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Annual Report 2004

Plain-text annual report

OLD MUTUAL PLC ANNUAL REPORT AND ACCOUNTS 2004 We are an international financial services group, whose activities are focused on asset gathering and asset management. We offer a diverse range of financial services in three principal geographies, South Africa, the United States and the United Kingdom. We have a talented team across all of our regions, sharing skills to help deliver our vision. Financial Highlights Contents 01 04 Chairman’s Statement 06 Chief Executive’s Statement 10 Group Business Review 21 Corporate Citizenship 26 Corporate Governance and Directors’ Report 42 Board of Directors 44 Remuneration Report 53 Statement of Directors’ Responsibilities Summary Consolidated Profit and Loss Account Independent Auditors’ Report 56 57 Consolidated Profit and 54 Loss Account 60 Consolidated Statement of Total Recognised Gains and Losses 60 Reconciliation of Movements in Consolidated Equity Shareholders’ Funds 61 Consolidated Balance Sheet 63 Company Balance Sheet 64 Consolidated Cash Flow Statement 65 Notes to the Financial Statements 138 Supplementary Disclosures 140 Achieved Profits – Statement of Directors’ Responsibilities 141 Achieved Profits – Independent Auditors’ Report 142 Achieved Profits Basis Supplementary Information 156 Financial History 160 Notice of Annual General Meeting 165 Shareholder Information Financial Highlights Financial Highlights | 01 £956m > Adjusted operating profit* up 47% to £956 million (2003: £650 million), and up 40% to R11,296 million (2003: R8,041 million) £908m > Operating profit: £908 million (2003: £475 million), R10,711 million (2003: R5,884 million) 15.3p 14.1p > Adjusted operating earnings per share* up 53% to 15.3p (2003: 10.0p), and up 46% to 181.1c (2003: 123.8c) > Basic operating earnings per share: 14.1p (2003: 8.0p), 166.2c (2003: 99.1c) £140bn 139.1p > Funds under management: £140 billion > Adjusted embedded value per share: (2003: £125 billion), an increase of 12%, R1,520 billion (2003: R1,495 billion) 139.1p, R15.08 at 31 December 2004 (2003: 104.6p, R12.49) 19.1% > Return on equity: 19.1% (2003: 14.4%**) 13% > Final dividend increased by 13% to 3.5p making 5.25p for the year*** Wherever the items asterisked in the Financial Highlights are used, whether in the Financial Highlights, the Chairman’s Statement, the Chief Executive’s Statement or the Group Business Review, the following apply: * Adjusted operating profit represents the directors’ view of the underlying performance of the Group. For life assurance and general insurance businesses, adjusted operating profit is based on a long term investment return and includes investment returns on own shares held within the policyholders’ funds. For banking business, adjusted operating profit excludes the loss on disposal of investment in Dimension Data Holdings plc, restructuring and integration costs and the transitional impact of the change in credit provisioning methodology. For all businesses, adjusted operating profit excludes goodwill amortisation and impairment, and fines and penalties. Adjusted operating earnings per share is similarly based, but is stated after tax and minority interests, with the calculation of the weighted average number of shares including own shares held in policyholders’ funds. The segmental analysis has been prepared on a gross of inter-segment transactions basis. ** Comparative figures have been restated to reflect the adoption of Urgent Issues Taskforce Abstract 38 “Accounting for ESOP Trusts”. *** The dividend recommended (final 3.5p per share, making 5.25p per share for the year) will be converted, for payment to shareholders on the branch registers and the Namibian section of the principal register, into local currencies at exchange rates ruling at the close of business on 31 March 2005 (or 30 March 2005 in the case of Zimbabwe). 02 | Financial Highlights A year of delivery... The Company achieved strong results in 2004 with profit, earnings per share, assets under management and embedded value all increased. A return on equity of 19.1% and net cash inflow at our US business of $12.3 billion further demonstrate the power underlying this performance. Adjustedembeddedvalue(£orRmillion) 1 3 8 , 1 6 R 5 6 4 , 5 £ 3 8 8 , 9 5 R 7 3 4 , 3 £ , 4 3 1 8 5 R 9 5 3 5 £ , 0 9 8 , 2 5 R 8 2 8 , 3 £ 9 2 9 , 7 4 R 5 1 0 , 4 £ 2000 2001 2002 2003 2004 Shareholders’ adjusted net worth Value of in-force business Market value adjustments New business annual premium equivalent (£orRmillion) UK £25 USA £274 UK R291 USA R3,225 SA £247 SA R2,924 2004: £546 2004: R6,440 Year 2000 2001 2002 2003 2004 £ million 338 361 557 529 546 R million 3,556 4,546 8,791 6,532 6,440 Financial Highlights | 03 Dividend per share Funds under management 2004 5.25p 58.5c*** £140bn R1,520bn UK UK Year 2000 2001 2002 2003 2004 ***Indicative only p 4.70 4.80 4.80 4.80 5.25 c 49.5 72.3 66.0 56.0 58.5*** USA SA Adjusted operating profit for 2004 (£ or R million) 5 8 5 , 9 R 1 1 9 £ 1 0 6 , 0 1 R 6 5 8 £ , 6 9 2 1 1 R 6 5 9 £ 1 3 4 , 1 1 R 4 2 7 £ 1 4 0 , 8 R 0 5 6 £ Year 2000 2001 2002 2003 2004 USA SA £ billion 168 143 123 125 140 R billion 1,903 2,489 1,704 1,495 1,520 2000 2001 2002 2003 2004 04 | Chairman’s Statement I retire this year, knowing that the business is in good hands and set fair for the future Mike Levett, Chairman Chairman’s Statement | 05 DEAR SHAREHOLDER, Old Mutual’s results rebounded in 2004, with good performances from all businesses, and as a result earnings per share increased by 53% to 15.3 pence, a very pleasing outcome. On behalf of the Board and all the Company’s shareholders, I would like to thank management and employees in each business for their continued dedication and commitment to the Group. This commitment will ensure that your Company is well placed to continue to build in the future on the momentum that has been created. Investment performance was strong at Old Mutual South Africa, benefiting sales of unit trusts, and our South African general insurance business, Mutual & Federal, had a spectacularly good result. Nedcor is well on the recovery path that we have outlined. We are continuing to develop our plans in South Africa to address Black Economic Empowerment. In the USA, our asset management business had a successful year, and we were able to resolve the regulatory issues that had arisen at Pilgrim Baxter & Associates, Ltd. Our US life business continued to write a significant amount of new business. In the UK our asset management operations continued to make good progress. BOARD Chris Liebenberg retired from the Board in October 2004, having served as a non-executive director of the Company since 1999. I am most grateful to him for his contribution to the Group, and wish him a long and happy retirement. Russell Edey joined the Board as a non-executive director in June 2004 and we have also appointed Wiseman Nkuhlu as a non-executive director with effect from 1 March 2005. I am delighted to welcome them to the Board. I shall be retiring as Chairman of the Company at the end of the AGM on 11 May 2005, thereby ending over 46 years with the Group. During that period Old Mutual has transformed itself from a major Southern African mutual life assurer into the international financial services group it is today. No greater changes have happened during that time than those that have occurred since the Group demutualised and listed in 1999, which was the springboard for our subsequent international development. At the end of 2004, 38% of the Group’s net assets were in countries other than South Africa and 52% of the value of life new business came from those countries during the year. I have no doubt that the decision to demutualise and seek a primary listing on the London Stock Exchange was the right one, and this year’s figures clearly demonstrate this. DIVIDEND Your directors are proposing a final dividend of 3.5p per share, in line with our progressive dividend policy, making a total dividend for the year of 5.25p per share, an increase of 9.4%. Your Company is financially strong, with a high return on equity, talented management and staff, and a dedicated Board. I retire this year, knowing that the business is in good hands and set fair for the future. I wish my successor as Chairman, Chris Collins, the Board and all others involved with Old Mutual good fortune as the Group continues to develop in the years ahead. Mike Levett Chairman 28 February 2005 ANNUAL GENERAL MEETING 2005 There are a number of items of special business included in the agenda for our AGM, which is to be held at our offices in London on 11 May 2005. The notice of the AGM is set out on pages 160 to 164. The explanatory notes accompanying that notice provide further details of these matters. We are proposing that the existing authorities for the Company to buy back its shares on the five exchanges where they are listed be renewed for a further year at the AGM, and that the Company be authorised to hold any shares that are bought back in treasury, as permitted by UK company law, as an alternative to their being cancelled. The equivalent authorities were not activated during 2004, and we have no immediate plans to use them in the forthcoming year, but they do provide the Company with desirable flexibility in its capital management. The directors recommend that you vote in favour of all of the items of business at the AGM, as they intend to do in respect of their personal shareholdings in the Company. 