdles to overcome in the Group’s results for the year. The effect of actual short term; however, we are confident of meeting the market movements on shareholder investment values is challenges ahead. The money market operations depicted as short term fluctuations, which were an of Gerrard & King, the discount house acquired as adverse £180 million in 2000, principally reflecting part of Gerrard Group, were wound down over the movements in the JSE All Share Index. Profit after tax last quarter of 2000, and its collateral management and minority interests for the year was £506 million, capability rehoused under fellow subsidiary, GNI. compared to £1,066 million for 1999. Banking The operating profit of our banking business increased by 56%, to £327 million, from £210 million in 1999, with the main contributor to these results being Nedcor, our 53% owned subsidiary. Nedcor continues to meet world class operational standards, whilst investing prudently in technology and retail joint ventures that will provide future opportunities for growth and Whilst operating earnings in South Africa have been strongly positive in Rand terms, their contribution to Group profit has been affected by the continued depreciation in the Rand/Sterling exchange rate, which, using average rates, was some 7% down in 2000 when compared to 1999. This reduced reported operating profit for 2000 by approximately £59 million from what it would have been under the average exchange rate in 1999. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 5 Chairman’s Statement continued Management/Employees and announced by the Company on 17 April 2001. I am pleased that in the last year we have significantly strengthened management of the Group. Jim Sutcliffe Outlook joined as Chief Executive, Life, in January 2000, and The Group set itself a great deal to accomplish in Julian Roberts as Group Finance Director in August 2000 and has worked hard to drive through its strategy. 2000, following Eric Anstee’s appointment as Chief The economic environment affecting our businesses Executive, Financial Services. Richard Laubscher, Chief remains important to future performance, and Executive of Nedcor, was appointed as an Executive conditions may prove challenging in 2001. We are Director of the Company from 1 January 2001. confident, however, that the foundations we have In addition to appointing Roddy Sparks as the new Chief Executive for our South African life operations, we have recruited key personnel for our UK businesses, and taken important steps to restructure and strengthen management within our newly acquired US operations. To all our new colleagues in the Group, I would like to extend a particularly warm welcome. I would also like to thank all employees of the Group for their contribution to Old Mutual plc in an exciting and successful year. Dividend The directors are proposing a final dividend of 3.1p per share, making a total dividend for the year of 4.7p per share, an increase of 18% on last year’s pro forma. The dividend is covered 3.6 times by operating earnings per share of 17.0p. The dividend, which is subject to approval by shareholders at the AGM on 18 May 2001, will be paid to shareholders on the register at the close of business on 20 April 2001 for all the exchanges where Old Mutual plc’s shares are listed. The shares will trade ex- dividend from the opening of business on 18 April 2001. The local currency equivalents of the proposed dividend for shareholders on the South African, Malawi and Zimbabwe branch registers and the Namibian section of the principal register will be determined using exchange rates on 12 April 2001 established this year provide a sound platform for building value for the future. Annual General Meeting There are a number of items of special business included in the agenda for our AGM, which is to be held in London on 18 May 2001. The notice of that meeting is set out on pages 129 to 131 of this document and the accompanying notes on pages 132 to 138 provide further details and explanation of these matters. I would particularly draw to your attention Resolution 10 set out in the enclosed notice of the AGM, which relates to the adoption of amended Articles of Association to take account of recent developments in South African and UK law, and Resolution 11, which relates to the proposed adoption of a new all employee share plan. The terms of this plan and further background on this proposal are described in more detail on pages 134 to 138 of this document. Your Board considers that all of the items of special business (Resolutions 6 to 11 inclusive) to be proposed at the AGM are in the Company’s best interests and recommends that you vote in favour of them. Mike Levett Chairman and Chief Executive O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 6 Building value W E A R E C O M M I T T E D T O D E V E L O P I N G T H E G R O U P I N A WA Y T H AT G E N E R AT E S VA L U E F O R O U R C U S T O M E R S A N D S H A R E H O L D E R S . B Y TA K I N G T H E S K I L L S A N D E X P E R I E N C E B U I LT U P I N S O U T H A F R I C A , A N D A P P L Y I N G T H E M I N N E W M A R K E T S , W E A R E C R E AT I N G A W O R L D C L A S S I N T E R N AT I O N A L F I N A N C I A L S E R V I C E S C O M PA N Y. T H E Y E A R 2 0 0 0 H A S S E E N R A P I D P R O G R E S S . T H E A C Q U I S IT I O N S O F G E R R A R D G R O U P I N T H E U K A N D U N I T E D A S S E T M A N A G E M E N T I N T H E U S A G I V E U S A S U B S TA N T I A L P R E S E N C E I N T H O S E M A R K E T S . W E A R E B U I L D I N G O N O U R S T R E N G T H I N S O U T H A F R I C A , S E R V I N G B O T H T H E S O P H I S T I C AT E D C U S T O M E R A N D T H E N E W L Y E M E R G I N G M I D D L E C L A S S . AT T H E S A M E T I M E , O U R N E W L I F E A S S U R A N C E J O I N T V E N T U RE I N I N D I A P R O V I D E S A F O O T H O L D I N O N E O F T O M O R R O W ’ S G R O W T H M AR K E T S . T H R O U G H O U T T H E B U S I N E S S W E A R E B U I L D I N G N E W T E C H N OL O G I E S , D E P L O Y I N G O U R S K I L L S A C R O S S N AT I O N A L B O U N D A R I E S , O P E R AT I N G T O W O R L D C L A S S S TA N D A R D S A N D C R E AT I N G A C U S T O M E R - F O C U S E D , E N T R E P R E N E U R I A L C U LT U R E . We aim to add value in three ways: • Optimising the performance of our core businesses by growing profitably and operating more efficiently. • Taking our skills into new ventures in related businesses and new markets. • Planting the seeds for longer-term growth by establishing new businesses in developing markets. Optimising the performance of our core businesses Taking our skills into new ventures and new markets Planting the seeds for longer-term growth Short term Long term O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 7 D E V E L O P I N G I N T E R N A T I O N A L L Y World standard on a world stage O U R S T R A T E G Y O F B U I L D I N G A N I N T E R N A T I O N A L A S S E T A C C U M U L AT I O N A N D P R O T E C T I O N B U S I N E S S T O O K A M A J O R S T E P F O R W A R D D U R I N G 2 0 0 0 W I T H T H E A C Q U I S I T I O N O F G E R R A R D G R O U P. T H E I N T E G R A T I O N O F I T S G R E I G M I D D L E T O N P R I VA T E C L I E N T S T O C K B R O K I N G B U S I N E S S W I T H O U R E X I S T I N G C A P E L C U R E S H A R P O P E R A T I O N S C R E A T E S T H E L A R G E S T P R I VA T E C L I E N T S T O C K B R O K E R I N T H E U N I T E D K I N G D O M , N O W R E B R A N D E D G E R R A R D . T H I S D E V E L O P M E N T C O N S O L I D A T E S O L D M U T U A L ’ S P O S I T I O N A S A N I M P O R T A N T P L A Y E R I N T H E U K F I N A N C I A L S E R V I C E S M A R K E T. With 90,000 discretionary wealth management clients and more than 100,000 other trading customers, the new Gerrard is well placed to leverage the Group’s asset management expertise. Old Mutual’s broking and asset management operations have one of the largest trading volumes of clients on the London Stock Exchange, offering unrivalled execution capacity and in-depth market knowledge. Old Mutual Asset Managers (UK) has successfully launched new funds and set itself ambitious growth targets. GNI touch – the innovative online dealing system developed by Gerrard’s derivatives business, GNI – is helping to enhance our dealing capability and to attract new clients. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 9 D E V E L O P I N G I N T E R N A T I O N A L L Y O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 10 D E V E L O P I N G I N T E R N A T I O N A L L Y Building a presence in America T H E A C Q U I S I T I O N O F U N I T E D A S S E T M A N A G E M E N T C O R P O R AT I O N ( U A M ) G I V E S U S O U R F I R S T M A J O R P R E S E N C E I N T H E U S A . I T B R I N G S S I G N I F I C A N T N E W I N V E S T M E N T C A PA B I L I T I E S T O T H E G R O U P, T R I P L E S A S S E T S U N D E R M A N A G E M E N T T O £ 1 6 9 B I L L I O N A N D P U T S U S A M O N G T H E T O P 3 0 F U N D M A N A G E R S I N T H E W O R L D . O U T S I D E T H E U S A , U A M A L S O H A S O P E R A T I O N S I N C A N A D A , J A PA N A N D A N U M B E R O F C O U N T R I E S I N E U R O P E . Twenty-two Morningstar ratings of four and five stars demonstrate outstanding investment performance by UAM affiliates. Pilgrim Baxter is a leading US mutual fund provider, with some of the most admired funds in the market. We are supporting the evolution of its product lines and the broadening of its distribution. Seven key UAM affiliates have aligned themselves under Old Mutual Asset Managers (US) and are developing a common marketing platform, offering a unique multi-style institutional asset management service. 2000 saw the launch of eSecLending, an innovative stocklending system developed by UAM through a joint venture with the giant US investment fund, CalPERS. In early 2001 Old Mutual announced plans to launch a life assurance business in the USA, selling selected products through phone contact with brokers. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 11 D E V E L O P I N G I N T E R N A T I O N A L L Y O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 12 G R O W I N G I N S O U T H A F R I C A World class products for South Africa’s customers W I T H O U R S T R O N G B R A N D S A N D E X T E N S I V E C U S T O M E R B A S E , W E L E A D T H E S O U T H A F R I C A N F I N A N C I A L S E R V I C E S I N D U S T R Y. I N 2 0 0 0 W E R E V I T A L I S E D O U R S AV I N G S P R O D U C T S A N D F O C U S E D O U R T E A M S O N T H E N E E D S O F D I F F E R E N T C U S T O M E R G R O U P S . W E I N V E S T H E AV I L Y I N N E W T E C H N O L O G Y T O D E L I V E R L O W E R C O S T N E W G E N E R A T I O N P R O D U C T S . T H E R E S U LT I S A R A N G E O F W O R L D C L A S S P R O D U C T S T H A T M E E T C U S T O M E R S ’ N E E D S I N A D E M A N D I N G M A R K E T P L A C E . To respond to market trends, our Employee Benefits business has developed a multi-manager product capability for institutional investors’ funds. Modelled on the success of our Investment Frontiers range of savings policies, we have introduced a flexible life product called Investment Horizons to meet customers’ needs for long term asset accumulation and protection. FundsNet is an innovative online funds supermarket, launched in 2000. In a further development in 2000, unit trust customers can now access their accounts on the move via WAP mobile phones. We now have a new team of financial advisers offering high quality advice and up-market products to wealthy South Africans. Nedcor continues to be at the forefront of the South African banking market. Recent innovations include customer smartcards with added security and flexibility. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 13 D E V E L O P I N G I N T E R N A T I O N A L L Y O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 14 G R O W I N G I N S O U T H A F R I C A D E V E L O P I N G I N T E R N A T I O N A L L Y Meeting the needs of ordinary South Africans T H E G R O U P I S P L A Y I N G A L E A D I N G R O L E I N E X T E N D I N G F I N A N C I A L S E RV I C E S T O T H E E N T I R E S P E C T R U M O F T H E S O U T H A F R I C A N P O P U L A T I O N . I N PA R T I C U L A R , W E A I M T O M E E T T H E A S P I R A T I O N S O F T H E E M E R G I N G M I D D L E C L A S S – T H E W E A LT H C R E A T O R S O F T O M O R R O W – A N D L A S T Y E A R W E L A U N C H E D A N U M B E R O F P R O D U C T S T O H E L P M O R E S O U T H A F R I C A N S T O P L A N T H E I R F I N A N C I A L F U T U R E S . T H E G R O U P A L S O C O N T R I B U T E S T O A W I D E R A N G E O F C O M M U N I T Y C A U S E S . Old Mutual plays a leading role in the gathering of South African savings and arranges their investment both domestically and internationally. It also administers a leading South African healthcare scheme which doubled its membership in 2000. The Essential Savings Plan – a flexible, low-cost policy that offers customers a choice of investments – was launched during 2000. Nedcor acquired FBC Fidelity Bank and merged it with Peoples Bank to create the country’s largest black empowerment bank. Old Mutual’s Group Schemes’ life and savings products are now sold through Peoples Bank branches throughout South Africa. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 15 15 Key Facts and Figures K E Y B U S I N E S S O P E R A T I O N S F I N A N C I A L H I G H L I G H T S Insurance • Largest life assurer in South Africa, selling protection and investment products to large institutional clients and retail market segments in South Africa and offshore. • 2000 life operating profit of £478 million, up 12% from 1999. • 2000 annual new business premiums of • Individual product businesses and distribution channels reorganised around major customer segments of High Income, Middle Income and Emerging Wealth. • Group interest of 51% in Mutual & Federal, the second largest general insurance group in South Africa, selling protection products to corporate and retail clients – with a market share of approximately 19% of the South African general insurance market. • Market leader in life assurance in Zimbabwe, Namibia, Kenya and Malawi. Offshore life assurance operations in Guernsey and the Isle of Man. • Broker-orientated life assurance capability recently acquired in the USA. Old Mutual Asset Managers (US) – is a focused multi-style, multi- product asset management business, providing a wide range of products to US institutions through a network of seven affiliates. Pilgrim Baxter & Associates – sells a wide range of US mutual fund products to retail customers. Old Mutual Asset Managers (SA) – is asset manager to many large South African institutions, offering both local and offshore capabilities. Old Mutual Asset Managers (UK) – is building a specialist institutional capability. GNI – provides targeted financial product offerings to retail and small institutional customers. Gerrard – is the UK’s largest private client stockbroker. Old Mutual Securities – offers equity research, corporate finance and market-making services to UK clients. Old Mutual Unit Trusts – manages retail unit trusts in South Africa. FundsNet – offers real-time trading capabilities for unit trust investors. Nedcor Ltd, Nedbank, Permanent Bank, Peoples Bank, Nedcor Investment Bank, Cape of Good Hope Bank, Central Africa Building Society • Group interest of 53.4% in the Nedcor group, which provides a comprehensive range of banking products in South Africa. • The Group is also a market leader in South African investment banking through its controlling interest in Nedcor Investment Bank. • The Group’s UK money market discount operation, Gerrard & King, was wound down during 2000. £1.9 billion. • New business margin increased from 20% (new tax basis) to 22% in 2000. • Insurance funds totalled £22 billion in 2000. • Payment by Mutual & Federal of special dividend of £71 million. Gross premium income 2000 – Life Single premium – individual £952m Single premium – group £660m Recurring premium – individual £1,002m Recurring premium – group £351m • 2000 operating profit of £124 million. • Net contribution to profit of £33 million from acquired asset management operations. • Total funds under management of £169 billion at 31 December 2000, including Gerrard Group and United Asset Management Corporation. • A leading player in UK high net worth market. Funds under management at 31 December 2000 Total £169bn OMAM(US) £50bn Other UAM £57bn PBA £12bn Other £7bn Life £22bn Gerrard £21bn • Cost to income ratio improved from 51.7% to 50.0% in 2000. • Total average net assets of the Nedcor group £12.5 billion. • Return on equity of 24.0%. Nedcor – earnings per share R cents 1,267 1,024 822 665 528 96 97 98 99 00 A leader in the South African life and general insurance marketplace Financial Services Among the top 30 fund managers in the world, with strong foundations in the USA and South Africa UK private client stockbroking capability through Gerrard Banking A powerful force in South African banking, leveraging innovative technology O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 16 D E V E L O P I N G I N T E R N A T I O N A L L Y C U S T O M E R B A S E P R O D U C T S , D I S T R I B U T I O N A N D D E V E L O P M E N T 2 0 0 0 H I G H L I G H T S • Our individual life and affinity group businesses together have approximately 3.8 million customers. • Employee Benefits administers in excess of 800 funds, representing approximately 520,000 members – number of funds being reduced to approximately 200. • International offshore business has over 50,000 high net worth and expatriate customers. • 400,000 general insurance customers. • An average of 2,000 general insurance claims handled every working day. • Over 350 third party clients served by Old Mutual Asset Managers outside the USA. • 982,000 unit trust accounts at Old Mutual Unit Trusts. • 90,000 managed clients and 100,000 other trading customers at Gerrard. • 2.3 million retail customers and 600 corporate customers of the Nedcor group. Distribution • Individual business distributed by agents, brokers and • Salaried advisory service launched under Mint brand. • Reorganisation of individual product businesses and distribution channels around major customer segments. • Launch of Splitfunder for efficient transfer of member-level investment choices to appropriate asset managers. • Dataway – electronic data and money exchange capability. • Formation of Miraculum - a joint venture with Dimension Data and Nedcor in the electronic procurement services market. • Investment Frontiers web-enabled for client and intermediary transactions and interactions. • Affinity group sales alliance with Peoples Bank and JD Group. • Nedcor Elite Personal Portfolio Service launched in Hong Kong by Old Mutual International together with Nedcor Asia. • Critical mass and distribution economies through acquisition of CGNU’s general insurance operation in SA by Mutual & Federal. • Indian joint venture with Kotak Mahindra. • SA life assurance business received an Aa3 rating from Moody’s for domestic liabilities. • Mutual & Federal’s AAA credit rating from Duff & Phelps reconfirmed. • Award of SAIFSA Commercial Insurer of the Year for 2000. • OMAM(SA) named top South African fund management company by management of listed corporations in 2000 for second year running – Reuters survey. • Creation of single genuine third party asset management capabilities at OMAM(UK). • UAM acquired for $2.2 billion effective September 2000. • Launch of FundsNet, an online unit trust trading facility. • Economic arrangements with Pilgrim Baxter & Associates and OMAM(US) affiliates modified from revenue-sharing to profit sharing. • Formation of eSecLending, offering a web-based auction system for securities lending. • Gerrard Group acquired in March 2000 for £529 million. • Integration of private client businesses and relocation of London operations to one building. • Collateral management function moved from Gerrard & King to GNI. • Technology joint ventures with Dimension Data and others. • FBC Fidelity Bank acquired and merged with Peoples Bank. • Strategic alliances with Capital One, Old Mutual Group Schemes, JD Group, Pick ‘n Pay, Virgin Active and Imperial. • Enabling technology investments – Aplitec, Nihilent, IQ Business Group, The Internet Solution, Miraculum, as well as Dimension Data. directly. • Employee Benefits products are distributed directly and through brokers. • Predominantly agent distribution in the rest of Africa. • General insurance business substantially written through broker channels. Innovative products Investment Horizons – savings and investment products for middle income market. Platinum Pensions – defined contribution retirement plans. Essential Savings Plan – affordable savings plan for entry-level investors. Symmetry – multi-manager capability, complementary to smoothed bonus products. Synergy – short term disability product. ORB – group risk arrangement offering member-level flexibility. Distribution • Range of investment management services to institutions, retail mutual funds and high net worth individuals. • 31 Gerrard offices around the UK. • A major retail funds franchise and distribution network in Pilgrim Baxter & Associates. Innovative products • GNI European Funds – guaranteed multi-adviser funds providing investors with exposure to equity derivatives and commodity futures trading. Distribution • Nedcor Bank retail operates through 238 branches and over 1,000 electronic interfaces and sophisticated delivery mechanisms to large corporate clients, with Global Business Centres for cross-border transactional banking. • Business Direct, a telephone banking facility, is experiencing exponentially increasing volumes. • Cape of Good Hope Bank operates through 14 outlets. Product development • Development of bancassurance products with Old Mutual. • Innovations in delivery channels and software platforms lead to development of value added products. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 17 17 Business Review Life Assurance Jim Sutcliffe Chief Executive, Life Roddy Sparks M.D., S.A. Life Peter de Beyer Individual Life (S.A.) Peter Moyo Employee Benefits/Group Schemes (S.A.) This year has seen significant progress in our life demutualisation premiums and the new South African assurance businesses. In South Africa we have life office tax regime, the underlying value of new appointed a new, young management team business was up 16% in Sterling terms. following Gerhard van Niekerk’s well earned retirement, reorganised the business with much greater customer focus, and significantly extended our technology platforms. The increase in underlying operating profit in Rand terms was 24%. The growth in operating profit derived mostly from capital charges on the high asset base arising from the strong equity markets during 1999, Outside South Africa we have acquired licences to and tight expense management. start operations in India and the USA and built new distribution relationships in the Far East. On an embedded value basis, new business annual premium equivalent was up 3% in Sterling terms, with We achieved world class results from our continuing sales in South Africa up 16% in Rand, excluding the life businesses, with operating profit up 12% at windfall effects in both years of demutualisation. Single £478 million, a return of 23% on internal capital premiums were strong both inside and outside South allocated (1999: 20%), and the embedded value of Africa, and Group business recurring premium sales new business topped £74 million, with the margin on more than doubled. sales being 22%. After adjusting for the effects of Operating profit - continuing operations £m Underlying value of new business £m 500 400 300 200 100 0 Long term investment return Rest of world Group Individual } South Africa 1999 2000 75 60 45 30 15 0 margin 22% margin 20% 1999 2000 Rest of world Group Individual O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 18 South Africa Group Business Financial performance Employee Benefits continued to lead the Guaranteed Fund market in 2000 and declared bonuses for the 1999/2000 year giving policyholders a return of 16% Our Group business, Employee Benefits, delivered in our flagship product, following strong investment an excellent operating profit for the year, which at performance in that period. £85 million was 27% higher than the £67 million achieved in 1999. This performance principally reflects Product innovation the impact of a high opening asset base, coupled with The Group developed a number of innovative products improved fee levels and expense savings from last during the year. Symmetry, launched in August, provides year’s Project 500 initiative. The underlying value of a multi-manager capability to complement our with- new business increased 7% from £27 million to profits range, and is already a growing presence in the £29 million, although margins fell from 49% to 38%, multi-manager market. Synergy, launched in May, is a primarily as a result of changes in the business mix. new short term disability product. October also saw the New recurring business premiums were £48 million, an increase of 129%, compared to £21 million in 1999, principally arising from a higher volume of risk products sold. Single premiums (excluding certain market-linked business, where profits are reported under Asset Management) were lower when excluding the re-investment effects of demutualisation share sale proceeds in both years. launch of our optional risk benefits product (ORB), which offers members flexibility of product choice within a group risk arrangement. Further progress has also been made in the area of group retirement fund administration. In June we launched Splitfunder, a computer application that ensures the efficient transfer of member-level investment choices to a wide choice of asset managers. During the second half of the year we added the capability of electronic data and money exchange known as Dataway. This has provided the business with O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 19 Business Review Life Assurance continued a more efficient, web-enabled, customer service and higher than the £28 million in 1999, primarily improved controls. Moving forward as a result of a reduction in the cost of financing acquisition expenses. New single premiums on an embedded value basis, at £805 million, increased The market for outsourcing pensioner liabilities 15% from a high 1999 base of £697 million, with the remains strong, although the uncertainty surrounding Investment Frontiers range in particular continuing to regulation of distribution of pension fund surpluses is attract flows in excess of £540 million. holding some clients back. Employee Benefits has the products and financial strength to continue attracting significant flows from this market. In addition, the market for more flexible open fund arrangements is developing and we are rapidly adapting our products to meet this demand. We will continue to invest strongly in providing service improvements through better IT systems. Individual Business Financial performance Operating profit of £165 million was 2% lower than the £168 million earned in 1999, although 16% higher Total individual recurring new business premiums, on an embedded value basis, of £131 million were disappointing at some 7% below 1999 levels of £141 million. This principally reflected the adverse impact of a sales force reorganisation on agent headcount and deliberate action to exit unprofitable business areas. Agent numbers have, however, now stabilised and the planned rollout of a new sales methodology was completed in October. Some improvement in volumes was evident in the second half of the year and, importantly, persistency, average case size, and agent productivity trends were positive. in Rand terms after excluding costs of £13 million Within these numbers, our affinity group business, previously reported as shareholder expenses. Higher Group Schemes, continued to perform well, with new margins were earned from high asset levels in the first business premiums this year up 27% on the prior year. part of the year. The value of new business at £38 million was 36% Alliances with Peoples Bank and JD Group, and other initiatives into the private sector represent a significant opportunity for future growth. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 20 20 Product innovation also widely used by the Group for premium collection, This year has seen the development of a number of particularly in our Group Schemes business. innovative new products for the individual client. In June 2000, we launched the Essential Savings Plan, which is an affordable savings plan for entry-level investors, and in November we launched the Investment Horizons range of savings and investment products for the middle market. We have played an important role in the dialogue between Government and the life industry to mitigate the effects on our customers and welcome its intention to continue to allow insurance premiums to be deducted from Government employee payrolls. We have also made considerable progress in the second half of 2000 in building our bancassurance Moving forward joint venture with Nedcor. In addition to the Peoples The individual market is changing rapidly in South Bank/Group Schemes arrangements, we are Africa. The Group is therefore planning for further embarking on a series of product and distribution product launches in 2001 aimed at ensuring a initiatives aimed at middle and high-income customers. comprehensive and competitive range of savings, risk Following the launch of our Mint high net worth brand in July, we have established a specialist salaried advisory service aimed at improving our penetration in this competitive high value market. and investment products in each market segment. At the same time, we are moving our products on to new-generation administration platforms, pioneered for our successful Investment Frontiers range, and aim to deliver significantly improved service levels. Regulation We also aim to expand our market reach by growing Following concerns over increasing debt levels of our Personal Financial Advice distribution force in the Government employees and the activities of unlicensed middle income market, without compromising on the micro-lenders, the South African Government higher entry requirements introduced following the announced, during 2000, plans to phase out non- restructuring of the agency sales force, and by building a statutory deductions from the payroll of Government new sales team focused on the emerging middle market. employees, through the Persal system. This method is O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 21 Business Review Life Assurance continued Technological developments This change has given us the opportunity to build a This past year has seen an aggressive roll-out of our management infrastructure focused on the specific deployment of Information Technology in key areas needs of each of our major customer segments. such as rapid product development systems and e-commerce, where we launched our 4th generation website and low cost administrative platforms. The launch of Investment Horizons and the Essentials product range on a lower cost administrative platform was a key feature, together with the web-enablement of Investment Frontiers, which now allows our customers to interrogate their accounts and monitor performance online. This new customer focus called for a change in culture within the organisation, which is being driven by an initiative, Siyakhula (a Xhosa expression which means “We Are Growing”), recently rolled out to our employees. It aims to harness our employees’ energy within our overall business strategy and to ensure that the virtuous circle of satisfied customer needs, shareholder value, return to the community and In addition to our own developments in the employee development is completed. e-commerce arena, we formed Miraculum in August in conjunction with Dimension Data and Nedcor, to compete in the growing electronic procurement services market. We also acquired a 20% strategic shareholding in The Internet Solution, the leading business-to-business internet service provider in South Africa, in which Nedcor also holds a 20% stake. These investments will secure access to scarce skills and intellectual capital within the rapidly evolving e- commerce marketplace. Customer focus In October we announced the re-organisation of the individual product businesses and distribution Investing in people During the year Gerhard van Niekerk announced his retirement as managing director of Old Mutual South Africa, effective 1 March 2001, following a long and distinguished career. We are all grateful to him for the huge contribution he has made over the years. He is succeeded as M.D. by Roddy Sparks, whose 15 years at Old Mutual have included appointments as Executive General Manager of life investments, finance and, most recently, responsibility for the non-life businesses. Also appointed were Peter Moyo, as Deputy M.D. responsible for institutional business, and Peter de Beyer, Deputy M.D., focusing on individual business. channels around major customer segments, High In February 2001 the Group established Old Mutual Income, Middle Income and Emerging Wealth. Business School, which will provide educational O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 22 opportunities for staff at all levels, and significantly In India, our joint venture with Kotak Mahindra was enhance their skills to deliver better value products one of the few companies to receive its licence in and services for customers and profitable growth December, and we are well advanced in the to our shareholders. development of products and the building of the Rest of the World International and offshore In 2000, our international and offshore expatriate businesses embarked on a fresh strategy, to provide quality single premium bonds and multi-manager offshore unit trusts into South Africa, the Far East and other markets. sales and service teams. In the USA we have entered into an agreement to acquire a widely licensed company, Unified Life, which will provide a platform to sell fixed and equity-linked annuities. We have hired a powerful team of executives for this venture, led by Guy Barker, previously Chief Executive of Natwest Life in the UK and before that Chief Actuary of Jackson National in the USA. We have made considerable progress focusing our product range on high quality single deposit offerings, Rest of Africa with both internal and external asset management, The Group’s operations in Namibia, Kenya and Malawi and we teamed up with Nedcor in the Far East to have made steady progress. Our Zimbabwe business launch a range of innovative unit trust products. continues, however, to suffer from political turmoil, In addition to developing our core operations, during 2000 we started work on a project to bring localised versions of our South African Investment Frontiers product to the UK. This product is expected to be launched towards the end of 2001. which was heightened this year by disturbances surrounding the General Election. This operation, which is the largest financial services business in the country, continued to be profitable, but rapid currency devaluation has significantly reduced its contribution to the Group’s results. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 23 Business Review Financial Services Eric Anstee Chief Executive, Financial Services The Group’s asset management capability took a integration costs of £14 million) was included in significant step forward at the end of September Group earnings from April 2000, and earnings of with the acquisition of United Asset Management £44 million were generated by UAM from Corporation (UAM), one of the largest independent October 2000. investment management organisations in the world. The US market is the world’s largest Asset Management worldwide both for institutional and retail/individual assets. Our asset management businesses performed The acquisition gives the Group a diversified range of well in 2000, with operating profit at £97 million investment managers, styles, asset classes and clients growing 116% from £45 million in 1999. Excluding and now makes the Group one of the top 30 asset the contribution of UAM, existing operations managers in the world, classified by funds under produced an 18% increase in profit, with Old Mutual management. Total operating profit across the financial services segment of £124 million increased 158% from £48 million in 1999, due primarily to a contribution of £57 million from businesses acquired in the year. A Gerrard Group profit of £13 million (after charging Asset Managers (South Africa) and Old Mutual Unit Trusts performing well. Funds under management increased by 276% to £169 billion, primarily as a result of the UAM acquisition. Operating profit £m Funds under management £bn 125 100 75 50 25 0 1999 2000 Other financial services Private client Asset Management worldwide 180 150 120 90 60 30 0 1999 2000 Insurance funds Third party Unit trusts O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 24 United Asset Management Financial Performance Whereas growth-orientated managers in the US performed well in the period of market growth during UAM operating profit of £44 million for the period the first quarter, OMAM(US)’s value-orientated since acquisition represents a strong result in the light managers, Barrow, Hanley, Mewhinney & Strauss, and of difficult market conditions in the last quarter of the NWQ Investment Management, together with certain year. The UAM group ended the year with £119 billion other UAM firms, achieved superior results during the of funds under management, down 14% from the time market’s move to value in the last quarter. of acquisition, principally reflecting the Nasdaq driven lower market levels during the fourth quarter and the Restructuring £6 billion of funds which left the Group through Working closely and cooperatively with affiliate senior planned divestiture. In spite of the market downturn, executives, the Group has successfully completed the net cash flows at Pilgrim Baxter were positive, as the reorganisation of UAM into three focused groups: diversity of Pilgrim Baxter’s product range softened the market effects. The trend toward value managers also became increasingly apparent as cash out-flows from these managers slowed in the last quarter. • Old Mutual Asset Managers (US): seven affiliated firms providing focused, multi-style, multi-product capability; • Pilgrim Baxter & Associates, our major retail funds The investment performance of UAM’s firms during franchise and distribution platform; and the year reflected the breadth of talent and the full • a strategic group consisting of the remaining UAM spectrum of capabilities within the organisation. affiliates providing a wide variety of capabilities, primarily to the institutional marketplace. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 25 Business Review Financial Services continued UAM assets under management at 31 December 2000 (total £119bn) £57bn UAM The remaining UAM affiliates are being carefully reviewed and evaluated to determine the most appropriate future strategy for each firm. These £50bn OMAM (US) discussions encompass a range of options, including joining OMAM(US), remaining indefinitely as a stand- alone firm inside the Group, merging with another UAM firm, or possible alignment with other third parties. The process of working with the firms is £12bn Pilgrim Baxter collaborative, keeping in mind the needs and interests of the firms’ clients, principals and employees. In November 2000, we announced the restructuring of our relationship with Pilgrim Baxter & Associates. The restructuring moved the company from a historical revenue-sharing model to profit-sharing, in order to align incentives with the Group’s objectives. New opportunities Since acquisition we have further developed some research and development initiatives already underway in UAM. In particular, we have established eSecLending Securities as a separate company, to be based in our Bermuda office and targeted to create a new globally- operated internet-based auction system for securities Since then, we have also announced similar lending. The first auction with our US partner arrangements, whereby Acadian Asset Managers, CalPERS took place very successfully in October 2000. Analytic Investors, Barrow, Hanley, Mewhinney & Strauss, Clay Finlay, Dwight Asset Management, NWQ Moving forward Investment Management and Provident Investment Going forward, there will be many opportunities for Counsel have all moved to a profit-sharing model our asset management businesses worldwide, as the under OMAM(US). These affiliates will work together, Group takes advantage of the closer links with UAM and with our other international OMAM asset affiliates, and continues its restructuring programme. management businesses, to meet client needs and seek Our strategy focuses on providing our institutional and opportunities for co-operation. retail clients with high standards of performance and O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 26 service to build value and to maximise cross-business Gross sales amounted to R11.5 billion, an increase of synergies, particularly between Gerrard and UAM. 31% over the previous year. After achieving record inflows in the first half of the year as a result of the Old Mutual Asset Managers – South Africa launch of ten Rand-denominated global funds, these Financial performance funds reached exchange control limits in August and Old Mutual Asset Managers (South Africa) were consequently closed. This, together with a change (OMAM(SA)) delivered excellent results this year with in sentiment by wrap fund managers, resulted in a operating profits of £19 million, up 68% in Rand terms slowing of sales during the second half. from 1999. This principally resulted from higher market values throughout the first half of the year, Launch of FundsNet focused expense management, and enhanced overall In November 2000, FundsNet, an internet-based fee levels from new and existing mandates. investment platform, was launched, giving investors Relative investment performance in South Africa, whilst not as strong as in the previous year, was satisfactory across the range of products during the year. For the second year running, OMAM(SA) was rated the No. 1 fund management company in South Africa by the management of listed corporations in the annual Reuters Survey on Global Emerging Markets. and intermediaries 24-hour access to an extensive range of unit trusts from Old Mutual and other leading South African asset managers. Relaunch of Old Mutual Asset Managers (UK) (OMAM(UK)) 2000 was a year of significant and exciting change for OMAM(UK) following a strategic review of the business, coinciding with the move of the previous Old Mutual Unit Trusts (OMUT) produced excellent CEO, Kevin Carter, to the USA. John Ainsworth was results this year, with operating profit of £16 million, appointed Chief Executive toward the end of the year up 40% in Rand terms on the previous year. This result and brought with him a highly regarded team of was in spite of poor JSE performance, as investor flows investment professionals. The team is now working were directed to global funds, with OMUT benefiting to establish OMAM(UK) as the Group’s UK asset from the timely launch of higher margin offshore management platform and to grow its third party funds, and the continued success of its range of Fund specialist institutional mandates and retail business of Funds products. aggressively. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 27 Business Review Financial Services continued In November 2000, the European Fund was which arose from the high business volumes relaunched, led by Adrian Farthing, and in February experienced in the first half. These issues resulted in 2001, under Ashton Bradbury, the team successfully additional costs, following the recruitment of launched a new UK Select Smaller Companies Fund. temporary resources by the Group to manage the Gerrard Private Client UK Merger and Restructuring In March 2000 the Group’s offer for Gerrard Group was finalised, adding Greig Middleton’s private client business to Capel Cure Sharp Limited. Throughout the year our management teams have worked to integrate and merge the two businesses at all levels, and to co-locate their operations in London and selected branches. In December, Greig Middleton and Capel Cure Sharp were rebranded under the Gerrard name. The combined Gerrard business is the UK’s largest high net worth private client asset manager, offering a wide range of discretionary, advisory and managed services from 31 different office locations. Financial Performance Operating profit, before integration costs of problem and rectify the issues involved. We have strengthened the management team during the latter part of the year following the retirement of Richard Bernays. Stephen Clark was appointed Deputy Chief Executive and Chief Operating Officer of Gerrard in August and Clive Boothman was appointed Chief Executive in September. A new Chief Financial Officer, Peter Meyer, was appointed in December. The restructuring plan following the merger remains on track to secure improved revenue sources and future annualised cost savings of approximately £15 million from a total restructuring cost outlay of £25 million. The timing of delivery has been delayed as a result of a change required to our IT strategy for the combined group to secure operational platforms that are sufficiently robust to deal with high trading volumes similar to those experienced in the first quarter of 2000. £14 million, was £26 million for the year, incorporating Revenues of £149 million were 6% better than the a full year’s contribution from Capel Cure Sharp and previous year on a like-for-like basis, despite the nine months’ contribution from Greig Middleton. transfer of revenue from Institutional and Corporate Operating profit from our Capel Cure Sharp business was adversely affected by regulatory and system issues, business from Greig Middleton to Old Mutual Securities and GNI during the year, as part of the post- O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 28 acquisition rationalisation. Commissions continued to Other Financial Services be strong and, despite flat to lower market and fee Operating profit of £15 million for other financial income levels, improved as charging structures were services businesses was either purchased following the extended throughout our client base and clients Gerrard acquisition or earned by newly established moved toward more discretionary services. Capel Cure businesses. Sharp unit trusts performed well, particularly in the first quarter of the year. GNI Market conditions during the year were challenging, as the APCIMS balance benchmark fell by almost 5% and the FTSE fell by nearly 10%. Total funds under management, at £20.9 billion, increased 118% from £9.6 billion in 1999, principally through the acquisition of Greig Middleton: however, market movements and net fund outflows have somewhat offset this effect. Moving forward The continued integration of the Capel Cure Sharp Trading in GNI’s business has been satisfactory despite market conditions, which saw volumes at low levels in the second half of the year. Operating profit of £8 million for the nine-month period ended 31 December 2000 benefited from further development of equity products. GNI now incorporates the collateral management arm of Gerrard & King, the former discount house business of the Gerrard Group, which was substantially wound down at the end of 2000. GNI remains at the centre of technological innovation for the Group’s asset management division. and Greig Middleton businesses offers exciting GNI Fund Management launched two guaranteed opportunities to leverage the different skill bases multi-adviser funds, GNI European Funds 1 and 2, within each organisation. Over 2001, it is our intention in August and September. The two funds have a to produce a broader and enhanced range of both combined value of $48 million. The funds provide products and services and to leverage the now investors with exposure to both equity derivatives and rebranded Gerrard Investment Funds. Significant commodity futures trading, and both finished the year focus will also be placed on successful delivery of at new peaks. several key transaction processing and client service infrastructure projects. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 29 Business Review Financial Services continued Old Mutual Securities came back into favour. Market-making in stocks began Old Mutual Securities (OMS) was launched in June, in February 2000 and has made a strong start. following the combination of Greig Middleton’s Corporate and Institutional and Albert E Sharp Securities’ businesses into one entity. Since then the group has developed a market-making capability covering more than 300 stocks and gained 30 new corporate broking clients. Prospects remain good as OMS’s product range widens to cover all sectors that exhibit growth potential in the small and mid-cap areas. Old Mutual Specialised Finance (OMSFIN) OMSFIN grew rapidly in 2000, with after tax earnings Revenues have increased strongly to £19 million from of £6 million from its corporate lending, securities £9 million in 1999, reflecting the increased level of lending and structured product activities. The activity and product diversity. OMS benefited from company is well positioned to continue this trend high levels of activity in the early part of the year, through the growth of existing operations and particularly in the IT sector. These reduced in the introduction of new products. second half of the year, when more traditional sectors O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 30 Business Review Banking Richard Laubscher Chief Executive, Nedcor Limited Financial Performance Net interest income was reported as showing an Banking profit of £327 million increased 56% from increase of 9% in the year, despite a decline in interest £210 million in 1999, principally reflecting the impact margin from 3.64% to 3.46%. The margin was of special provisions and property write-downs of £94 negatively affected by the reduced endowment effects million made by the Group’s 53% subsidiary Nedcor of lower interest rates on free capital and the in 1999. Nedcor’s contribution to the Group’s operating profit before minority interests was £337 million, up 57% from £215 million in 1999. In spite of the continuing high interest rate environment in South Africa, which continued to slow business volumes, Nedcor reported a strong result, generating a 26% increase in headline earnings from R2,406 million to R3,027 million and an increase of 24% in earnings per share. Nedcor also reported R98 million in exceptional charges relating to redeployment of funds into strategic investments. Non-interest revenue continued to grow strongly, increasing by 23% and reflecting a strong performance overall and excellent foreign exchange income. Nedcor’s cost to income ratio fell from 51.7% to 50.0% as a result of continued successful cost management, and stabilisation of debt provision levels, the charge increasing by 5% year on year after allowing for the higher provisioning levels within the acquired FBC Fidelity Bank. branch property write-downs and leasehold premises, Nedcor exchanged its 25% interest in Dimension Data which have been included in the Group’s operating International for shares in Dimension Data Holdings profit for reporting under UK GAAP. plc during the fourth quarter, generating an Return on assets Cost to income ratio 1.95% 2.10% 51.7% 50.0% 1999 As reported by Nedcor 2000 1999 As reported by Nedcor 2000 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 31 Business Review Banking continued exceptional profit of R3.7 billion (£356 million). Pick ’n Pay Financial Services to extend its product The increase in shareholders’ funds caused by the range and outlets; Imperial Holdings through the exceptional profit has resulted in the reported overall purchase of 50.1% of Imperial Bank, a specialist return on equity, on a South African GAAP basis, asset-based finance house; and Virgin Active, through reducing 1.3% to 24.0%. Excluding technology the acquisition of a 30% private equity interest in investments, the adjusted return on equity for the the Virgin Active South African health and banking operations was 25.3%, the same as the fitness business. These alliances have given Nedcor previous year. access to over nine million customers. Gerrard & King’s operating profit of £2 million is Secondly, Nedcor’s technology and outsourcing included in this year’s banking results. However, division moved towards commercialisation as a stand- Gerrard & King began winding down its banking book alone entity. This will enable it to utilise capacity more from November and this process is now largely widely and create the potential for the outsourcing of complete. The results of its collateral management IT and processing needs of other financial institutions. division, which moved to GNI in 2000, will be reported as part of other financial services in future. Business development Nedcor developed three non-linear strategies during the year, firstly by forming alliances and partnerships with best-of-breed companies in their fields to develop its retail banking network. In August Nedcor acquired the business of FBC Fidelity Bank Limited, which has Thirdly, Nedcor has seen exciting developments in investments in strategic IT companies and other business enhancing partnerships. This led to further investment in Dimension Data and new investments in IQ Business Group, The Internet Solution, Aplitec, Nihilent Technologies and Miraculum, all new technology businesses that are expected to add value to the traditional business in future. been merged into Peoples Bank Limited and is now Moving forward one of the largest financial institutions serving the Cost control and increased efficiencies, benefits from previously under-banked population in South Africa. alliances and a continued drive to improve client Nedcor also formed important alliances with: Capital One to utilise its unique data-mining capabilities; Old Mutual’s Group Schemes to offer assurance and savings products; furniture retailer JD Group and service should lead to market share growth. These factors, together with anticipated growth from Nedcor’s strategic investments, should contribute to continuing positive results. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 32 Business Review General Insurance Operating ratio Net written premium (total £305m) 99% 100% Other £22m Motor £141m Accident £11m Fire £131m 1999 2000 Financial performance operating profit from £59 million to £44 million Following a difficult first half due to weather-related principally reflects the impact of currency effects and losses, our 51% subsidiary, Mutual & Federal recovered special dividends, which have reduced the asset levels well in the second half as rating increases were passed upon which long term investment returns are earned. into the market place and claims incidence and severity improved. Mutual & Federal’s underwriting Corporate development result for the year was marginally positive, compared to Continuing with its strategy of consolidation in general a £3 million loss reported at the half year. insurance, Mutual & Federal acquired CGU Holdings Premium income rose 18% from £258 million to for R1,206 million (£106 million) in October. £305 million, largely as a consequence of the inclusion As part of its capital restructuring plans, during of the results of the acquired CGU Holdings from November, Mutual & Federal announced a special October, along with the benefit of rate hardening in dividend to shareholders of £71 million. the market. Expense management remains an Notwithstanding this, its capital position remains important feature of Mutual & Federal’s performance, very strong. with levels being contained well this year. The fall in O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 33 Financial Review Julian Roberts Group Finance Director We highlight in this review some of the key features of this year’s financial statements and describe how the significant changes that took place during 2000 affected the Group from a financial perspective. Operating profit presentation In accordance with common UK industry practice, in order to facilitate the evaluation of performance, we have shown operating profit and operating earnings per share before the impact of short term fluctuations in investment return, non-operating items and goodwill amortisation. Acquisitions The Gerrard Group acquisition was funded by £98 million of loan notes and £431 million of internal resources. The $2.9 billion UAM acquisition was principally debt financed through a $1,600 million acquisition finance facility with a syndicate of banks, issuances of $520 million of Medium Term Notes, and other internal resources. Pilgrim Baxter’s initial re-equitisation costs (see below) were funded by placing £153 million worth of new ordinary shares, with future payments expected to be met out of internal resources. UAM operated with 41 separately governed affiliates where the effective economic interest to UAM was restricted to a share of revenues. Since acquisition we have taken steps to realign the interests of the Group with those of certain of the affiliates by a process of re-equitisation, which moves our relationship with Pilgrim Baxter and the Shareholders’ funds £m 4,000 3,000 2,000 1,000 0 1999 2000 Other General insurance Asset management Banking Life assurance O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 34 OMAM(US) affiliates from revenue-sharing to an earnings-linked business model. The transaction with Pilgrim Baxter was in three parts: initial payments of $110 million and $111 million, for 52% of revenues previously owned by management: further payments totalling $420 million (payable at the option of the Group and to be exercised by the end of the third quarter 2001) for the remaining 48%, and a grant of $170 million in phantom stock. Consideration other than the initial payments, together with $129 million relating to the re-equitisation of OMAM(US) affiliates, is structured to be paid over the next seven years, and has been capitalised into goodwill in accordance with UK GAAP. Goodwill is being amortised over 20 years. Other shareholders’ income/(expenses) These items principally represent long term investment return of £17 million earned on shareholders’ funds, offset by financing costs of £32 million and other shareholder costs of £47 million, which include business development costs of £6 million. Taxation The Group’s effective tax rate (based on the tax charge as a proportion of profits on ordinary activities before tax) of 18% is 12% lower than the UK standard corporation tax rate. This is primarily due to the positive effects of tax-exempt income earned by the Group’s life assurance and banking businesses in South Africa and the impact of brought forward tax losses in our South African life businesses, partially offset by STC payments on distributions. Non-operating items Following the restructuring of Nedcor’s interests in the Dimension Data group, the Group realised a gain of £356 million. This has been recorded in the profit and loss account as a non-operating item. Earnings per share The Group’s operating earnings per share based on a long term investment return before goodwill amortisation have increased by 38% from 12.3p in 1999 to 17.0p. This increase principally reflects the strong performance by our life and banking businesses and the one-off charges relating to pensions mis-selling (£50 million), special provisions and property write-downs (£94 million) recorded in 1999. Earnings per share are calculated using an average number of shares in issue during the year of 3,373 million (1999 number of shares: 3,127 million). These shares exclude 88 million unvested shares held in employee share trusts. Dividends The Board recommends a final dividend of 3.1p per share, which, if approved at the AGM, will bring the total dividend per share for the year to 4.7p. This represents an 18% increase over the total pro forma dividend for 1999. Dividend cover (based on a long term investment return) at this level is 3.6 times operating earnings per share (pro forma 1999: 3.1 times). Currency and Markets The principal currency affecting the Group’s operations is the Rand. Depreciation in that currency against Sterling over the reporting period was 14%, with the exchange rate finishing at R11.3:£1 at the end of the year, compared to R9.9:£1 at the beginning of the year. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 35 Financial Review continued Our current policyholder charging and asset management fee-earning arrangements entail that the Group’s earnings are dependent to a significant degree upon asset values, which are themselves determined by world stock markets. The results benefited from the high asset values generated by a strong 1999 South African equity market, which saw the JSE All Share Index rise by 57% during that year. Since the acquisition of UAM, the Group’s earnings have also been affected by movements in US equity markets, particularly those of Pilgrim Baxter, which are closely related to the Nasdaq index. Embedded value Embedded value is the sum of the shareholders’ net assets adjusted to reflect listed subsidiaries at market value, and the present value of the future after tax profit from the life business written and in-force at the valuation date, adjusted for the cost of holding appropriate solvency capital. The change in the embedded value over the period, adjusted for any capital raised and dividend provided for, gives an economic measure of performance. Embedded value is not an appraisal value, so does not include any value for policies not written at the reporting date. The methodology also does not record any additional value for linked “investment type” contracts where profits are recorded under Asset Management, nor any additional “market” value not reflected in the books for non-listed subsidiaries. Embedded value increased 3% during the year from £5,414 million to £5,553 million as positive growth in Rand terms was offset by adverse currency movements. The main contributors to the Rand growth of 17% were the strong growth in Nedcor’s share price, strong new business value, and the effect of assumption changes which crystallised positive experience variances. An analysis of the composition of shareholders’ funds plus the Nedcor and Mutual & Federal market value uplift (the Adjusted Net Worth) is given below: Embedded value £bn 6.0 4.0 2.0 0 1999 2000 Value of in-force Nedcor and Mutual & Federal uplift Shareholders’ funds Composition of adjusted net worth 31.12.2000 31.12.1999 Strategic holdings – Nedcor – Mutual & Federal Portfolio investments in S.A. Other African assets International portfolio investments Cash Unlisted subsidiaries Loans 39% 4% 27% 3% 4% 3% 46% (26)% 37% 4% 33% 4% 11% 7% 4% – Long term investment return The long term investment return used is 14% (1999: 14%), which is based upon actual historical investment returns earned on our South African portfolio. This rate is applied to a rolling average of investible assets adjusted for shareholder cashflows. The return has been translated into Sterling, with other profit and loss account items, using the average exchange rate of R10.5:£1 for the year. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 36 Capital During the year, there were some important changes to the Group’s capital. In July, the Company obtained UK High Court approval to cancel an amount equal to £500 million from its share premium account and to increase its distributable reserves by a like amount, and in October, Mutual & Federal Insurance Company Limited returned capital through payment of a R750 million special dividend (£36 million Group share). In order to fund the $221 million initial Pilgrim Baxter re-equitisation payments, the Group placed 105 million new ordinary shares, simultaneously with 25 million existing issued shares, representing shares held in connection with satisfying claims and errors in accordance with the Scheme of Demutualisation. Solvency The Group’s life assurance and asset management businesses all operate within regulatory environments which set minimum levels of required capital for the purposes of policyholder and customer protection. All of the Group’s main operating businesses have solvency levels comfortably in excess of the local regulatory minimums. In November 2000 the Group received an A2 senior unsecured issuer rating from Moody’s Investor Service and Old Mutual Life Assurance Company (South Africa) Limited, the Group’s South African life company, received an Aa3 rating for domestic liabilities. Mutual & Federal Insurance Company Limited enjoys an AAA rating from Duff & Phelps and Nedcor had a tier 1 capital ratio of 11.5% at 31 December 2000 (1999: 10.5%). Gearing In order to fund acquisitions this year and bring the Group toward a more balanced capital structure, the Group raised £850 million of debt finance, which at 31 December 2000 represented a gearing proportion (defined as debt over capital plus debt) of 25% or 23%, net of cash and short term investments which are immediately available to repay debt. Treasury management The Group’s central treasury function is responsible for managing Old Mutual’s internal and external financing requirements and related interest rate exposures, the management of foreign currency exposures, and the development of best practice within the Group for co-ordinating and managing financial risk. Group Treasury also maintains and develops Old Mutual’s banking relationships in order to ensure transactional and funding needs are met at all times. Risk management The Group recognises that effective risk management is an essential part of protecting and increasing shareholder value and earnings. At the Group level the principal risks are the volatility of the major currencies in which the Group operates (Rand and US$) to Sterling and investment market movements. Given the lack of deep and liquid markets for African trading currencies and the size of currency-related risks, the Group does not currently hedge translation risk, although action may be taken to hedge specific forecast cash flows, such as the payment of dividends from South Africa. In order to manage investment risk, the Group makes limited use of derivative contracts outside regulated entities only for the purpose of risk reduction or efficient portfolio management. Speculative activity is not permitted and O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 37 Financial Review continued all transactions must be fully covered by cash or corresponding assets and liabilities. The total income of all derivative instruments outside regulated entities is not material to the Group. Other risks managed by the Group’s businesses are described below. Life Assurance Underwriting risk is controlled by underwriting principles governing product re-pricing procedures and authority limits. The underwriting process takes into account actual mortality, morbidity and expense experience. The impact of HIV/AIDS is mitigated wherever possible by writing products that allow for re-pricing on a regular basis or are priced to allow for the expected inflationary effects of AIDS. The Group also conducts HIV tests for lives insured above specific values and offers reduced premiums for those willing to undergo regular testing. Market risks on non-profit policies (where the investment risk is carried by the shareholders) principally reside in the guaranteed non-profit annuity book, which is closely matched with gilts and semi-gilt investments. Other non- profit policies are also suitably matched through comprehensive investment guidelines. Market risks on with-profit policies where investment risk is shared are minimised by the practice of smoothing bonus declarations out of surplus assets. Where guarantees are involved, a minimum portion is held in fixed interest assets. Reducing or passing bonuses or even the claw back of non-vested bonuses can mitigate the impact of significant investment shocks before there would be recourse to shareholders. Amounts would be recoverable should market values subsequently improve. Equity price risk and interest rate risk (on the value of securities) are modelled by the Group’s risk-based capital practices which require sufficient capital to be held by the life assurance company in excess of the statutory minimum to allow the Group to manage significant equity exposures. Credit risk is monitored by credit committees covering life and third party funds which establish appropriate exposure limits by portfolio. Banking Financial instruments are fundamental to the operations of Nedcor and such instruments are frequently used to create, alter or reduce the risks that the Group is exposed to in the course of its normal operations. Risks relating to trading and non-trading activities are managed through a comprehensive framework of policies, methods and independent monitoring committees. Asset and liability management is conducted within a formal structure which monitors the levels of acceptable financial risk and the management thereof. Asset and liability management is not heavily reliant on trading securities and derivatives. The focus is on utilising on-balance sheet mechanisms. Interest rate risk for Nedcor is the Group’s net income exposure to adverse movements in rates arising as a result of the mismatches in the re-pricing terms of assets and liabilities. Prospective re-pricing of assets and liabilities is assessed using gap analysis and earnings at risk modelling techniques to assess the potential impact. Liquidity risk is the risk of being unable to raise funds at market prices to meet commitments as they fall due or satisfy client demands for funds. Risk is managed by the maintenance of adequate capital combined with sophisticated cash flow forecasting and strategic planning, maintaining an adequate pool of high quality marketable assets and ensuring appropriate diversity in liabilities. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 38 Credit risk is governed by policy guidelines and administered by an appropriately constituted committee, which meets to approve all facilities in excess of 10% of capital together with other large exposures, risk limits, provisions and non-performing loans. Concentrations in country credit risk are similarly managed. Nedcor trades primarily in foreign exchange and interest rate markets using interest rate swaps, forward rate agreements, bonds and bond options. Currency options, equity and equity derivatives are also traded on a limited basis and may have adverse consequences to shareholder funds. Trading exposures, however, are measured using sensitivity analysis, value at risk and scenario testing and Nedcor operates a formal system of monitoring and oversight on market trading risk. Asset Management The exposure of our asset management businesses to market fluctuations is limited to impacts on revenue levels which themselves are a function of the value of client portfolios. Investment risk is principally borne by the client. Compliance risks faced by these businesses is monitored and reviewed by compliance and risk committees which have been established for this purpose. The risk of loss of key employees is managed by the extension of long term incentive schemes which align with shareholder value targets, and competition restrictions in employment agreements. GNI makes extensive use of derivatives in the ordinary course of its business, however, the nature of this business requires that positions be matched with minimal basis risk, therefore exposures are small. Credit exposures are monitored daily by a credit committee. Gerrard & King’s credit risk exposures are now minimal following the winding down of its banking book over the last quarter of 2000. General Insurance Underwriting risks are controlled through a formal system of parameters within Mutual & Federal Insurance Company Limited which are regularly updated and only deviated from following approval by senior management. Reinsurance cover is in place, with retentions set at conservative levels. Equity price risk is covered by the capital strength of the Company. Julian V F Roberts Group Finance Director London, 6 March 2001 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 39 Board of Directors The Board comprises five executive and six non-executive directors. Mike Levett (61) B. Com, D. Econ. Sc (hc), FIA, FFA, FASSA, is the Chairman and Chief Executive. He was Chief Executive of the Group’s South African life company from 1985 until demutualisation in 1999 and has worked for the Group since 1959. He is also a non-executive director of Barloworld Limited, Central Africa Building Society, Mutual & Federal Insurance Company Limited, Nedcor Limited, South African Breweries plc and Old Mutual South Africa Trust plc. Eric Anstee (50) FCA, is Chief Executive, Financial Services, a position to which he was appointed during 2000, having joined the Group as Group Finance Director in 1998. He was previously Finance Director of The Energy Group PLC. Prior to that he was Group Finance Director of Eastern Group plc from 1993 to 1997. Before joining Eastern Group plc, he was a senior partner with Ernst & Young. He is a member of the Senate of the Institute of Chartered Accountants in England and Wales. He is a non-executive director of Severn Trent plc. Richard Laubscher (49) B.Com (Hons) (Fin), AMP (Harvard), was appointed as an executive director with effect from 1 January 2001. He is Chief Executive of Nedcor Limited, a position he has held since 1994, and of Nedcor Bank Limited and Chairman of Cape of Good Hope Bank and of Peoples Bank. He has worked for the Nedcor Group for a total of 30 years. He is also a director of The Banking Council and of National Housing Finance Corporation in South Africa. Julian Roberts (43) BA, FCA, MCT, was appointed as Group Finance Director from 21 August 2000. He is also a non-executive director of Nedcor Limited and of Mutual & Federal Insurance Company Limited. He was formerly Group Finance Director of Sun Life & Provincial Holdings PLC. Before joining Sun Life & Provincial Holdings PLC, he was Director and Chief Financial Officer of Aon UK Holdings Limited for five years. Jim Sutcliffe (44) BSc, FIA, joined the Group as an executive director and as Chief Executive, Life, in January 2000. He was formerly Deputy Chairman of Liberty International plc, having previously been Chief Executive, UK, of Prudential plc and Chief Operating Officer of Jackson National, Prudential’s US subsidiary. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 40 Norman Broadhurst (59) FCA, FCT, is a non-executive director, Chairman of the Audit Committee and Deputy Chairman of Old Mutual Financial Services (UK) plc. He was Group Finance Director of Railtrack plc from 1994 to 2000. From 1990 to 1994 he was the Finance Director and then Deputy Chief Executive (Finance/Commercial) for VSEL Consortium PLC. His other current non- executive directorships include Chloride Group plc, Clubhaus plc, Tomkins plc, Taylor Woodrow plc and United Utilities PLC. Warren Clewlow (64) OMSG, CA(SA), D. Econ. (hc), is a non-executive director and Chairman of the Compliance Committee. He has been Chairman of Barloworld Ltd since 1991. He was previously Chief Executive of the Barloworld group and has managed many of its diverse divisions. He is also a non-executive director of Nedcor Limited, Sasol Limited and Iscor Limited. Christopher Collins (61) FCA, is a non-executive director and Chairman of the Remuneration Committee. He was appointed Chairman of Hanson PLC in 1998, having been Vice-Chairman since 1995. His international experience includes working as a Hanson PLC representative in Australia. He is also Chairman of Forth Ports plc and a non- executive director of The Go-Ahead Group PLC and of Alfred McAlpine plc. Peter Joubert (67) BA, DPWM, is a non-executive director. He is also Chairman of Delta Motor Corporation (Pty) Limited, Delta Electrical Industries Limited, Foodcorp Holdings (Pty) Limited, Munich Reinsurance of Africa Limited, NEI Africa Holdings Limited and Sandvik (Pty) Limited, deputy chairman of Nedcor Limited and a director of Impala Platinum Holdings Limited, Malbak Limited, Murray & Roberts Holdings Limited and Nedcor Bank Limited. He is a past Managing Director and Chairman of African Oxygen Limited. Chris Liebenberg (66) CAIB(SA), FIBSA, AMP (Harvard), is a non-executive director. He is also Chairman of Nedcor Limited and a former Minister of Finance in the South African Government of National Unity. He is a past Chief Executive of Nedcor Limited and past Chairman of Hoechst SA. He is also a director of Mutual & Federal Insurance Company Limited and of Development Bank of Southern Africa. Murray Stuart (67) CBE, MA, LLB, D. Univ, CA, FCT, is the senior non-executive director and Chairman of the Nomination Committee. He is also non-executive Chairman of Intermediate Capital Group plc, a non- executive director of The Royal Bank of Scotland Group plc and of CMG plc, a member of the Supervisory Board of Vivendi Environnement, and a member of the Advisory Board of Credit Lyonnais Europe. He was Chairman of ScottishPower plc from 1992 to 2000. He was previously Deputy Managing Director of ICL and Chief Executive of Metal Box. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 41 Directors’ Report The directors of Old Mutual plc submit their report and the audited financial statements of the Group for the year ended 31 December 2000. Principal activities The Company is the holding company of the Old Mutual group of companies, whose principal activities are life assurance (including retirement savings), asset management (including unit trusts and portfolio management and services), banking and general insurance. Share capital The Company’s issued share capital as at 31 December 2000 was £355,141,289.10 divided into 3,551,412,891 ordinary shares of 10p each (1999: £344,462,423 divided into 3,444,624,230 ordinary shares of 10p each). During the year ended 31 December 2000, a total of 1,788,661 ordinary shares of 10p each were issued pursuant to the Group’s share schemes (including on the exercise of “roll-over” options granted under the Gerrard Group plc share schemes in connection with the Group’s acquisition of Gerrard Group plc) and 105,000,000 shares were issued pursuant to a placing in connection with the restructuring of revenue-sharing arrangements at the Company’s subsidiary, Pilgrim Baxter & Associates, Ltd. Authorities from the shareholders for the Company to make market purchases and/or to purchase pursuant to contingent purchase contracts relating to each of the four African stock exchanges on which the Company’s shares are listed up to an aggregate of 344,462,423 of its own shares were in force at 31 December 2000. Review of the year and future developments The Chairman’s Statement, the Business Review and the Financial Review beginning on pages 4, 18 and 34 respectively contain a review of the year and of future developments of the Group. The Group’s profit, appropriations and financial position are shown in the financial statements. Dividend The directors recommend a final dividend of 3.1p per share for payment on 31 May 2001 to holders of ordinary shares on the register at the close of business on 20 April 2001. If approved, this dividend will be paid to shareholders on the South African, Malawi and Zimbabwe branch registers and the Namibian section of the UK register in the respective local currency of those territories, by reference to the relevant exchange rates prevailing on 12 April 2001, as determined by the Company. The equivalent of the recommended Sterling dividend in these currencies will be announced by the Company on 17 April 2001. It is expected that payment will be made via dividend access trust mechanisms in each country concerned. This means that holders of shares on the South African branch register will receive their dividend from a South African domestic entity and will not, therefore, be subject to the South African tax on foreign dividends on this dividend. For future dividends, the Board intends to follow a policy to achieve stable returns to shareholders over time reflecting the Group’s long term investment return and the cash flow requirements of its businesses. It expects to declare an interim dividend for the current year in September 2001, payable in November 2001, representing approximately one third of the expected full dividend for the year. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 42 Directors The Board currently has 11 members, consisting of five executive and six non-executive directors. The Chairman and Chief Executive (Mr M J Levett), the Chief Executive, Financial Services (Mr E E Anstee) and the six non- executive directors (Mr N N Broadhurst, Mr W A M Clewlow, Mr C D Collins, Mr P G Joubert, Mr C F Liebenberg and Mr C M Stuart) were all in office as at 1 January 2000. Mr J H Sutcliffe was appointed as an executive director and Chief Executive, Life, on 24 January 2000; Mr J V F Roberts was appointed as Group Finance Director (a role previously held by Mr Anstee) on 21 August 2000 and Mr R C M Laubscher, Chief Executive of Nedcor Limited, was appointed as an executive director as from 1 January 2001. Directors’ interests Details of the directors’ interests (within the meaning of section 346 of the Companies Act 1985, including interests of connected persons) in the share capital of the Company and its quoted subsidiaries are set out in the table below, whilst their interests in share options and awards made under the Company’s share incentive schemes are described in the section of the Remuneration Report entitled “Directors’ share options”. No director had a material interest in any significant contract with the Company or any of its subsidiaries during the year. At 31 December 2000 M J Levett E E Anstee N N Broadhurst W A M Clewlow C D Collins P G Joubert C F Liebenberg J V F Roberts C M Stuart J H Sutcliffe At 1 January 2000 M J Levett E E Anstee N N Broadhurst W A M Clewlow C D Collins P G Joubert C F Liebenberg C M Stuart Old Mutual plc number of shares Nedcor Limited number of shares Nedcor Investment Bank Holdings Limited number of shares Mutual & Federal Insurance Company Limited number of shares 184,000 47,508 2,416 30,700 5,541 50,000 600 – 5,541 10,000 184,000 47,508 2,416 30,700 5,541 4,500 600 5,541 – 864,100 – – – – – – – – – – – – – – 15,000 – 40,500 20,768 320,706 500 – – – – – – – – – 864,100 100 500 – 100 – – – – – – – – – – – 15,000 40,500 20,459 320,000 – – – Included in the above interests are the following non-beneficial interests held as qualification shares: M J Levett (100 shares in Nedcor Limited at 1 January 2000, and 500 shares in Mutual & Federal Insurance Company Limited at both 1 January and 31 December 2000); E E Anstee (100 shares in Nedcor Limited and 500 shares in Mutual & Federal Insurance Company Limited at 1 January 2000); C F Liebenberg (500 shares in Mutual & Federal Insurance Company Limited at both 1 January and 31 December 2000); and J V F Roberts (500 shares in Mutual & Federal Insurance Company Limited at 31 December 2000). Neither Mr Sutcliffe nor Mr Roberts had any interests in shares in the Company or any of its subsidiaries at their respective dates of appointment as directors of the Company. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 43 Directors’ Report continued Corporate governance and internal control A statement on corporate governance and internal control appears on pages 46 to 50. Substantial interests in shares As at 6 March 2001, the following substantial share interest had been declared to the Company in accordance with Part VI of the Companies Act 1985: Name Old Mutual Life Assurance Company (South Africa) Limited No. of shares % of total issued shares 300,000,000 8.4% Employment policies The Group’s employment policies are regularly reviewed and updated to ensure their appropriateness for the locations in which they apply. They are designed to promote a working environment which supports the recruitment and retention of highly effective employees, improves productivity and fosters relationships free of discrimination. Whilst local employment policies and procedures are developed by each subsidiary company according to its own circumstances, a number of key Human Resources values and policies are promoted throughout the Group: • the Group considers that the establishment of the right priorities and environment for its people is essential for their performance and development and to the future of the Group; • employees are recruited and promoted on the basis of their suitability for the job, without discrimination in terms of race, religion, national origin, colour, gender, age, marital status, sexual orientation or disability unrelated to the task at hand. In South Africa this principle needs to be balanced against the requirement to address the issues of employment equity, and the Group’s practices are cognisant of this; • the Group values the involvement of its employees and continues to keep them informed on matters affecting them as employees and factors relevant to the performance of the Group. Employee involvement and consultation are managed in a number of ways, including in-house publications, briefings, roadshows, and the intranet. In many parts of the business employee representatives are consulted regularly on a wide range of issues affecting their current and future interests. Where this is not the case, change management processes and capability are being developed to ensure the inclusion of staff in changes affecting them; • the efforts of the individual in helping to create the success of the Group should be appropriately recognised. Pay systems are structured to recognise both the contribution of individuals and the performance of the sector of the business in which they work; • training and development of all employees remains a priority and new initiatives are being developed. Supplier payment policy In most cases a supplier of goods or services does so under standard terms of contract which lay down terms of payment. In other cases, specific terms are agreed beforehand. It is the Group’s policy to ensure that the terms of payment are notified in advance and adhered to. The total outstanding indebtedness of the Company (and its service company subsidiary, Old Mutual Berkeley Square Limited) to trade creditors as at 31 December 2000 amounted to £1.73 million, corresponding to 12 days’ payments when averaged over the year then ended. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 44 Charitable and political contributions The Company and its subsidiaries in the UK made charitable donations of £162,202 (1999: £211,241) and made no (1999: none) political donations during the year. Social investment and environmental activities A description of the Group’s social investment and environmental activities is set out in the Corporate Citizenship section of this document on pages 51 to 55. Auditors KPMG Audit Plc have expressed their willingness to continue in office as auditors of the Company and a resolution proposing their re-appointment will be put to the Annual General Meeting. By order of the Board Martin C Murray Group Company Secretary London, 6 March 2001 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 45 Corporate Governance and Internal Control The Group is committed to the objective of achieving high standards of corporate governance and internal control. In the year ended 31 December 2000 and in the preparation of this Annual Report and Accounts, the Company has applied the principles set out in Section 1 of the Combined Code and complied throughout the accounting period with the Code provisions set out therein in the following manner. Board of directors The Board meets eight times a year (including sessions devoted to strategy and business planning) and has specific matters reserved to it for decision. It also meets ad hoc, as and when required, to deal with specific matters requiring Board consideration between its regularly scheduled meetings. Directors, on appointment and regularly thereafter, are briefed in writing and orally by the executive management and may take independent professional advice at the Company’s expense if necessary for the furtherance of their duties. The Board currently comprises five executive and six non-executive directors, as described in more detail on pages 40 and 41 of this document. Mr Liebenberg is chairman of the Company’s subsidiary, Nedcor Limited. The other non-executive directors are considered to be free from any business or other relationship that could materially interfere with the exercise of their independent judgement. In reaching this view, the Board has taken into account that Mr Clewlow is non-executive chairman of Barloworld Limited, a South African company on whose board Mr Levett serves as a non-executive director. Mr Levett serves as both Chairman and Chief Executive. The Nomination Committee has confirmed that it considers his continued holding of this dual role to be in the Company’s best interests for the present, in view of the continuity of executive knowledge and experience that he provides to the Board. The Nomination Committee keeps this matter regularly under review. The executive element of the Board is balanced by a strong independent group of non-executive directors. Mr Stuart serves as the senior independent non-executive director. The Articles of Association of the Company require that one third of the directors (excluding those appointed by the Board during the year) shall retire by rotation each year. This reflects the principle of the Combined Code and is applied in such a manner that each of the directors will submit himself for re-election at regular intervals and at least every three years. Proposals for re-election to the Board are considered by the Nomination Committee, and are not automatic. The Nomination Committee, chaired by Mr Stuart, meets at least twice a year and makes recommendations to the Board in relation to the appointment of directors and the structure of the Board. The committee members currently comprise all of the non-executive directors, together with Mr Levett, who does not take part in any decisions regarding his dual role as Chairman and Chief Executive. The Remuneration Committee, chaired by Mr Collins, comprises all of the non-executive directors except for Mr Liebenberg. All members of the Remuneration Committee are considered by the Board to be independent for the purposes of the Combined Code. It meets at least four times a year. Details of how the Board has applied the principles of the Combined Code in respect of directors’ remuneration are provided in the Remuneration Report on pages 56 to 61 of this document. The Group Compliance Committee, chaired by Mr Clewlow, reviews compliance risks within the Group’s wholly-owned operations, with a view to ensuring that appropriate controls are in place to address those risks. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 46 Responsibility for the day-to-day control of compliance remains, however, primarily with the management of the underlying operations. An escalation process is in place that ensures significant compliance issues are reported to the Group Compliance Committee and, as appropriate, to the Board. The Audit Committee of the Board (the Group Audit Committee) comprises all of the non-executive directors, and is chaired by Mr Broadhurst. Its terms of reference enable it to take an independent view of the appropriateness of the Group’s accounting policies and practices for presentation of the Report and Accounts, the effectiveness of the Group’s internal control system (including financial, operational and compliance controls and risk management). The minimum number of meetings per year of the Group Audit Committee was increased during 2000 from three to four, to reflect the additional responsibilities undertaken by it in relation to requirements of the Institute of Chartered Accountants in England and Wales entitled “Internal Control Guidance for Directors on the Combined Code” (the Turnbull guidance) dated September 1999. The Group also has a number of audit committees which operate at subsidiary level, namely at Old Mutual Financial Services (UK) plc, Old Mutual (South Africa) Limited, Old Mutual Zimbabwe, Old Mutual (US) Holdings, Inc, Nedcor Limited and Mutual & Federal Insurance Company Limited, with terms of reference (in relation to the businesses under their respective remit) broadly equivalent to those of the Group Audit Committee. The Group Audit Committee receives minutes of the proceedings and reports from each of these subsidiary audit committees on a regular basis. The Group Audit Committee reviews annually the remit, authority, resources and scope of the work of internal audit. It considers the appointment of, and fees (both audit and non-audit) for, the external auditors, who have unrestricted access to it. It also monitors internal and external auditors’ performance against expectations. Internal control environment The Board acknowledges its overall responsibility for the Group’s system of internal control and for reviewing its effectiveness, whilst the role of executive management is to implement Board policies on risk and control. Executive management have implemented an internal control system designed to facilitate effective and efficient operation of the Group and its business units and aimed at enabling them to respond appropriately to significant business, operational, financial, compliance and other risks to achieving the Group’s business objectives. These include protecting policyholders’ interests, safeguarding shareholders’ investments, safeguarding assets from inappropriate use or from loss and fraud, and ensuring that liabilities are identified and managed. The system of internal control also helps to ensure the quality of internal and external reporting, compliance with applicable laws and regulations, and internal policies with respect to the conduct of business. The Group’s internal control system is designed to manage, rather than eliminate, the risk of failure to achieve the Group’s business objectives, and can only provide reasonable, and not absolute, assurance against material misstatement or loss. The Board is of the view that there is a sufficient ongoing process which has steadily improved throughout the year for identifying, evaluating and managing the significant risks faced by the Group, and that this process has been in place for the year ended 31 December 2000 and up to the date of approval of this Report. The process accords with the Turnbull guidance and is regularly reviewed by the Board. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 47 Corporate Governance and Internal Control continued The key components of the Group’s overall system of internal control currently in operation and the process of review by the directors are set out below. Business planning The Board regularly reviews the Group’s strategic direction and the executive directors consider the strategy for individual businesses with executive management on a planned basis. Annual budgets and three year strategic plans are prepared, with performance targets for each business set by the executive directors in conjunction with executive managers. The overall Group plan is then reviewed by the Board in the light of the Group’s objectives. Performance against plan is regularly monitored at Board level. Management structures The Group has an appropriate organisational structure for planning, executing, controlling and monitoring its business operations in order to achieve the strategic business objectives approved by the Board. The management of the Group as a whole is delegated to the executive directors in accordance with a Scheme of Delegated Authority, which also governs the conduct of the executive managers of the underlying wholly-owned operations of the Group. These executive managers are accountable for the control, conduct and performance of their businesses within the agreed business strategy. Each of the Group’s separately quoted subsidiaries, Nedcor Limited, Nedcor Investment Bank Holdings Limited and Mutual & Federal Insurance Company Limited, has a board that comprises executive and non-executive directors. Each board is responsible for compliance with good corporate governance and codes of conduct applicable to listed South African companies (the King Report). In addition, as regulated businesses, all three of these entities must comply with regulatory requirements in their sectors. Risk management Executive management are responsible for the identification, evaluation and management of the significant risks applicable to their areas of business. These risks are assessed on a regular basis and may be associated with a variety of internal or external sources. The Group Risk Management Committee is responsible for maintaining and updating on a regular basis the Group’s risk profile and monitoring changes to it. The Group Risk Management Committee reports to the Group Audit Committee on the significant risks to the achievement of the Group’s objectives. The Group Risk Management Committee comprises executive management and is chaired by the Group Finance Director. It is supported by a Group Risk Function that co-ordinates monthly reporting from the Risk Management Committees within the Group’s subsidiaries or business units, whose terms of reference are aligned with those approved by the Board for the Group Risk Management Committee. It also benefits from agreed cross-membership by executive management from subsidiaries that support the escalation of risk issues that are of relevance to the Board. In relation to the Group’s life assurance businesses, the Chief Actuary is responsible for ensuring that financial soundness is maintained with regard to actuarial and underwriting risks in the Group’s South African life business. He reports three times a year to an Actuarial Review Committee, which comprises senior actuaries and executive management of the Group, on the integrity of the actuarial valuation results and his satisfaction with overall financial discipline. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 48 Monitoring of controls The Board has reviewed the effectiveness of the system of internal control during the year. The key processes supporting the Board’s regular and annual review processes are summarised below. The Chief Executive Officers of the Group’s principal subsidiaries and business units report to the Board on behalf of their respective executive committees on major changes in the business and the external environment that affect the significant risks of their respective businesses. The Group Finance Director provides the Board with monthly performance information, which includes key performance and risk indicators. Management report regularly on their review of risks and how they are managed to executive committees in the Group’s principal subsidiaries and business units, and to their respective Risk Management Committees. These Risk Management Committees provide monthly reports to the Group Risk Management Committee, which reports quarterly to the Board. As part of the Board’s annual review process, each executive director is asked to complete a letter of assurance confirming compliance throughout the year and up to the date of approval of this Annual Report with the Group’s Scheme of Delegated Authority and with the Group’s risk management and control policies. The results of these letters are reported to the Group Audit Committee. These letters of assurance are supported by regularly updated risk profiles of each subsidiary and business unit, combined with a process of control self-assessment. Management teams in each subsidiary and business unit have applied the Criteria of Control Model (CoCo) developed by the Canadian Institute of Chartered Accountants, and have produced a control integrity profile for successive assurances given at increasingly higher levels of management and finally to the Group Audit Committee. This process is co-ordinated by the Group Risk Management Committee and facilitated by the Group Risk Function. The Group’s internal audit function operates on a global basis and carries out regular risk-focused reviews of the system of internal control. The internal audit function operates independently of executive management, reporting, for day-to-day operational purposes only, to the Group Finance Director, with unrestricted access to the Chairman and the Group Audit Committee. An Internal Audit Charter, reviewed and approved by the Group Audit Committee, governs internal audit activity within the Group. Progress against the plan is reported regularly to that Committee. Control failures are reported in terms of an escalation protocol to the appropriate level of risk and audit committee, where rectification procedures and progress are closely monitored. Planned corrective actions are independently monitored for timely completion by internal audit and, as appropriate, by the Group Audit Committee and Board. Acquisitions In the case of companies acquired during the year, including Gerrard Group plc, acquired in March 2000, and United Asset Management Corporation, acquired in September 2000, the internal controls in place in these companies have been reviewed against the Group’s benchmarks of effective risk management and control and they are being integrated into the Group’s systems. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 49 Corporate Governance and Internal Control continued Associates The policyholders’ funds of the Group’s life assurance operations have holdings representing in aggregate in excess of 20% of the issued share capital of a number of major South African and Zimbabwean companies listed on the JSE Securities Exchange South Africa and the Zimbabwe Stock Exchange, respectively. These are held as investments and the companies concerned are not subject to the governance or control structures of the Group. Investor relations The Company is committed to a process of continuing dialogue with its investors and has maintained a policy of proactive communication, appropriate disclosure and transparency of information throughout the past year. After each results declaration and following major corporate actions, the Company makes appropriate contact with investors and intermediaries, and issues news releases and other materials, including electronic communications. Formal presentations, webcasts and speeches are posted on the Company’s website, www.oldmutual.com, where they are accessible by interested parties. Old Mutual Shareholder Services, based in Cape Town, supports shareholders who hold their shares in the name of the Group’s South African corporate nominee through a telephone call-centre, personal enquiry desks and direct communications. The Company’s Registrars in the UK and each other country where its shares are listed offer comprehensive services to personal shareholders to deal with specific requests that they may have. The Company’s brokers in each of the five markets where Old Mutual’s shares are listed also maintain active communications with, and other services for, shareholders. Group strategy and performance are communicated to financial markets through annual and interim reports, news releases, speeches, transcripts and presentations, using a wide spectrum of internal and external communications channels. Frequently asked questions are posted on the Company’s website and the Company responds to many direct requests for information and also provides answers to specific queries. The Company’s website maintains a comprehensive set of services for investors, which includes the Company’s share price, details of dividends and other essential data for shareholders. - The Board monitors investor relations matters closely. The executive directors participate fully in specific investor programmes on an international basis. Going concern The Board has satisfied itself that the Group has adequate resources to continue in operation for the foreseeable future. The Group’s financial statements have accordingly been prepared on a going concern basis. By order of the Board Martin C Murray Group Company Secretary London, 6 March 2001 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 50 Corporate Citizenship Social investment For many years the Old Mutual group has operated social investment and charitable donations programmes within the regions in which its principal businesses operate. The Company conducts a significant part of these activities through Old Mutual Foundations established in South Africa, Zimbabwe, Bermuda, Malawi and Namibia. The policy priorities chosen for the Group’s social investment programme are education, health and welfare, local economic development and matching funds for staff community initiatives. In addition to the activities of the Old Mutual Foundations, it is the policy of the Group to support specific programmes developed by its individual business units in the context in which each business operates. The Group has adopted a Code of Business Conduct and Ethics, copies of which are available from the Company upon request. South Africa The activities of the Old Mutual South African Foundation concentrate on education, health and welfare, local economic development and job creation, and a staff community builder programme. The Foundation also contributes to arts and culture, environmental projects and disaster relief. In 2000 total expenditure was R20 million. The Group’s South African social investment and community involvement activities for 2000 included the construction of a school in the Western Cape and a donation to the Red Cross Children’s Hospital. Initiatives took place throughout the country to aid local economic development through funding for training projects from brick-making and building skills to training for the hotel industry. The Disaster Relief Fund contributed to a variety of emergencies, including the floods in Mozambique and Mpumalanga, the tornado which devastated the Cape Flats region and settlement fires. Funding for the Rural Economic Development Initiative helped development workshops to improve management and business skills in 20 local communities. The Grant Fund was established in 2000, providing start-up capital to new business initiatives within these communities. The Foundation will expand its support for this project in 2001. Sponsorships by Old Mutual’s businesses have a strong social component, with key programmes focused on arts and culture, including the National Choir Festival, sports (particularly road running through the Two Oceans and Soweto Marathons), and the environment and conservation, notably the establishment of the Save Chapman’s Peak Fund. Rest of Africa In Zimbabwe, community building programmes focus on education and training, health, welfare and medical research, sports development, social sponsorships including arts and culture, job and business skills development, donations and staff community builder projects. The 2000 education projects focused on mathematics in schools, health projects involved AIDS awareness and AIDS research, as well as the Cancer Centre, Blood Transfusion and Medic Alert: in sport the emphasis was on road running, together with golf, cricket and swimming. The Community Builder Projects hold a donations budget for long term donations to orphanages and homes throughout Zimbabwe as well as for arts and culture. The Old Mutual Staff Community Builder Programme was established in 2000 to provide financial support for the efforts of staff members and families who have been actively involved in sustainable, long term community development projects. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 51 Corporate Citizenship continued The activities of the Old Mutual Foundations in Namibia and Malawi are modelled on those of the South African Foundation, with particular emphasis on health, welfare and medical projects. Nedcor Nedcor’s social responsibility arm, the Nedcor Foundation, is its main conduit for external social investment. Nedcor contributes 1.2% of its attributable income to the Nedcor Foundation, which it regards as an integral part of its business. A total of R105 million has been spent by the Nedcor Foundation over the last five years. The Nedcor Foundation focuses its activities on education (with strong emphasis on mathematics, science, technology training and literacy programmes), business and leadership development (especially among youth), affordable housing, conservation and the environment, primary healthcare and poverty relief. Nedcor has a vested interest in the future of the country and its business extends to ensuring that the living and working environment of all South Africa’s people is improved. By supporting the disadvantaged and impoverished through a range of projects sponsored by its Foundation, Nedcor contributes towards a democratic society that is successful, open and non-racial. Nedcor, through its Foundation, works closely with government, the non-government organisation sector and other corporate, business and development agencies. The aim of the Nedcor Social Investment Programme is to make a meaningful difference to the lives of people in disadvantaged communities who seek to empower themselves, thereby contributing towards a better and more prosperous South Africa. In addition, Nedcor has supported the Arts and Culture, Sports and Green Trusts, the Business Trust and the Tourism Business Council. Nedcor has also shown its support of the new South Africa through the business activities of Peoples Bank, NedEnterprise and Kagiso Trust Investment Company. Mutual & Federal Mutual & Federal supports a range of charitable and socially beneficial activities, including crime prevention, education, primary healthcare, traffic safety, the environment, and socio-economic initiatives for the disadvantaged. It is moving towards corporate social investment, rather than outright donations, and there is continual realignment according to the changing needs of society and the business environment. United Kingdom During 2000, Old Mutual plc supported various sports and arts events and it is planned that this association will continue and grow in 2001. Much of the Group’s UK social responsibility programme is conducted directly through the operating businesses. In 2000, Old Mutual International undertook community-based sponsorships in Guernsey and Hook, whilst Old Mutual Asset Managers (UK) focused on arts activities, including contributions to the Barbican Art Gallery, the Royal Academy, the English National Opera and the London Philharmonic Orchestra. A major UK/South African environmental sponsorship was made through the Group’s association with Kirstenbosch Botanical Gardens and its award-winning contribution to the Chelsea Flower Show. Old Mutual Asset Managers (UK) contributed to the Lord Mayor’s charity event. Gerrard Group, including Capel Cure Sharp and Greig Middleton, made contributions to sport and the arts. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 52 Main Headings Sub to main heading The Old Mutual South African Foundation concentrates on education, health and welfare, local economic development and job creation, and a staff community builder programme. In Zimbabwe, community building programmes focus on education and training, health, welfare and medical research, sports development and social sponsorships. The policy priorities chosen for the Group’s social investment programme are The Nedcor Foundation focuses on education, business and leadership development, affordable housing, conservation and the environment, primary healthcare and poverty relief. Mutual & Federal supports a range of activities, including crime prevention, education, primary healthcare, traffic safety, the environment, and socio-economic initiatives for the disadvantaged. The Old Mutual South African Foundation also contributes to arts and culture, environmental projects and disaster relief. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 53 Corporate Citizenship continued United States The UAM Charitable Foundation was established by UAM in 1993. In addition some individual affiliates of UAM have their own charitable programmes. In 2000, UAM set aside $150,000 for outright gifts and $30,000-$50,000 for matching employees’ donations. The UAM Foundation supports Greater Boston area organisations that help minorities and disadvantaged children and adults to improve their lives, especially through education and social services, cultural programmes, and investment management industry-related initiatives that benefit minorities and the disadvantaged. Economic development Old Mutual South Africa’s Transformation Initiative covers relationships with government and other stakeholders, and business activities in relation to transformation, including support for black economic empowerment, social investment and community involvement. During 2000, Old Mutual remained active in the financing of Black Economic Empowerment transactions and in the support of important infrastructure development activities, including water and electrification projects, and bulk infrastructure projects such as the Beit Bridge toll bridge and the Maputo Corridor toll road. Old Mutual now owns or manages over R2 billion in infrastructure and empowerment assets. Old Mutual, through Old Mutual Asset Managers (South Africa), is now the largest manager of infrastructure funds in South Africa, following its award of R800 million in the South African Infrastructure Fund. In 1999 Old Mutual South Africa established a joint venture with Unity Corporation, a trade union-led consortium, to launch the Infrastructure, Development and Environmental Assets (IDEAS) Fund. This has given excellent returns, as well as positively contributing to the development of viable economic zones, increasing spend and procurement from entities controlled by previously disadvantaged individuals, and providing sustainable job creation and support for small businesses through a deliberate policy of allocating procurement spend to such entities. The Group constantly looks for other joint ventures underpinned by a sound commercial rationale, that deliver on clearly defined social and community goals. Financial literacy and education are a national priority in South Africa and Old Mutual worked on three major programmes in 2000, including a Money Management series with Peoples Bank, linking distribution of educational booklets with a series of educational talk shows on a variety of community radio stations across the country. The Group Schemes business provides educational workshops covering basic financial concepts, as well as budgeting and financial products. Old Mutual contributed R18.2 million to the Business Trust for Job Creation in 2000. Projects focus on building the tourism industry, education and the strengthening of the criminal justice system. In Zimbabwe, the Group actively supports economic empowerment initiatives. Z$24 billion of the Group’s assets are invested in indigenous enterprises, through investments and loans, and assistance with infrastructure development including low cost housing, roads, shopping centres, electricity, farming and telephones. The Group has also supported Government initiatives by participating in capital raising. Old Mutual Zimbabwe actively pursues links with organisations involved in the development of entrepreneurial skills within Zimbabwe. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 54 Environment The Group recognises that its business activities have both direct and indirect environmental impacts. The Group’s environmental policy is to strive to: • use energy and natural resources wisely and to minimise waste; • take appropriate account of environmental considerations in its operations; and • support through its social and community investment programmes initiatives on environmental issues that have a direct impact on the lives of its clients. The policy is delivered through the following: • using water and electricity efficiently; • optimising efficient use of natural resources; • minimising its production of waste, and identifying the best means to dispose of the same; and • monitoring environmental impacts and, where appropriate, setting targets for reduction. Amongst the various environmental projects with which it is involved, Old Mutual has established a trust fund and donated R100,000 towards the restoration of the Chapman’s Peak Road, a natural landmark in Cape Town. Old Mutual’s joint initiative with the Botanical Society, the National Botanical Institute Environment Day Poster Project, aims to educate children about their environment and to encourage them to become active custodians of some of the world’s unique ecosystems. It is one of the biggest environmental education projects of its kind in South Africa and the posters have already reached some four million children. The Cape Flats Food Growing and Tree Project is an urban agriculture and greening programme that helps people in the Cape Flats townships to grow food for themselves and their families through trench gardening. Old Mutual is a Diamond Custodian of the Table Mountain Fund. Table Mountain is one of the world’s foremost eco-tourism destinations, with 2,285 plant species in the peninsula alone. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 55 Remuneration Report This report has been prepared by the Remuneration Committee and has been approved by the Board for submission to shareholders. The Remuneration Committee consists exclusively of non-executive directors who are considered to be independent. It meets at least four times a year and is responsible for: • determining the total remuneration package and contractual terms for each of the executive directors; and • reviewing and monitoring incentive share arrangements (including option schemes) of the Company. Where appropriate, the Remuneration Committee takes advice on specific issues from independent consultants. Remuneration policy The Company embraces the principles and complies with the provisions of the Combined Code relating to directors’ remuneration. It seeks to attract, retain and motivate the high quality management necessary to lead and develop the Group’s businesses. The importance of aligning the interests of directors and senior managers with shareholders is carefully considered, particularly in the design of the performance-related elements of their remuneration packages. The individual salary, incentive and benefit levels of the executive directors are reviewed annually by the Remuneration Committee, having regard to individual responsibilities and performance. Employee Share Ownership Plans (ESOPs) Prior to demutualisation, the Group operated a share incentive scheme using shares in a subsidiary company, Old Mutual Group Achievements Ltd (OMGA). Most entitlements to OMGA shares outstanding at the date of demutualisation have been converted into entitlements linked to Old Mutual plc shares and those entitlements continue to be governed by the OMGA rules. The ESOPs currently in use are as follows: (a) Share Option and Deferred Delivery Plan This is the plan generally used for the grant of “executive” options to qualifying senior level employees of the Group. A regular annual grant was made under this plan in March 2000 and an interim grant, for new appointments or promotions, in September 2000. All grants outside South Africa were made subject to a UK retail price index (RPI) related earnings per share (EPS) performance target. The minimum target specified, for option grants of up to 100% of basic salary, was that growth in EPS must exceed the accumulated growth in RPI, over the three year vesting period, plus 9%. Higher targets are applied for grants in excess of 100% of basic salary. South African grants, which are made as options on deferred delivery shares, were subject to an escalating strike price, rather than a performance target. Options awarded during 2000 have a maximum life of six years. (b) Restricted Share Plan Shares awarded under this plan are restricted for three or more years and are subject to forfeit in the event of early termination of employment. The Restricted Share Plan is currently used primarily to assist in recruiting key individuals to the Group. The funding obligations under the Restricted Share Plan and the Share Option and Deferred Delivery Plan may be met directly by the Group or by an Employee Share Trust. The obligations currently undertaken by the O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 56 Employee Share Trust in relation to Group employees outside South Africa have been hedged in part by a series of contracts for differences which have the economic effect of a purchase of shares. The Employee Share Trust currently has no obligation to meet any of the costs associated with the granting of options to the directors of Old Mutual plc. These are expected to be met from market purchases at the time of exercise or by the issue of new shares. (c) Savings-Related Share Option Scheme The Group operates a savings-related share option scheme, which provides a savings and investment opportunity for employees in the United Kingdom. The scheme is open to both full-time and part-time employees. The options may normally be exercised after three or five years at a price equivalent to not less than 80% of the market value of the shares at the time of grant. The Company is proposing at this year’s Annual General Meeting to adopt an All Employee Share Plan, which may, if approved by shareholders, supersede the savings-related share option scheme in due course. (d) Annual Incentive Plan This plan links the acquisition of shares in the Company to an eligible employee’s annual bonus. The Remuneration Committee has determined that the executive directors of the Company in office during 2000 may elect to defer some or all of their annual bonus entitlement for 2000 into shares of the Company for three years, on terms that, provided the Group’s EPS increase by a factor of at least 9% above RPI over that period and the participant remains employed by the Group, he will then receive one free matching share (net of tax at his currently applicable marginal rate) for each share acquired with his net of tax deferred bonus. Directors’ service contracts Directors who held executive office during the year have service contracts, the terms of which are considered by the Remuneration Committee to provide a proper balance of duties and security between the respective parties. Mr Anstee and Mr Levett have service contracts terminable on 12 months’ notice, save that until 12 July 2001 (being two years from the date on which the Company’s shares were first listed) the period of notice required to be given by the Company is 24 months. Mr Sutcliffe and Mr Roberts have service contracts terminable on 12 months’ notice. In the case of all executive directors, dismissal by the employer, without notice and in the absence of specific grounds, may require a payment equal to three-quarters of the aggregate of his salary, contractual benefits and a sum equal to 25% of his salary for the period concerned in respect of potential annual bonuses, which includes an allowance for mitigation. If not terminated, the contract can continue until the director attains the age of 60 (in the case of Mr Anstee, Mr Roberts and Mr Sutcliffe) or until 30 June 2003 (in the case of Mr Levett, his normal retirement date). Directors’ remuneration Remuneration for each of Messrs Anstee, Levett, Roberts and Sutcliffe comprises a basic salary, an allowance (described in more detail under “Benefit allowance” below) in lieu of pension or other benefits in kind, an annual bonus based on the performance of the individual and the Group, and participation in the Group’s executive share incentive schemes. Details of the remuneration and share options of directors in office during the year under review are set out later in this Remuneration Report. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 57 Remuneration Report continued Mr Laubscher was not a director of the Company during the year and his remuneration and terms of service were determined by Nedcor Limited, which is separately listed on the JSE Securities Exchange South Africa and has its own remuneration committee. Benefit allowance The Company has adopted a cash-based package approach for the four executive directors who held office during 2000 and other senior executives. The total cash package comprises a basic salary and a benefit allowance, which was 35% of basic salary for the four executive directors from 1 April 2000 (previously 25%). The benefit allowance is provided in lieu of contributions to retirement funds, life, disability and medical cover, as well as other fringe benefits which are usual at this level such as car or travel allowances. The executive directors may use the benefit allowance to purchase benefits appropriate to their needs from independent suppliers of their choice or, if they wish, may participate in certain benefit arrangements established for Group employees in the UK. Participation in any Group defined contribution pension arrangement is on a commercial basis, which must be fully funded from the benefit allowance. Mr Levett’s contract of service includes the provision of residential accommodation in the UK at the Company’s expense. The Company has leased appropriate accommodation in London since May 1999 for this purpose. Mr Sutcliffe’s contract of service includes the provision of a monthly allowance for residential accommodation (in lieu of the provision of accommodation) in South Africa. Annual bonus The annual bonuses for 2000 for Mr Sutcliffe, who joined the Board in January 2000, and for Mr Roberts, who joined the board in August 2000, were guaranteed as part of their terms of engagement at, respectively, the pro rata equivalent of 50% of his basic salary for the part of the year during which Mr Sutcliffe was employed by the Company, and £80,000 in the case of Mr Roberts. The annual bonus plans for Mr Anstee and Mr Levett in 2000 were based as to 80% and 100% of maximum bonus, respectively, upon the growth in the Group’s operating earnings per share on a long term investment return basis for the year exceeding prescribed targets (on a scale from 10% to 17.5%). The balance of Mr Anstee’s bonus target was referable to assessment of individual performance. Growth in operating earnings per share on a long term investment return basis exceeded 17.5% in 2000 and the Remuneration Committee was satisfied that Mr Anstee’s performance during the year justified full payment of the individual performance-related element of his bonus. Mr Levett and Mr Anstee accordingly were entitled to receive the maximum bonus, of 50% of annual salary, for that year and may elect (along with Mr Sutcliffe and Mr Roberts) to defer some or all of this, under the terms of the Annual Incentive Plan described above. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 58 Directors’ share options The following options and rights over shares in the Company were granted during the year and are now outstanding under the Company’s share option schemes: E E Anstee E E Anstee M J Levett J V F Roberts J V F Roberts J H Sutcliffe J H Sutcliffe J H Sutcliffe Notes: Date of grant No. of shares 14.03.00 886,800 8,920 11.04.00 14.03.00 1,007,700 150,600 08.09.00 288,800 08.09.00 517,300 14.03.00 460,700 14.03.00 15,538 11.04.00 Exercise price Date exercisable or receivable 130.25p 108.6p 130.25p – 14.03.031 – 14.03.06 01.05.03 – 01.11.03 14.03.031 – 14.03.062 21.08.03 – 21.08.053 172.75p 08.09.031 – 08.09.06 14.03.031 – 14.03.06 130.25p – 24.01.034 01.05.05 – 01.11.05 108.6p 1 Subject to the fulfilment of performance targets prescribed by the Remuneration Committee, under which these will only be exercisable if the Company’s EPS increase by prescribed factors in excess of UK RPI over the period between 1 January 2000 and 31 December 2002, which the Remuneration Committee considers to be stretching targets, having regard to the currencies in which the majority of the Group’s revenues are currently earned. 2 Subject to curtailment to 12 months after Mr Levett’s retirement date. 3 Restricted shares, which are to be released in three equal tranches on the third, fourth and fifth anniversaries of Mr Roberts’ appointment, subject to his still being in employment with the Group on those dates. 4 Restricted shares, which are to be released on the third anniversary of Mr Sutcliffe’s appointment, subject to his still being in employment with the Group on that date. 5 No payment was made by any of the directors for the grant of any of the above options or awards. Details of the directors’ share interests arising from the OMGA Share Incentive Scheme, which were outstanding at 1 January 2000 and are now outstanding, are set out below: M J Levett E E Anstee No. of options over OMGA shares Date of grant Date exercised Date of conversion (Equivalent*) no. of Company shares (Equivalent*) price per Company share 01.01.97 470,200 16.04.99 26.04.99 507,816 15.05.97 654,100 23.07.97 26.04.99 706,428 946,404 01.10.98 876,300 22.10.98 26.04.99 01.10.98 1,939,800 01.10.98 26.04.99 2,094,984 216 01.10.98 200 22.10.98 26.04.99 01.10.98 808,000 16.04.99 26.04.99 872,640 N/A 26.04.99 2,137,536* 01.11.98 1,979,200 R9.17 R9.17 R8.98 R9.07 R9.07 R8.98 R9.21* The market price of the Company’s shares was 166p at 29 December 2000 (the last trading day of the year), ranging from a low of 125.75p to a high of 181p during the year ended 31 December 2000. Gains on share options Options under the OMGA Share Incentive Scheme were awarded prior to demutualisation on the basis of the performance of the individuals, but are not linked to future performance criteria. Exercise of the options (in the case of Mr Anstee) and delivery or disposal of the shares (in the case of Mr Levett) is only permitted at the earliest, as to one third at the end of each of three, four and five years following the date of grant of the relevant option. Exercise of the options (in the case of Mr Anstee) or delivery of the shares (in the case of Mr Levett) must in any event take place within six years of the grant of the option concerned. None of the directors exercised any options during the year ended 31 December 2000. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 59 Remuneration Report continued Directors’ emoluments 1. Remuneration Remuneration of the directors of the Company in office during the years ended 31 December 2000 and 31 December 1999 (including, in each case, remuneration from offices held with the Company’s subsidiaries, Old Mutual Financial Services (UK) plc, Old Mutual Group Limited (Bermuda), Old Mutual Life Assurance Company (South Africa) Limited, Nedcor Limited, Nedcor Bank Limited and Mutual & Federal Insurance Company Limited, where relevant) was as follows: M J Levett E E Anstee J V F Roberts J H Sutcliffe N N Broadhurst W A M Clewlow C D Collins P G Joubert C F Liebenberg C M Stuart M J Levett E E Anstee N N Broadhurst W A M Clewlow C D Collins P G Joubert C F Liebenberg C M Stuart Notes: Year to 31 December 2000 Benefit & benefit allowance £000 Pension £000 3362 125 37 1214 – – – – – – – – – – – – – – – – Total £000 1,124 703 2223 6645 51 68 41 72 224 43 Year to 31 December 1999 Benefit & benefit allowance £000 Pension £000 2072 75 – – – – – – – – – – – – – – Total £000 1,052 525 31 317 31 46 162 33 Bonus £000 2631 1931 801 1811 – – – – – – Bonus £000 4176 150 – – – – – – Salary & fees £000 525 385 105 362 51 68 41 72 224 43 Salary & fees £000 428 300 31 317 31 46 162 33 1 Eligible for deferment, at the director’s election, into a bonus matching arrangement under the Annual Incentive Plan. 2 Inclusive of cost of London accommodation provided by the Company. 3 Mr Roberts was first employed by the Group on 21 August 2000 and his emoluments for 2000 accordingly relate to service from 21 August to 31 December 2000. 4 Inclusive of allowance for accommodation in South Africa. 5 Mr Sutcliffe was first employed by the Group on 24 January 2000 and his emoluments for 2000 accordingly relate to service from 24 January to 31 December 2000. 6 In April 1999 Mr Levett was awarded £192,500 by way of bonus for his services to the Group for the previous two years. This amount is included in the figures for the year to 31 December 1999. 7 Mr Clewlow waived £12,000 of these fees in favour of Barloworld Limited in the period ended 31 July 1999. 8 The executive directors waived in favour of the Company fees for non-executive directorships held in subsidiary companies totalling £12,492 and Mr Liebenberg waived in favour of Nedcor Limited fees arising from his non-executive directorship of Nedcor Investment Bank Holdings Limited totalling £11,643 during the year ended 31 December 2000. These waivers are currently expected to continue in effect in the future. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 60 2. Pension benefits At 31 December 2000 Mr Levett had accrued pension fund benefits, paid-up since December 1998, under his previous service with the South African Mutual Life Assurance Society, held in the Old Mutual Staff Retirement Fund and the Old Mutual Offshore Retirement Savings Plan. Both of these are defined contribution funds and the growth in value in 2000 is based on investment returns only. There were no contributions specific to Mr Levett to either of these funds during 2000. His accrued benefit accrues final fund interest annually, subsequent to the end of the funds’ financial year, which runs from 1 July to 30 June. The benefit as at 31 December 2000 therefore includes both the final rate of fund interest for the period 1 July 1999 to 30 June 2000 and the interim rate of fund interest from 1 July 2000 to 31 December 2000. The actual growth in the benefit may therefore differ from the amount provided as at 31 December 2000 when the final fund interest rate for the period 1 July 2000 to 30 June 2001 is declared in the last quarter of 2001. Increase in Accumulated accrued total accrued pension pension fund value at during 31 December 2000 £000 the year £000 fund value Actual service to year end Date of birth M J Levett 6 June 1939 42 yrs 875 7,217 In February 2001, Mr Levett withdrew all sums accrued under the above-mentioned funds and, as a consequence, he no longer has any remaining pension benefits from the Group. None of Mr Anstee, Mr Roberts or Mr Sutcliffe has any accrued pension fund benefits in any Group pension fund and none of them contributed to any Group pension fund during 2000. C D Collins Chairman of Remuneration Committee, on behalf of the Board London, 6 March 2001 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 61 Statement of Directors’ Responsibilities in respect of the preparation of the financial statements Company law requires the directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and the Group and of the profit or loss for that period. In preparing those financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; • prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Company and the Group will continue in business. The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and the Group and to enable them to ensure that the financial statements comply with the Companies Act 1985. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 62 Summary Consolidated Profit and Loss Account for the year ended 31 December 2000 The following table summarises the Group’s results reported in the profit and loss accounts on pages 65 to 68. This summary does not form part of the statutory financial statements. In the table below, operating profit is based on a long term investment return and is stated before goodwill amortisation, short term fluctuations in investment return, non-operating items, taxation and minority interests. Operating profit Life assurance Continuing operations Discontinued operations Banking Asset management General insurance Other shareholders’ income/(expenses) Existing operations Acquired operations 478 – 325 67 44 (36) – – 2 57 – (26) Operating profit based on a long term investment return before goodwill amortisation 878 33 Goodwill amortisation Short term fluctuations in investment returns Non-operating items Profit on ordinary activities before tax Tax on profit on ordinary activities Profit on ordinary activities after tax Minority interests Profit on ordinary activities after tax and minority interests Dividends paid and proposed Retained profit for the financial year Earnings per share Basic earnings per share Diluted earnings per share Operating earnings per share (based on a long term investment return before amortisation of goodwill) Dividend per share Year to 31 Dec 2000 Total 478 – 327 124 44 (62) 911 (54) (180) 356 1,033 (186) 847 (341) 506 (163) 343 £m Year to 31 Dec 1999 Total 426 (50) 210 48 59 (32) 661 (5) 778 54 1,488 (165) 1,323 (257) 1,066 (69) Year to 31 Dec 2000 Total 5,029 – 3,440 1,305 463 (652) Rm Year to 31 Dec 1999 Total 4,200 (493) 2,072 473 582 (316) 9,585 6,518 (568) (1,894) 3,746 10,869 (1,958) 8,911 (3,588) 5,323 (1,714) (49) 7,670 532 14,671 (1,627) 13,044 (2,534) 10,510 (680) 997 3,609 9,830 15.0 14.9 p 34.1 33.9 157.8 156.6 c 336.2 334.2 17.0 12.3 179.4 121.4 4.7 2.0 49.5 19.7 Weighted average number of shares – millions 3,373 3,127 3,373 3,127 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 63 Auditors’ Report to the Members of Old Mutual plc for the year ended 31 December 2000 We have audited the financial statements on pages 65 to 122. Respective responsibilities of directors and auditors The directors are responsible for preparing the Annual Report. As described on page 62, this includes responsibility for preparing the financial statements in accordance with applicable United Kingdom law and accounting standards. Our responsibilities, as independent auditors, are established in the United Kingdom by statute, the Auditing Practices Board, the Listing Rules of the Financial Services Authority, and by our profession’s ethical guidance. We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies Act. We also report to you if, in our opinion, the directors’ report is not consistent with the financial statements, if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law or the Financial Services Authority regarding directors’ remuneration and transactions with the Group is not disclosed. We review whether the statement on pages 46 to 50 reflects the Company’s compliance with the seven provisions of the Combined Code specified for our review by the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures. We read the other information contained in the Annual Report, including the corporate governance statement, and consider whether it is consistent with the audited financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Basis of audit opinion We conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. Opinion In our opinion, the financial statements give a true and fair view of the state of affairs of the Company and the Group at 31 December 2000 and of the profit of the Group for the year then ended and have been properly prepared in accordance with the Companies Act 1985. KPMG Audit Plc Chartered Accountants Registered Auditor 8 Salisbury Square London EC4Y 8BB 6 March 2001 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 64 Consolidated Profit and Loss Account for the year ended 31 December 2000 Notes Technical account – long term business Earned premiums, net of reinsurance Gross premiums written Continuing operations Discontinued operations 5(a)(i) Outward reinsurance premiums 6 Investment income Unrealised gains on investments Other technical income, net of reinsurance Claims incurred, net of reinsurance Claims paid Gross amount Reinsurers’ share Change in the provision for claims, net of reinsurance Changes in other technical provisions, net of reinsurance Long term business provision, net of reinsurance Gross amount Reinsurers’ share Change in technical provisions for linked liabilities, net of reinsurance 9 Net operating expenses Unrealised losses on investments 7 Investment expenses and charges 15(a) Tax attributable to the long term business 8(a) Allocated investment return transferred to the non-technical account Balance on the technical account – long term business Analysed between: Continuing operations 17(b) Discontinued operations Analysis of balance on technical account – long term business Long term business result before long term investment return 8(a) Long term investment return Balance on the technical account – long term business Year to 31 Dec 2000 2,965 – 2,965 (15) 2,950 1,896 – 83 £m Year to 31 Dec 1999 3,301 33 3,334 (5) 3,329 2,995 3,783 35 Year to 31 Dec 2000 Rm Year to 31 Dec 1999 31,196 – 32,546 325 31,196 (158) 32,871 (49) 31,038 19,948 – 873 32,822 29,527 37,296 345 4,929 10,142 51,859 99,990 (3,377) 36 (3,341) 5 (3,360) 35 (3,325) (67) (35,530) 379 (33,126) 345 (35,151) 53 (32,781) (661) (3,336) (3,392) (35,098) (33,442) 14 (23) (9) (282) (291) (493) (423) (34) (117) 184 419 419 – 419 204 215 419 (3,670) (30) (3,700) (1,519) (5,219) (552) – (28) (116) (543) 147 (242) (36,182) (296) (95) (2,967) (3,062) (5,187) (4,451) (358) (1,231) 1,936 (36,478) (14,976) (51,454) (5,442) – (276) (1,144) (5,353) 292 4,408 2,879 342 (50) 292 4,408 – 4,408 3,372 (493) 2,879 105 187 292 2,146 2,262 4,408 1,035 1,844 2,879 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 65 Consolidated Profit and Loss Account for the year ended 31 December 2000 Notes Technical account – general business Earned premiums, net of reinsurance Gross premiums written Existing operations Acquired operations Outward reinsurance premiums 5(d) Change in the provision for unearned premiums, net of reinsurance Gross amount Reinsurers’ share Year to 31 Dec 2000 £m Year to 31 Dec 1999 Year to 31 Dec 2000 Rm Year to 31 Dec 1999 297 41 (33) 305 (3) 1 291 – (33) 258 2 (1) 3,125 431 (347) 2,869 – (325) 3,209 2,544 (32) 11 20 (10) 303 259 3,188 2,554 8(a) Allocated investment return transferred from the non-technical account 44 56 463 552 Claims incurred, net of reinsurance Claims paid Gross amount Reinsurers’ share 5(d) Change in the provisions for claims, net of reinsurance Gross amount Reinsurers’ share 9 Net operating expenses Balance on the technical account – general business Analysed between: Existing operations 17(a) Acquired operations Analysis of balance on technical account – general business General business result before long term investment return 8(a) Long term investment return Balance on the technical account – general business (248) 22 (226) 1 (2) (223) 21 (2,609) 231 (2,199) 207 (202) (2,378) (1,992) 8 (5) 11 (21) 79 (49) (227) (199) (2,388) (1,962) (76) 44 (57) 59 (800) 463 (562) 582 44 – 44 – 44 44 59 – 59 3 56 59 463 – 463 – 463 463 582 – 582 30 552 582 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 66 Notes Non-technical account – insurance and asset management activities Balance on the technical account – long term business 15(b) Tax attributable to shareholders’ profits on long term business 5(a)(iii) Profit from long term business before tax Balance on the technical account – general business 6 Investment income 7 Investment expenses and charges 8(a) Allocated investment return transferred from the long term business account 8(a) Allocated investment return transferred to the general business technical account Unrealised (losses)/gains on investments 5(c) Asset management operating profit before goodwill amortisation Other income Other charges Goodwill amortisation Year to 31 Dec 2000 419 53 472 44 104 (28) (184) (44) (30) 124 3 (57) (30) £m Year to 31 Dec 1999 292 84 376 59 267 (33) 543 (56) 64 48 186 (225) (5) Year to 31 Dec 2000 4,408 558 4,966 463 1,094 (295) (1,936) (463) (315) 1,305 32 (600) (315) Rm Year to 31 Dec 1999 2,879 828 3,707 582 2,632 (325) 5,353 (552) 631 473 1,834 (2,219) (49) Insurance and asset management operating profit on ordinary activities before tax and non-operating items 374 1,224 3,936 12,067 Analysed between: Continuing operations Discontinued operations Non-technical account – banking activities Interest receivable Interest payable 5(b) Net interest income Dividend income Fees and commissions receivable Dealing profits Other operating income 5(b) Operating income Administrative expenses Depreciation and amortisation Fees and commissions payable Goodwill amortisation Other operating charges Operating profit before provisions Provisions 5(b) Operating profit before share of associated undertakings’ profit Share of associated undertakings’ profit 5(b) Banking operating profit on ordinary activities before tax 374 – 374 1,274 (50) 3,936 – 12,560 (493) 1,224 3,936 12,067 1,864 (1,400) 1,652 (1,208) 19,612 (14,730) 16,287 (11,909) 464 9 255 115 28 871 (265) (48) (24) (24) (137) 373 (94) 279 24 444 6 229 88 7 774 (223) (34) (33) – (124) 360 (163) 197 13 4,882 95 2,682 1,210 295 9,164 (2,789) (505) (253) (253) (1,441) 3,923 (989) 2,934 253 4,378 59 2,258 868 69 7,632 (2,199) (335) (325) – (1,222) 3,551 (1,607) 1,944 128 and non-operating items 303 210 3,187 2,072 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 67 Consolidated Profit and Loss Account for the year ended 31 December 2000 Non-technical account – insurance, asset Notes management and banking activities Insurance and asset management operating profit on ordinary activities before tax and non-operating items 5(b) Banking operating profit on ordinary activities before tax and non-operating items Profit on ordinary activities before tax and non-operating items 11 Non-operating items Gain on restructuring of Dimension Data and other interests Profit on sale of businesses – continuing operations – discontinued operations Share selling service offered to policyholders on demutualisation – continuing operations Profit on ordinary activities before tax Analysis of profit on ordinary activities before tax Operating profit based on a long term investment return before goodwill amortisation Goodwill amortisation Short term fluctuations in investment returns Non-operating items 15(b) Tax on profit on ordinary activities Profit on ordinary activities after tax Minority interests 3 Profit on ordinary activities after tax and minority interests 4 Dividends paid and proposed Retained profit for the financial year Earnings and dividend per share attributable to equity shareholders 3 Basic earnings per share 3 Diluted earnings per share 3 Operating earnings per share (based on a long term investment return before amortisation of goodwill) 4 Dividend per share Year to 31 Dec 2000 374 303 677 356 356 – – £m Year to 31 Dec 1999 1,224 210 1,434 54 – 46 31 Year to 31 Dec 2000 3,936 3,187 7,123 3,746 3,746 – – Rm Year to 31 Dec 1999 12,067 2,072 14,139 532 – 453 306 – (23) – (227) 1,033 1,488 10,869 14,671 911 (54) (180) 356 1,033 (186) 847 (341) 506 (163) 343 15.0 14.9 661 (5) 778 54 1,488 (165) 1,323 (257) 1,066 (69) 9,585 (568) (1,894) 3,746 10,869 (1,958) 8,911 (3,588) 5,323 (1,714) 6,518 (49) 7,670 532 14,671 (1,627) 13,044 (2,534) 10,510 (680) 997 3,609 9,830 p 34.1 33.9 157.8 156.6 c 336.2 334.2 17.0 12.3 179.4 121.4 4.7 2.0 49.5 19.7 Weighted average number of shares - millions 3,373 3,127 3,373 3,127 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 68 Consolidated Statement of Total Recognised Gains and Losses for the year ended 31 December 2000 Notes Profit for the financial year Foreign exchange movements Total recognised gains for the year Year to 31 Dec 2000 506 (415) £m Year to 31 Dec 1999 1,066 (35) Year to 31 Dec 2000 5,323 477 Rm Year to 31 Dec 1999 10,510 241 91 1,031 5,800 10,751 Reconciliation of Movements in Consolidated Equity Shareholders’ Funds for the year ended 31 December 2000 Total recognised gains for the year 4 Dividends paid and proposed Issues of new capital Issue of new capital in respect of re-equitisation of Pilgrim Baxter & Associates and employee share option schemes Proceeds from sale of shares previously held to satisfy claims and errors on demutualisation Issue of new capital on policyholder self-investment transaction Issue of new capital on listing Net addition to equity shareholders’ funds Equity shareholders’ funds at the beginning of the year Equity shareholders’ funds at the end of the year Year to 31 Dec 2000 91 (163) (72) £m Year to 31 Dec 1999 1,031 (69) Year to 31 Dec 2000 Rm Year to 31 Dec 1999 5,800 (1,714) 10,751 (680) 962 4,086 10,071 153 – 1,691 – 24 – – 105 3,513 3,618 – 404 559 253 – – – 3,954 5,355 1,925 1,588 6,030 34,907 19,380 15,527 3,513 40,937 34,907 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 69 Consolidated Balance Sheet at 31 December 2000 Notes Intangible assets 18 Goodwill Insurance and other assets 19 Land and buildings 20 Other financial investments Assets held to cover linked liabilities Reinsurers’ share of technical provisions Long term business provision Claims outstanding Provision for unearned premiums 30 23 Debtors 24 Other assets Cash at bank and in hand 25 Prepayments and accrued income At 31 Dec 2000 £m At 31 Dec 1999 At 31 Dec 2000 Rm At 31 Dec 1999 2,279 164 25,786 1,629 831 15,173 16,004 5,602 914 9,081 9.403 17,167 171,680 170,577 18,081 181,083 179,658 58,784 63,386 5,916 21,606 23,997 244,469 238,442 118 19 7 144 3,890 530 458 232 5,110 140 16 5 161 524 133 443 317 1,335 215 79 1,629 44,014 5,997 5,182 2,625 1,391 159 50 1,600 5,207 1,322 4,402 3,150 1,417 57,818 14,081 Total insurance and other assets 26,860 25,575 303,916 254,123 Banking assets Cash and balances at central banks 22(a) Treasury bills and other eligible bills 22(b) Loans and advances to banks 22(c) Loans and advances to customers 22(f) Debt securities 22(g) Equity securities 21 Interest in associated undertakings 24(c) Tangible fixed assets 19 Land and buildings 24 Other assets Prepayments and accrued income Total banking assets Total assets 1,138 657 1,218 11,404 924 624 207 93 102 547 373 760 744 613 12,876 7,433 13,781 9,704 129,033 10,455 7,061 2,343 1,052 1,154 6,189 4,220 629 145 179 98 89 88 168 7,552 7,393 6,091 96,423 6,250 1,441 1,779 974 884 874 1,669 17,287 13,217 195,597 131,330 46,426 38,956 525,299 387,082 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 70 Notes Capital and reserves 26 Called up share capital 26 Share premium account 26 Profit and loss account Equity shareholders’ funds 28 Minority interests 29 Subordinated liabilities Insurance and other liabilities Technical provisions Long term business provision Claims outstanding Provision for unearned premiums 30 Technical provisions for linked liabilities 31 Provisions for other risks and charges 32 Creditors 33 Amounts owed to credit institutions Accruals and deferred income Total insurance and other liabilities Banking liabilities 34 Deposits by banks 35 Customer accounts 36 Debt securities in issue 37 Other liabilities 38 Provisions for liabilities and charges 29 Subordinated liabilities Total banking liabilities Total liabilities Memorandum items 43 Commitments 44 Contingent liabilities At 31 Dec 2000 355 511 2,752 3,618 £m At 31 Dec 1999 At 31 Dec 2000 Rm At 31 Dec 1999 344 868 2,301 4,017 5,782 31,138 3,418 8,625 22,864 3,513 40,937 34,907 1,013 857 11,458 8,515 39 – 442 – 13,048 323 62 13,433 5,602 220 5,646 1,224 230 14,767 147,636 146,731 3,170 3,654 427 702 319 43 15,129 151,992 150,328 58,784 63,386 3,150 2,490 9,907 63,883 953 13,850 427 2,602 5,916 317 997 96 43 26,355 22,498 298,203 223,549 1,873 10,737 1,417 1,195 114 65 798 21,193 9,343 121,487 16,033 1,194 13,521 609 1,290 76 735 68 7,929 92,836 11,864 6,048 755 679 15,401 12,088 174,259 120,111 46,426 38,956 525,299 387,082 554 937 244 863 6,269 10,602 2,422 8,584 These financial statements were approved by the duly authorised Executive Committee on behalf of the Board on 6 March 2001 and were signed on the Board’s behalf by: Julian V F Roberts Group Finance Director O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 71 Company Balance Sheet at 31 December 2000 Notes Fixed assets Investments Shares and other variable yield securities Fixed interest securities Deposits with credit institutions 39 Shares in group undertakings 39 Loans due from group undertakings Current assets Debtors Amounts owed by group undertakings Other debtors Cash at bank and in hand Creditors: amounts falling due within one year 33 Amounts owed to credit institutions Amounts owed to group undertakings Other creditors including taxation and social security Accruals and deferred income 4 Dividend proposed Net current (liabilities)/assets Total assets less current liabilities Capital and reserves 26 Called up share capital 26 Share premium account 27 Profit and loss account Equity shareholders’ funds At 31 Dec 2000 8 1 33 1,281 1,227 2,550 188 1 2 191 643 515 14 8 35 1,215 – 43 – 679 264 986 95 1 279 375 – 68 5 – 21 94 £m At 31 Dec 1999 At 31 Dec 2000 Rm At 31 Dec 1999 – 427 – 6,747 2,623 9,797 91 11 373 14,494 13,883 28,852 2,127 11 23 2,161 945 10 2,773 3,728 7,275 5,827 158 91 395 13,746 – 676 50 – 209 935 (1,024) 281 (11,585) 2,793 1,526 1,267 17,267 12,590 355 511 660 344 868 55 4,017 5,782 7,468 3,418 8,625 547 1,526 1,267 17,267 12,590 These financial statements were approved by the duly authorised Executive Committee on behalf of the Board on 6 March 2001 and were signed on the Board’s behalf by: Julian V F Roberts Group Finance Director O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 72 Consolidated Cash Flow Statement for the year ended 31 December 2000 Notes Operating activities 46 Net cash inflow from insurance operating activities 46 Net cash inflow from banking operating activities Net cash inflow before financing activities 46(a) Net cash outflow from returns on investments and servicing of finance 46(a) Total taxation paid 46(a) Net cash outflow from capital expenditure and financial investment 46(a) Net cash (outflow)/inflow from acquisitions and disposals Equity dividend paid Net cash (outflow)/inflow financing activities 46(a) Net cash inflow from financing activities Year to 31 Dec 2000 128 847 975 (72) (156) (295) (1,718) (122) (1,388) 1,027 £m Year to 31 Dec 1999 Year to 31 Dec 2000 495 257 752 (124) (70) (84) 66 – 540 547 1,346 8,913 10,259 (753) (1,642) (3,104) (18,076) (1,284) (14,600) 10,801 Rm Year to 31 Dec 1999 4,880 2,534 7,414 (1,223) (690) (828) 650 – 5,323 5,391 Net cash (outflow)/inflow of the Group excluding long term business (361) 1,087 (3,799) 10,714 Cash flows relating to insurance activities were invested as follows: Increase in cash holdings (Decrease)/increase in net portfolio investments 46(b),(c) 46(b) Cash flows relating to banking activities were invested as follows: Increase in cash and balances at central banks 142 (1,008) (866) 122 732 854 1,494 (10,605) 1,202 7,215 (9,111) 8,417 505 233 5,312 2,297 Net cash (outflow)/inflow of the Group excluding long term business (361) 1,087 (3,799) 10,714 The cash flows presented in this statement relate to shareholder and general business transactions only. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 73 Notes to the Financial Statements for the year ended 31 December 2000 1 Accounting policies The following principal accounting policies have been applied consistently in dealing with items that are considered material in relation to the Group’s financial statements. Basis of preparation The Group’s consolidated financial statements have been prepared in accordance with the provisions of Section 255A of, and schedules 9A and 9 to, the Companies Act 1985, applicable United Kingdom accounting standards and, in relation to the insurance business, the Statement of Recommended Practice “Accounting for Insurance Business” issued by the Association of British Insurers (ABI SORP) in December 1998. In order to present a true and fair view of the Group’s insurance and banking operations, the directors have prepared these financial statements using Schedule 9A and 9 formats respectively. Had a Schedule 9A format been used solely, banking activities would be summarised in appropriate income and expense lines within the non-technical account, and banking assets and liabilities would be shown together with insurance and other assets and liabilities in the balance sheet. The Company’s balance sheet has been prepared in accordance with Section 226 of, and schedule 4 to, the Companies Act 1985. As permitted by Section 230 of the Companies Act 1985, no profit and loss account of the Company is presented. No note of historical cost profits has been prepared as the Group’s only material gains or losses on assets relate to the holding and disposal of insurance company investments. Basis of consolidation The consolidated accounts include the accounts of the Company and its subsidiary undertakings up to 31 December 2000. Subsidiaries of the Group have been consolidated using acquisition accounting principles, with the results of subsidiary undertakings acquired or disposed in the year being included in the consolidated profit and loss account from the date of acquisition or up to the date of disposal. Associated undertakings outside of the long term business fund are accounted for using the equity method of accounting. Investments in associated undertakings attributable to long term business, or otherwise held as part of the Group’s investment portfolio, are accounted for as investments. Investments (i) Insurance Investments, including those classified under assets held to cover linked liabilities, are stated at their current value. Listed investments are stated at year end market value. Unlisted investments are valued, on a prudent basis, by the directors having regard to their likely realisable value. Land and buildings are treated as investment properties and valued at a market valuation primarily by internal professional valuers. The Group has commenced a programme whereby properties will be valued by independent external valuers on a cyclical basis such that the full portfolio will be covered within five years. In accordance with UK SSAP 19, no depreciation is provided on the properties as the directors consider that these properties are held for investment and to depreciate them would not give a true or fair view. Securities borrowed and lent that are collateralised by cash are included in the balance sheet at amounts equal to the collateral advanced or received. Shares in subsidiary undertakings are included in the Company balance sheet at historical cost, adjusted for any permanent impairment. (ii) Banking Securities which are intended to be held to maturity are stated at cost, adjusted for differences between cost and redemption value which are amortised over the period to redemption date. Securities held for trading purposes are marked to market value and the related gains/losses are taken directly to the banking non-technical profit and loss account as they arise. Other investments are stated at cost and provision is made where, in the opinion of the directors, there has been a permanent diminution in value. Where securities are sold under agreements to repurchase securities at future dates, the securities are recorded in the financial statements with the corresponding liability to repurchase those securities. Securities purchased under agreements to resell those securities at future dates are treated as secured loans and reflected on the balance sheet. Profits and losses arising from these transactions are accounted for over the periods of the contracts. Acceptances, promissory notes, trade and other bills drawn by customers and discounted by banking subsidiaries are included under advances. Amounts rediscounted are included under the contra items for acceptances. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 74 1 Accounting policies (continued) Freehold land and buildings are treated as investment properties and are not depreciated, although they are assessed for impairment on a regular basis. Properties in possession that are held with a view to orderly realisation of the advance are included under advances and valued at the lower of cost or net realisable value. Cost includes advances, interest and other charges. Financial futures and options contracts held for trading purposes are valued daily at fair value and capital gains and losses resulting from these valuations are accounted for in the capital value of the funds to which they relate. Margin deposits are included in current assets. Investment return Dividends on equity investments are accrued on an “ex-dividend” basis. Interest on fixed income securities, net rental income from property investments and investment expenses are recorded on an accruals basis. Realised gains and losses represent the difference between net sales proceeds and purchase price. Unrealised gains and losses represent the difference between the valuation of investments at the balance sheet date and their original cost or, if they have been previously valued, their valuation at the last balance sheet date. Movements in unrealised gains and losses are recorded in the profit and loss account, and include an adjustment for previously recognised unrealised gains and losses on investments disposed during the reporting period. Income arising from the securities lending and borrowing business is recognised in the non-technical account on an accruals basis. For long term business, an allocation is made from the long term business technical account to the non-technical account representing the difference between the long term investment return and the actual return on investments of the long term business that is directly attributable to shareholders. The long term investment return for relevant categories of investments takes into account past performance, current trends and future expectations. The long term investment return on investments supporting general insurance technical provisions and related shareholders’ funds is allocated from the non-technical account to the general business technical account. Long term business Long term business results have been prepared on a modified statutory solvency basis. The main features of this basis are outlined below. (i) Premiums Premiums and annuity considerations are stated gross of commission, exclude taxes and levies, and are accounted for when due for payment, except for unit-linked premiums, which are accounted for when the liability is established. Outward reinsurance premiums are accounted for on a payable basis. (ii) Claims Maturity and annuity claims are recorded as they fall due for payment. Death claims and surrenders are accounted for when notified. (iii) Long term business provisions Long term business provisions for South African and other African businesses have been computed using a gross premium valuation. Provisions in respect of South African business have been prepared in accordance with the Financial Soundness Valuation basis as set out in the guidelines issued by the Actuarial Society of South Africa in Prudential Guidance Note (“PGN”) 103 (1998). Under this guideline, the provisions are valued using realistic expectations of future experience with prescribed margins for prudence and deferral of profit emergence. This method makes implicit allowance for deferred acquisition costs. Technical provisions supporting linked policies reflect the market value of assets supporting these liabilities. For other territories, the valuation bases adopted are in accordance with the local actuarial practices and methodologies. (iv) Acquisition costs Acquisition costs comprise all direct and indirect costs arising from the sale of insurance contracts. As the gross premium valuation method used in South Africa and other African territories to determine the long term business provision makes implicit allowance for the deferral of acquisition costs, no explicit deferred acquisition cost asset has been included in the balance sheet. Deferral of costs on other business is limited to the extent that there are available future margins. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 75 Notes to the Financial Statements continued Notes to the Financial Statements continued for the year ended 31 December 2000 for the year ended 31 December 2000 1 Accounting policies (continued) General insurance business (i) Premiums Premiums are stated gross of commissions, exclude taxes and levies and are accounted for in the period in which the risk commences. The proportion of the premiums written relating to periods of risk after the balance sheet date is carried forward to subsequent accounting periods as unearned premiums, so that earned premiums relate to risks carried during the accounting period. Outward reinsurance premiums are accounted for in the same accounting period as the premiums for the related direct insurance. (ii) Claims Claims incurred comprise the settlement and handling costs of paid and outstanding claims arising during the year and adjustments to prior year claim provisions. Outstanding claims comprise claims incurred up to but not paid at the end of the accounting period whether reported or not. Whilst the directors consider that the gross provisions for claims and the related reinsurance recoveries are fairly stated on the basis of the information currently available to them, the ultimate liability will vary as a result of subsequent information and events, and may result in significant adjustments to the amounts provided. Adjustments to the amounts of claims provisions established in prior years are reflected in the financial statements for the period in which the adjustments are made, and disclosed separately if material. The methods used and estimates made are reviewed regularly. (iii) Acquisition costs Acquisition costs, which represent commission and other related expenses, are deferred over the period in which the related premiums are earned. Banking (i) Banking income Interest receivable and payable are recognised in the banking non-technical account as they accrue. Fee and other income is recognised in the banking non-technical account when receivable, except where it is charged to cover the costs of a continuing service to, or risk borne for, the customer. In these cases, the income is recognised on an appropriate basis over the relevant period. Other operating income is derived from township development and computer-related services, including distribution and servicing of equipment. (ii) Derivative instruments Off-balance sheet financial instruments, commonly referred to as derivatives, are contracts the characteristics of which are derived from those of underlying assets, interest and exchange rates or indices. They include future, forward, swap and option transactions in the foreign exchange, interest rate and equity markets. Transactions are negotiated directly with customers, with the Group acting as a counterparty, or can be dealt through exchanges. Certain subsidiaries of the Group use derivative instruments for both trading and non-trading activities. Trading activities The Group trades in financial instruments for customer facilitation and as principal. The objective of trading in financial instruments is to maximise short term gains for both the customer and/or the Group. Trading activity is restricted to certain areas in the Group and is subject to strict policies and limits. Trading positions on financial futures, option contracts and forward rate agreements are marked to market value and the resultant profits and losses are accounted for in the non-technical account. Fair values are based on quoted market prices when available. Where not marked to market, the fair value of short term borrowings approximate to the carrying amount because of the short maturity of these instruments. Where no quoted prices are available for a particular derivative, its fair value is determined by reference to quoted market prices for its component parts. Fair values reflect adjustments for credit and market risk. Non-trading activities Non-trading activities (or hedges) are financial instruments which form part of the Group’s risk management strategy. A derivative is designated as a hedge if its purpose is to match or eliminate the risk inherent in the Group’s non-trading assets, liabilities and cash flows arising from potential movements in interest rates, exchange rates, credit ratings, equity prices or commodity prices. Profits and losses on contracts entered into for the purpose of hedging are recognised in the appropriate non-technical account on the same basis and cover the same accounting period as those of the hedged items to which they relate. Once a hedge ceases to be effective, it is transferred to the trading book at fair value. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 76 1 Accounting policies (continued) (iii) Loans and advances and doubtful debts Specific provisions for bad and doubtful debts are made against identified doubtful advances, including amounts in respect of interest that is not serviced, and are deducted from advances. When there is no longer any prospect of recovery, the outstanding debt is written off. In addition, a further provision is maintained against banking exposures, which are not separately identified, but known from experience to exist in any portfolio of banking relationships. The provision is deducted from advances. The provisions, both specific and general, made during the year, less recoveries of advances previously written off, are charged to the banking non-technical account. (iv) Instalment transactions Instalment credit agreements are regarded as financing transactions and total instalments, less unearned finance charges, are included in advances and other accounts in the banking balance sheet. Lease income and finance charges are computed at the commencement of the contractual periods and are recognised in income in proportion to the net cash investment capital balances outstanding. (v) Debt securities in issue and subordinated debt instruments issued Premiums and discounts incurred in the issue of fixed rate subordinated liabilities are accounted for as an adjustment to the amount of the liability and amortised over the relevant period to maturity. Asset management Asset management fees and commissions are credited as earned, while expenses are recognised when incurred. Taxation and deferred taxation Taxation is charged on all taxable profits arising during the year. Deferred taxation is calculated on the liability method and is provided only to the extent that it is probable that a liability will crystallise in the foreseeable future. Goodwill Purchased goodwill arising on consolidation in respect of acquisitions has been capitalised and amortised over its estimated useful life, normally twenty years. Gains or losses on subsequent disposals of subsidiary or associated undertakings will include any attributable goodwill. Tangible fixed assets Tangible assets, principally computer equipment and software, motor vehicles, fixtures and furniture, are capitalised and depreciated by equal annual instalments over their estimated useful lives. Pension plans and post-retirement liabilities Defined benefit and defined contribution schemes have been established for eligible employees of the Group with the assets held in separate trustee administered funds. For defined benefit schemes, pension costs are charged to the profit and loss account so as to spread the related charges over the service lives of employees and are determined by independent qualified actuaries undertaking formal actuarial valuations at least every three years. The effects of variations from regular cost are spread over the expected average remaining service lives of members of the scheme. Any difference between the amounts charged against profits and the amounts contributed to schemes is included as a prepayment or provision in the balance sheet Contributions in respect of defined contribution schemes are recognised when incurred. Certain Group companies make provision for post retirement medical and housing benefits for eligible employees. The expected costs of post retirement benefits are charged over the expected working lives of eligible employees. Employee share ownership plans The assets, liabilities, income and expenses of employee share ownership plans (ESOPs) are incorporated into the financial statements. These shares are recognised as fixed assets in the balance sheet and amortised over the vesting period, until they vest unconditionally with the employees. The shares in the trust are put under option to employees at their value on the date the options are granted. The difference between the shares’ value at the date of grant and their residual value is charged as an operating expense to the profit and loss account. This charge is spread over the employees’ period of service in respect of which the options have been granted. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 77 Notes to the Financial Statements continued for the year ended 31 December 2000 2 Foreign currencies The information contained in these financial statements is expressed in both Sterling and South African Rand. This is in order both to meet the legal requirements of Schedule 9A of the UK Companies Act 1985 and to provide the users of the accounts in South Africa with illustrative information. Principal exchange rates used to translate the operating results, assets and liabilities of key foreign business segments are presented below. Profit and loss account (average rate) Balance sheet (closing rate) Year to 31 Dec 2000 R Year to 31 Dec 1999 10.5213 11.3148 9.8588 9.9364 Year to 31 Dec 2000 1.5159 1.4937 US$ Year to 31 Dec 1999 1.6153 1.6176 Foreign currency revenue transactions are translated at weighted average exchange rates for the year. Foreign currency assets and liabilities are translated at year end exchange rates. Exchange differences arising from the translation of net investments in foreign subsidiary undertakings are taken to the consolidated statement of total recognised gains and losses. Other exchange differences are included in the profit and loss account as part of unrealised gains and losses on investments. 3 Earnings and earnings per share Basic earnings per share are based upon the profit attributable to equity shareholders after the amortisation of goodwill arising on acquisitions. The directors view operating earnings per share, derived from operating profit based on a long term investment return and before goodwill amortisation, short term fluctuations in investment return, non-operating items, taxation and minority interests, as providing a better indication of the underlying performance of the Group. A table reconciling operating profit after tax and minority interests to operating earnings is included below. Profit on ordinary activities after tax and minority interests Goodwill amortisation net of minority interests Short term fluctuations in investment return net of minority interests Non-operating items net of taxation and minority interests Operating profit Basic earnings per share Goodwill amortisation net of minority interests Short term fluctuations in investment return net of minority interests Non-operating items net of taxation and minority interests Operating earnings per share Year to 31 Dec 2000 506 42 205 (178) 575 15.0 1.2 6.1 (5.3) 17.0 £m Year to 31 Dec 1999 1,066 5 (667) (19) Year to 31 Dec 2000 5,323 442 2,158 (1,873) Rm Year to 31 Dec 1999 10,510 49 (6,576) (187) 385 6,050 3,796 P 34.1 0.1 (21.3) (0.6) C 336.2 1.1 (210.0) (5.9) 157.8 13.1 64.0 (55.5) 12.3 179.4 121.4 Basic earnings per share are calculated by reference to the profit on ordinary activities after tax and minority interests of £506 million (R5,323 million) for the year ended 31 December 2000 (1999: £1,066 million (R10,510 million)) and a weighted average number of shares in issue of 3,373 million (1999: 3,127 million). This is calculated after taking into account shares held by Employee Share Ownership Plans (ESOPs), which have waived their rights to dividends. The diluted earnings per share calculation reflects the impact of shares in the ESOP Trusts, which upon vesting will have an anticipated dilution effect of 26 million (1999: 13 million) shares. 316 million (1999: 316 million) Old Mutual plc shares held by policyholders’ funds are included in the weighted average number of shares used in the earnings per share calculation, reflecting the policyholders’ economic interest in these shares. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 78 4 Dividend Equity: ordinary Group Final dividend proposed: 3.1p (1999: 2.0p ) per 10p share Interim dividend paid: 1.6p (1999: nil p) per 10p share Company Final dividend proposed: 3.1p (1999: 2.0p) per 10p share Interim dividend paid: 1.6p (1999:nil p) per 10p share Year to 31 Dec 2000 £m Year to 31 Dec 1999 108 55 163 35 16 51 69 – 69 21 - 21 Year to 31 Dec 2000 1,135 579 1,714 395 192 587 Rm Year to 31 Dec 1999 680 – 680 209 - 209 Provision has been made in the Group’s financial statements for a final dividend of 3.1p per share calculated using the number of shares in issue at 31 December 2000 of 3,551 million less 88 million shares in Employee Share Ownership Plans, which have waived their rights to dividends. As a consequence of the exchange control arrangements in place in South Africa and other relevant African territories, dividends to shareholders on the branch registers in those countries (or in the case of Namibia, the Namibian section of the principal register) are settled through Dividend Access Trusts established for that purpose. The dividend payable by the Company represents only the proportion of the Group dividend payable to shareholders on the principal register (other than its Namibian section) and is calculated based on the directors’ estimate of the number of shares that will be on the share registers at the close of business on 20 April 2001, being the record date for the dividend. 5 Segmental analysis 5(a) Life assurance (i) Gross premiums written Year to 31 December 2000 Single Recurring Year to 31 December 1999 Single Recurring (ii) New business premiums Year to 31 December 2000 New business premiums on a statutory basis Single Recurring Annual premium equivalent Year to 31 December 1999 New business premiums on a statutory basis Single Recurring Annual premium equivalent South Africa Rest of world £m Total South Africa Rest of world Rm Total 1,393 1,187 2,580 1,650 1,279 2,929 1,393 227 1,620 366 1,650 204 1,854 369 219 166 385 208 197 405 219 21 240 43 202 36 238 56 1,612 1,353 14,656 12,489 2,304 1,747 16,960 14,236 2,965 27,145 4,051 31,196 1,858 1,476 16,269 12,611 2,050 1,941 18,319 14,552 3,334 28,880 3,991 32,871 1,612 248 14,656 2,388 2,304 221 16,960 2,609 1,860 17,044 2,525 19,569 409 3,854 451 4,305 1,852 240 16,269 2,011 1,991 355 18,260 2,366 2,092 18,280 2,346 20,626 425 3,637 555 4,192 Annual premium equivalent is defined as one tenth of single premiums plus recurring premiums. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 79 Notes to the Financial Statements continued for the year ended 31 December 2000 5 Segmental analysis (continued) 5(a) Life assurance (continued) (iii) Analysis of life operating profit Year to 31 December 2000 Individual business Group business Life assurance technical result Long term investment return Life assurance operating profit Interest receivable from group undertakings eliminated on consolidation Balance on the technical account – long term business Year to 31 December 1999 Individual business Group business Continuing operations Discontinued operations Life assurance technical result Long term investment return Balance on the technical account – long term business South Africa Rest of world 165 85 250 215 465 (6) 459 168 67 235 – 235 167 402 4 3 7 6 13 – 13 2 2 4 (50) (46) 20 (26) 5(b) Banking operating profit South Africa Rest of world Year to 31 December 2000 Net interest income Non-interest revenue Operating income Specific and general provisions Net income Goodwill amortisation Operating expenses Operating profit before share of associated undertakings’ profit Share of associated undertakings’ profit Banking operating profit on ordinary activities before tax Year to 31 December 1999 Net interest income Non-interest revenue Operating income Specific and general provisions Net income Operating expenses Operating profit before share of associated undertakings’ profit Share of associated undertakings’ profit Banking operating profit on ordinary activities before tax 421 382 803 (90) 713 (24) (452) 237 24 261 422 317 739 (162) 577 (399) 178 13 191 43 25 68 (4) 64 – (22) 42 – 42 22 13 35 (1) 34 (15) 19 – 19 £m Total 169 88 257 221 478 South Africa Rest of world 1,736 894 2,630 2,262 4,892 42 32 74 63 137 Rm Total 1,778 926 2,704 2,325 5,029 (6) (63) – (63) 472 4,829 137 4,966 170 69 239 (50) 189 187 376 £m Total 464 407 871 (94) 777 (24) (474) 279 24 303 444 330 774 (163) 611 (414) 197 13 210 1,656 661 2,317 – 2,317 1,647 3,964 20 19 39 (493) (454) 197 (257) South Africa Rest of world 4,430 4,019 8,449 (947) 7,502 (253) (4,757) 2,492 253 2,745 4,162 3,125 7,287 (1,597) 5,690 (3,933) 1,757 128 1,885 452 263 715 (42) 673 – (231) 442 – 442 216 129 345 (10) 335 (148) 187 – 187 1,676 680 2,356 (493) 1,863 1,844 3,707 Rm Total 4,882 4,282 9,164 (989) 8,175 (253) (4,988) 2,934 253 3,187 4,378 3,254 7,632 (1,607) 6,025 (4,081) 1,944 128 2,072 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 80 5 Segmental analysis (continued) 5(c) Asset management operating profit Existing operations Acquired operations £m Total Existing operations Acquired operations Rm Total Year to 31 December 2000 Operating income Asset management worldwide Private client UK – gross profit – integration costs Other financial services Asset management operating profit before goodwill amortisation Goodwill amortisation Asset management operating profit Year to 31 December 1999 Operating income Asset management worldwide Private client UK Asset management operating profit before goodwill amortisation Goodwill amortisation Asset management operating profit 251 245 496 2,641 2,578 5,219 53 7 – 7 67 (4) 63 192 45 3 48 (5) 43 44 19 (14) 8 57 (26) 31 – – – – – – 97 26 (14) 15 124 (30) 94 557 74 – 74 705 (42) 663 463 200 (147) 84 600 (273) 327 – – – – – – 192 1,893 444 29 473 (49) 424 45 3 48 (5) 43 £m 1,020 274 (147) 158 1,305 (315) 990 1,893 444 29 473 (49) 424 Rm Operating income comprises gross fees earned from asset management activities. 5(d) Analysis of general insurance result by class of business Year to 31 December 2000 Motor Fire Accident Other Long term investment return Operating profit Analysed between Existing operations Acquired operations Year to 31 December 1999 Motor Fire Accident Other Long term investment return Operating profit Premiums written net of reinsurance Claims incurred net of Underwriting result reinsurance Premiums written net of reinsurance Claims incurred net of Underwriting result reinsurance 141 131 11 22 305 – 305 267 38 305 123 40 86 9 258 – 258 113 96 5 12 226 – 226 198 28 226 98 70 26 8 202 – 202 (3) – 2 1 – 44 44 44 – 44 (1) 1 3 – 3 56 59 1,484 1,378 116 231 3,209 – 3,209 2,809 400 3,209 1,213 394 848 89 2,544 – 2,544 1,189 1,010 53 126 2,378 – 2,378 2,083 295 2,378 967 690 256 79 1,992 – 1,992 (32) – 21 11 – 463 463 463 – 463 (7) 8 30 (1) 30 552 582 General insurance operating profit consists of the underwriting result reported above and the long term investment return disclosed in note 8(a). O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 81 Notes to the Financial Statements continued for the year ended 31 December 2000 5 Segmental analysis (continued) 5(e) Other shareholders’ income/(expenses) Long term investment return credited to operating result Net corporate expenses Other shareholders’ income/(expenses) before intragroup interest Interest payable to group undertakings eliminated on consolidation Other shareholders’ income/(expenses) Year to 31 Dec 2000 17 (79) (62) 6 (56) £m Year to 31 Dec 1999 21 (53) (32) – (32) Year to 30 Dec 2000 179 (831) (652) 63 (589) Rm Year to 31 Dec 1999 207 (523) (316) – (316) Included in other shareholders’ income/(expenses) of £56 milion (R589 million) are interest income and losses on sale of investments amounting to £2 million (R23 million). 5(f) Net assets 31 December 2000 Life assurance Banking Asset management General insurance Other Net assets 31 December 1999 Life assurance Banking Asset management General insurance Other Net assets 5(g) Banking business average assets Retail Commercial Corporate Investment merchant banking International Other Average interest-earning assets Net interest margin (based on average assets) South Africa Rest of world 1,247 534 67 139 81 2,068 1,810 513 36 189 139 2,687 157 292 1,049 9 43 1,550 170 79 128 10 439 826 £m Total 1,404 826 1,116 148 124 South Africa Rest of world Rm Total 14,110 6,042 758 1,573 917 1,776 3,304 11,869 102 486 15,886 9,346 12,627 1,675 1,403 3,618 23,400 17,537 40,937 1,980 592 164 199 578 17,986 5,097 358 1,878 1,381 1,689 785 1,272 99 4,362 19,675 5,882 1,630 1,977 5,743 3,513 26,700 8,207 34,907 At 31 Dec 2000 3,487 1,280 2,730 2,128 774 3,272 £m At 31 Dec 1999 4,014 1,360 2,806 2,180 992 1,217 At 31 Dec 2000 36,688 13,467 28,723 22,389 8,143 34,426 Rm At 31 Dec 1999 39,573 13,408 27,664 21,492 9,780 11,998 13,671 12,569 143,836 123,915 12,989 12,173 136,661 120,011 3.57 % 3.65 3.57 % 3.65 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 82 5 Segmental analysis (continued) 5(h) Funds under management South Africa Rest of world £m Total South Africa Rest of world Rm Total 31 December 2000 Investments including assets held to cover linked liabilities 14,913 6,693 21,606 168,739 75,730 244,469 Unit trusts Asset management worldwide Old Mutual Asset Managers Private client Other financial services Third party Asset management worldwide Old Mutual Asset Managers United Asset Management Private client Other financial services 1,266 – – 1,266 779 1,252 200 2,231 2,045 1,252 200 14,325 – – 8,814 14,166 2,263 23,139 14,166 2,263 3,497 14,325 25,243 39,568 4,101 379 4,480 – 119,111 119,111 46,402 4,288 50,690 – 1,347,715 1,347,715 4,101 119,490 123,591 19,619 19,619 435 420 – 15 46,402 1,352,003 1,398,405 221,985 221,985 4,922 – 170 4,752 Total funds under management 20,295 148,453 168,748 229,636 1,679,713 1,909,349 4,116 139,529 143,645 46,572 1,578,740 1,625,312 31 December 1999 Investments including assets held to cover linked liabilities 16,998 6,999 23,997 168,897 69,545 238,442 Unit trusts Asset management worldwide Private client Nedcor Investment Bank Asset Managers Third party Asset management worldwide Private client Nedcor Investment Bank Asset Managers Other financial services 1,941 – 757 2,698 4,697 – 2,360 11 7,068 745 1,111 278 2,134 399 8,538 35 – 2,686 1,111 1,035 19,287 – 7,522 7,403 11,039 2,762 26,690 11,039 10,284 4,832 26,809 21,204 48,013 5,096 8,538 2,395 11 46,668 – 23,450 113 3,965 84,837 348 – 50,633 84,837 23,798 113 8,972 16,040 70,231 89,150 159,381 Total funds under management 26,764 18,105 44,869 265,937 179,899 445,836 Following the sale of Nedcor Investment Bank Asset Managers to Franklin Templeton in July 2000, the associated funds under management have been excluded at 31 December 2000. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 83 Notes to the Financial Statements continued for the year ended 31 December 2000 6 Investment income Technical account – long term business Income from investment properties Income from other financial investments Gains on the realisation of investments Non-technical account – insurance and asset management activities Income from other financial investments Gains on the realisation of investments 7 Investment expenses and charges Technical account – long term business Interest payable on other loans Investment management expenses Non-technical account – insurance and asset management activities Interest payable on bank loans and overdrafts Investment management expenses Year to 31 Dec 2000 60 1,137 699 1,896 70 34 104 Year to 31 Dec 2000 1 33 34 27 1 28 £m Year to 31 Dec 1999 Year to 31 Dec 2000 Rm Year to 31 Dec 1999 79 1,109 1,807 631 11,963 7,354 779 10,933 17,815 2,995 19,948 29,527 89 178 267 736 358 1,094 877 1,755 2,632 £m Year to 31 Dec 1999 Year to 31 Dec 2000 Rm Year to 31 Dec 1999 5 23 28 3 30 33 11 347 358 284 11 295 49 227 276 30 295 325 Interest payable on bank loans and overdrafts in the non-technical account includes £26 million (R274 million) in respect of debt finance used for the Company’s acquisition of United Asset Management Corporation. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 84 8 Insurance long term investment return In accordance with requirements of the ABI SORP, profit on ordinary activities is stated after allocating an investment return earned by insurance businesses based on a long term investment return. This long term investment return is based on achieved real rates of return adjusted for current inflation expectations, and consensus economic investment forecasts. For life assurance business, the return is applied to an average value of investible shareholders’ assets, adjusted for net fund flows. For general insurance liabilities, the return is an average value of investible assets supporting shareholders’ funds and insurance liabilities, adjusted for net fund flows. Short term fluctuations in investment return represent the difference between actual return and long term investment return. The long term investment rate of return used in South Africa is 14 per cent. (1999: 14 per cent.). The directors are of the opinion that this rate of return is prudent and has been selected with a view to ensuring that returns credited to operating earnings are not inconsistent with the actual returns expected to be earned over the long term. 8(a) Analysis of short term fluctuations in investment returns Technical account – long term business Actual investment return attributable to shareholders Long term investment return credited to operating result Technical account – general business Actual investment return attributable to shareholders Long term investment return credited to operating result Non-technical account Actual investment return attributable to shareholders Long term investment return credited to operating result Year to 31 Dec 2000 31 215 (184) 55 44 11 10 17 (7) £m Year to 31 Dec 1999 Year to 31 Dec 2000 Rm Year to 31 Dec 1999 730 187 543 230 56 174 82 21 61 326 2,262 7,197 1,844 (1,936) 5,353 579 463 116 105 179 (74) 2,268 552 1,716 808 207 601 Short term fluctuations in investment returns (180) 778 (1,894) 7,670 8(b) Comparison of long term investment returns with actual investment returns Technical account – long term business Actual investment return attributable to shareholders Long term investment return credited to operating result Technical account – general business Actual investment return attributable to shareholders Long term investment return credited to operating result Non-technical account Actual investment return attributable to shareholders Long term investment return credited to operating result 1996-2000 1995-1999 £m Rm £m Rm 1,586 1,241 12,325 10,006 2,686 1,853 18,686 12,676 345 2,319 833 6,010 467 345 122 92 38 54 3,796 2,847 949 913 386 527 645 499 146 82 21 61 4,532 3,411 1,121 808 207 601 Short term fluctuations in investment returns 521 3,795 1,040 7,732 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 85 Notes to the Financial Statements continued for the year ended 31 December 2000 9 Net operating expenses Technical account – long term business Acquisition costs Administration expenses Technical account – general business Acquisition costs Administration expenses 10 Profit on ordinary activities before tax Profit on ordinary activities before tax is stated After crediting Aggregate rentals receivable under Finance leases Operating leases Income from listed investments Gains on the disposal of investment securities – banking After charging Depreciation Rental charges – operating leases and similar hire purchase Auditors’ remuneration 10(a) Auditors’ remuneration For audit services For other services Rm Year to 31 Dec 1999 2,233 3,209 5,442 385 177 562 Rm Year to 31 Dec 1999 1,568 99 6,753 424 572 296 49 Year to 31 Dec 2000 175 318 493 49 27 76 £m Year to 31 Dec 1999 227 325 552 39 18 57 Year to 31 Dec 2000 1,841 3,346 5,187 516 284 800 Year to 31 Dec 2000 £m Year to 31 Dec 1999 Year to 31 Dec 2000 1,409 84 8,691 84 715 326 86 134 8 826 8 68 31 8 4 4 8 159 10 685 43 58 30 5 3 2 5 45 41 86 30 19 49 The above figures include £0.2 million (1999: £0.1 million) in respect of audit fees payable by the Company. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 86 11 Non-operating items Profit attributable to shareholders for the year ended 31 December 2000 is stated after crediting/(charging) the following non-recurring items. Gain on restructuring of Dimension Data and other interests Profit on sale of NedTravel Profit on flotation of Nedcor Investment Bank Profit on sale of UK life assurance operations Provision for costs associated with the withdrawal of the Group from its UK life assurance operations Profit on sale and restructuring of businesses Cost of free share selling service offered to policyholders on demutualisation Non-operating items before tax and minority interests Taxation Non-operating items after tax and before minority interests Minority interests Non-operating items after tax and minority interests Year to 31 Dec 2000 356 – – – – 356 – 356 (5) 351 (173) 178 £m Year to 31 Dec 1999 – 20 46 15 (4) 77 (23) 54 – 54 (35) 19 Year to 31 Dec 2000 3,746 – – – – 3,746 – 3,746 (52) 3,694 (1,821) 1,873 Rm Year to 31 Dec 1999 – 197 453 148 (39) 759 (227) 532 – 532 (345) 187 12 Directors’ emoluments and interests The remuneration payable to the directors of the Company for their services to the Group including the estimated money value of benefits in kind for the year ended 31 December 2000 is shown in the Remuneration Report on pages 56 to 61 of this document. The interests of directors of the Company in shares of the Company and its quoted subsidiaries are shown in the Directors’ Report on page 43 and in the Remuneration Report on page 59 of this document. 13 Remuneration expenses The aggregate remuneration payable in respect of employees during the year was: Wages and salaries Social security costs Pension costs 13(a) Particulars of staff The average number of persons employed by the Group during the year was: Life assurance Banking Asset management General insurance Other Year to 31 Dec 2000 525 19 23 567 £m Year to 31 Dec 1999 389 15 29 433 Year to 31 Dec 2000 5,524 200 242 5,966 Rm Year to 31 Dec 1999 3,847 148 274 4,269 Year to 31 Dec 2000 Year to 31 Dec 1999 14,473 18,862 5,456 2,617 58 15,467 17,010 1,187 2,278 57 41,466 35,999 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 87 Notes to the Financial Statements continued for the year ended 31 December 2000 14 Employee benefits 14(a) Employee pension plans The Group operates a number of pension schemes around the world. These schemes have been designed and are administered in accordance with local conditions and practices in the countries concerned and include both defined contribution and defined benefit schemes. The assets of these schemes are held in separate trustee administered funds. Pension costs and contributions relating to defined benefit schemes are assessed in accordance with the advice of qualified actuaries. Actuarial advice confirms that the current level of contributions payable to each pension scheme, together with existing assets, are adequate to secure members’ benefits over the remaining service lives of participating employees. The schemes are reviewed at least on a triennial basis or in accordance with local practice and regulations. In the intervening years the actuary reviews the continuing appropriateness of the assumptions applied. The actuarial assumptions used to calculate the projected benefit obligations of the Group’s pension schemes vary according to the economic conditions of the countries in which they operate. The most recent valuation of the largest defined benefit fund in the United Kingdom is in respect of the asset management businesses in the Group and was made on 30 March 2000 by an independent qualified actuary. The attained age method was used for calculating the scheme’s past service liabilities and the principal actuarial assumptions adopted were an investment return of 7 per cent. before retirement and 6 per cent. after retirement, salary increases of 6 per cent. and pensions in payment increases of 3.5 per cent. The market value of scheme assets at that date was £63.1 million and the actuarial value of the assets represented 124 per cent. of the benefits accrued to members, after allowing for expected future increases in earnings. This scheme is now closed to new members. The most recent valuation of the defined benefit fund for the South African life business was made on 1 July 2000 by an independent qualified actuary. The attained age method was used and the principal actuarial assumptions adopted were an investment return of 12 per cent., salary increases ranging from 11.0 per cent. (at age 60 and above) to 16.8 per cent. (at age 20) and pensions in payment increases of 8.0 per cent. per annum. The market value of scheme assets at that date was £11 million (R113 million) and the actuarial value of the assets represented 177 per cent. of the benefits accrued to members, after allowing for expected future increases in earnings. This scheme is now closed to new members. At 31 December 2000, the provision for pension contributions included in other provisions and charges in the Group’s balance sheet amounted to £9 million (R102 million) (1999: £7million (R69 million)). The charge to the technical account represents the regular pension cost, offset by the investment return on the surplus scheme assets, and variations from regular cost arising from the scheme’s surplus being amortised on a straight line basis over the average expected remaining service lives of current employees. An analysis of the profit and loss account charge is presented below. Pension cost charge Regular cost Variations from regular cost Profit and loss charge 14(b) Post retirement benefits Year to 31 Dec 2000 29 (6) 23 £m Year to 31 Dec 1999 36 (7) 29 Year to 31 Dec 2000 305 (63) 242 Rm Year to 31 Dec 1999 344 (70) 274 Certain Group subsidiary undertakings provide medical and mortgage bond benefits to qualifying employees beyond the date of retirement. The profit and loss account charge and related liability included in the Group’s balance sheet is presented below. Profit and loss charge Provisions for other risks and charges Year to 31 Dec 2000 7 57 £m Year to 31 Dec 1999 1 67 Year to 31 Dec 2000 74 645 Rm Year to 31 Dec 1999 6 663 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 88 14(c) Employee share ownership plans (ESOPs) The ESOPs currently in use are described on pages 56 and 57 in the Remuneration Report. The total ESOP expenses charged to the profit and loss account for the year ended 31 December 2000 were £5 million (R55 million) (1999: £4 million (R37 million)). The number and market value of the investment of the Group’s ESOPs in the ordinary shares of the Company at 31 December 2000 were 88,186,786 (1999: 68,580,222) and £145 million (R1,640 million) (1999: £111 million (R1,108 million)) respectively. Dividends on these shares have been waived by the ESOP trusts. The shares held by the ESOP trusts are held for the continuing benefit of the Group’s business, and are recognised as fixed assets in the balance sheet and amortised over the vesting period, until they vest unconditionally with the employees. 15 Tax on profit on ordinary activities 15(a) Technical account – long term business United Kingdom taxation UK corporation tax Overseas taxation South African tax Rest of world tax Prior period adjustment Year to 31 Dec 2000 £m Year to 31 Dec 1999 Year to 31 Dec 2000 Rm Year to 31 Dec 1999 – 5 – 49 112 5 – 117 112 4 (5) 1,178 53 1,106 39 – (50) 116 1,231 1,144 15(b) Non-technical account – insurance, asset management and banking activities United Kingdom taxation UK corporation tax Double taxation relief Overseas taxation South African tax Rest of world tax Secondary taxation on companies (STC) Deferred taxation Prior period adjustment Tax for the year Tax attributable to shareholders’ profits on long term business Charge to non-technical account – insurance, asset management and banking activities 15(c) Reconciliation of tax charge Tax at UK rate of 30.0 per cent. (1999: 30.25 per cent.) on profit on ordinary activities before tax Untaxed income (including tax exempt investment return) Disallowable expenditure STC Other Reported tax charge 123 (104) 19 118 9 32 (76) 31 133 53 39 (32) 1,294 (1,094) 7 37 2 18 16 1 81 84 200 1,241 95 338 (800) 326 1,400 558 384 (315) 69 366 20 177 157 10 799 828 186 165 1,958 1,627 310 (204) 16 32 32 186 450 (252) (25) (18) 10 165 3,262 (2,146) 166 338 338 4,436 (2,484) (246) (177) 98 1,958 1,627 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 89 Notes to the Financial Statements continued for the year ended 31 December 2000 16 Profit for the financial year As permitted by section 230(4) of the Companies Act 1985, no profit or loss account is presented for the parent Company. The Company’s profit for the financial year was £81 million (R853 million) (1999: £55 million (R547 million)). 