06 | Chief Executive’s Statement We have established a momentum in our business that has the potential to take us much further, as we pursue our ambition to build a world class financial services group Jim Sutcliffe, Chief Executive Chief Executive’s Statement | 07 UK > The UK and RoW adjusted operating profit1 grew to £42 million in 2004. > Our UK asset management business, OMAM (UK), and leading-edge funds supermarket, Selestia, are now well established. > OMAM (UK) had £3.4 billion of assets under management at the end of 2004 and is well positioned for growth. > Selestia was on track in terms of sales, with inflows of £423 million during 2004. USA > Our US life business produced over half our life assurance sales and hit new highs. New premiums reached our target of $4 billion with a margin of 23% of APE. > US asset management produced excellent investment performance, with 72% of assets outperforming their customer benchmarks on a three-year basis. > Positive equity markets boosted assets under management by 20% to $185 billion. > Strong net cash flows in the USA resulted in total funds under management rising by 12% to £140 billion. SA > We had another very profitable year at our OMSA business and the return on equity, at 24%, continued to be at the high end of our target range. Total funds under management at OMSA increased by 15% to R312 billion. > Gross sales of unit trusts were up by 52%. Our direct sales force grew and produced an increasing volume of business. > Nedcor achieved the milestones promised at the time of its rights issue. Tier 1 solvency exceeded the 7.5% goal. > Mutual & Federal had an excellent year, with an outstanding 7.8% underwriting ratio and a return on equity of 24%. 1Excluding other shareholders’ expenses and debt service costs. We are using our high quality and powerful SAbase to create an international financial services company GROUP RESULTS 2004 has seen us make significant progress. Adjusted operating earnings per share rose by 53% in Sterling and 46% in Rand, with each major business making a significant contribution. Our South African life business produced its usual strong profit contribution with return on capital of 24%. Nedcor made good progress in its recovery and a welcome return to profitability, while Mutual & Federal performed strongly as the short term insurance cycle reached its peak. Our US businesses increased their combined adjusted operating profit by 25% to $337 million. Overall, our adjusted embedded value per share rose by 33% to 139.1p and by 21% to R15.08. Good earnings, the recovery in Nedcor’s share price and rising equity markets all contributed. The operating return on embedded value was 19.4% and return on equity for our business rose from 14.4% to 19.1%, reflecting the progress in the business and tight capital management. BUSINESS PERFORMANCE AND DEVELOPMENT Our US life business now accounts for roughly half of our life new business. Sales were up 29% on an Annual Premium Equivalent (APE) basis to $501 million and, as a result, assets under management in this business grew from $13.3 billion to $17.3 billion. Margins remained at historically high levels under helpful interest rate conditions. We continued to innovate and adapt our product range to changing customer needs, particularly in the equity index annuity and mortgage term insurance markets. In order to bolster our ratings in support of this growth, we added a further $200 million of capital in December, making a total of $300 million for the year. We successfully finalised the transfer of our outsourced back-office functions in order to reduce costs and improve service to customers and agents. We expect our US life business to start paying dividends in 2007. 08 | Chief Executive’s Statement South African life sales fell by 10%, impacted by disappointing Employee Benefit sales, and we did not recover as well as we hoped in the broker market. More encouragingly, our Personal Financial Advisors (PFA) sales force grew by 14% to over 2,600, individual single premium sales were up 16% and unit trust sales were up 52% to R5.0 billion. Group Schemes sales were up by 10%, and our overall South African life margins remained unchanged at 25%. Investment performance at Old Mutual Asset Managers (OMAM) South Africa was good – we came top in the Alexander Forbes Global Manager Watch (Large) Survey and 50% of our unit trusts performed in the top quartile of their comparator groups. Our new investment product, MaxInvestments, which brings the best of the unit trust and life assurance worlds to the customer, was the first product of its type to be launched in the South African market in November. Total funds under management at Old Mutual South Africa (OMSA) increased by 15% to R312 billion. Nedcor achieved the milestones promised at the time of its rights issue. Tier 1 solvency exceeded the 7.5% goal and new governance is working effectively to control risks. The new management team is in place, with a clearly defined strategy. Profits met our targets for the year and, although growth was subdued overall, there were some notable successes – bancassurance sales rose 57% for example. Our objective remains a 20% return on equity at Nedcor by 2007. Mutual & Federal had an excellent year, producing an outstanding 7.8% underwriting ratio and a return on equity of 24%. Its reputation for quality service was maintained and it won the three most prestigious customer service awards in the general insurance industry. We have been working hard to complete the Black Economic Empowerment (BEE) ownership plans that are so important for the growth of all our South African businesses, and expect to be able to make a firm announcement on our detailed plans in this area in the near future. Our US asset management business continued to produce excellent investment performance, with 72% of assets outperforming their customer benchmarks on a three-year basis. The developing strength of our distribution effort, combined with underlying investment performance, delivered $12.3 billion in net client cash flow which, together with positive equity markets, boosted assets under management by 20% to $185 billion. Almost two-thirds of Group assets under management are now for the account of US clients. Our UK start-up businesses produced positive results. Selestia, in only its third year of operation, had sales of £423 million, and continued to win awards for its South African built systems and service to independent financial advisors. OMAM (UK) again won accolades for its investment performance, and attracted high margin hedge fund investors to replace unit trust funds withdrawn by Gerrard clients. Our fledgling business in India is making steady progress and we now have over 40 branches. We have also established a representative office in Beijing to facilitate a Chinese life joint venture in due course. Mike Levett’s retirement this year is in many ways the end of an era for the Group. He has served Old Mutual with distinction for over 46 years and has overseen the transformation of the business into its current powerful form. Along with all my colleagues, I thank him for his great contribution to Old Mutual and wish him a well-earned, happy retirement. OUTLOOK Market conditions in our industry are favourable at present, and the South African economy is strong. The momentum we have built up is expected to continue into 2005, although we will spend further amounts on the growth of our US asset management business and SA life distribution systems. We expect Nedcor to make steady progress towards its 2007 goal for return on equity. Old Mutual has shown that it is well able to prosper as an international financial services company, and we look forward to the next phase of our journey with confidence. Jim Sutcliffe Chief Executive 28 February 2005 Corporate Investment Insurance Asset Management Healthcare Old Mutual Financial Services Old Mutual South Africa Unit Trusts Personal Banking Nedcor Integrity Respect Accountability Pushing beyond Boundaries Mutual & Federal General Insurance Capital Management US Asset Management US Life Fixed Income Life Assurance Value Equity Our Group values of Integrity, Respect, Accountability and Pushing beyond Boundaries are central to our diverse businesses Chief Executive’s Statement | 09 Strategy Priorities Value creation • Our strategy has not changed. We are using our high quality and powerful South African base to create an international financial services company. More than half our life sales and nearly three-quarters of our assetmanagement clients are now in the USA and the UK. • In the UK our asset management businesses and leading-edge fund supermarket are now well established – exploitation of these skills is our top organic priority. In India, we have over 40 branches and in China we have a representative office – fledgling businesses under development for the long term. • Old Mutual is in a very different position today from three years ago. We have sold non-core businesses and a number of asset management companies. We have resolved some difficult problems and established common metrics, values and methodologies around the Group. • Our core industry is the management of • In the USA we are committed to growing • Organic growth has the potential to money. We provide high quality investment skills to build and protect client assets. • We are focused on the specific needs of our client base in whichever market we operate. We are built for organic growth as well as being able to take on strategic opportunities as they arise. We aim to buildon our skills and potential in each ofourmarkets. our life business at a level that will produce a dividend in 2007. In asset management, the building of our load fund platform is well underway and a top organic priority. Adding new affiliates with new investment styles to take advantage of changing customer needs is at the top of our strategic agenda. • Mutual & Federal is investing in better data management systems and claims handling arrangements to prepare for the downward pressure on rates. Nedcor has a clear five-point plan. At OMSA, our priority is attracting more customers by improving standards of investment and quality of products, as well as building our sales capability. increaseour profitability in the USA and ensure that the international diversity of theGroup continues to develop. Our ambitionremains to create value by becoming a worldclass international financial services company. • Producing high returns on equity, returns on assets and returns on embedded value, and growing the base from which these are derived, are key focuses for the future. 10 | Group Business Review Operating earnings, at just short of £1 billion, have increased by 47% in Sterling due to good progress from all businesses, none more so than Nedcor where recovery is making good progress Julian Roberts, Group Finance Director Group Finance Director’s Review GROUP RESULTS 2004 EPS up by 53% to 15.3p Strong delivery across all businesses contributed to an increase of 47% in adjusted operating profit before tax to £956 million. Adjusted operating profit after tax and minority interests increased by 54% from 2003 to £574 million in 2004, resulting in a 53% increase in adjusted operating earnings per share to 15.3p for 2004. The basic earnings per share is 14.1p (2003: 8.0p), representing a 76% increase. Operating profit on ordinary activities before tax increased to £908 million compared to a profit of £475 million in 2003. Funds under management and fund flows During 2004 funds under management increased by 12% from £125 billion to £140 billion. Our international diversity delivered strong net cash flows (increased from £1.8 billion in 2003 to £5.3 billion in 2004) as strong performances by our US and UK businesses more than offset weak flows in South Africa. Achieved profits The Group’s adjusted operating profit on an achieved profits basis of £1,111 million increased by 57% from £707 million in 2003. Adjusted operating profit for life assurance of £749 million was up by 25% from £600 million in 2003, driven by increased new business in the USA and improved experience variances in South Africa. Adjusted operating earnings per share on an achieved profits basis rose from 10.8p to 19.1p. Achieved profits equity shareholders’ funds (adjusted for own shares held in policyholders’ funds and to bring listed Group subsidiaries to market value) of £5,359 million at 31 December 2004 increased by 33% from £4,015 million at 31 December 2003. This benefited from an improvement in the Rand exchange rate, an increase in the share prices of Nedcor and Mutual & Federal and the impact of the Nedcor rights issue. Adjusted embedded value per share (before dividends) up by 37% Adjusted embedded value (EV) per share at 31 December 2004 was 139.1p after dividends (143.8p before dividends) representing a growth in EV per share before dividends of 37% over 2003. EV per share has benefited from the strong result for the year including the recovery at Nedcor, increased Group net cash flows, higher market levels and a stronger Rand offset by a weaker US Dollar. Capital The Group’s gearing level remains favourable, with senior debt gearing at 31 December 2004 of 11.0% (14.7% at 31 December 2003) and total gearing, including hybrid capital, of 16.5% (21.7% at 31 December 2003). Hybrid capital excludes hybrid debt from banking activities and includes the $750 million of Guaranteed Cumulative Perpetual Preferred Securities issued during 2003 that are reported as part of non-equity minority interests in the financial statements. Senior debt gearing is defined as senior debt over senior debt plus adjusted embedded value on an achieved profits basis. Senior debt excludes debt from banking activities and is net of cash and short term investments which are immediately available to repay debt. Total gearing is similarly based, but includes hybrid capital instruments within debt. Strong support from Old Mutual ensured that the Nedcor rights issue completed in May 2004 was a success, raising R5.2 billion. That issue, together with repatriation of surplus foreign capital and other management actions, strengthened Nedcor’s capital base resulting in a capital adequacy ratio at 31 December 2004 of 12.1% (10.1% at 31 December 2003). The Group’s shareholding in Mutual & Federal increased to 88% early in 2004 as a result of the offer to acquire the outstanding minority interests, which resulted in acceptances representing 37% of Mutual & Federal’s issued share capital. Following that transaction, Mutual & Federal paid a special dividend of R860 million, reducing its solvency margin, being the ratio of net assets to net premiums, to 53% at 31 December 2004 (61% at 31 December 2003). This remains comfortably above the minimum required to support current operations and to facilitate the future growth of the business. The solvency ratios of the Group’s major life businesses at 31 December 2004 remain well above the minimum statutory requirements, with South Africa’s excess assets (after regulatory asset limitations) equivalent to 2.6 times the statutory minimum, and the US business at 299% of the risk-based capital requirement. At 31 December 2004, the Group had in issue US$636 million 3.625% Convertible Bonds maturing on 2 May 2005, which are guaranteed by and convertible into ordinary shares in the Company at a conversion price of 190p per share and an exchange rate of one US Dollar to 69.52p Sterling. During 2004, Old Mutual plc entered into a new £1.1 billion five-year multi-currency Revolving Credit Facility, which matures during May 2009, and cancelled its existing £900 million, US$600 million and US$60 million Revolving Credit Facilities. The new facility was undrawn at 31 December 2004. Old Mutual is now twelve months into a Group-wide Economic Capital (EC) Programme. Once completed, this will significantly improve the Group’s ability to measure risk and business performance. It will also improve transparency and communication with regulators, ratings agencies and investors. Early results are highly encouraging, showing the Group’s available financial resources to be well above the EC required for our target rating. Since 1 January 2005 the Group has met the minimum capital resources requirement under the Financial Groups Directive which applies to UK-based financial conglomerates. Taxation The Group’s effective tax rate (based on the tax charge as a proportion of adjusted operating profit) of 25% decreased from 34% in 2003. This is primarily as a result of the much improved profitability at Nedcor. In 2003 the Group’s effective rate was higher due to Nedcor’s non-tax deductible expenses, which were relatively fixed amounts on a very low profit base. Group Business Review | 11 International Financial Reporting Standards (IFRS) Implementation of IFRS across the Group is currently nearing completion. We are planning to publish a restatement of our 2004 year-end income statement and balance sheet under IFRS in May 2005. The aspects of IFRS that will most impact the Group, in common with our peers, are those that deal with financial instruments and insurance and investment contracts. Currently there are a few remaining points of clarity regarding the final version of certain elements of IFRS and interpretation of a number of principles. We anticipate that these points will be resolved before publication of our 2004 numbers restated under IFRS in May. European Embedded Value (EEV) The Group has continued to publish supplementary information on an achieved profits basis for the 2004 financial year. We support the new EEV proposals that have been developed by the European CFO Forum with the purpose of increasing comparability and uniformity in EV reporting. We are currently assessing the impact of those new proposals and for the 2005 interim announcement we will discontinue publishing information on an achieved profits basis and commence reporting in line with EEV. We continue to be committed to monitoring our business on an EV basis as we see this as a key indicator of long-term value. Dividend The directors of Old Mutual plc are recommending a final dividend for the year ended 31 December 2004 of 3.5p per share (making a total of 5.25p for the year, an increase of 9.4% over 2003). The indicative Rand equivalent of this final dividend is 38.0c*** (making a total of 58.5c*** for the year, an increase of 4.5%). The record date for this dividend payment is the close of business on Friday, 22 April 2005 for all the Exchanges where the Company’s shares are listed. The last day to trade cum-dividend on the JSE Securities Exchange South Africa (JSE), the Namibian and the Malawi Exchanges will be Friday, 15 April 2005, on the Zimbabwe Stock Exchange, Thursday, 14 April 2005, and on the London Stock Exchange, Tuesday, 19 April 2005. The shares will trade ex-dividend from the opening of business on Monday, 18 April 2005 on the JSE, the Namibian and the Malawi Exchanges, from the opening of business on Friday, 15 April 2005 on the Zimbabwe Stock Exchange, and from the opening of business on Wednesday, 20 April 2005 on the London Stock Exchange. Shareholders on the South African, Zimbabwe and Malawi branch registers and the Namibian section of the principal register will be paid the local currency equivalent of the dividend under the dividend access trust arrangements established in each country. Local currency equivalents of the dividend will be determined by the Company using exchange rates prevailing at close of business on Thursday, 31 March 2005 (Wednesday, 30 March 2005 in the case of Zimbabwe) and will be announced by the Company on Friday, 1 April 2005. Share certificates may not be dematerialised or rematerialised on the South African branch register between Monday, 18 April and Friday, 22 April 2005, both dates inclusive, and transfers between the registers may not take place during that period. The final dividend is subject to approval at the Annual General Meeting of Old Mutual plc, which is to be held in London on Wednesday, 11 May 2005. Subject to being so approved, the final dividend will be paid on Tuesday, 31 May 2005. Business Review: South Africa LIFE ASSURANCE & ASSET MANAGEMENT – OLD MUTUAL SOUTH AFRICA (OMSA) Strong returns continue Highlights (Rm) Life assurance technical result LTIR Asset management Adjusted operating profit ROC (Life business) Client funds (Rbn) 2004 3,697 1,974 544 6,215 26% 312 2003 3,210 2,198 554 5,962 23% 270 