17 Acquisitions and disposals 17(a) Acquisitions (i) United Asset Management Corporation In September 2000, the Group acquired the net assets of United Asset Management Corporation for a cash consideration of £1,351 million (R14,412 million). During December 2000, the Group restructured its revenue sharing interests in Pilgrim Baxter & Associates (PBA) and OMAM(US) affiliates to increase participation in the earnings of those firms. The fair value adjustments detailed below relate to the reclassification of intangible assets to goodwill on consolidation, the recognition of a deferred taxation asset in respect of future tax benefits expected to arise from re-equitisation payments made to affiliates and intangible asset amortisation, and a revaluation of businesses acquired for resale. The resultant goodwill of £1,795 million (R19,147 million) has been capitalised and is being amortised over its estimated useful life of twenty years. The Group has accounted for the purchase of United Asset Management Corporation using acquisition accounting principles, whereby its results are included in the consolidated profit and loss from the date of acquisition. Intangible assets Investments Debtors Tangible fixed assets Cash at bank and in hand Prepayments and accrued income Other assets Deferred tax asset Subordinated liabilities Creditors Amounts owed to credit institutions Net assets of retained businesses Net assets of businesses acquired for resale Net assets of acquired businesses Consideration paid Original consideration Purchase of revenue shares PBA initial payments PBA option PBA phantom stock plan OMAM(US) affiliates Total consideration Goodwill arising on acquisition £m Rm Book value Fair value on acquisition adjustments Fair value to Group Fair value to Group 534 32 103 18 133 7 10 30 (34) (246) (287) 300 46 346 (534) – – – – – – 194 – – – (340) 198 (142) – 32 103 18 133 7 10 224 (34) (246) (287) (40) 244 204 – 341 1,099 192 1,419 75 107 2,390 (363) (2,624) (3,062) (426) 2,603 2,177 1,351 14,412 160 285 116 87 1,707 3,040 1,237 928 1,999 21,324 1,795 19,147 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 90 17 Acquisitions and disposals (continued) 17(a)(i) Acquisitions (continued) The summarised profit and loss account of United Asset Management Corporation for the period from 1 January 2000 to 30 September 2000 and for the full year ended 31 December 1999, together with the consolidated statements of total recognised gains and losses for each period, prepared in accordance with the accounting policies applied by United Asset Management Corporation in those periods, is presented below. Profit and loss account – summary Revenues Profit on ordinary activities before tax Tax on profit on ordinary activities Profit on ordinary activities after tax Statement of total recognised gains and losses Profit on ordinary activities after tax Foreign exchange movements Total recognised gains for the year 1 Jan 2000 to 30 Sep 2000 £m Year to 1 Jan 2000 to 30 Sep 31 Dec 2000 1999 Rm Year to 31 Dec 1999 471 546 4,873 5,383 60 (25) 35 35 4 39 66 (28) 38 38 2 40 621 (259) 362 362 41 403 651 (276) 375 375 20 395 (ii) Gerrard Group On 31 March 2000, the Group acquired £172 million of net assets of Gerrard Group for a consideration of £529 million. The resultant goodwill of £357 million has been capitalised and is being amortised over its estimated useful life of twenty years. The Group has accounted for the purchase of Gerrard Group using acquisition accounting principles, whereby its results are included in the consolidated profit and loss account from the date of acquisition. An analysis of the net assets acquired and the fair value of Gerrard Group is presented below. Insurance and other Banking Total Total £m Rm Investments Debtors Tangible fixed assets Treasury bills and other eligible bills Loans and advances to banks and customers Interest in associated undertakings Other assets Prepayments and accrued income Cash at bank and in hand Creditors and provisions Deposits by banks and customers Other liabilities Net assets Consideration paid Goodwill arising on acquisition 917 2,445 17 – – – – – 134 (3,394) – – – – – 8,371 11,054 15 189 8 4 – (19,119) (469) 119 53 917 2,445 17 8,371 9,546 25,458 177 87,142 11,054 115,072 156 1,967 83 1,437 (35,332) (19,119) (199,026) (4,889) 15 189 8 138 (3,394) (469) 172 529 357 1,791 5,507 3,716 There were no material accounting policy alignments or fair value adjustments to assets and liabilities in Gerrard Group’s balance sheet at the date of acquisition. However, adjustments to the Gerrard Group balance sheet at the date of acquisition have been made in respect of provisions and the rollover of options since the interim reporting date, which better reflect the value of the net O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 91 Notes to the Financial Statements continued for the year ended 31 December 2000 17(a) Acquisitions (continued) (iii) Other In October 2000, the Group’s 51 per cent. owned general insurance subsidiary, Mutual & Federal Insurance Company Limited, acquired net assets of £96 million (R1,103 million) of CGU Holdings Limited for a consideration of £106 million (R1,206 million). Goodwill of £10 million (R103 million) has been capitalised and is being amortised over nine years. During July 2000, the Group’s listed banking subsidiary, Nedcor Limited, acquired FBC Fidelity Bank, which has been merged with Peoples Bank to create the biggest empowerment bank in South Africa. No goodwill arose on the acquisition of FBC Fidelity Bank, as the consideration paid and net assets acquired both amounted to nil. Goodwill arising on acquisitions of CGU Holdings Limited and FBC Fidelity Bank Gross assets Gross liabilities Net assets Consideration paid Goodwill arising on acquisition £m Rm Fair value to Group Fair value to Group 720 (624) 7,515 (6,412) 96 106 10 1,103 1,206 103 There were no material accounting policy alignments or fair value adjustments to assets and liabilities in the balance sheets of CGU Holdings Limited and FBC Fidelity Bank at the dates of acquisition. 17(b) Disposals There were no disposals during the year ended 31 December 2000. In December 1999, the Group sold its UK life assurance company, Old Mutual Life Assurance Company Limited (OMLA), to the Century Group. The results of OMLA for the year ended 31 December 1999 have been disclosed as discontinued operations in the Group’s profit and loss account. 18 Goodwill At beginning of year Additions arising on acquisitions during the year (note 17(a)) Adjustment in respect of prior year acquisitions Amortisation for the year Foreign exchange and other movements At end of year At 31 Dec 2000 164 2,162 – (33) (14) 2,279 £m At 31 Dec 1999 100 63 8 (5) (2) At 31 Dec 2000 1,629 22,747 – (347) 1,757 Rm At 31 Dec 1999 981 627 78 (49) (8) 164 25,786 1,629 Goodwill amortisation for the year of £54 million (R568 million) (1999: £5 million (R49 million)) comprises £33 million (R347 million) (1999: £5 million (R49 million)) disclosed in note 18 above, and £21 million (R221 million) (1999: £nil (Rnil)) disclosed in note 21. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 92 19 Land and buildings Insurance and other assets Market value Freehold Long and short leasehold Market value of land and buildings occupied for own use Cost Freehold Long and short leasehold Cost of land and buildings occupied for own use Banking Market value Freehold Long and short leasehold Market value of land and buildings occupied for own use Cost Freehold Long and short leasehold Cost of land and buildings occupied for own use At 31 Dec 2000 £m At 31 Dec 1999 At 31 Dec 2000 Rm At 31 Dec 1999 816 15 831 116 580 – 580 67 100 2 102 97 117 2 119 110 894 20 914 9,233 170 9,403 8,882 199 9,081 123 1,313 1,222 667 17 684 6,563 – 6,563 6,628 169 6,797 96 758 954 85 4 89 28 106 10 116 1,131 23 1,154 1,100 1,327 26 1,353 844 40 884 278 1,048 96 1,144 32 1,242 318 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 93 Notes to the Financial Statements continued for the year ended 31 December 2000 20 Insurance and other assets – other financial investments Market value Shares and other variable yield securities and units in unit trusts Debt securities and other fixed income securities Other loans Deposits with credit institutions Other investments Included in the above were investments: Listed on London Stock Exchange Listed on recognised southern African investment exchanges Listed on other investment exchanges Cost/book value Shares and other variable yield securities and units in unit trusts Debt securities and other fixed income securities Other loans Deposits with credit institutions Other investments Assets held to cover linked liabilities Cost 21 Interest in associated undertakings At beginning of year Share of associated undertakings’ operating profit Net additions Goodwill amortisation Foreign exchange and other movements At end of year At 31 Dec 2000 9,273 3,929 308 1,483 180 £m At 31 Dec 1999 At 31 Dec 2000 Rm At 31 Dec 1999 11,831 104,922 117,557 30,792 44,456 2,484 3,485 19,744 16,780 – 2,037 3,099 250 1,987 – 15,173 17,167 171,680 170,577 1,284 9,638 18 1,447 14,528 9,890 109,052 204 1,103 14,378 98,271 10,960 10,940 12,440 123,784 123,609 6,912 3,732 296 1,337 1 10,307 2,937 304 1,593 – 78,208 102,414 29,183 42,227 3,021 3,349 15,829 15,128 – 11 12,278 15,141 138,923 150,447 3,592 5,079 40,643 50,467 At 31 Dec 2000 179 24 41 (21) (16) 207 £m At 31 Dec 1999 109 13 56 – 1 179 At 31 Dec 2000 1,779 253 460 (221) 72 2,343 Rm At 31 Dec 1999 1,077 130 556 – 16 1,779 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 94 22 Banking assets 22(a) Treasury bills and other eligible bills Investment securities Treasury bills and similar securities Other eligible bills Other securities The movement in the book value of Treasury bills and other eligible bills held for investment purposes was as follows: At beginning of year Net (disposals)/additions Foreign exchange and other movements At end of year At 31 Dec 2000 397 33 430 227 657 £m At 31 Dec 1999 577 67 644 100 744 At 31 Dec 2000 4,492 373 4,865 2,568 7,433 Rm At 31 Dec 1999 5,734 665 6,399 994 7,393 644 (158) (56) 430 396 253 (5) 644 6,399 (1,788) 254 4,865 3,865 2,492 42 6,399 Investment securities are those intended for use on a continuing basis in the activities of the Group and not for dealing purposes. 22(b) Loans and advances to banks Remittances in transit Other/loans to other banks Total loans and advances to banks All loans and advances to banks are repayable on demand. 22(c) Loans and advances to customers Advances secured on residential properties Leases and instalment debtors Factoring accounts Preference shares and debentures Other loans and overdrafts Loans granted under resale agreements Other Total loans and advances before provisions (note 22(e)) Provision for bad and doubtful debts (note 22(d)) Loans and advances to customers after provisions Maturity profile Repayable on demand or at short notice Three months or less but not repayable on demand or at short notice One year or less but over three months Five years or less but over one year Over five years Provision for bad and doubtful debts Loans and advances to customers after provisions At 31 Dec 2000 11 1,207 1,218 At 31 Dec 2000 3,213 1,094 31 332 6,933 75 87 £m At 31 Dec 1999 12 601 613 £m At 31 Dec 1999 2,960 1,068 32 463 5,257 81 128 At 31 Dec 2000 124 13,657 13,781 At 31 Dec 2000 36,354 12,378 351 3,757 78,446 849 983 Rm At 31 Dec 1999 121 5,970 6,091 Rm At 31 Dec 1999 29,413 10,614 317 4,596 52,232 804 1,279 11,765 (361) 9,989 133,118 (4,085) (285) 99,255 (2,832) 11,404 9,704 129,033 96,423 1,537 2,834 1,026 5,198 1,170 (361) 1,754 1,108 882 3,135 3,110 (285) 17,391 32,066 11,609 58,814 13,238 (4,085) 17,425 11,012 8,765 31,155 30,898 (2,832) 11,404 9,704 129,033 96,423 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 95 Notes to the Financial Statements continued for the year ended 31 December 2000 22 Banking assets (continued) 22(d) Loans and advances to customers – provision for bad and doubtful debts Non-performing loans Value of non-performing loans before specific provisions Specific provisions Value of non-performing loans after specific provisions Specific provisions At beginning of year Charge to profit and loss account Amounts written off in year Recoveries of advances written off in previous years Foreign exchange and other movements At end of year General provisions At beginning of year Charge to profit and loss account Foreign exchange and other movements At end of year Total provisions for bad and doubtful debts 22(e) Loans and advances to customers – concentrations of exposure Loans and advances before provisions Individuals Manufacturing Financial services, insurance and real estate Other At 31 Dec 2000 515 (272) 243 182 82 (71) 9 70 272 103 5 (19) 89 361 At 31 Dec 2000 4,041 1,438 3,647 2,639 £m At 31 Dec 1999 At 31 Dec 2000 Rm At 31 Dec 1999 350 (182) 168 5,832 (3,079) 3,515 (1,804) 2,753 1,711 148 98 (94) 10 20 182 43 62 (2) 103 285 £m At 31 Dec 1999 4,015 1,644 2,005 2,325 1,804 862 (745) 91 1,067 1,449 964 (930) 95 226 3,079 1,804 1,028 50 (72) 1,006 4,085 At 31 Dec 2000 419 609 – 1,028 2,832 Rm At 31 Dec 1999 45,723 16,270 41,265 29,860 39,894 16,336 19,922 23,103 Loans and advances to customers before provisions 11,765 9,989 133,118 99,255 Specific provisions Individuals Manufacturing Financial services, insurance and real estate Other Specific provisions against loans and other advances to customers 98 15 31 128 272 57 16 34 75 182 1,114 174 348 1,443 3,079 565 159 334 746 1,804 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 96 22 Banking assets (continued) 22(f) Debt securities Book value Investment securities Government securities Other securities Government securities Other public sector securities Investment securities analysed by listing status Listed on recognised southern African investment exchanges Unlisted All other debt securities are listed on recognised southern African investment exchanges. Maturity profile – book value Due within one year Due after one year The movement in the book value of debt securities held for investment purposes was as follows: At beginning of year Additions Disposals Foreign exchange and other movements At end of year 22(g) Equity securities Book value Investment securities Listed on London Stock Exchange Listed on recognised southern African investment exchanges Unlisted Market value Investment securities Listed on London Stock Exchange Listed on recognised southern African investment exchanges Unlisted At 31 Dec 2000 £m At 31 Dec 1999 At 31 Dec 2000 Rm At 31 Dec 1999 393 140 391 531 924 385 8 393 348 576 924 293 4,447 2,909 244 92 336 1,584 4,424 6,008 2,426 915 3,341 629 10,455 6,250 276 17 293 4,356 91 4,447 2,745 164 2,909 235 394 629 3,938 6,517 10,455 2,335 3,915 6,250 293 153 (19) (34) 393 310 470 (412) (75) 293 2,909 1,731 (215) 22 3,028 4,638 (4,058) (699) 4,447 2,909 At 31 Dec 2000 £m At 31 Dec 1999 464 50 110 624 464 52 287 803 – 54 91 145 – 59 95 154 At 31 Dec 2000 5,250 566 1,245 7,061 Rm At 31 Dec 1999 – 533 908 1,441 5,250 588 3,247 9,085 – 587 944 1,531 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 97 Notes to the Financial Statements continued for the year ended 31 December 2000 22 Banking assets (continued) 22(g) Equity securities (continued) The movement in the book value of equity securities held for investment purposes was as follows: At beginning of year Net additions Foreign exchange and other movements At end of year 23 Debtors Debtors arising from direct insurance operations (note 23(a)) Debtors arising from reinsurance operations Other debtors (note 23(b)) 23(a) Debtors arising from direct insurance operations Amounts owed by policyholders Amounts owed by intermediaries Outstanding securities realised Other 23(b) Other debtors Outstanding securities realised Tax recoverable Securities purchased under agreements to resell Other 24 Other assets Insurance Deferred tax asset (note 24(a)) Tangible fixed assets (note 24(c)) Other Banking Customer indebtedness for acceptances Securities purchased Other O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 98 At 31 Dec 2000 £m At 31 Dec 1999 At 31 Dec 2000 Rm At 31 Dec 1999 145 534 (55) 624 131 14 – 145 1,441 6,043 (423) 1,280 161 – 7,061 1,441 At 31 Dec 2000 268 6 3,616 3,890 At 31 Dec 2000 52 29 66 121 268 At 31 Dec 2000 186 1 2,368 1,061 3,616 At 31 Dec 2000 320 101 109 530 76 459 12 547 £m At 31 Dec 1999 95 11 418 524 £m At 31 Dec 1999 30 17 31 17 95 £m At 31 Dec 1999 136 2 – 280 418 £m At 31 Dec 1999 – 58 75 133 88 – – 88 At 31 Dec 2000 3,032 68 40,914 44,014 At 31 Dec 2000 588 328 747 1,369 3,032 At 31 Dec 2000 2,105 11 26,793 12,005 40,914 At 31 Dec 2000 3,621 1,143 1,233 5,997 860 5,193 136 6,189 Rm At 31 Dec 1999 946 109 4,152 5,207 Rm At 31 Dec 1999 298 169 309 170 946 Rm At 31 Dec 1999 1,351 20 – 2,781 4,152 Rm At 31 Dec 1999 – 576 746 1,322 874 – – 874 24(a) Deferred tax asset At beginning of year Acquisition of subsidiaries Charge for the year Utilised during the year Foreign exchange and other movements At end of year The deferred tax asset comprises: Insurance funds Unrelieved tax losses Accelerated capital allowances Short term timing differences Other timing differences 24(b) Deferred tax asset – unrecognised Insurance funds Unrelieved tax losses Accelerated capital allowances Short term timing differences Other timing differences At 31 Dec 2000 £m At 31 Dec 1999 – 236 74 (10) 20 320 34 22 109 11 144 320 – – – – – – – – – – – – At 31 Dec 2000 £m At 31 Dec 1999 56 4 1 3 (1) 63 – – – – – – At 31 Dec 2000 – 2,526 775 (113) 433 3,621 385 249 1,233 124 1,630 3,621 At 31 Dec 2000 634 45 11 34 (11) 713 Rm At 31 Dec 1999 – – – – – – – – – – – – Rm At 31 Dec 1999 – – – – – – O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 99 Notes to the Financial Statements continued for the year ended 31 December 2000 24 Other assets (continued) 24(c) Tangible fixed assets Insurance and other assets Computer and other equipment, fixtures and vehicles Cost At beginning of year Additions Acquisitions Disposals Foreign exchange and other movements At end of year Accumulated depreciation At beginning of year Charge for year Acquisitions Disposals Foreign exchange and other movements At end of year Net book value At end of year Banking Computer and other equipment, fixtures and vehicles Cost At beginning of year Additions Acquisitions Disposals Foreign exchange and other movements At end of year Accumulated depreciation At beginning of year Charge for year Acquisitions Disposals Foreign exchange and other movements At end of year Net book value At end of year 25 Prepayments and accrued income Accrued interest and rent Other prepayments and accrued income At 31 Dec 2000 £m At 31 Dec 1999 At 31 Dec 2000 Rm At 31 Dec 1999 135 38 60 (25) 1 209 (77) (20) (24) 13 – 196 32 – (78) (15) 135 (109) (29) – 57 4 1,341 430 679 (283) 198 1,922 318 – (775) (124) 2,365 1,341 (765) (226) (272) 147 (106) (1,064) (288) – 566 21 (108) (77) (1,222) (765) 101 58 1,143 576 202 57 12 (15) (31) 225 (104) (47) (9) 10 18 (132) 200 47 – (42) (3) 202 (108) (32) – 37 (1) 1,978 645 136 (170) (43) 1,952 462 – (412) (24) 2,546 1,978 (1,004) (532) (102) 113 31 (1,057) (315) – 365 3 (104) (1,494) (1,004) 93 98 1,052 974 At 31 Dec 2000 193 39 232 £m At 31 Dec 1999 228 89 317 At 31 Dec 2000 2,184 441 2,625 Rm At 31 Dec 1999 2,266 884 3,150 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 100 26 Equity shareholders’ funds Authorised 6,000,000,000 ordinary shares of 10p each The movement in equity shareholders’ funds for the year is shown below. Number of Equity shares shareholders’ funds m At 31 Dec 2000 £m At 31 Dec 1999 600 600 Share capital Share premium Profit and loss £m Total 344 868 2,301 3,513 11 – – – – 142 (500) – – 1 – 500 343 24 (416) 153 – 343 24 (415) 355 511 2,752 3,618 – – – – – – – – – – – – – – 3,444 107 – – – – 3,551 1 316 2,654 473 – – 3,444 3,444 107 – – – – 3,551 1 316 2,654 473 – – 3,444 Number of Equity shares shareholders’ funds m 1,588 – (1,588) – – – – – 32 265 47 – – 344 – 24 332 512 – – 868 – 348 991 – 997 (35) 1,588 404 – 559 997 (35) 2,301 3,513 Share capital Share premium Profit and loss Rm Total 3,418 8,625 22,864 34,907 122 – – – 477 1,569 (5,261) – – 849 – 5,261 3,609 253 (849) 1,691 – 3,609 253 477 4,017 5,782 31,138 40,937 15,527 – (15,527) – – – – – 318 2,646 454 – – 3,418 – 235 3,489 4,901 – – – 3,401 9,392 – 9,830 241 15,527 3,954 – 5,355 9,830 241 8,625 22,864 34,907 Allotted, called up and fully paid 3,551 million shares of 10p each (1999: 3,444 million) Year to 31 December 2000 Opening equity shareholders’ funds Issue of shares for re-equitisation of Pilgrim Baxter & Associates and employee share option schemes Transfer between reserves Retained profit for the financial year Amounts taken directly to reserves Foreign exchange and other movements Closing equity shareholders’ funds Year to 31 December 1999 Opening equity shareholders’ funds Policy self investment Issue of shares on demutualisation Additional capital raised on listing Retained profit for the financial year Foreign exchange movements Closing equity shareholders’ funds Year to 31 December 2000 Opening equity shareholders’ funds Issue of shares for re-equitisation of Pilgrim Baxter & Associates and employee share option schemes Transfer between reserves Retained profit for the financial year Amounts taken directly to reserves Foreign exchange and other movements Closing equity shareholders’ funds Year to 31 December 1999 Opening equity shareholders’ funds Policy self investment Issue of shares on demutualisation Additional capital raised on listing Retained profit for the financial year Foreign exchange movements Closing equity shareholders’ funds All ordinary shares in issue carry the same right to receive dividends and other distributions paid by the Company, except for certain shares held by Employee Share Ownership Plans where dividends have been waived by the trustees. Old Mutual placed 105 million new ordinary shares on the London Stock Exchange, the proceeds of which were used to satisfy the initial $221 million of payments to the principals of Pilgrim Baxter & Associates in terms of Old Mutual plc’s restructured management incentives and acquisition of control of additional revenue streams (see note 17(a)). O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 101 Notes to the Financial Statements continued for the year ended 31 December 2000 26 Equity shareholders’ funds (continued) On demutualisation, the Company issued free shares to the existing members of the original society and, in addition, issued 37 million free shares to a nominee company, incorporated in South Africa, where they were held in trust pending their use in correcting any errors made when allocating free shares to qualifying members. Under the terms of the Scheme of Demutualisation if, on the expiry of a period of eighteen months after demutualisation, any free shares issued to the nominee company remained in trust, having not been allocated to qualifying members, they were to be sold in the market and the proceeds paid to Old Mutual plc. The Company placed 25 million of its existing issued shares, representing shares held in connection with satisfying claims and errors in the Company’s demutualisation in May 1999, which are now due to be sold in accordance with the Scheme of Demutualisation. It was considered inappropriate to sell the balance of the shares on 11 November 2000, as certain allocations were still in the process of being finalised. As these proceeds represent external funds passing to the Company, they are treated as distributable reserves and reflected as a movement in reserves of £24 million (R253 million) (amounts taken directly to reserves in the tables on page 101). The transfer from share premium to profit and loss reserves is described on page 37 of the Financial Review. 27 Company reserves – profit and loss account At beginning of year Transfer from share premium account Amounts taken directly to reserves Retained profit for the year Foreign exchange movements At end of year Year to 31 Dec 2000 55 500 24 81 – 660 All of the above reserves of the Company at 31 December 1999 and 2000 were distributable. £m Year to 31 Dec 1999 - - - 55 - 55 £m Year to 31 Dec 1999 808 150 (116) 15 Year to 31 Dec 2000 547 5,261 253 853 554 7,468 Year to 31 Dec 2000 8,515 2,904 32 7 Rm Year to 31 Dec 2000 - - - 542 5 547 Rm Year to 31 Dec 1999 7,901 1,479 (1,144) 279 Year to 31 Dec 2000 857 276 3 (123) 1,013 857 11,458 8,515 28 Minority interests At beginning of year Minority interests’ share of profit, net of dividends Net acquisition/(disposal) of interests Foreign exchange and other movements At end of year O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 102 29 Subordinated liabilities Insurance and other liabilities Subordinated debt instruments are repayable: Less than two years Between two and five years Over five years The total insurance and other subordinated debt instruments of the Group are as follows: £0.8 million loan repayable within two years £2.8 million repayable in instalments between July 2001 and July 2003 US$22 million repayable between January 2001 and February 2002 US$27 million repayable June 2004 £1.6 million loan repayable after five years At 31 Dec 2000 £m At 31 Dec 1999 At 31 Dec 2000 Rm At 31 Dec 1999 19 18 2 39 1 3 15 18 2 39 – – – – – – – – – – 215 204 23 442 11 34 170 204 23 442 – – – – – – – – – – The instruments repayable in US dollars between January 2001 and February 2002 bear interest at a rate of between 5.5 and 6.0 per cent. per annum on the nominal value. The instruments repayable in US dollars in June 2004 bear interest at a rate of 6.0 per cent. per annum on the nominal value. Both of these subordinated notes are guaranteed by United Asset Management Corporation. Banking Subordinated debt instruments are repayable: Less than two years Between two and five years Over five years The total subordinated debt instruments of the Group are as follows: R80 million repayable 15 May 2001 R80 million repayable 15 May 2002 R140 million repayable 15 May 2003 US$40 million repayable 17 April 2008 US$18 million repayable 31 August 2009 R200 million repayable 30 November 2029 14 12 39 65 7 7 12 27 12 – 65 – 29 39 68 8 8 13 24 11 4 68 158 136 441 735 80 80 136 302 136 1 735 – 291 388 679 78 77 133 245 111 35 679 The instruments repayable between 15 May 2001 and 2003 bear interest at the rate of 14 per cent. per annum on the nominal value and are guaranteed by Nedcor Limited. The instruments repayable in US dollars on 17 April 2008 and 31 August 2009 bear interest at the 6-month Libor rate and 1,5 basis point below the 6-month Libor rate respectively, on the nominal value of the instrument. The subordinated unsecured debentures, repayable on 30 November 2029, are now free of interest. Coupon holders are entitled, in the event of interest default, to put the coupon covering such interest payment to Nedcor Limited. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 103 Notes to the Financial Statements continued for the year ended 31 December 2000 30 Technical provisions At 31 December 2000 Long term business technical provision Claims outstanding – long term business Claims outstanding – general business Provision for unearned premiums At 31 December 1999 Long term business technical provision Claims outstanding – long term business Claims outstanding – general business Provision for unearned premiums Gross Reinsurance £m Net Gross Reinsurance Rm Net 13,048 169 154 62 13,433 14,767 197 122 43 15,129 (118) – (19) (7) 12,930 147,636 1,912 1,742 702 169 135 55 (1,335) 146,301 1,912 1,527 623 – (215) (79) (144) 13,289 151,992 (1,629) 150,363 (140) – (16) (5) 14,627 146,731 1,958 1,212 427 197 106 38 (1,391) 145,340 1,958 1,053 377 – (159) (50) (161) 14,968 150,328 (1,600) 148,728 Valuation methods and assumptions: South Africa The valuation was performed using the “Financial Soundness Valuation” method, in keeping with the applicable professional guidance notes issued by the Actuarial Society of South Africa (“ASSA”). The technical provisions are based on realistic expectations of future experience with prescribed margins for prudence and deferring the emergence of profit. Where applicable, allowance has been made for bonuses already declared, as well as future bonuses still to be declared at rates consistent with the assumed valuation interest rates. These bonuses include both vested bonuses and non–vested (terminal) bonuses. The principal assumptions used at 31 December 2000 and 31 December 1999 for South Africa are set out below. Rates of interest (gross of tax and charges) Non-profit annuities – discounted on appropriate spot yield curve With-profit annuities – interest rate on which premium rates were based Assurances – 14 per cent. per annum for all years The gross interest rates were reduced as follows, where applicable: • to allow for tax; • to allow for the minimum margin of 0.25 percentage points per annum, as prescribed by the ASSA; and • in the case of smoothed bonus business, by an additional margin equal to the excess over the 0.25 percentage points of the capital charges applicable to the business. This second tier margin is incorporated to ensure that the value of capital charges emerge as profit over the full duration of the policy. Mortality tables Non-profit annuities – a90 rated down 5 years With-profit annuities – PA90 rated down 1 year (adjusted for own experience) Assurances – table derived from own experience with allowance for increasing AIDS claims For assurances, the above underlying mortality rates were further increased by the prescribed ASSA margin of 7.5 per cent. For annuities, the mortality rates were reduced by the prescribed ASSA margin of 7.5 per cent. Renewal expenses Renewal expense assumptions (including renewal commissions) have been based on recent experience inflating at 11 per cent. per annum. In terms of the prescribed ASSA margins, the underlying expense assumption was increased by 10 per cent., and the expense inflation assumption was increased to 12.1 per cent. Surrenders/lapses Where appropriate, allowance has been made for surrenders and lapses at rates consistent with past experience. The underlying lapse rates were then increased by the prescribed ASSA margin of 25 per cent. Surrender rates were increased or decreased by the prescribed ASSA margin of 10 per cent., depending on which alternative gave rise to an increase in liabilities. Valuation method and assumptions outside South Africa Technical provisions have been calculated using generally accepted actuarial methods for the territory in question, and using interest rates and actuarial tables appropriate to the territory in question. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 104 30 Technical provisions (continued) 30(a) Pensions mis-selling The terms of the sale of Old Mutual Life Assurance Company Ltd, agreed in December 1999, included a warranty by the Group in respect of the costs of mis-sold pension business such that, if related costs exceeded the provisions passed to the purchaser, the Group would remain liable. Provisions of £36 million (R407 million) at 31 December 2000 (1999: £38 million (R380 million)) have been retained by the Group in accordance with Personal Investment Authority guidelines to cover for this eventuality. Provision for deferred tax Provision for pension and other obligations Other provisions Rm Total 3,150 53 (221) (284) (95) (113) 732 – 316 (137) – (164) 1,842 53 137 (147) (95) (104) 747 1,686 2,490 734 (280) (282) 732 3,397 1,173 (2,728) 4,134 2,019 (3,003) 1,842 3,150 576 – (516) – – (3) 57 3 572 1 576 At 31 Dec 2000 £m At 31 Dec 1999 At 31 Dec 2000 5 – – 5 (3) 60 1 58 57 – – 57 At 31 Dec 2000 275 4 5,345 22 5,646 £m At 31 Dec 1999 87 7 893 10 997 At 31 Dec 2000 3,112 44 60,478 249 63,883 Rm At 31 Dec 1999 (30) 596 10 576 Rm At 31 Dec 1999 865 70 8,873 99 9,907 31 Insurance and other – provisions for other risks and charges Provision for deferred tax Provision for pension and other obligations Other provisions Year to 31 December 2000 At beginning of year Acquisition of subsidiaries Charge to the profit and loss account Utilised during the year Released during the year Foreign exchange and other movements At end of year Year to 31 December 1999 At beginning of year Charge to the profit and loss account Foreign exchange and other movements At end of year 58 – (49) – – (4) 5 – 58 – 58 74 – 30 (13) – (25) 66 75 30 (31) 74 185 5 13 (14) (9) (31) 149 348 119 (282) 185 £m Total 317 5 (21) (27) (9) (45) 220 423 206 (312) 317 The potential liability for deferred tax provided in the financial statements is as follows: 31(a) Deferred tax liability The deferred tax liability comprises: Short term timing differences Insurance funds Prepayment of pension contributions There were no unrecognised deferred tax liabilities at 31 December 2000 (1999: nil). 32 Creditors Creditors arising from direct insurance operations (note 32(a)) Creditors arising from reinsurance operations Other creditors including tax and social security Falling due within one year (note 32(b)) Falling due after one year O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 105 Notes to the Financial Statements continued for the year ended 31 December 2000 32 Creditors (continued) 32(a) Creditors arising from direct insurance operations Amounts owed to policyholders Amounts owed to intermediaries Outstanding securities purchased Other 32(b) Other creditors including taxation and social security – falling due within one year Current taxation Dividend payable Outstanding securities purchased Other creditors 33 Amounts owed to credit institutions At 31 December 2000 Bank overdrafts Bank loans Other loans Repayable Within one year Between one and two years Greater than two years At 31 December 1999 Bank loans Other loans Repayable Within one year Between one and two years Greater than two years At 31 Dec 2000 55 9 53 158 275 At 31 Dec 2000 257 108 3,042 1,938 5,345 At 31 Dec 2000 622 102 600 1,788 3,112 At 31 Dec 2000 2,908 1,222 34,420 21,928 60,478 £m At 31 Dec 1999 64 3 – 20 87 £m At 31 Dec 1999 42 69 146 636 893 £m General business and shareholders General business and Company shareholders 22 544 658 1,224 332 565 327 1,224 8 88 96 88 2 6 96 – 551 92 643 29 561 53 643 – – – – 249 6,156 7,445 13,850 3,757 6,393 3,700 13,850 79 874 953 874 20 59 953 Rm At 31 Dec 1999 636 30 – 199 865 Rm At 31 Dec 1999 417 680 1,451 6,325 8,873 Rm Company – 6,234 1,041 7,275 328 6,347 600 7,275 – – – – Bank loans include: • a US$1.6 billion Acquisition Finance Facility dated 15 September 2000, of which US$304 million was drawn. The facility is repayable on 14 September 2001, with a term-out option for US$500 million to 13 September 2002. • a £300 million Revolving Credit Facility dated 18 August 1999, of which £286 million has been drawn. The facility is repayable on 18 August 2002. • a three year term loan of £30 million, repayable on 30 April 2003. • a five year term loan of £6 million, repayable on 30 May 2005. Other loans include: • US$400 million preference shares issued in September 2000. • US$67 million senior debt, secured by the stock of certain UAM affiliates, repayable in July 2005. • US$183 million senior debt, secured by the stock of certain UAM affiliates, repayable in July 2008. • US$125 million senior debt, secured by the stock of certain UAM affiliates, repayable in August 2005. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 106 34 Deposits by banks Items in the course of transmission to other banks Secured deposits Other deposits All deposits by banks are repayable on demand. 35 Customer accounts, maturity profile Repayable on demand With agreed maturity dates or years of notice, by remaining maturity, of: Three months or less but not repayable on demand One year or less but over three months Five years or less but over one year Over five years 36 Debt securities in issue Bonds and medium term notes (notes 36(a)) Other debt securities in issue 36(a) Bonds and medium term notes, maturity profile Repayable: Within one year Between one and two years Between two and five years All other debt securities in issue are repayable between one and two years. At 31 Dec 2000 22 724 1,127 1,873 At 31 Dec 2000 2,462 5,201 2,283 646 145 £m At 31 Dec 1999 31 – 767 798 At 31 Dec 2000 249 8,192 12,752 21,193 Rm At 31 Dec 1999 308 – 7,621 7,929 £m At 31 Dec 1999 At 31 Dec 2000 Rm At 31 Dec 1999 5,138 27,857 51,063 2,097 1,303 745 60 58,848 25,832 7,309 1,641 20,832 12,945 7,397 599 10,737 9,343 121,487 92,836 At 31 Dec 2000 1,213 204 1,417 At 31 Dec 2000 1,162 13 38 1,213 £m At 31 Dec 1999 1,157 37 At 31 Dec 2000 Rm At 31 Dec 1999 13,725 2,308 11,496 368 1,194 16,033 11,864 £m At 31 Dec 1999 At 31 Dec 2000 983 102 72 13,148 147 430 Rm At 31 Dec 1999 9,768 1,009 719 1,157 13,725 11,496 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 107 Notes to the Financial Statements continued for the year ended 31 December 2000 37 Banking – other liabilities Trade creditors Other liabilities falling due within one year (note 37(a)) 37(a) Other banking liabilities – falling due within one year Current taxation Other liabilities, including accrued interest Securities sold under agreement to resell Liabilities under acceptances 38 Banking – provision for liabilities and charges Provision for deferred taxation Other provisions 38(a) Banking - deferred tax At beginning of year Charge to profit and loss account Foreign exchange and other movements At end of year Comprising Short term and other timing differences Leasing transactions Unrelieved tax losses 38(b) Banking - unrecognised deferred tax Assets Unrelieved tax losses Other At 31 Dec 2000 216 979 1,195 At 31 Dec 2000 6 513 384 76 979 At 31 Dec 2000 86 28 114 At 31 Dec 2000 72 47 (33) 86 (44) 146 (16) 86 £m At 31 Dec 1999 238 371 609 £m At 31 Dec 1999 2 281 – 88 371 £m At 31 Dec 1999 72 4 76 £m At 31 Dec 1999 67 18 (13) 72 43 29 – 72 At 31 Dec 2000 £m At 31 Dec 1999 4 1 5 – – – At 31 Dec 2000 2,444 11,077 13,521 At 31 Dec 2000 68 5,804 4,345 860 11,077 At 31 Dec 2000 977 313 1,290 At 31 Dec 2000 712 491 (226) 977 (490) 1,648 (181) 977 At 31 Dec 2000 45 11 56 Rm At 31 Dec 1999 2,361 3,687 6,048 Rm At 31 Dec 1999 20 2,793 – 874 3,687 Rm At 31 Dec 1999 712 43 755 Rm At 31 Dec 1999 653 179 (120) 712 424 288 – 712 Rm At 31 Dec 1999 – – – O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 108 39 Investments – Company At 31 December 2000 At beginning of year Acquisitions Net amount advanced during year At end of year At 31 December 1999 At beginning of year Acquisitions Net amount advanced during year At end of year Shares in subsidiaries Loans to subsidiaries Shares in subsidiaries Loans to subsidiaries Total £m Rm Total 679 602 – 264 – 963 943 602 963 6,747 6,334 1,413 2,623 – 11,260 9,370 6,334 12,673 1,281 1,227 2,508 14,494 13,883 28,377 – 679 – 679 – – 264 264 – 679 264 943 – 6,747 – 6,747 – – 2,623 2,623 – 6,747 2,623 9,370 The Company’s principal subsidiaries at 31 December 2000 are set out in note 40 on page 110. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 109 Notes to the Financial Statements continued for the year ended 31 December 2000 40 Principal Group and associated undertakings The principal Group undertakings whose results are included in the consolidated financial statements (all of which are held indirectly by the Company and all shares of which are ordinary shares) are: Name Nature of business Asset management Acadian Asset Management, Inc. Asset management Analytic Investors, Inc. Asset management Barrow, Hanley, Mewhinney & Strauss, Inc. Asset management Clay Finlay Inc. Asset management Dwight Asset Management Company Asset management NWQ Investment Management Company Asset management Old Mutual Asset Managers (Bermuda) Ltd Asset management Old Mutual Asset Managers (South Africa) (Pty) Ltd Asset management Old Mutual Asset Managers (UK) Ltd Asset management Pilgrim Baxter & Associates, Ltd Asset management Provident Investment Counsel Asset management United Asset Management Corporation Banking Gerrard & King Ltd Banking Old Mutual Bank Ltd Financial services GNI Fund Management Ltd Financial services GNI Ltd Financial services Old Mutual Group Ltd Financial services Old Mutual Securities Ltd Financial services Old Mutual Specialised Finance (Pty) Ltd Health insurance Old Mutual Healthcare (Pty) Ltd Health insurance Old Mutual Health Insurance Ltd Investment holding Ashtree Investments Ltd Investment holding Old Mutual Portfolio Holdings (South Africa) (Pty) Ltd Investment holding Rodina Investments Ltd Life assurance Old Mutual International (Guernsey) Ltd Life assurance Old Mutual Life Assurance Company (Bermuda) Ltd Life assurance Old Mutual Life Assurance Company (Malawi) Ltd Life assurance Old Mutual Life Assurance Company Ltd Life assurance Old Mutual Life Assurance Company (South Africa) Ltd Life assurance Old Mutual Life Assurance Company (Namibia) Ltd Life assurance Old Mutual Life Assurance Company Zimbabwe Ltd Private client fund management Capel Cure Sharp Ltd Private client fund management Gerrard Ltd Private client fund management Greig Middleton Financial Services Ltd Property holding Old Mutual Property Investment Corporation (Pvt) Ltd Property management Old Mutual Properties (Pty) Ltd Trust administration Fairbairn Trust Company Ltd Unit trust management Gerrard Investment Funds Ltd Unit trust management Old Mutual Fund Managers (Guernsey) Ltd Old Mutual Fund Managers Ltd Unit trust management Old Mutual Unit Trust Management Company Namibia Ltd Unit trust management Unit trust management Old Mutual Unit Trust Managers Ltd Unit trust management Ridgefield Unit Trust Administration Ltd Mutual & Federal Insurance Company Ltd General insurance Nedcor Ltd Nedcor Bank Ltd Cape of Good Hope Bank Ltd Nedcor Investment Bank Holdings Ltd Nedcor Asia Ltd Banking Banking Banking Banking Banking Note: 1Percentage holding of issued shares at 31 December 2000 A complete list of subsidiaries is included in the Company’s annual return. Percentage Country of holding1 incorporation 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 61 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 51 53.4 53.4 53.4 50.4 53.4 Massachusetts,USA California, USA Nevada, USA New York, USA Delaware, USA Massachusetts,USA Bermuda South Africa England and Wales Delaware, USA Massachusetts,USA Delaware, USA England and Wales South Africa England and Wales England and Wales Bermuda England and Wales South Africa South Africa South Africa South Africa South Africa South Africa Guernsey Bermuda Malawi Kenya South Africa Namibia Zimbabwe England and Wales England and Wales England and Wales Zimbabwe South Africa Guernsey South Africa Guernsey England and Wales Namibia South Africa England and Wales South Africa South Africa South Africa South Africa South Africa Hong Kong Year end 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 110 41 Related party transactions The Group provides certain pension fund, insurance, banking and financial services to related third parties as defined by FRS 8. These are conducted on similar terms to third party transactions and are not material to the Group’s results. In accordance with FRS 8, transactions or balances with Group entities that have been eliminated on consolidation are not reported. No director had a material interest in any contract of significance with the Company or any of its subsidiaries during 2000. 