Adjusted operating profit comprises the life assurance technical result, the Long Term Investment Return (LTIR) of the shareholders’ funds and the adjusted operating profit of the asset management businesses. The life assurance technical result increased by 15% to R3,697 million reflecting the positive impact of the strong South African equity market, favourable experience variances and the positive effect of assumption changes predominantly relating to mortality. The LTIR of R1,974 million declined by 10% from R2,198 million in 2003. This reduction reflects our participation (R2.6 billion) in the Nedcor rights issue and the net impact (R0.6 billion) of our additional stake in Mutual & Federal, both of which were funded from OMSA’s existing financial resources, thus negatively impacting the average shareholder assets used in the calculation. In addition, an increase in the cash component of the portfolio, coupled with the lower rates on cash, contributed towards the reduction of the LTIR. Group Business Review | 13 Adjusted operating profit for the asset management businesses, excluding Nedcor, decreased to R544 million in 2004 from R554 million in 2003. Higher asset levels driven largely by the better performing South African equity market contributed positively. This has been offset by lower trading profit in the unit trust company resulting from changes in industry guidelines regarding trading in units, charges relating to the accounting treatment of share incentive arrangements, the cost of the acquisition of Quaystone mandates and the development of administration infrastructure. Adjusted operating profit for OMSA increased by 4% to R6,215 million in 2004. The efficient use of capital and performance improvement of the life business resulted in the return on life allocated capital increasing to 26%. Funds under management continue to grow Client funds under management for the business increased by 15% from R270 billion to R312 billion. Within this, life assets were 9% higher, reflecting the equity market uplift partly offset by negative cash flows, whilst asset management assets were 31% higher, driven by strong market returns and positive client cash flow. Total net client cash flow was a negative R4 billion, primarily due to net negative flows of R10 billion in Group Life business. This was offset by positive net cash flows of R6 billion in asset management, with Individual Life Business flows being broadly neutral. Old Mutual Asset Managers (South Africa) (OMAM) delivered strong investment performance, being ranked first out of the eleven institutional asset managers in the Alexander Forbes Global Manager Watch (Large) Survey over the year ended December 2004. This represents an improvement from third position in the 2003 survey. Over three years OMAM was ranked third. Rapid growth in unit trust sales Unit trust sales increased by 52% from R3.3 billion in 2003, to R5.0 billion in 2004, reflecting more positive consumer sentiment towards unit trusts as investment vehicles. Unit trust investment performance was good, with eleven funds positioned in the top quartile of their respective peer groups and seven of these funds being top in their respective categories. Total life sales impacted by weak Group Business Total life sales, including Old Mutual International (OMI), on an APE basis for the period were R3,084 million, 10% lower than the comparative period in 2003, as Group Business sales continued to disappoint throughout the year. Individual Life Business sales were at similar levels to 2003 and Group Business significantly lower. Individual Business and Group Business contributed R2,662 million (2003: R2,632 million) and R422 million (2003: R809 million) respectively to this result. 14 | Group Business Review Individual Life Business sales mixed Individual APE (Rm) Savings Protection Immediate annuity Group Schemes Total excl. OMI OMI Total incl. OMI – Single – Recurring 2004 1,075 651 164 612 2,502 160 2,662 792 1,870 2003 1,138 701 125 556 2,520 112 2,632 686 1,946 Var % (6%) (7%) 31% 10% (1%) 43% 1% 16% (4%) Whilst Individual Life Business sales were at similar levels overall to 2003, the mix was different. Single premium sales were R792 million, 16% ahead of prior year, driven by strong sales growth in savings and annuity products. OMI’s new international product range also led to significant growth in its single premium sales. Single premium sales growth was similar in both the agency and broker channels. Recurring premium sales were R1,870 million, 4% below 2003, with sales through brokers, particularly of savings products, being markedly lower than in 2003. Reasons for the reduction in broker channel recurring premiums included the impact of regulatory changes, the establishment of broker networks, as well as media perceptions regarding the value provided by recurring premium investment products. In the case of recurring premium sales the performance in the agency channel was much stronger in the second half of the year, reflecting growth in agent manpower. Group Schemes sales were 10% higher overall than the prior year, although the second half sales were adversely affected by attrition in the sales force headcount, which finished the year some 12% lower than in June 2004. Group Business sales disappoint Group APE (Rm) Savings Protection Annuity Total – Single – Recurring 2004 260 120 42 422 240 182 2003 495 86 228 809 582 227 Var % (47%) 41% (82%) (48%) (59%) (20%) A low level of Group Business sales continued throughout 2004 with no material single premium flows, the exception being the protection business which increased by 41% to R120 million. Group Business single premiums fell 59% to R240 million; recurring premiums also decreased by 20% to R182 million. Group Business single premium sales arise principally from restructuring of benefit plans or the movement of existing assets between different providers. The time-consuming nature of pension fund surplus apportionments (a legislative requirement) and a slow response by companies to provide for post-retirement medical aid liabilities meant that few opportunities crystallised in 2004 for Group Business single premium sales. Lower value of new business, but steady margins The after-tax value of new business excluding OMI, was 13% down on 2003 to R719 million. Growth of 18% in the value of Individual Life Business, reflecting the positive impact of economic and assumption changes, was offset by a 65% reduction in the value of Group Business. The overall new business margin remained stable at 25%. Higher margins were recorded on Individual Life Business following assumption changes and offset the shortfall in Employee Benefits margins. The value of in-force business (VIF) of R10,903 million at 31 December 2004 increased from R9,832 million at 31 December 2003. Within this total, the VIF for Individual Life Business increased by 25% due largely to the positive effect of economic and operating assumption changes, primarily reflecting positive mortality experience and the valuation of some sources of profit that were not previously valued. The Group Business VIF declined by 12% on account of the relatively low new business value added, the negative impact of operating assumption changes and the increase in the cost of solvency capital. Management actions showing returns OMSA has increased its Personal Financial Advisors (PFA) sales force from 2,314 at 31 December 2003 to 2,643 at 31 December 2004. More than 50% of the Advisor sales force is now on a new remuneration model and benefits are starting to be seen in increasing sales arising from this channel. Our new investment product Max Investments was successfully launched in November. This product uses both life and non-life investment structures to offer investors a cost- and tax-efficient wrapper in one investment and aims to address the need for lower client charges in a low inflation environment. Encouraging sales were achieved in the last two months of 2004 and these have continued into 2005. This has been one of the fastest new product take-ups ever in the PFA distribution channel, confirming the positive market response. A year of solid progress by responding to change 16 | Group Business Review The Masthead independent broker network has helped to protect the independent broker market, with over 2,200 brokers signed up in 2004. Addressing the sales performance of our Group Business, we continue to work towards the delivery of an integrated distribution approach. Furthermore, the implementation of the Compass administration platform will provide increased efficiency and service benefits for administration clients. Solid capital position The capital strength of the life company has been demonstrated through Statutory Capital Adequacy Requirement (SCAR) coverage of 2.6 times, after allowing for statutory limitations on the value of certain assets. In addition, the proportion of cash in shareholders’ funds backing statutory capital requirements increased from 20% in 2003 to 43% in 2004. During 2004 R2.6 billion was invested in Nedcor to support its recapitalisation and a net R0.6 billion was invested to acquire our increased shareholding in Mutual & Federal. BANKING – NEDCOR Nedcor has been stabilised Nedcor has been stabilised and the balance sheet significantly de-risked. The Nedcor rights issue completed in May 2004 was a success, raising R5.2 billion of additional ordinary capital. The capital injection, together with the active management of assets, including the disposal of non-core assets, the repatriation of R5.1 billion of foreign capital and the improving attributable profits by Nedcor, have all strengthened capital. This improved the mix between the bank’s tier 1 and tier 2 capital. Nedcor’s capital adequacy (which is defined as regulatory capital as a percentage of risk-weighted assets) was 12.1% at 31 December 2004 (2003: 10.1%), with tier 1 capital at 8.1% (2003: 5.0%). A formal relationship agreement has been put in place. We have finalised the appointment of the executive team and we have introduced the Old Mutual Group Enterprise Risk Management framework. Foreign exchange translation risk has been substantially reduced by the repatriation and hedging of part of the foreign capital, which has been reduced to R4.5 billion at 31 December 2004 from R9.3 billion at 31 December 2003. Nedcor continues to be exposed to foreign exchange rate movements on the remaining capital held offshore to support foreign operations. During 2004 the translation losses on the remaining foreign capital amounted to R372 million, substantially lower than in 2003 (R1,356 million). Recovery is on track Nedcor’s adjusted operating profit, including asset management operations, of R2,423 million was a substantial increase on the disappointing year in 2003 (R67 million). This reflects moderate revenue growth in both net interest income (NII) and non-interest revenue (NIR). Revenue was enhanced through margin improvement and controlled asset growth at the expense in some areas of market share. Nedcor’s NII, on a UK GAAP basis, increased by 11% to R7,529 million over 2003, driven by improved margins. This margin increase resulted from improved funding and hedging strategies, offshore capital being repatriated and the positive endowment effects of the rights issue. NIR at R7,580 million reflected an upturn in the second half of the year due to improved deal flow in investment banking, increasing 10% over the comparative period in 2003. NIR throughout the year was adversely affected by strategic disposals, and exchange and securities dealing revenue remaining muted. The cost to income ratio at 74.5% (2003: 72.5%) was adversely affected by the merger and recovery programme costs, while not yet fully recognising the benefits of these programmes realised towards the latter part of 2004. During 2004, management actively reduced headcount by 13% from 24,205 to 21,103. The full effect of headcount reductions will be reflected in 2005. Nedcor continues to focus on improving its cost to income ratio and is on track to achieve its goal of 20% return on equity in 2007. GENERAL INSURANCE – MUTUAL & FEDERAL Mutual & Federal achieved exceptional results Mutual & Federal had an exceptional year with an adjusted operating profit (on a UK GAAP basis) of R1,057 million, an increase of 16% from R909 million in 2003. This excellent performance was largely attributable to the continued favourable underwriting cycle, which is reflected in the increase in the underwriting surplus of R527 million in 2004, up 60% from R329 million in 2003. The Group now owns 87% of Mutual & Federal following the acquisition of the 37% previously owned by Royal & Sun Alliance. Strong premium growth – up 13% Gross premiums (on a UK GAAP basis) increased to R7,360 million in 2004, an increase of 13%, reflecting new business acquired plus corrective action and rating adjustments in less profitable segments of the business. An overall reduction in claims frequency and severity resulted in one of the strongest cycles the general insurance industry has experienced. Underwriting ratio climbs to 9.8% (SA GAAP) The underwriting surplus of R527 million compared to 2003 (R329 million) reflects the exceptional insurance cycle, improved claims management and close control of management expenses. The strong underwriting ratio (the ratio of the underwriting surplus to net earned premiums) was accordingly 7.8%, up from 5.8% in 2003. The corresponding SA GAAP ratio was 9.8% for 2004, up from 6.9% in 2003. Insurance cycle softening Although conditions remain conducive to underwriting profitability, the softer cycle and pressure on rates indicate more normal trading conditions are likely to prevail in 2005. Business Review: United States US ASSET MANAGEMENT Group Business Review | 17 US LIFE Growth in assets delivers improved profits – up 25% Our US life business’s adjusted operating profit of $174 million was 25% up on the $139 million achieved in 2003 as our strategy to manage growth in profitable product areas and to drive towards capital self-sufficiency in 2007 made good progress. The impact of the continued growth in scale of the business is shown by funds under management increasing by 30% to $17 billion during 2004. Strong APE growth continues – up 29% Total APE for 2004 was $501 million, an increase of 29% from $389 million in 2003, with the business reaping the benefits of successfully diversifying from fixed to equity-linked products during 2004, coupled with the maturing of the offshore and corporate channels. Total premiums exceeded $4 billion. OMNIA and Corporate channels continued to mature, with 44% growth of APE over 2003 ($41 million to $59 million). Life assurance sales grew by 25% from $85 million in 2003 to $106 million in 2004. Managing product mix enhances margin to 23% Over the past year the business has demonstrated its flexibility to seize new opportunities in changing market conditions by rapid product development. We succeeded in producing profitable equity index annuity and term life products, both of which achieved second place market share nationally for the period for our Managing General Agents channel. The average margin on new business after tax increased from 15% to 23% of APE and the value of new business after tax at $113 million increased by 92% on 2003, reflecting the positive movements in interest rates and changes in product mix. Capital position strengthened We continued to manage the capital position of our US life business carefully. In order to support our ratings, we decided to increase the target risk-based capital (RBC) ratio to 300%. Consequently, the capital base was strengthened by a one-off injection of $200 million (making a total of $300 million for the year). At the same time we repatriated to the USA a significant block of annuity business from Old Mutual Re (Ireland). This repatriation improved our Group solvency position, but had one-off negative impacts of $39 million on our consolidated embedded value and $43 million on the statutory profit before tax of Fidelity & Guaranty Life Insurance Company. The US life business continues to mature and is expected to begin releasing capital from 2007. Adjusted operating profit up 22% The Group’s US asset management business delivered adjusted operating profit of $163 million, an increase of 22% on 2003. The combination of increased client inflows and strong equity markets in the latter half of 2004 led to a 21% improvement in average asset levels to $165 billion for 2004. Management fees increased from $497 million in 2003 to $570 million in 2004, significantly improving adjusted operating profit. Strong performance fees, transaction fees and improved revenues from securities lending also contributed to the overall growth in revenue. Offsetting this improvement, expenses increased by 17%, as a result of costs associated with our retail initiative ($6 million) and increased variable compensation costs together with one-off expenses, including the cost of restructuring the Dwight Stable Value Fund ($7 million). Funds under management up 20% Funds under management increased 20% overall during 2004, from $154 billion at 31 December 2003 to $185 billion at 31 December 2004. Investment returns in the funds under management accounted for 12% of the increase, while net inflows of client assets, including $3.2 billion in cash collateral assets, contributed a total of $12.3 billion, or 8% of the increase for the year. 2004 marks the fourth consecutive year of net inflows of client assets to our member firms. Strong fund performance The inflows reflect the continuing strong investment performance achieved by our member firms. At 31 December 2004, 72% and 95% of assets were outperforming their benchmarks over three and five years respectively. Over the same periods, 61% and 73% of assets ranked in the first quartile of their peer group. Retail initiative launched In October, Old Mutual Capital launched the Old Mutual Advisor Funds, establishing the foundation for a full-scale retail distribution initiative. These funds utilise the diverse asset management capabilities of our affiliates to construct asset allocation mutual fund products tailored to different investor risk profiles. This initiative is targeted to increase our presence in the mutual fund market and is designed to give our affiliates access to a higher margin market, further diversifying revenue-generating sources for the Group. Group Business Review | 19 Business Review: UK&Rest of World Adjusted operating profit from the Group’s UK and Rest of World asset management and life assurance businesses, excluding Nedcor, was £22 million in 2004, higher than the £12 million earned in the equivalent period in 2003. This result includes the adjusted operating profit from the UK, African countries other than South Africa, OMI and the Far East. Total funds under management in the UK grew by 9% to £4.3 billion. Strong net cash inflows into our hedge fund products continued, offset by funds withdrawn by Gerrard clients. During the year, the operations of Bright Capital were merged into OMAM (UK). Selestia continued to grow, with funds under management increasing from £289 million to £730 million, predominantly through new business sales of £423 million (2003: £218 million). Selestia reduced its adjusted operating loss to £5 million from £9 million in 2003. Julian V F Roberts Group Finance Director 28 February 2005 Managing the portfolio The US asset management group continually assesses its business position and ability to maintain product leadership. In line with this strategy, several adjustments were made to the manager group in 2004. We reached agreement with the principals of one of our remaining revenue-sharing firms, First Pacific Advisors, under which they have an option to acquire certain of the firm’s assets and liabilities with effect from October 2006. Its assets under management at 31 December 2004 were $8.4 billion (31 December 2003: $5.5 billion). At the end of 