42 Post balance sheet events On 2 March 2001, the Group announced it had entered into an agreement to acquire Unified Life Insurance Company, a company domiciled in Texas, USA, for £25 million. The acquisition is subject to approval by the Texas Department of Insurance. Unified Life Insurance Company will provide a platform for Old Mutual to sell a suite of annuity and term products in the USA through brokers. 43 Commitments Undrawn formal standby facilities, credit lines and other commitments to lend Capital and other commitments 44 Contingent liabilities Guarantees and assets pledged as collateral security Irrevocable letters of credit Other contingent liabilities At 31 Dec 2000 530 24 554 At 31 Dec 2000 771 85 81 937 £m At 31 Dec 1999 172 72 244 £m At 31 Dec 1999 588 214 61 863 At 31 Dec 2000 5,997 272 6,269 At 31 Dec 2000 8,724 962 916 10,602 Rm At 31 Dec 1999 1,707 715 2,422 Rm At 31 Dec 1999 5,845 2,125 614 8,584 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 111 Notes to the Financial Statements continued for the year ended 31 December 2000 45 Banking financial instruments Notwithstanding the exemption available to insurance groups from the scope of FRS 13, the tables below set out details of derivative financial instruments in respect of the banking activities of the Group. The Group uses off-balance sheet financial instruments (derivatives) to meet customers’ requirements for proprietary trading and to hedge interest rate risk, foreign exchange risk and other market risks. Contracts used for hedging purposes, undertaken as part of the Group’s risk management strategy, are classified as “other contracts” in the table below. 45(a) Summary At 31 December 2000 Exchange rate contracts Spot, forwards and futures Currency swaps Options purchased Options written Interest rate contracts Interest rate swaps Forward rate agreements Options purchased Options written Futures Contracts held for trading purposes Notional principal Positive value Negative value £m Other contracts Notional principal Contracts held for trading purposes Notional principal Positive value Negative value Rm Other contracts Notional principal 21,198 447 48 42 10,648 213 43 – 10,550 234 5 42 8,872 239,851 120,480 119,371 100,385 – 2,410 11 487 11 – 2,648 57 475 5,058 544 475 – 1 1 21,735 10,904 10,831 8,874 245,928 123,377 122,551 100,407 13,182 11,076 248 99 257 6,665 5,370 211 – 133 6,517 5,706 37 99 124 1,487 149,152 300 125,322 2,806 150 1,120 – 2,908 – 75,413 60,760 2,387 – 1,505 73,739 64,562 419 1,120 1,403 16,825 3,394 1,697 – – 24,862 12,379 12,483 1,937 281,308 140,065 141,243 21,916 Balances arising from off-balance sheet financial instruments 46,597 23,283 23,314 10,811 527,236 263,442 263,794 122,323 At 31 December 1999 Exchange rate contracts Spot, forwards and futures Currency swaps Options purchased Options written Interest rate contracts Interest rate swaps Forward rate agreements Options purchased Options written Futures 9,010 309 40 26 9,385 7,327 4,498 154 257 449 12,685 5,648 159 17 20 5,844 3,500 1,925 154 – 280 5,859 3,362 150 23 6 3,541 3,827 2,573 – 257 169 6,826 9,504 5 4 4 89,538 3,071 398 250 56,121 1,577 170 194 33,417 1,494 228 56 94,428 51 40 40 9,517 93,257 58,062 35,195 94,559 949 – – 3 38 72,810 44,695 1,531 2,556 4,460 34,780 19,125 1,531 – 2,780 38,030 25,570 – 2,556 1,680 990 126,052 58,216 67,836 9,434 – – 31 382 9,847 Balances arising from off-balance sheet financial instruments 20,070 11,703 10,367 10,507 219,309 116,278 103,031 104,406 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 112 Fair value of assets/(liabilities) The fair value of trading instruments entered into with third parties was as follows: At 31 December 2000 Exchange rate contracts Spot, forwards and futures Currency swaps Options purchased Options written Interest rate contracts Interest rate swaps Forward rate agreements Options purchased Options written Contracts held for trading purposes Notional principal Positive value Negative value £m Other contracts Notional principal Contracts held for trading purposes Notional principal Positive value Negative value Rm Other contracts Notional principal 75 1 1 (1) 76 (28) 7 7 (47) (61) 388 227 1 – 616 297 22 7 – 326 313 226 – 1 540 325 15 – 47 387 8 – – – 8 (35) (3) – – (38) 848 11 11 (11) 859 (318) 79 79 (532) (692) 4,390 2,568 11 – 6,969 3,360 249 79 – 3,688 3,542 2,557 – 11 6,110 3,678 170 – 532 4,380 91 – – – 91 (396) (34) – – (430) Balances arising from off–balance sheet financial instruments 15 942 927 (30) 167 10,657 10,490 (339) At 31 December 1999 Exchange rate contracts Spot, forwards and futures Currency swaps Options purchased/written Interest rate contracts Interest rate swaps Forward rate agreements Options purchased/written – 31 (1) 30 (13) 2 (41) (52) – 167 – 167 65 4 20 89 – 136 1 137 78 2 61 141 Balances arising from off-balance sheet financial instruments (22) 256 278 (1) – – (1) (2) – – (2) (3) – 306 (2) 304 (123) 20 (408) (511) 2 1,661 4 1,667 648 43 197 888 2 1,355 6 1,363 771 23 605 1,399 (7) – – (7) (15) – – (15) (207) 2,555 2,762 (22) These figures do not demonstrate the exposure of the Group to interest rate, foreign exchange or commodity market risks, since they include only off-balance sheet instruments. The market risk exposure arising from such instruments may be increased or offset by on-balance sheet transactions. There were no material unrecognised gains or losses on “other contracts” for the year. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 113 Notes to the Financial Statements continued for the year ended 31 December 2000 45 Financial instruments (continued) 45(b) Trading Exchange rate contracts Interest rate contracts Replacement cost of OTC derivatives At 31 December 2000 Maturity analysis Under one year One to five years Over five years Counterparty analysis Financial institutions Non-financial institutions At 31 December 1999 Maturity analysis Under one year One to five years Over five years Counterparty analysis Financial institutions Non-financial institutions Notional principal of OTC derivatives At 31 December 2000 Maturity analysis Under one year One to five years Over five years Counterparty analysis Financial institutions Non-financial institutions At 31 December 1999 Maturity analysis Under one year One to five years Over five years Counterparty analysis Financial institutions Non-financial institutions £m Total 409 210 323 942 917 25 942 48 75 133 256 240 16 256 Exchange rate contracts Interest rate contracts Rm Total 4,152 973 1,844 6,969 6,777 192 6,969 191 301 1,175 1,667 1,564 103 1,667 475 1,403 1,810 4,627 2,376 3,654 3,688 10,657 3,597 91 10,374 283 3,688 10,657 289 450 149 888 828 60 888 480 751 1,324 2,555 2,392 163 2,555 33,050 219,497 154,458 373,955 86,897 109,345 43,936 39,953 22,448 3,983 9,664 3,883 367 86 163 616 599 17 616 19 30 118 167 157 10 167 42 124 160 326 318 8 326 29 45 15 89 83 6 89 19,399 1,984 352 13,651 7,680 3,531 21,735 24,862 46,597 245,928 281,308 527,236 21,593 142 24,458 404 46,051 244,321 276,737 521,058 6,178 4,571 1,607 546 21,735 24,862 46,597 245,928 281,308 527,236 8,801 393 191 8,646 3,118 921 17,447 3,511 1,112 87,452 3,907 1,898 85,926 173,378 34,886 30,979 11,045 9,147 9,385 12,685 22,070 93,257 126,052 219,309 8,909 476 12,400 285 21,309 761 88,523 123,222 211,745 7,564 2,830 4,734 9,385 12,685 22,070 93,257 126,052 219,309 Replacement cost is defined as the cost of replacing transactions that have a positive fair value. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 114 45(c) Non-trading Notional principal The notional principal amounts of non-trading instruments entered into with third parties were as follows: Exchange rate contracts Interest rate contracts The maturity of the notional principal amounts and replacement cost of instruments entered into with third parties was: Exchange rate contracts Under one year One to five years Over five years Interest rate contracts Under one year One to five years Over five years At 31 Dec 2000 £m At 31 Dec 1999 At 31 Dec 2000 Rm At 31 Dec 1999 8,874 1,937 9,517 100,407 21,916 990 94,559 9,847 10,811 10,507 122,323 104,406 13 8,820 41 8,874 920 432 585 1,937 1,117 8,340 60 147 99,796 464 11,092 82,867 600 9,517 100,407 94,559 359 305 326 990 10,410 4,888 6,618 21,916 3,582 3,026 3,239 9,847 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 115 Notes to the Financial Statements continued for the year ended 31 December 2000 45 Financial instruments (continued) 45(d) Non-trading book interest rate risk The Group holds interest rate exposure in the non-trading book. Items are allocated to time bands by reference to the earlier of the next contractual interest rate repricing date and the maturity date. At 31 December 2000, non-trading book interest risk, after taking into account off-balance sheet hedges, comprised: At 31 December 2000 Assets Cash and balances at central banks Treasury bills and other eligible bills Loans and advances to banks Loans and advances to customers Debt securities Equity securities Investments in associated undertakings Tangible fixed assets Land and buildings Other assets Prepayments and accrued income Liabilities Deposits by banks Customer accounts Debt securities in issue Provision for liabilities and charges Other liabilities Subordinated liabilities Net position Off-balance sheet items Interest rate sensitivity gap Cumulative gap 882 539 1,218 9,785 439 – – – – 444 – 13,307 1,873 8,743 771 – 385 – 11,772 1,535 566 2,101 2,101 More than More than More than one year but not three months six months but not but not Not more than three more than more than more than More than Non-interest bearing months six months five years five years one year £m Total 1,138 657 1,218 11,404 924 624 207 93 102 547 373 256 – – 164 – 624 207 93 102 103 373 1,922 17,287 – 331 – 114 2,696 – 1,873 10,737 1,417 114 3,081 65 3,141 17,287 – 107 – 190 – – – – – – – 297 – 295 331 – – 7 633 – 10 – 295 20 – – – – – – 325 – 484 269 – – – 753 – 1 – 540 339 – – – – – – 880 – 869 46 – – 19 934 – – – 430 126 – – – – – – 556 – 15 – – – 39 54 (336) (13) (349) (428) (17) (445) (54) (382) (436) 502 (154) (1,219) – 348 (1,219) 1,752 1,307 871 1,219 – – – – – O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 116 45(d) Non-trading book interest rate risk (continued) More than three months but not more than six months More than six months but not more than one year More than one year but not more than five years Not more than three months More than Non-interest bearing five years Total £m At 31 December 1999 Assets Cash and balances at central banks Treasury bills and other eligible bills Loans and advances to banks Loans and advances to customers Debt securities Equity securities Tangible fixed assets Land and buildings Other assets Prepayments and accrued income Liabilities Deposits by banks Customer accounts Debt securities in issue Provision for liabilities and charges Other liabilities Subordinated liabilities Net position Off-balance sheet items Interest rate sensitivity gap Cumulative gap – 706 613 6,934 192 – – – – – 8,445 798 6,641 876 – – – 8,315 130 373 503 503 – 26 – 514 86 – – – – – 626 – 265 186 – – 7 458 168 (23) 145 648 – 11 – 467 28 – – – – – 506 – 333 81 – – – 414 92 (4) 88 736 – 1 – 1,391 165 – – – – – 1,557 – 1,680 51 – – 20 1,751 (194) (346) (540) 196 – – – – 158 – – – – – 158 – 126 – – – 41 167 (9) – (9) 187 760 – – 398 – 324 98 89 88 168 760 744 613 9,704 629 324 98 89 88 168 1,925 13,217 – 298 – 76 1,738 – 798 9,343 1,194 76 1,738 68 2,112 13,217 (187) – (187) – – – – – O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 117 Notes to the Financial Statements continued for the year ended 31 December 2000 Rm 45 Financial instruments (continued) 45(d) Non-trading book interest rate risk (continued) More than three months but not more than six months More than six months but not more than one year More than one year but not more than five years Not more than three months More than Non-interest bearing five years Total At 31 December 2000 Assets Cash and balances at central banks Treasury bills and other eligible bills Loans and advances to banks Loans and advances to customers Debt securities Equity securities Investments in associated undertakings Tangible fixed assets Land and buildings Other assets Prepayments and accrued income Liabilities Deposits by banks Customer accounts Debt securities in issue Provision for liabilities and charges Other liabilities Subordinated liabilities Net position Off-balance sheet items 9,980 6,098 13,781 110,715 4,967 – – – – 5,024 – 150,565 21,193 98,925 8,724 – 4,356 – 133,198 17,367 6,403 – 1,211 – 2,150 – – – – – – – 3,361 – 3,338 3,745 – – 79 7,162 – 113 – 3,338 226 – – – – – – 3,677 – 5,476 3,044 – – – – 11 – 6,110 3,836 – – – – – – 9,957 – 9,833 520 – – 215 8,520 10,568 – – – 4,865 1,426 – – – – – – 2,896 – – 1,855 – 7,061 2,343 1,052 1,154 1,165 4,220 12,876 7,433 13,781 129,033 10,455 7,061 2,343 1,052 1,154 6,189 4,220 6,291 21,746 195,597 – 170 – – – 441 611 – 21,193 3,745 121,487 16,033 1,290 34,859 735 – 1,290 30,503 – 35,538 195,597 (3,801) (147) (4,843) (192) (611) (4,322) 5,680 (1,742) (13,792) – – – – – Interest rate sensitivity gap 23,770 (3,948) (5,035) (4,933) 3,938 (13,792) Cumulative gap 23,770 19,822 14,787 9,854 13,792 – At 31 December 1999 Assets Cash and balances at central banks Treasury bills and other eligible bills Loans and advances to banks Loans and advances to customers Debt securities Equity securities Tangible fixed assets Land and buildings Other assets Prepayments and accrued income Liabilities Deposits by banks Customer accounts Debt securities in issue Provision for liabilities and charges Other liabilities Subordinated liabilities Net position Off-balance sheet items Interest rate sensitivity gap Cumulative gap – 7,012 6,091 68,903 1,910 – – – – – 83,916 7,929 65,993 8,700 – – – 82,622 1,294 3,715 5,009 5,009 – 259 – 5,111 858 – – – – – 6,228 – 2,636 1,853 – – 70 4,559 1,669 (231) 1,438 6,447 – 108 – 4,642 277 – – – – – – 14 – 13,816 1,644 – – – – – – – – – 1,561 – – – – – 7,552 – – 3,951 – 3,220 974 884 874 1,669 7,552 7,393 6,091 96,423 6,250 3,220 974 884 874 1,669 5,027 15,474 1,561 19,124 131,330 – 3,313 808 – – – – 16,692 503 – – 200 – 1,240 – – – 409 – 2,962 – 755 17,267 – 7,929 92,836 11,864 755 17,267 679 4,121 17,395 1,649 20,984 131,330 906 (43) 863 (1,921) (3,441) (5,362) (88) – (88) (1,860) – (1,860) 7,310 1,948 1,860 – – – – – O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 118 45(e) Fair value disclosure Book value at 31 Dec 2000 Fair value at 31 Dec 2000 Book value at 31 Dec 1999 Fair value Book value at 31 Dec 2000 at 31 Dec 1999 Fair value at 31 Dec 2000 Book value at 31 Dec 1999 £m Rm Fair value at 31 Dec 1999 The fair value of the financial assets and liabilities of the Group’s banking subsidiary comprised: Trading book financial assets and liabilities Assets Cash and balances at central banks Treasury bills and other eligible bills Loans and advances to banks Loans and advances to customers Debt securities Investments in associated undertakings Tangible fixed assets Land and buildings Other assets Prepayments and accrued income Off balance sheet financial instruments – positive value Liabilities Deposits by banks Customer accounts Debt securities in issue Provision for liabilities and charges Other liabilities Subordinated liabilities Off balance sheet financial instruments – negative value Non-trading book financial assets and liabilities Assets Marketable assets Debt securities Equity securities Liabilities Customer accounts Provision for liabilities and charges Other liabilities 1,137 215 1,204 11,388 531 207 – – 398 373 1,137 215 1,204 11,388 531 207 – – 398 373 760 137 613 9,704 340 – 98 89 88 168 760 137 613 12,865 12,865 2,433 2,433 13,623 13,623 9,704 128,852 128,852 6,008 6,008 2,343 2,343 – – – – 4,503 4,503 4,220 4,220 340 – 98 100 88 168 7,552 1,357 6,091 96,423 3,377 – 974 884 874 1,669 7,552 1,357 6,091 96,423 3,377 – 974 992 874 1,669 – 942 256 256 – 10,657 2,555 2,555 1,873 10,721 1,417 12 1,115 65 1,873 10,721 1,417 12 1,112 65 798 9,343 1,194 76 1,738 68 798 21,193 21,193 9,343 121,306 121,306 16,033 16,033 1,194 136 76 136 12,582 12,616 1,738 735 735 68 7,929 92,836 11,864 755 17,277 679 7,929 92,836 11,864 755 17,277 679 – 927 278 278 – 10,490 2,762 2,762 817 393 624 16 102 80 773 399 628 16 102 80 607 289 324 – – – 607 289 618 – – – 9,242 4,447 7,061 181 1,154 905 8,747 4,515 7,106 181 1,154 905 6,036 2,873 3,220 6,036 2,873 6,141 – – – – – – All financial assets and liabilities held or issued for trading purposes are carried in the financial statements at fair value. For those financial assets and liabilities in the non-trading book, fair values have been determined by valuation against mid-market prices or by discounting forward cash flows. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 119 Notes to the Financial Statements continued for the year ended 31 December 2000 46 Reconciliation of operating profit to net operating cash flows Profit from insurance and asset management activities before tax and non-operating items Depreciation and amortisation of goodwill Unrealised investment gains/(losses) Profits relating to the long term business Long term investment return in the life business Cash received from long term business Increase/(decrease) in provisions for other risks and charges Increase/(decrease) in insurance technical provisions net of reinsurance Other (including amounts reinvested in long term business operations) Net cash inflow from insurance operating activities Operating profit from banking activities (Decrease)/increase in accrued income and prepayments Provision for bad and doubtful debts Depreciation and amortisation Other Net cash flow from banking trading activities Net (decrease)/increase in collections/transmissions Net increase/(decrease) in loans and advances to banks and customers Net (decrease)/increase in deposits by banks and customer accounts Net increase in debt securities in issue Net increase/(decrease) in other assets Net (decrease)/increase in other liabilities Year to 31 Dec 2000 374 46 184 (472) 215 277 2 4 (502) 128 303 (235) 95 48 14 £m Year to 31 Dec 1999 1,224 13 (416) (376) 187 – (8) (3) (126) 495 210 82 263 33 (75) Year to 31 Dec 2000 3,936 484 1,936 (4,966) 2,262 2,914 21 42 (5,283) Rm Year to 31 Dec 1999 12,067 128 (4,101) (3,707) 1,844 – (79) (30) (1,242) 1,346 4,880 3,187 (2,473) 1,000 505 149 2,072 808 2,593 325 (740) 5,058 108 (12,156) 7,769 3,017 (2,258) 996 225 (6) 5,557 (6,876) 397 9,951 (8,401) 2,368 513 (63) 11 58,467 (1,233) (72,344) 788 4,177 306 (229) 104,697 (88,389) 101 Net cash inflow from banking operating activities 847 257 8,913 2,534 46(a) Analysis of cash flows Returns on investment and servicing of finance Net interest paid Dividends paid to minority interests Finance costs of debt and non-equity share capital Net cash outflow from returns on investments and servicing of finance Taxation United Kingdom corporation tax Overseas tax Total taxation paid Capital expenditure and financial investment Net purchase of banking investment securities Net purchase of tangible fixed assets Net cash outflow from capital expenditure and financial investment Acquisitions and disposals Acquisition of interests in subsidiary undertakings Disposal of interests in subsidiary undertakings Net cash (outflow)/inflow from acquisitions and disposals Financing activities Issue of ordinary share capital net of costs Issue of ordinary share capital of subsidiary undertakings to minority interests Net cash inflow from disposal of issued shares in connection with satisfying claims and errors on demutualisation Increase/(decrease) in borrowings Net cash inflow from financing activities (7) (65) – (72) (9) (147) (156) (180) (115) (295) (6) (111) (7) (124) (30) (40) (70) (22) (62) (84) (69) (684) – (59) (1,095) (69) (753) (1,223) (95) (1,547) (1,642) (1,894) (1,210) (3,104) (296) (394) (690) (217) (611) (828) (1,718) – (1,718) (64) 130 (18,076) – (631) 1,281 66 (18,076) 650 154 10 37 826 559 23 – (35) 1,618 106 392 8,685 5,509 227 – (345) 1,027 547 10,801 5,391 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 120 46(b) Movement in portfolio investments, net of financing Increase in cash holdings Cash flow (excluding long term business) (Decrease)/increase in net portfolio investments Movement arising from cash flow Movement in long term business Acquired/(disposed) with subsidiary Changes in market values and exchange rates Total movement in portfolio investments, net of financing Portfolio investments, net of financing at beginning of year Portfolio investments, net of financing at end of year Year to 31 Dec 2000 142 (1,008) (866) (1,705) 804 (295) £m Year to 31 Dec 1999 122 Year to 31 Dec 2000 1,494 Rm Year to 31 Dec 1999 1,202 732 (10,605) 7,215 854 3,521 (22) 712 (9,111) 1,271 8,459 1,586 8,417 34,730 (217) 9,563 (2,062) 18,524 5,065 52,493 2,205 13,459 184,060 131,567 16,462 18,524 186,265 184,060 46(c) Movement in insurance cash, portfolio investments and financing At start of year Cash flow Changes in long term business Changes to market value, with currencies and other Acquired subsidiary £m At end of year Year to 31 December 2000 Movement in insurance cash and portfolio investments Cash in hand and at bank Land and buildings Other financial investments Movement in financing Share capital Share premium Subordinated liabilities Bank loans Other loans 443 914 17,167 18,524 344 868 – 8 88 1,308 142 (16) (992) (99) (65) (1,541) (866) (1,705) 11 143 – 536 289 979 – – – – – – – 2 802 804 – – 39 – 287 326 (28) (4) (263) 458 831 15,173 (295) 16,462 – (500) – – (6) (506) 355 511 39 544 658 2,107 Rm At end of year At start of year Cash flow Changes in long term business Changes to market value, with currencies and other Acquired subsidiary Year to 31 December 2000 Movement in insurance cash and portfolio investments Cash in hand and at bank Land and buildings Other financial investments Movement in financing Share capital Share premium Subordinated liabilities Bank loans Other loans 4,402 9,081 170,577 1,494 (168) (10,437) (779) 452 1,598 184,060 (9,111) 1,271 3,418 8,625 – 79 874 122 1,580 – 5,589 3,013 12,996 10,304 – – – – – – – 21 8,438 8,459 – – 410 – 3,020 65 17 5,182 9,403 1,504 171,680 1,586 186,265 477 (4,423) 32 488 538 4,017 5,782 442 6,156 7,445 3,430 (2,888) 23,842 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 121 Notes to the Financial Statements continued for the year ended 31 December 2000 46(d) Acquisitions of subsidiary undertakings Net assets acquired Investments Cash Other net liabilities Goodwill arising on acquisitions Cash consideration £m Year to 31 Dec 2000 949 145 (622) 472 2,162 Rm Year to 31 Dec 2000 9,887 1,512 (6,109) 5,290 22,747 2,634 28,037 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 122 Embedded Value Information 1. Embedded value The embedded value of Old Mutual plc at 31 December 2000 is set out below, together with the corresponding position at 31 December 1999. Adjusted net worth Equity shareholders’ funds Excess of market value of listed subsidiaries over their net asset value Adjustment to include OMI life subsidiaries on a statutory solvency basis Value of in-force business Value of in-force business before cost of solvency capital Cost of solvency capital Embedded value 31 Dec 2000 4,730 3,618 1,132 (20) 823 886 (63) £m 31 Dec 1999 31 Dec 2000 Rm 31 Dec 1999 4,608 53,517 45,791 3,513 1,114 (19) 40,937 12,805 (225) 34,907 11,069 (185) 806 884 (78) 9,314 10,028 (714) 8,003 8,781 (778) 5,553 5,414 62,831 53,794 An embedded value is an actuarially determined estimate of the economic value of a life assurance company, excluding any value that may be attributed to future new business. Old Mutual plc’s embedded value is the sum of its adjusted net worth and the present value of the projected stream of future after-tax profits from its life assurance business in force at the valuation date, adjusted for the cost of holding solvency capital equal to the South African Statutory Capital Adequacy Requirement (or equivalent for non-African operations). The adjusted net worth is equal to the consolidated equity shareholders’ funds adjusted to reflect the Group’s listed subsidiaries at market value, and Old Mutual International (OMI) life assurance subsidiaries on a statutory solvency basis. The embedded value does not include a market valuation of the Group’s asset management subsidiaries (including asset management business written through the life assurance companies), nor of any other in-force non-life business of the Group. No account has been taken of capital gains tax proposed to be introduced in South Africa with effect from 1 October 2001. Draft legislation was issued by the South African tax authorities in December for comment. As there may still be changes to the proposed legislation it was considered premature to adjust the embedded value to include the impact of capital gains tax as envisaged by the draft legislation. An indication of the impact of the proposed legislation on the embedded value has however been provided in section 5. The assumptions used to calculate the embedded value are set out in section 4. The table below sets out a geographical analysis of the value of in-force business at 31 December 2000 and 31 December 1999. South Africa Individual business Group business Rest of World Value of in-force business 31 Dec 2000 706 451 255 117 823 £m 31 Dec 1999 687 448 239 119 806 31 Dec 2000 7,988 5,098 2,890 1,326 9,314 Rm 31 Dec 1999 6,830 4,455 2,375 1,173 8,003 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 123 Embedded Value Information continued 2. Embedded value profits Embedded value profits represent the change in embedded value over the period, adjusted for any capital raised and dividends proposed. The after-tax embedded value profits for the 12 months to 31 December 2000 are set out below, together with the corresponding figures for the 12 months to 31 December 1999. Embedded value at end of year Embedded value at beginning of year Increase in embedded value Less capital raised Self-investment transaction New capital raised Proceeds from sale of shares previously held to satisfy claims and errors on demutualisation Plus dividends proposed Embedded value profits The components of the embedded value profits are set out below: Profits from new business – Point of sale – Expected return to end of year Expected return Experience variances Experience assumption changes Profits before investment and exceptional items Investment variances Investment assumption changes Investment return on adjusted net worth Exceptional items – Impact of 2000 SA tax change – Sale of UK life operation – Additional pensions mis-selling provisions Exchange rate movements Embedded value profits £m Rm 12 months to 31 Dec 2000 12 months to 31 Dec 1999 12 months to 31 Dec 2000 12 months to 31 Dec 1999 5,553 5,414 139 (177) – (153) (24) 163 125 5,414 3,086 2,328 (963) (404) (559) 62,831 53,794 9,037 (1,956) – (1,691) 53,794 30,174 23,620 (9,309) (3,954) (5,355) – 69 (265) 1,714 – 680 1,434 8,795 14,991 £m Rm 12 months to 31 Dec 2000 12 months to 31 Dec 1999 12 months to 31 Dec 2000 12 months to 31 Dec 1999 74 68 6 144 28 72 318 (14) 10 484 – – – – (673) 75 69 6 160 } 13 248 } 99 1,331 (185) (121) (12) (52) (59) 782 718 64 1,514 289 757 3,342 (143) 101 5,092 – – – – 403 741 678 63 1,581 } 129 2,451 } 972 13,118 (1,826) (1,190) (118) (518) 276 125 1,434 8,795 14,991 The profits from new life assurance business comprise the value of new business written during the year, determined initially at the point of sale and then accumulated to the end of the year by applying the discount rate to the value of new business at the point of sale and adding back the expected cost of solvency capital between the point of sale and the end of the year. The new business profits for the 12 months to 31 December 1999 are shown on the old South African tax basis – the restated figures on the new tax basis (effective 1 January 2000) are set out in section 3 below. The profits from existing life assurance business consist of the expected return on the in-force business, experience variances and changes in experience assumptions. The expected return is determined by applying the discount rate to the value of in-force business at the beginning of the year and adding back the expected cost of solvency capital over the year. The experience variances are caused by differences between the actual experience in the year and the assumptions used to calculate the value at the start of the year. The amount under assumption changes is the result of revised expectations of future experience and includes the value of certain margins not previously valued. The investment variances represent the differences between the actual returns in the year and the assumptions used to calculate the value at the start of the year. The investment assumption change primarily represents the 1% reduction in all South African O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 124 investment return assumptions and the risk discount rate, reflecting the decline in interest rates in South Africa. Differentials between the various investment assumptions and the risk discount rate have been left unchanged. The investment return on adjusted net worth represents the actual investment return earned on the shareholder portfolio investments (which includes the return on the market value of the shareholders’ investments in Nedcor, Mutual & Federal and Nedcor Investment Bank), as well as the profits arising from other non-life businesses within the Group. The basis of taxation of life assurance companies in South Africa changed with effect from 1 January 2000, but the impact was included in the value of in-force as at 31 December 1999. The value of in-force business as at 31 December 2000 does not include the impact of the proposed introduction of capital gains tax in South Africa. 3. Value of new business The value of new business (VNB) written in the year is the present value of the projected stream of after-tax profits from that business, adjusted for the cost of holding solvency capital. The value is determined initially at the point of sale and then accumulated to the end of the year as described in section 2 above. The tables below set out a geographical analysis of the value of new business for the 12 months to 31 December 2000 and the 12 months to 31 December 1999. New business profitability (as measured by the ratio of the value of new business to the Annual Premium Equivalent) is also shown. Annual Premium Equivalent (APE) is calculated as recurring premiums (RP) plus 10% of single premiums (SP). South Africa Individual business Group business (excl free shares) Rest of World Total (pro forma) SA Group (free shares) Total 12 months to 31 Dec 2000 12 months to 31 Dec 2000 RP £m 179 131 48 20 199 199 SP £m 1,097 805 292 211 1,308 78 1,386 APE £m 289 212 77 41 330 8 338 VNB £m 67 38 29 5 72 2 74* Margin 23% 18% 38% 13% 22% 22% 22% RP Rm 1,886 1,384 502 212 2,098 SP Rm 11,542 8,465 3,077 2,216 13,758 818 2,098 14,576 APE Rm 3,040 2,230 810 434 3,474 82 3,556 VNB Rm 708 399 309 56 764 18 782* *Value of new business net of cost of solvency capital of £5 million (R52 million). South Africa Individual business (new tax basis) Group business (excl free shares) Rest of World Total (pro forma – new tax basis) SA Individual (tax change) SA Group (free shares) RP £m 162 141 21 36 198 SP £m 1,043 697 346 172 1,215 175 Total (old tax basis) 198 1,390 12 months to 31 Dec 1999 12 months to 31 Dec 1999 APE £m 266 211 55 53 319 18 337 VNB £m 55 28 27 7 62 8 5= 75* Margin 21% 13% 49% 13% 20% 30% 22% RP Rm 1,597 1,390 207 355 SP Rm 10,280 6,873 3,407 1,696 1,952 11,976 APE Rm 2,625 2,077 548 525 3,150 1,727 172 1,952 13,703 3,322 VNB Rm 546 277 269 70 616 73 52= 741* =Value of new business relating to demutualisation proceeds restated due to overstatement of £2 million (R19 million) in December 1999. *Value of new business net of cost of solvency capital of £7 million (R65 million). The tax change in respect of Individual business in South Africa reflects the impact of the new South African tax basis effective 1 January 2000. The value of new Group business for the year to 31 December 2000 includes an amount of £1.7 million (R18 million) in respect of the proceeds from free shares issued to retirement funds at demutualisation, and re-invested with Old Mutual. The corresponding figure for the year to 31 December 1999 was £5.3 million (R52 million). The value of new business excludes the value of new individual unit trust and some Group market-linked business written through the life companies, as the profits on this business arise in the asset management subsidiaries. It also excludes premium increases arising from indexation arrangements in respect of existing business, as these are already included in the value of in-force O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 125 Embedded Value Information continued business. The value of new business however includes the value of new Investment Frontiers business that originated from existing policies that matured. A reconciliation of the new business premiums shown in the notes to the financial statements to those shown above is set out below. New business premiums in the notes to the financial statements Less: – Group market-linked business not valued – Unit trust business not valued – New business premiums arising from indexation Plus transfer of maturing policies to Investment Frontiers New business premiums as per embedded value report £m Rm Recurring premiums Single Recurring premiums premiums Single premiums 248 1,612 2,609 16,960 – – (49) – (268) (108) – 150 – – (511) – (2,819) (1,142) – 1,577 199 1,386 2,098 14,576 4. Assumptions The principal assumptions used in the calculation of the value of in-force business and the value of new business are set out below. • The pre-tax investment and economic assumptions used for South African business were as follows: South Africa Fixed Interest Return Equity and Property Return Inflation Risk Discount Rate 31 Dec 2000 31 Dec 1999 13.0% 14.0% 16.0% 17.0% 9.0% 10.0% 17.0% 18.0% For the non-South African operations, appropriate investment and economic assumptions were chosen on bases consistent with those adopted in South Africa. • Rates of future bonuses have been set at levels consistent with the investment return assumptions. • • • • • • For the in-force business, projected company taxation is based on the current tax basis that applies to South African life assurers, and includes full allowance for secondary tax on companies that may be payable in South Africa. No account has been taken of proposed capital gains tax in South Africa. The assumed future mortality, morbidity and voluntary discontinuance rates have been based as far as possible on analyses of recent operating experience. Allowance has been made where appropriate for the effect of expected AIDS-related claims. The management expenses attributable to life assurance business have been analysed between expenses relating to the acquisition of new business and the maintenance of business in force. Assumed future expenses were based on levels experienced up to 31 December 2000. The future expenses attributable to life assurance business do not include Group holding company expenses. Future investment expenses were based on the current scales of fees payable by the life assurance companies to the asset management subsidiaries. To the extent that these fees include profit margins for the asset management subsidiaries, these margins have not been included in the value of in-force business or the value of new business. The effect of increases in premiums over the period for policies in-force as at 31 December 2000 and 31 December 1999 has been included in the value of in-force business only where such increases are associated with indexation arrangements. Other increases in premiums of existing policies are included in the value of new business. The experience assumptions have been changed to reflect revised expectations of future experience and to include certain margins not previously valued. In particular, Group Schemes’ mortality assumptions were revised, Employee Benefits’ expense and retention assumptions were revised, and some sources of Individual Life profit not previously valued have now been valued. • Conversions between Rand and Sterling were carried out at the following exchange rates: Exchange rates At 31 December 2000 At 31 December 1999 12 months to 31 December 2000 (average) 12 months to 31 December 1999 (average) Rand per Sterling 11.3148 9.9364 10.5213 9.8588 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 126 5. Alternative Assumptions The discount rate appropriate to an investor will depend on the investor’s own requirements, tax position and perception of the risks associated with the realisation of the future profits. To illustrate the effect of using different discount rates, the table below shows the embedded value of Old Mutual plc at 31 December 2000 at alternative discount rates. In determining the values at different discount rates, all other assumptions have been left unchanged. Adjusted net worth Value of in-force business Value before cost of capital Cost of solvency capital Embedded value £m Value at central discount rate –1% Value at central discount rate Value at Value at central central discount discount rate +1% rate –1% 4,730 928 929 (1) 4,730 823 886 (63) 4,730 731 847 (116) 53,517 10,502 10,513 (11) Value at central discount rate 53,517 9,314 10,028 (714) Rm Value at central discount rate +1% 53,517 8,267 9,580 (1,313) 5,658 5,553 5,461 64,019 62,831 61,784 The table below sets out the value of new life assurance business for the 12 months to 31 December 2000 at alternative discount rates. Value before cost of capital Cost of solvency capital Value of new business £m Value at central discount rate –1% Value at central discount rate Value at Value at central central discount discount rate +1% rate –1% Value at central discount rate 84 – 84 79 (5) 74 75 (9) 66 885 – 885 834 (52) 782 Rm Value at central discount rate +1% 786 (99) 687 The table below shows the sensitivity of the value of in-force business at 31 December 2000 and the value of new business for the 12 months to 31 December 2000 to changes in key assumptions. All of the sensitivities have been determined at the central discount rates and for each sensitivity illustrated, all other assumptions have been left unchanged. Central assumptions Effect of: • Decreasing the pre-tax investment return assumptions by 1% with bonus rates changing commensurately – Value before cost of capital – Cost of solvency capital • Voluntary discontinuance rates increasing by 25% • Maintenance expense levels increasing by 20% with no corresponding increase in policy charges • Increasing the inflation assumption by 1% £m Rm Value of Value of new in-force life business for year to 31 Dec 2000 business at 31 Dec 2000 Value of Value of new in-force life business for year to 31 Dec 2000 business at 31 Dec 2000 823 74 9,314 782 (89) (33) (56) (33) (78) (11) (7) (3) (4) (12) (7) (1) (1,007) (366) (641) (368) (881) (125) (74) (27) (47) (127) (74) (10) O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 127 Embedded Value Information continued As mentioned in section 1, no account has yet been taken of the capital gains tax (CGT) proposed to be introduced in South Africa with effect from 1 October 2001. Given that about 10% of the Company’s equity portfolio is traded each year, we have estimated that CGT as currently proposed could reduce the equity investment return in the Individual Policyholder Fund (IPF) by about 0.5% per annum, and in the Corporate Policyholder Fund (CPF) and Corporate Fund (CF) by about 0.9% per annum. Based on the Company’s current product and investment portfolio mix, the overall investment return on total policyholder funds is expected to reduce by about 0.1% per annum. This would cause the value of in-force life business (before cost of capital) to reduce by about £3.3 million (R37 million). The corresponding reduction in the value of new business (before cost of capital) is £0.3 million (R3 million). A 0.9% per annum reduction in the investment return on solvency capital would increase the cost of solvency capital (and reduce the net value of in-force life business) by £50 million (R577 million), if the risk discount rate remained unchanged. The corresponding figure for the cost of solvency capital in respect of new business is £0.4 million (R4 million). Should the risk discount rate be reduced from 17% to 16% when CGT is introduced, then the net impact on the cost of solvency capital would cause a small increase in the value of new and in-force life business. 6. External review These results have been reviewed by Tillinghast-Towers Perrin, who have confirmed to the directors that the methodology and assumptions used to determine the embedded value are reasonable and that the embedded value profits are reasonable in the context of the operating performance and experience of the life assurance business during the 12 months to 31 December 2000. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 128 Notice of Annual General Meeting The Annual General Meeting of Old Mutual plc (the “Company”) will be held in the Ballroom, Claridge’s, Brook Street, London W1A 2JQ, on Friday 18 May 2001 at 11.00 a.m. for the following purposes: 1 To receive and adopt the directors’ report and audited financial statements of the Group for the year ended 31 December 2000. 2 To declare a final dividend of 3.1p per ordinary share. 3 (i) to re-appoint Mr C D Collins as a director of the Company; (ii) (iii) (iv) (v) to re-appoint Mr P G Joubert as a director of the Company; to re-appoint Mr R C M Laubscher as a director of the Company; to re-appoint Mr M J Levett as a director of the Company; and to re-appoint Mr J V F Roberts as a director of the Company. 4 To re-appoint KPMG Audit Plc as auditors to the Company. 5 To authorise the directors of the Company to settle the remuneration of the auditors. As special business, to consider and, if thought fit, pass the following resolutions, those numbered 6 and 11 as Ordinary Resolutions and those numbered 7, 8, 9 (i) to (iv) and 10 as Special Resolutions: Ordinary Resolution 6 That, pursuant to Section 80 of the Companies Act 1985, and in substitution for any previously existing authority under that section insofar as not already used, the directors be and they are hereby authorised generally and unconditionally to allot relevant securities (as defined in the said Section 80) up to an aggregate nominal amount of £118,394,637 provided that: (i) this authority shall expire at the end of the next Annual General Meeting of the Company; and (ii) the Company may before such expiry make one or more offers or agreements which would or might require relevant securities to be allotted after such expiry and the directors may allot relevant securities in pursuance of such offers or agreements as if the authority hereby conferred had not expired. Special Resolutions 7 That, subject to the passing of the immediately preceding resolution, the directors be and they are hereby authorised to allot equity securities, within the meaning of Section 94 of the Companies Act 1985, up to a maximum nominal aggregate amount of £17,759,195 for cash, as if Section 89(1) of that Act did not apply to any such allotment. This authority shall expire at the end of the next Annual General Meeting of the Company, save that the Company may before such expiry make one or more offers or agreements which would or might require equity securities to be allotted after such expiry and the directors may allot equity securities in pursuance of such offers or agreements as if the power conferred hereby had not expired. 8 That the Company be and is hereby unconditionally and generally authorised in accordance with Section 166 of the Companies Act 1985 to purchase Ordinary Shares of 10p each in the Company (“Ordinary Shares”) by way of market purchase (as defined in Section 163(3) of the Companies Act 1985) upon and subject to the following conditions: O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 129 Notice of Annual General Meeting continued (i) the maximum number of such Ordinary Shares which may be purchased pursuant to this authority (when aggregated with any purchases made pursuant to any of the contingent purchase contracts referred to in Resolution 9 below) shall be 355,183,913; (ii) the minimum price which may be paid for any Ordinary Share is 10p and the maximum price (exclusive of expenses) which may be paid for such Ordinary Share is not more than 5% above the average of the middle market values taken from the London Stock Exchange Daily Official List for the five business days before the date on which such Ordinary Share is contracted to be purchased; (iii) such authority shall continue for a period of 12 months from the date hereof (or until the conclusion of the Company’s Annual General Meeting in 2002 whichever is the earlier), provided that any contract for the purchase of any such Ordinary Shares which is concluded before the expiry of the said authority may be executed wholly or partly after the said authority expires; and (iv) all Ordinary Shares purchased pursuant to the said authority shall be cancelled immediately upon completion of the purchase. 9 That the following contingent purchase contracts, in the respective forms produced to the meeting (or with any non-material amendments thereto which the directors may consider to be necessary or desirable), each be and is hereby approved in accordance with Section 164 of the Companies Act 1985 and that the Company be and is hereby authorised to make off-market purchases of its shares pursuant to each such contract for a period of 12 months from the date hereof (or until the conclusion of the Company’s Annual General Meeting in 2002, whichever is the earlier): (i) contract between the Company and Merrill Lynch South Africa (Pty) Limited pursuant to which the Company may make off-market purchases from Merrill Lynch South Africa (Pty) Limited of up to a maximum of 355,183,913 Ordinary Shares of 10p each in the Company (“Ordinary Shares”) in aggregate (such maximum number to be reduced by any purchases made pursuant to the authority in Resolution 8 above or any of the other contingent purchase contracts referred to in this Resolution 9); (ii) contract between the Company and ABN Amro Securities (Namibia) (Pty) Limited pursuant to which the Company may make off-market purchases from ABN Amro Securities (Namibia) (Pty) Limited of up to a maximum of 355,183,913 Ordinary Shares in aggregate (such maximum number to be reduced by any purchases made pursuant to the authority in Resolution 8 above or any of the other contingent purchase contracts referred to in this Resolution 9); (iii) contract between the Company and Fleming Martin Edwards Securities (Private) Ltd pursuant to which the Company may make off-market purchases from Fleming Martin Edwards Securities (Private) Ltd of up to a maximum of 355,183,913 Ordinary Shares in aggregate (such maximum number to be reduced by any purchases made pursuant to the authority in Resolution 8 above or any of the other contingent purchase contracts referred to in this Resolution 9); (iv) contract between the Company and Stockbrokers Malawi Limited pursuant to which the Company may make off-market purchases from Stockbrokers Malawi Limited of up to a maximum of 355,183,913 Ordinary Shares in aggregate (such maximum number to be reduced by any purchases made pursuant to the authority in Resolution 8 above or any of the other contingent purchase contracts referred to in this Resolution 9). 10 That the Articles of Association, in the form now produced to the meeting and signed by the Chairman, be and are hereby adopted as the Articles of Association of the Company in substitution for the existing Articles of Association. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 130 Ordinary Resolution 11 That: (i) the Rules of the Old Mutual Share Incentive Scheme (the “Scheme”) be amended by the inclusion, as a schedule to the Scheme, of the Trust Deed and Rules of the Old Mutual All Employee Share Plan (the “Plan”); (ii) the Plan, the main features of which are summarised in the section headed “Resolution 11” in the accompanying Notes, and the Trust Deed and Rules of which are produced to the meeting and signed by the Chairman for the purpose of identification, be approved; and (iii) the directors be authorised to do all such acts and things as they may consider necessary or desirable to carry the Plan into effect and to obtain its approval by the Inland Revenue. By Order of the Board Martin C Murray Group Company Secretary London, 6 March 2001 Notes: Registered Office: 3rd Floor Lansdowne House 57 Berkeley Square London W1J 6ER 1 A member of the Company entitled to attend and vote at the meeting may appoint (a) proxy(ies) to attend and, on a poll, vote on his or her behalf or, in the case of a member who holds shares through Old Mutual Nominees, instruct the nominee company to vote on his or her behalf or request such nominee company to appoint him or her as proxy to enable him or her to attend the meeting in person. (Old Mutual Nominees is Old Mutual (South Africa) Nominees (Pty) Limited, Old Mutual (Namibia) Nominees (Pty) Limited, Old Mutual Zimbabwe Nominees (Private) Limited or Old Mutual (Blantyre) Nominees Limited if shares are held through the Group’s nominee on the South African, Namibian, Zimbabwe or Malawi register respectively). A proxy need not be a member of the Company. 2 Pursuant to Regulation 34 of the Uncertificated Securities Regulations 1995, the Company gives notice that only those shareholders entered on the register of members of the Company at 6.00 p.m. (UK time) on 16 May 2001 will be entitled to attend and to vote at the Annual General Meeting in respect of the number of shares registered in their name at that time. Changes to the entries on the register after that time will be disregarded in determining the rights of any person to attend or vote at the meeting. 3 To be effective, the form of proxy or, as the case may be, the voting instruction form for use at the meeting and the power of attorney or other authority (if any) under which it is signed, or a notarially certified copy of such power or authority, must be received at the return address specified on the enclosed postage-free envelope or by the Company’s registrar, Computershare Services PLC, The Pavilions, Bridgwater Road, Bristol BS99 7NH by not later than 11.00 a.m. (UK time) on 16 May 2001. 4 The completion and return of a form of proxy or voting instruction form will not preclude a member entitled to attend and vote at the meeting from doing so if he or she wishes. Documents available for inspection Copies of the directors’ service contracts, together with the register of directors’ interests, the contingent purchase contracts referred to in Resolutions 9(i) to (iv), the new Articles of Association of the Company referred to in Resolution 10, showing the full terms of the proposed amendments to the existing Articles of Association, and the Old Mutual Share Incentive Scheme, including the schedule referred to in Resolution 11(i) setting out the Trust Deed and Rules of the Old Mutual All Employee Share Plan, are available for inspection at the registered office O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 131 Notice of Annual General Meeting continued of the Company in London; at Mutualpark, Jan Smuts Drive, Pinelands 7405, South Africa; at “1066”, 4th Floor, 35 Pritchard Street, Johannesburg, South Africa; at Old Mutual Building, Glyn Jones Road, Blantyre, Malawi; at Mutual Platz, 5th Floor, Post Street Mall, Windhoek, Namibia; at Mutual Gardens, 100 The Chase (West), Emerald Hill, Harare, Zimbabwe; and at the offices of Slaughter and May, 35 Basinghall Street, London EC2V 5DB during normal business hours on each business day from the date of this notice until the Annual General Meeting and at the Ballroom, Claridge’s, Brook Street, London W1A 2JQ from at least 15 minutes prior to the Annual General Meeting until the conclusion of that meeting. The new Articles of Association and the Trust Deed and Rules of the Old Mutual All Employee Share Plan are also available on the Company’s website, www.oldmutual.com ANNUAL GENERAL MEETING – EXPLANATORY NOTES Resolution 2 – Dividend A dividend of 3.1p per Ordinary Share is being recommended by the Board. Subject to the dividend being approved at the Annual General Meeting, it is expected that the relevant subsidiaries of the Company will declare to the trustees of the Dividend Access Trusts, which have been established in each of South Africa, Zimbabwe, Namibia and Malawi, an equivalent amount of dividend in relation to the estimated number of shares on those territories’ respective registers in the respective local currencies of those territories (by reference to the exchange rate prevailing on 12 April 2001, as determined by the Board). Shareholders on the branch registers (or, in the case of Namibia, the relevant section of the principal register) in the territories will then receive their dividend, in accordance with the provisions of the Company’s Articles of Association, from the Dividend Access Trust concerned, rather than from the Company. The equivalent amounts of the recommended dividend in each of the four other currencies will be notified by the Company to each of the stock exchanges on which the Company’s shares are listed on 17 April 2001. Resolutions 3(i) to (v) – Re-appointment of directors Mr Collins, Mr Joubert and Mr Levett retire by rotation in accordance with Articles 95 and 96 of the Company’s Articles of Association and will be seeking re-appointment at the Annual General Meeting. Mr Laubscher and Mr Roberts, who have been appointed as directors since the last Annual General Meeting, automatically retire in accordance with Article 94 of the Company’s Articles of Association and will seek re-appointment at the meeting. Mr Levett has a service contract terminable on 12 months’ notice, save that until 12 July 2001 the period of notice required to be given by the Company is 24 months. Mr Roberts has a service contract terminable on 12 months’ notice. Mr Laubscher’s letter of engagement as an executive director of the Company does not contain a prescribed notice period, but his engagement as a director is envisaged to continue for so long as Mr Laubscher remains chief executive officer of Nedcor Limited, provided that Nedcor Limited remains a subsidiary of the Company. It is also terminable by the Board or the Company in accordance with the Articles of Association of the Company. The appointments of Mr Collins and Mr Joubert as non-executive directors are each at the will of the parties, but are stated to be envisaged to last initially for three years from the date of listing of the Company’s shares on the London Stock Exchange and thereafter to be reviewed annually prior to the Company’s Annual General Meeting. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 132 Brief biographical details of each of the above directors, and of the rest of the Board, are set out on pages 40 and 41. Resolutions 4 & 5 – Auditors KPMG Audit Plc has indicated its willingness to continue in office and Resolution 4 proposes the re-appointment of KPMG Audit Plc as auditors. Resolution 5 proposes that the directors be authorised to determine the remuneration of the auditors. Resolutions 6 & 7 – Authority to allot shares In accordance with Section 80 of the UK Companies Act 1985 (the “Companies Act”), it is proposed to renew the authority for the directors to allot relevant securities up to an amount not exceeding 331⁄3% of the current issued ordinary share capital as at 6 March 2001 without having to obtain prior approval from shareholders. In accordance with Section 95 of the Companies Act, it is proposed to renew the authority of the directors to allot equity securities for cash without first being required to offer such securities pro rata to existing shareholders in accordance with the provisions of the Companies Act. This authority relates to up to 177,591,950 Ordinary Shares, being 5% of the issued ordinary share capital of the Company at 6 March 2001. Resolutions 8 & 9(i) to (iv) – Purchase of own shares Under Resolution 8, the Board is seeking to renew the standard general authority from shareholders to make market purchases of up to 10% of the Company’s issued Ordinary Shares. In addition, it is seeking shareholders’ approval (under Resolutions 9(i) to (iv)) to renew for a further year four “contingent purchase contracts” approved at last year’s Annual General Meeting, the effect of which would be to enable the Company to repurchase its shares on the JSE Securities Exchange South Africa and the Namibian, Zimbabwe and Malawi Stock Exchanges respectively. These authorities, if renewed, would run in parallel with the general authority (under Resolution 8) to purchase shares on the London Stock Exchange and any purchases under any such authority would be aggregated for the purposes of monitoring the overall 10% limit on purchases. The purchase price for any shares cannot be more than 5% above the average of the middle market quotations taken from the London Stock Exchange Daily Official List for the five business days preceding such purchase (translated, for the purposes of any purchases under any of the contingent purchase contracts described in Resolutions 9(i) to (iv), into the applicable local currency at the then prevailing exchange rate). Any shares purchased under the authority granted by Resolution 8 or pursuant to any of the contingent purchase contracts to be approved under Resolutions 9(i) to (iv) will be cancelled and not reissued. The authorities under Resolutions 8 and 9(i) to (iv), if approved, will only be exercised if market conditions make it advantageous for the Company to do so and the Board considers this to be in the best interests of shareholders generally. Resolution 10 – Changes to the Articles of Association Resolution 10 relates to the adoption of new Articles of Association of the Company to reflect a number of changes that are necessary or desirable in the light of, firstly, the recently promulgated Companies Act 1985 (Electronic Communications) Order 2000 and, secondly, the prospective entry of the Company’s shares to trading through the “STRATE” system on the JSE Securities Exchange South Africa (the “JSE”). It is proposed that O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 133 Notice of Annual General Meeting continued technical changes be made, to accommodate the above matters, to Articles 2 (definitions), 20(ii) (enforcing lien by sale), 36 (uncertificated shares), 44(iii) (untraced shareholders), 56 (notices), 60 (procedure if quorum not present), 80 (voting on behalf of incapable member), 83 (execution of proxies), 84 (delivery of proxies), 85 (maximum validity of proxy), 87 (cancellation of proxy’s authority), 101 (vacation of office by directors), 115 (notice of board meetings), 122 (resolution in writing), 142 (summary financial statements and other communications), 143 (service of notices), 145 (addresses of members), 146 (service of notice on person entitled automatically by law) and 147 (when notice deemed served). Because of the number of these changes, they have not been itemised separately in Resolution 10 and have been incorporated into a revised draft of the Articles of Association, which it is proposed should replace the existing Articles of Association. If and when Resolution 10 is passed, the Company will consider the manner, timing and extent of implementing electronic communications with shareholders, as permitted by the Companies Act 1985 (Electronic Communications) Order 2000. That Order (and the changes to the Articles of Association) enables the principal documents, which the UK Companies Act 1985 previously required a company to transmit to its members in writing, to be sent (where the shareholder concerned has expressly agreed) to an electronic address nominated by the shareholder for that purpose. It also enables a company to post communications on its website where they will be accessible by shareholders and, subject to various safeguards, to receive proxies electronically. These procedures are not mandatory – they enable the Company and those of its shareholders who wish to do so to communicate electronically only if both the Company and the shareholder concerned expressly agree. Members will not be obliged to receive electronic communications if they do not wish to do so. STRATE (an acronym for Share TRAnsactions Totally Electronic) is a project of the JSE to establish a new electronic clearing, settlement and custody system for securities listed on the JSE. With the implementation of STRATE, certificated holdings on the Company’s South African branch register will be replaced with an electronic record of ownership. Shareholders who are unwilling to dematerialise their shareholdings in STRATE may retain their share certificates. Old Mutual plc is currently scheduled to be transferred into STRATE on 18 December 2001 and the changes to the Articles are intended to enable the Company to take any steps that may be necessary or desirable to facilitate this transition. The Company will communicate with shareholders affected by the dematerialisation into STRATE to explain its implications in more detail later in the year. Resolution 11 – Adoption of the Old Mutual All Employee Share Plan (the “Plan”) It is proposed that the Plan be adopted so as to enable the Company, if the directors think fit, to offer share-based incentives to UK (and, where appropriate, non-UK) employees of the Group in a tax-effective manner in accordance with amendments to UK tax legislation made in 2000. If and when the Plan is activated in the UK, the directors would intend to use it in lieu of further invitations to participate in the existing Savings-Related Share Option Plan and would operate it in such a manner that all of the Group’s eligible UK employees would be invited to participate in it on a like basis. The following is a summary of the principal features of the Plan: (i) Constitution The Plan is governed by the Governing Rules of the Old Mutual Share Incentive Scheme (the “Scheme”) and the Trust Deed and Rules of the Plan which will form a schedule to the Scheme. The Governing Rules of the Scheme and the Trust Deed and Rules of the Plan will be submitted for approval to the Inland Revenue. The Company and the Trustees of the Old Mutual plc Employee Share Trust will both be parties to the Trust Deed in addition to the Trustees of the Plan. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 134 (ii) Eligibility All employees or full-time directors of Old Mutual plc (the “Company”) and such of its subsidiaries as are designated participating companies by the directors (the “Group”) who are ordinarily resident in the UK for tax purposes and who have completed such minimum period of service not exceeding 18 months as the directors may determine will be able to join the Plan. (iii) Basis for Participation The Plan provides for the acquisition of shares in the Company (the “Shares”). Shares may be allocated to participants on one or more of four bases. The directors will determine in any year whether the Plan will be operated and, if so, on what basis. (iv) Allocation of Shares Free Shares: Allocations of Free Shares will be made to participating employees on a date set by the directors following the announcement of the Company’s final results for its previous accounting period. The value of Free Shares allocated to employees may be made conditional on performance targets, which will be determined by the directors, being met. Where this is the case, employees will be informed of the performance targets which apply to them before the start of the period when their performance will be measured. Each participant in the Plan will contract with the Company to allow his Free Shares to be held by the Trustees for five years or such shorter period, being not less than three years, as the directors determine. Free Shares may be removed from trust after three years, but, if removed before the fifth anniversary of allocation, income tax and National Insurance Contributions must be paid on their value. Free Shares may be retained by the Trustees so long as the participant remains employed by the Group. Partnership Shares: Invitations to employees to buy Partnership Shares may also be given to employees at the discretion of the directors. Employees will be able to apply to purchase Partnership Shares at any time. The directors will determine the terms for the acquisition of all Partnership Shares on one of the following bases: (a) Each participant in the Plan will agree with the Company to buy Partnership Shares by deductions from salary, which will be accumulated each month and held in an account until the end of an accumulation period not exceeding 12 months. At the end of the accumulation period the salary saved will be transferred to the Trustees, who will acquire Partnership Shares and then hold them on the participant’s behalf. The participant will thereafter be able to ask the Trustees to transfer his Partnership Shares to him at any time. Partnership Shares may, however, be retained by the Trustees so long as the participant remains employed by the Company; or (b) Each participant in the Plan will agree with the Company to buy Partnership Shares by deductions from salary, which will be deducted each month and transferred directly to the Trustees. Within 30 days of the pay deduction the Trustees will acquire Partnership Shares and then hold them on the participant’s behalf. The participant will thereafter be able to ask the Trustees to transfer his Partnership Shares to him at any time. Partnership Shares may, however, be retained by the Trustees so long as the participant remains employed by the Company. Matching Shares: If the Company decides to offer the opportunity for the acquisition of Partnership Shares, it may also offer Matching Shares to those participants who elect to buy Partnership Shares. Allocations of Matching O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 135 Notice of Annual General Meeting continued Shares will be made on the same day as Partnership Shares are acquired on behalf of participants by the Trustees. Allocations of Matching Shares will be made to all participants on exactly the same basis. The terms on which Matching Shares will be allocated are the same as the terms for Free Shares, save that if a participant withdraws the Partnership Shares to which the allocation of Matching Shares applies he will forfeit the relevant Matching Shares. (v) Dividends Participants will be entitled to dividends paid on their Free Shares, Partnership Shares and Matching Shares while they are held in trust. The Company will determine whether: (a) The dividends will be paid in cash to the Trustees who will transfer them directly to participants; or (b) The dividends will be paid to the Trustees, who will use them (within 30 days of their payment date) to acquire further shares (“Dividend Shares”) in the Company on behalf of the participants. The Dividend Shares will then be held in the trust for at least three years. A participant who leaves the employment of the Group during the three-year holding period will have his Dividend Shares transferred to him when his employment terminates, subject to payment of Income Tax. (vi) Individual limits Free Shares: The maximum value of Free Shares which can be given to an employee through the Plan for any year is the lesser of £5,000 and the limit contained in the relevant legislation, currently £3,000. Partnership Shares: The maximum amount which an employee can have deducted from his salary per month for the purpose of buying Partnership Shares is the lower of 10% of his salary or £125, or, if the relevant legislation so provides, up to £175. Matching Shares: The maximum number of Matching Shares which can be given to an employee who buys Partnership Shares through the Plan in any year is twice the number of Partnership Shares acquired. The Company will decide the basis on which Matching Shares are allocated up to a maximum match of two Matching Shares for every Partnership Share. Dividend Shares: The maximum value of dividends that can be reinvested for a participant is £1,500 or such higher amount as may be provided in the relevant legislation. (vii) Termination of Employment/Forfeiture Free and Matching Shares: If a participant ceases to be an employee by reason of death, injury, disability, redundancy, retirement, by reason of the fact that his employing company or the part of the business in which he is employed is transferred out of the Group or due to a change of control of the Company, his Free Shares and/or Matching Shares will be transferred to him (or to his personal representatives) with no charge to Income Tax or National Insurance Contributions. If a participant ceases to be an employee within three years of the allocation to him of Free Shares and/or Matching Shares for any other reason, both his Free Shares and Matching Shares will be forfeit and he will have no further entitlement to them. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 136 If a participant ceases to be an employee at least three years after his Free and/or Matching Shares are allocated to him, the Trustees will transfer his shares to him, subject to the payment of Income Tax and National Insurance Contributions. Partnership Shares: If a participant ceases to be an employee at any time and for any reason, his Partnership Shares will be transferred to him subject to the payment of Income Tax and National Insurance Contributions. (viii) Issues and Reorganisations Where Shares are held on behalf of participants and there is a general offer being made to the Company’s shareholders or a rights or capitalisation issue or other variation of the Company’s share capital, participants will be able to instruct the Trustees how to act or vote on their behalf. Otherwise in these circumstances the number of Shares held under the Plan will be adjusted in such manner as the directors determine, subject to written confirmation from the Company’s auditors that the adjustment is, in their opinion, fair and reasonable. (ix) Retention of Shares All the Shares acquired by a participant under the Plan may be retained by the Trustees after the relevant holding periods referred to above until the participant’s employment with the Group is terminated. The participant may request the transfer of his Shares at any time after the relevant holding periods. (x) Reconstructions and take-overs In the event of any reconstruction or take-over of the Company, participants may instruct the Trustees to receive any form of consideration in respect of any Shares held for them under the Plan. Consideration paid in cash is treated in a specific way. Any Shares which are received as consideration will be held in the trust on the same terms as the existing Free Shares, Partnership Shares, Matching Shares or Dividend Shares to which they relate. (xi) Administration The Trustees and administrators of the Old Mutual All Employee Share Plan will be appointed by the directors. The trust will hold the Shares on behalf of the participants during the applicable holding period. The Trustees will meet to vote on decisions relating to the administration of the trust and be responsible for complying with relevant Inland Revenue requirements. (xii) Changes to the Plan The directors may change the Plan in accordance with the Governing Rules of the Scheme; the directors in their discretion may alter the Rules of the Plan, provided that any amendments relating to the definition of “eligible employee”, the limits on the number of Shares that may be issued pursuant to the Scheme, the maximum entitlement of any eligible employee or participant; or the basis for determining an eligible employee’s entitlement, the terms of Shares, cash or other benefits to be provided and the basis for any adjustments of entitlements which are to the advantage of current or future participants, may be made only by an ordinary resolution of the shareholders in general meeting. The exceptions to this requirement are minor amendments which the directors consider necessary or desirable to benefit the administration of the Scheme or to obtain or maintain favourable tax, exchange control or regulatory treatment for the participants in the Plan or employees in any subsidiary. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 137 Notice of Annual General Meeting continued The Company needs Inland Revenue approval only to a change to a “Key Feature”, namely a feature which is necessary to satisfy the legislation. (xiii) Termination The directors or the Company at a general meeting may provide for the Plan to terminate at any time. (xiv) Limits on the use of Unissued Shares The Plan is subject to limits on the number of Shares which may be subscribed for as set out in the Governing Rules of the Scheme; in any ten year period not more than 10% of the issued share capital of the Company from time to time may be issued or become issuable pursuant to the grant of options or subscription of Shares for appropriation under all employees’ share schemes established by the Company; and in any five year period not more than 5% of the issued share capital of the Company from time to time may be issued or become issuable pursuant to the grant of options or subscription of shares for appropriation under all employees’ share schemes established by the Company. O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 138 Financial History Life assurance new business premiums Single Recurring Annual premium equivalent Summary consolidated profit and loss account Operating profit Life assurance Continuing operations Discontinued operations Banking Asset management General insurance Other shareholders’ income/(expenses) Operating profit based on a long term investment return before goodwill amortisation Goodwill amortisation Short term fluctuations in investment returns Non-operating items Profit on ordinary activities before tax Tax on profit on ordinary activities Profit on ordinary activities after tax Minority interests Profit on ordinary activities after tax and minority interests Dividends paid and proposed Retained profit for the financial year Operating earnings per share Basic earnings per share Dividends per share (1999 pro forma) Funds under management Borrowings (non banking) Net assets Gearing Gearing net of cash and short term investments Net assets per share Embedded value Life assurance value of new business Embedded value profit Embedded value per share R/£ Profit and loss account (average rate) R/£ Balance sheet (year end rate) Total number of shares in issue at 31 December Weighted average number of shares for the year 2000 1999 £m 1998 Pro forma 2000 1999 Rm 1998 Pro forma 1,612 248 409 1,852 240 425 1,737 331 505 16,960 2,609 4,305 18,260 2,366 4,192 15,815 3,011 4,593 478 – 327 124 44 (62) 911 (54) (180) 356 1,033 (186) 847 (341) 506 (163) 343 17.0 15.0 4.7 168,748 1,224 3,618 25% 23% £1.02 426 (50) 210 48 59 (32) 661 (5) 778 54 1,488 (165) 1,323 (257) 1,066 (69) 997 12.3 34.1 4.0 44,869 96 3,513 3% 5,029 – 3,440 1,305 463 (652) 9,585 (568) (1,894) 3,746 10,869 (1,958) 8,911 (3,588) 4,200 (493) 2,072 473 582 (314) 6,518 (49) 7,670 532 14,671 (1,627) 13,044 (2,534) 5,323 (1,714) 10,510 (680) 3,609 9,830 179.4 157.8 49.5 121.4 336.2 39.3 289 (118) 287 23 86 (33) 534 – (477) – 57 (85) (28) (73) (101) – (101) p 10.1 (3.4) – £m 2,628 (1,075) 2,610 207 782 (302) 4,850 – (4,329) – 521 (772) 251 (669) (920) – (920) c 92.0 (31.0) – Rm 34,780 1,909,349 445,836 342,637 – 15,527 13,850 40,937 953 34,907 – 1,588 – £1.02 £0.60 R11.53 R10.14 R5.84 5,553 74 125 £1.56 5,414 75 1,434 £1.57 3,086 62,831 782 8,795 £1.16 R17.69 53,794 741 14,991 R15.62 30,174 R11.34 10.5213 11.3148 9.8588 9.9364 9.1060 9.7763 3,551m 3,444m 1m 3,373m 3,127m 2,971m O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 139 Shareholder Information The Company’s shares are listed on the London, Malawi, Namibian and Zimbabwe Stock Exchanges and on the JSE Securities Exchange South Africa (“JSE”). The primary listing is on the London Stock Exchange and the other listings are all secondary listings. During the year (and with comparative figures for the period from 12 July 1999, when the Company’s shares were first admitted to listing, to 31 December 1999), the high and low prices at which the Company’s shares are recorded by the various exchanges as having traded were as follows: London Stock Exchange JSE Malawi Stock Exchange Namibian Stock Exchange Zimbabwe Stock Exchange High 2000 Low High 181.0p R19.3 125.75p R13.4 168.5p R16.15 MK178.5 MK100.0 MK115.0 N$19.15 N$16.05 N$14.7 Z$95 Z$102.25 Z$197 1999 Low 121.25p R12.10 MK79.5 N$12.10 Z$70.50 As at 31 December 2000, the geographical analysis and shareholder profile of the Company’s share register were as follows: UK (principal) register South African branch register Malawi branch register Namibian section of register Zimbabwe branch register Size of shareholding 1 – 1,000 1,001 – 10,000 10,001 – 100,000 100,001 – 250,000 250,001 + Total shares 1,141,675,504 2,312,442,197 6,813,050 17,170,591 73,311,549 % of Number of whole shareholders 32.15 65.11 0.19 0.48 2.07 11,185 71,9741 5,935 1,1451 41,405 3,551,412,891 100 131,644 Total shares Number of holders 41,190,155 58,033,169 43,680,910 38,784,076 3,369,724,581 107,366 22,065 1,520 231 4621 Note 1: The registered shareholdings on the South African register include Old Mutual (South Africa) Nominees (Pty) Limited, which held a total of 667,868,595 shares as nominee for 613,085 underlying beneficial owners as at 31 December 2000. The registered shareholdings on the Namibian section of the register include Old Mutual (Namibia) Nominees (Pty) Limited, which held a total of 5,381,528 shares as nominee for 8,827 underlying beneficial owners as at 31 December 2000. The Company’s share register is administered by Computershare Services in conjunction with local representatives in various jurisdictions. The following are the contact details: In the UK Computershare Services PLC The Pavilions, Bridgwater Road Bristol BS99 7NH (PO Box 82, Bristol BS99 7NH) Tel: (44) 870 702 0000 In South Africa Computershare Services Limited 41 Fox Street, Johannesburg, 2001 (PO Box 61595, Marshalltown, 2107) Tel: (27) 11 370 7777 In Malawi Nico Corporate Finance Limited 4th Floor, Unit House Victoria Avenue, Blantyre (PO Box 1396, Blantyre) Tel: (265) 623 856 In Namibia Transfer Secretaries (Pty) Limited Kaiserkrone Centre Shop No.12, Windhoek (PO Box 2401, Windhoek) Tel: (264) 61 227 647 In Zimbabwe Corpserve (Private) Ltd 4th Floor, UDC Centre Corner 1st Street and Union Avenue, Harare Tel: (263) 912 34621-5 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 140 The Company’s Shareholder Services, based in Cape Town, administer a number of shareholder support functions, including the following: • telephone and postal sales (via the Share Sales Service) of shares held through Old Mutual (South Africa) Nominees (Pty) Limited on the South African branch register and shares held through Old Mutual (Namibia) Nominees (Pty) Limited on the Namibian section of the register; • dividend mandate arrangements; and • tracing of holders of unclaimed shares in the Company. If you have any questions on any of the above matters, you may contact Shareholder Services on 08 60 60 9000 (International (27) 21 504 8107) at any time between 8.00 a.m. and 5.00 p.m. (local time) Monday to Friday. Checking your holding online An online service is situated at the Investor Centre option within the website address www.computershare.com and gives shareholders access into their account to confirm registered details, mandate instructions in place, dividend enquiries and a real-time shareholding balance. A simple calculator function places a market quote against each holding and allows shareholders to estimate its value. There are also a number of downloadable forms from this site such as change of address, dividend mandate instructions and stock transfer forms. Finally there is an extensive list of frequently asked questions and the facility to contact Computershare Services by e-mail. The Company’s financial calendar for the forthcoming year is as follows: Currency conversion date for final dividend Announcement of currency equivalents of final dividend, as so converted 12 April 2001 17 April 2001 Ex-dividend date on all exchanges where the Company’s shares are listed opening of business on 18 April 2001 Record date for final dividend Annual General Meeting Final dividend payment date Expected date of announcement of interim results Interim dividend payment date Final results for 2001 Rule 144A ADRs close of business on 20 April 2001 18 May 2001 31 May 2001 4 September 2001 November 2001 March 2002 The Company has a Rule 144A American Depositary Receipt (“Rule 144A ADR”) facility through The Bank of New York. Each Rule 144A ADR represents ten ordinary shares in the Company. As at 31 December 2000, none of the Company’s shares were held in the form of Rule 144A ADRs. Any enquiries about the Company’s Rule 144A ADR facility should be addressed to The Bank of New York, 101 Barclay Street, New York, N.Y. 10286. Websites Further information on the Company can be found at the following websites: www.oldmutual.com www.oldmutual.co.za O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 141 Contacts Investor Relations Department Old Mutual plc 3rd Floor Lansdowne House 57 Berkeley Square London W1J 6ER Tel: (44) 20 7569 0122 O L D M U T U A L A N N U A L R E P O R T 2 0 0 0 142