2004 we discontinued the operations of another member firm, Sirach Capital Management. The firm, predominantly a growth equity manager, had suffered steep asset declines since 2000. Funds under management at the beginning of 2004 were $1.6 billion, and management has taken the decision to return the remaining funds to clients. The resultant non-operating loss to the Group was $14 million, principally the write-off of goodwill. In June 2004, Liberty Ridge Capital (LRC) (formerly Pilgrim Baxter & Associates) reached agreement with the Securities and Exchange Commission and the Office of the New York Attorney General to settle regulatory action against the firm. Total fines and penalties agreed were $90 million and have been disclosed as a non-operating loss. LRC has also committed to future fee reductions of $10 million. During 2004, all outstanding class action lawsuits filed against Old Mutual in relation to these activities were consolidated into a single lawsuit, along with all other cases against US parties alleging market timing and late trading violations. Proceedings in this case are at the preliminary stage. Following the resolution of regulatory matters and reflecting new company management, LRC underwent a firm-wide revitalisation, revising its product strategy, enhancing its investment processes and rebranding under its new name. Despite net outflows of $2.4 billion in 2004, funds under management remain robust, and management continues to focus on rebuilding the franchise. Early in 2005, we created a strategic alliance with Copper Rock Capital Partners. This is a small cap growth firm, and the alliance is designed to supplement our capability in this product area. Clients benefit from diversity and focus Looking ahead, we are committed to derive business growth organically, leveraging off the diversity and styles of the individual firms. We are currently in negotiations to add a hedge fund capability and will continue to seek targeted investment opportunities in other areas to strengthen and broaden product capability. Corporate Citizenship | 21 REDI REDI had a very active year in 2004, the highlight being a celebratory event in Johannesburg attended by a variety of representatives of Government and the business sector at which the REDI champions mounted a display of their regional products. This event and the annual conference held before it were the first time all the REDI champions had gathered together. REDI continues to make a profound impact on the communities within its network and in 2004 it supported 58 different projects with total funding of R4.1 million. The community development component of REDI funding was allocated primarily to AIDS and food security projects. A total of 50 individual projects received funding this year. In total some 140 food security and AIDS projects have been established over the past four years. There was a significant shift in focus in Local Economic Development activities, with funding being allocated during 2004 to fewer, but larger, initiatives with the potential to impact on a greater number of people, such as the establishment of a soya processing plant. In total 18 new businesses were established under this aspect of the REDI programme during 2004. This brings the total over the four years to 211, 123 of which are owned or managed by women, with the creation of 2,000 jobs. In the area of educational projects REDI supported the “Out of the Box” Environmental Education Programme. A total of R500,000 was provided in the first half of the year towards the development of materials and teacher workshops for this programme, which aims, among other things, to encourage environmental awareness among teachers and pupils. AIDS Orphans Programme Old Mutual has adopted a four-pronged strategy to address the socially and economically crippling challenges caused by the HIV/AIDS epidemic in South Africa. This covers the workplace (employees), the broader community, financial services and advice (customers), and business impacts. In 2004 OMSA’s AIDS Orphans Programme provided R1.8 million to support around 2,000 orphans and vulnerable children via Heartbeat, Noah, Living Hope Hospice and SOS Children’s Village. It is clear from feedback received that this programme has had a positive impact on the children of orphan-headed households during the three years it has been in operation. Staff Volunteer Programme The Staff Volunteer Programme consists of the Staff Community Builder Programme, “Adopt an Orphan” and the Staff Charity Fund. In its tenth year the Staff Community Builder Programme supported 101 projects in seven provinces, giving a total of R2 million. Corporate Citizenship: During 2004 we continued our social investment programme by supporting selected charities and carrying outother significant community activities in countries where our businesses operate The Group’s social investment programmes continued to concentrate on education, health and welfare, local economic development, the environment and the arts during 2004. In South Africa particular attention was given to Black Economic Empowerment and HIV/AIDS. SOUTH AFRICA OLD MUTUAL SOUTH AFRICA (OMSA) OMSA is committed to growing and investing in socially responsible business activities, employment equity and diversity, skills development and affirmative procurement, as well as sustainable social investment projects and the active involvement of employees in social and community affairs. Its Corporate Citizenship programme recognises the value of non-financial performance and social accountability. The Old Mutual (South Africa) Foundation (the OMSA Foundation) is the primary source of funds for OMSA’s social investment programme. At the year end, the assets of the OMSA Foundation comprised 14.4 million shares in Old Mutual plc. The Group has also committed as part of the arrangements for the extension, in modified form, of its unclaimed shares trusts, to make a donation of the net amount released on expiry of the original unclaimed shares trusts to its Foundations (or another public benefit or similar organisation) in the five territories where these operate. For South Africa, this will result in OMSA committing an additional R190 million of endowment to the OMSA Foundation or other public benefit causes. In 2004 some R15.5 million was expended by the OMSA Foundation, of which R8.7 million was devoted to its flagship projects, namely the Rural Economic Development Initiative (REDI), the AIDS Orphans Programme, which has entered its third year and supports the children of orphan-headed households, and the Staff Community Volunteer Programme. This last programme comprises both the Community Builder Programme, through which staff volunteers support a range of community-based projects, and initiatives to encourage and support staff involvement in charities through payroll giving. OMSA also has a general donations programme. During the year R4.2 million was distributed by way of general donations among 31 education programmes, 42 community development projects and 12 ad hoc projects. 22 | Corporate Citizenship During 2004, 543 staff members committed funds on a regular basis through the Staff Charity Fund. On average R100,000 was paid to various charities and “adopted” orphans on a monthly basis from this fund. Donations were also made to animal welfare, the elderly, abused women and children and HIV/AIDS prevention and treatment. A total of 375 members of staff have “adopted” 650 orphans to date. Of these, 156 receive additional tertiary educational support. Black Economic Empowerment (BEE) The Old Mutual Group remains committed to achieving the targets to ensure it is considered an ‘A’ performer for the purposes of the Financial Sector Charter Scorecard. To this end, initiatives continue to be implemented to develop black management, make sound infrastructural investments, facilitate the entry of black entrepreneurs into corporate South Africa through structuring and investing in BEE deals, and make direct investments into communities and society at large. OMSA is well on track to achieve its BEE objectives. The company is already a leader in empowerment financing through various structured financing transactions and partnerships with Wiphold, J & J, Aka Capital and Amabubesi. OMSA plays a leading role in social investing and infrastructural investment and asset management, and the company’s robust employment equity programme positions it well to exceed the Charter targets. In addition, the Group is committed to completing the empowerment ownership transaction required under the Financial Sector Charter. OMSA will be publishing a more detailed report on its corporate citizenship activities in April 2005, which will be available on the Company’s website www.oldmutual.com from April 2005. It will also be obtainable upon request from the Public Affairs Manager, Old Mutual (South Africa), PO Box 66, Cape Town 8000 and from the Director of Corporate Affairs, Old Mutual plc, 5th Floor, Old Mutual Place, 2 Lambeth Hill, London EC4V 4GG. NEDCOR The Nedcor group focused its corporate social investment (CSI) work in 2004 mainly through the Nedbank Foundation, which funded over 450 projects (an increase of almost 100 on the previous year) in the fields of welfare, community development and sustainable development. Projects were supported throughout South Africa and were grouped through a programmatic approach to ensure higher impact for beneficiaries and optimal use of resources. The Community Support Programme was launched in 2004 to broaden staff involvement in Nedbank’s CSI work. The programme encourages staff members around the country to act as the Foundation’s eyes and ears, so as to align CSI activities more closely to the business of the bank and identify worthy and relevant projects needing its support, and increase cooperation between Nedbank’s staff, clients and the broader community. The largest Foundation Programme is the Corporate Collaborative Programme. This involves the raising of capital for larger projects by engaging Nedbank’s corporate and other business clients. The Foundation partners these clients in support of projects that involve relief aid on a larger scale, the building of schools, roll-out of IT infrastructure in disadvantaged areas, and similar ventures. An example is the funding of the Western Cape Red Cross Children’s Hospital. The Nedbank Heritage Programme supports projects that leave a legacy footprint. These include funding the regeneration of Clarkebury Educational Institute in the rural Eastern Cape. While the Foundation is primarily responsible for the Nedcor group’s external CSI, its Roots Programme involves Foundation support for employees or the families of employees with relevant, unusual and urgent needs for relief aid, as well as for helping to support objectives under the Financial Sector Charter and the bank’s HIV/AIDS programmes. The National Economic Development Incubator Programme provides infrastructure for small business development and partners with skills development centres to increase their reach among the poorest communities. Focus is placed on developing artisan, building, mechanical, catering, garment industry-related and agricultural and related skills. It also facilitates relevant community-wide development that assists general upliftment. In addition to continuing collaborations between the Foundation and the public sector, in 2004 it enjoyed the involvement of prominent politicians at a variety of functions. President Thabo Mbeki presented the first Nedbank Digital Hope IT training container to the community of Makopane. This was a corporate collaborative project involving Hewlett Packard and Nedbank, among others. Labour Minister Membathisi Mdladlana and Deputy Correctional Services Minister Cheryl Gillwald opened the Qalabotjha Multi-Purpose Community Centre at Villiers and Education Minister Naledi Pandor launched the national Readathon campaign in Cape Town and the National Business Initiative Adult Learners Week Campaign at Nedbank. A national tour by Josh Groban was the latest in a series of collaborative partnership efforts undertaken by the Foundation and Tiger Brands to support the Unite Against Hunger campaign. Beneficiary organisations of this campaign include the O R Tambo Foundation, Heartbeat and African Children’s Feeding Scheme. The Foundation, in conjunction with the O R Tambo Foundation, has undertaken the feeding of approximately 10,000 destitute elderly people on the East Rand for the past nine years. Beneficiaries receive bulk packs of food, designed to last three months at a time. The success of the Josh Groban tour enabled the Foundation to increase the reach and impact of this feeding scheme substantially. As a result, trucks carrying food aid to the destitute on the East Rand, in parts of greater Soweto and in Sharpeville were despatched, with almost 24,000 disadvantaged families being fed. Non-profit organisations (NPOs) comprise the core of the Foundation’s client base. NPOs rated Nedbank in 2004 as third-highest placed among 70 companies in the category “Good Corporate Grantmaker”, third among 48 companies as “Most Widely Recognised Corporate Grantmakers”, and as having the third biggest CSI budget out of 39 identified companies. In 2004 Nedbank sponsored the South African Paralympic team, which won 35 medals in total, 15 of them gold, at the Athens Paralympic Games. A Nedbank employee, who was a member of the Paralympic swimming team, won four medals. The Nedbank Green, Sport and Arts Affinities continued to grow during 2004. Together these have donated over R83 million to environmental, sports and art projects since they began. In 2004 the Green Trust supported a variety of projects including tree planting, food gardens and species-based projects. More than 30 projects were supported and almost R4 million was given through this trust. Nedbank again supported the Nedbank Golf Challenge and the day after this prestigious event the Sports Trust held its annual golf challenge, which raised over R1 million for a variety of projects to support golf at a grass roots level. Donations from Nedbank’s Arts affinity bank accounts grew by 27% in 2004, which increased the amount available for use by the Arts and Culture Trust. R1.2 million was split between nine disciplines and 30 projects. An open-air music and arts and crafts festival received funding, as well as the Jazzart Dance Theatre and the Zanendaba Storytellers. During 2004, Nedcor revised its environmental policy as part of its commitment to environmental responsibility, also evidenced by involvement with its conservation partner WWF-SA, and its membership of the United National Environment Programme Finance Initiative. Nedcor is publishing a Sustainability Report in April 2005, which will be available on its website www.nedcor.co.za. It will also be obtainable upon request from the Senior Manager, Corporate Governance and Sustainability, Nedcor Limited, PO Box 1144, Sandton 2196. MUTUAL & FEDERAL Mutual & Federal supports community-based projects that contribute towards the creation of a stable and prosperous society. Funding is directed to projects that are non-profit making in nature. Support is generally given to the same projects each year to establish long-standing relationships. In 2004, R1.6 million of investment was directed to 25 organisations in five areas: education, health and welfare, road traffic safety, crime prevention and conservation/environment. Road traffic safety and crime prevention have a direct relevance to Mutual & Federal’s business, as high accident rates and car hijacking translate into higher insurance costs. Mutual & Federal also supports national initiatives aimed at improving road safety, including the Drive Alive Trust, which promotes safe and responsible driving. Its safety campaigns are particularly visible during the holiday seasons and have resulted in the steady reduction of road accidents and fatality rates. Six educational projects received funding in 2004, including Thusenang Training and Development, a community project which supports illiterate and unemployed rural women. The project supplies basic courses such as knitting, needlework, embroidery, cooking and nutrition. It also offers advanced courses in business skills, life guidance and AIDS guidance and supplements these courses with job creation projects including bakeries, vegetable gardens and sewing groups. The National Institute for Crime Prevention and the Reintegration of Offenders (Nicro) was one of the crime prevention projects that received support. Nicro offers help to young offenders and communities to rise above the effects of crime. Its Diversion Programme diverts youth in conflict with the law from the criminal justice system by providing courses on drug abuse prevention, anger management, parenting skills and life skills. REST OF AFRICA The Old Mutual (Namibia) Foundation strives to develop and maintain an effective social empowerment programme, which will have a beneficial impact on health and welfare and education and community development in Namibia. Its approach to social investment is to support activities that are linked to its national agenda and in communities that are close to its business operations. In 2004 significant donations were made by the Namibia Foundation to national AIDS programmes, Rehoboth Primary and Secondary Schools and the Onamulele Primary School. The Mathematics Teachers’ Support System project, which is aimed at improving examination results in mathematics, was successfully launched in partnership with Nedbank Namibia’s Social Investment Fund. Corporate Citizenship | 23 The Namibia Foundation also supported four other major school education projects, the Cancer Association and the Genadegawe feeding scheme during 2004. Old Mutual Namibia’s staff participated actively in various community initiatives, including the Mariental “Day of the Homeless”, clean-up operations in Opuwo and Rundu Town Councils, the Erongo House of Safety for orphans in Swakopmund, the Cancer Association, Childline Namibia, and SOS Children Villages’ Christmas Card initiative. At the end of the year, the Namibia Foundation had assets of N$6.2 million, comprising 300,000 shares in Old Mutual plc and cash and other assets of N$2 million. In addition to these, the Namibia Foundation has received a donation of N$4,354,235 from the Namibian Unclaimed Shares Trust under the proposals approved by the Group’s shareholders in May 2004 relating to the extension of the arrangements for claiming entitlements under the original demutualisation of the Group. Old Mutual Zimbabwe has a structured social responsibility programme, which is actively involved in the sponsorship of sport, education and health projects. Old Mutual continued to sponsor the Zimbabwe cricket team in 2004, covering home and away test matches, one-day internationals and overseas tours. The Group continues to believe it is important to support the development of cricket in Zimbabwe. In 2004 Old Mutual Zimbabwe pledged to support the Jairos Jiri Association, which cares for disabled and blind children from pre-school through to secondary education. Jairos Jiri is an indigenous association established over 50 years ago and now has centres in every major urban area in Zimbabwe. As part of its support, Old Mutual has adopted pre-school centres for the blind and disabled in Harare. Old Mutual Zimbabwe continued to run the Mathematics Olympiad in conjunction with the University of Zimbabwe. This programme is designed to promote mathematics at high school level and to identify outstanding mathematical talent. In 2004 Old Mutual sponsored two students to the Pan-African Mathematics Olympiad, one of whom won a bronze medal. At the end of the year, the Zimbabwe Foundation had assets of Z$67,521,018,956, comprising 2,680,000 shares in Old Mutual plc and cash and other assets of Z$531,018. In addition to these, the Zimbabwe Foundation has received a donation of Z$91,452,000 from the Zimbabwe Unclaimed Shares Trust under the proposals approved by the Group’s shareholders in May 2004 relating to the extension of the arrangements for claiming entitlements under the original demutualisation of the Group. Old Mutual Malawi supported a number of projects in the areas of health and education during 2004, giving a total of MK1.3 million. Sponsorship was offered to medical students through a prize for the top medical student of each class, with financial prizes being awarded to five of them. In 2004 Old Mutual Malawi registered as a member of the Coalition against AIDS. Donations were also given in support of the Red Cross for its work on HIV/AIDS, the Kamuzu College of Nursing and the Kachere Rehabilitation Centre. At the end of the year, the Malawi Foundation had assets of MK38,523,976, comprising 190,000 shares in Old Mutual plc and cash and other assets of MK2,423,976. In addition to these, the Malawi Foundation has received a donation of MK13,913,369 from the Malawi Unclaimed Shares Trust under the proposals approved by the Group’s shareholders in May 2004 relating to the extension of the arrangements for claiming entitlements under the original demutualisation of the Group. 24 | Corporate Citizenship USA Old Mutual Asset Management (OMAM)’s Charitable Foundation supports local communities in need around its Boston headquarters and wherever OMAM has a presence through member firms. The OMAM Foundation continued to focus its efforts during 2004 on making meaningful contributions to its partner organisations in four target areas: community, healthcare, homelessness and emergency/crisis intervention. In 2004, it made 19 direct gifts totalling $278,000, including $25,000 in staff matching. Grants were made to national organisations such as The Rose Fund, Boys and Girls Club of America and Health Care for All, as well as local organisations including Pine Street Inn, Home for Little Wanderers and Rosie’s Place. OMAM’s member firms also made a wide range of charitable gifts. Support was provided to healthcare organisations, such as American Cancer Society, St. Jude’s Children’s Hospital, and the Heart Association; cultural organisations, including schools, museums and libraries; and community causes, including The Family Place, Bottom Line and the Bethesda Project. In addition to making monetary grants through its Foundation, OMAM seeks to promote employee involvement by encouraging employees to take advantage of paid volunteer days, sponsoring company-wide charitable events and matching personal charitable gifts from Foundation assets. In 2004, more than 65% of OMAM’s employees volunteered in five or more service projects or events. In June, employees joined the JP Morgan Corporate Challenge to benefit the Bay State Games, which provide Olympic-style athletic competitions and developmental programmes for Massachusetts amateur athletes of all ages and abilities. In October, OMAM served another year as a Neighbourhood Sponsor for City Year’s Serve-a-Thon event, at which a team of OMAM employees, family members and friends banded together and worked to restore a local Boston community. Additionally, throughout the calendar year, OMAM employees lent their support to Daffodil Day, benefiting the American Cancer Society, Lee Denim Day benefiting the Susan G. Komen Foundation, and the Winter Clothing Drive benefiting the Salvation Army. Old Mutual US Life (OMUSL) focused its support in 2004 on the community, arts and education. Employee gifts to charitable organisations were matched by OMUSL through its matching programme on a dollar-for-dollar basis up to an annual limit of $1,000. During 2004 the projects supported in this way included several cancer foundations, the Baltimore School for the Arts, the Baltimore Shakespeare Festival and several universities. OMUSL also continued to support employee involvement in charitable organisations such as the Baltimore Child Abuse Centre and Rebuilding Baltimore Together, a community project that repairs and rehabilitates the homes of low-income, elderly or disabled homeowners in Baltimore, where OMUSL’s headquarters are based. Other organisations supported by OMUSL during 2004 were the Living Classrooms Foundation, an organisation focused on teaching academic and social skills by using community work sites and other real-world environments, and the Salem Children’s Trust, a school with both residential and non-residential programmes that help facilitate a successful transition to public schools and society for emotionally disturbed and abused children. UK The UK/SA schools twinning project, a partnership between Old Mutual plc and the British Council involving six schools from the London Borough of Southwark and six schools in the Cape Town area, began in earnest in 2004. Most of the schools made reciprocal visits during the year and a number of new curricular activities have been developed as a result. Highlights of the first year included the writing of plays, participation in a video-conference link to mark South Africa Freedom Day on 16 June 2004 and a series of special Drum Café workshops in all the schools to celebrate the tenth anniversary of democratic government in South Africa. The relationships within the twinned schools have been extended, at the instigation of the head teachers, to include all the pupils – far beyond the individual classes and teachers originally allocated to the project, clear evidence of the enthusiasm with which the partnerships have been embraced. Additional funding has also been provided to assist the schools with the development of the programme in 2005. Old Mutual staff from all its London-based businesses were invited to volunteer as stewards for the Drum Café workshops. A formal volunteering programme centred on numeracy partnering, using a Maths games kit developed by the Group in Cape Town, is now being developed for 2005 and beyond. Staff are allowed two hours a month to spend in the schools if they wish to participate. Additional Maths kits have also been provided to the participating Cape Town schools. To mark the celebrations in the UK of the tenth anniversary of South African democracy, Old Mutual sponsored the 2004 City of London Festival South Africa series, supporting a number of South African musicians and artists in activities in the UK. The highlight of the festival was a concert in St Paul’s Cathedral where Lady Blacksmith Mambazo performed in front of a full house. A programme of team-building activities was developed for the Company’s UK staff around the festival including arts workshops, Drum Cafés, access to the concerts and other volunteering activities. The Company was delighted to receive a grant of £35,000 from Arts in Business in support of this programme. This funding also helped the Company to run the Drum Café activities in the London schools involved in the twinning project described above. Old Mutual has been nominated for an award for its programme of external and internal events associated with the Festival activities. The Company operates a staff matching scheme, which supports Old Mutual employees in their own activities to raise money for a wide range of charities. In 2004, these included The Tusk Trust, the Race for Life, a 5km walk which was supported by a group of women from head office, Jeans for Genes Day and Children in Need. Ad hoc donations were made throughout the year and Old Mutual plc began a three-year supporting role with the South African High Commission’s aim of building a cinema in the High Commission. Old Mutual has committed funds towards the cinema’s running costs. At the beginning of 2005 Old Mutual gave £20,000 to the Disasters Emergency Commission’s appeal for victims of the Tsunami in East Asia. Other good causes supported by the Bermuda Foundation at the request of the Group’s UK businesses were the Shooting Star Trust and the Friends of the Citizens, a charity which promotes quality education to primary and secondary school age children in an environment that encourages not only intellectual growth, but also spiritual and moral growth. At the end of the year, the Bermuda Foundation had assets of £4,487,000, comprising 3,650,000 shares in Old Mutual plc and cash and other assets of £107,000. In addition to these, the Bermuda Foundation has received a donation of £25,170 from the Bermuda Unclaimed Shares Trust under the proposals approved by the Group’s shareholders in May 2004 relating to the extension of the arrangements for claiming entitlements under the original demutualisation of the Group. Corporate Citizenship | 25 Old Mutual was looking to finalise its commitment to the UK government scheme “Making a Corporate Commitment” (MACC2) in 2004, but this programme ceased before it could do so. Old Mutual participated in Business in the Community’s Corporate Environmental Engagement Index for the third time in 2004 and submitted data for The Giving List, published by The Guardian and co-ordinated by Business in the Community. Participation in these systems and indices allows the Group to benchmark itself against other members of the financial services industry in the countries where it operates. In 2004 the Group joined the London Stock Exchange’s Corporate Responsibility Exchange system, allowing it to input information on to a database system to enable interested parties to review information on its environmental and CSR activities without having to contact the Company directly. This tool covers many of the issues previously raised through questionnaires and allows the Group to input data to one common reference point. HEALTH AND SAFETY The Group recognises its obligation to supply its employees with a safe and clean working environment. Data on health and safety compliance are collated and reported to the Board twice yearly via Julian Roberts, the director responsible. Nedcor is aware of the risk of robberies and attacks at its banking business and works continually to improve its systems to minimise the risk to its employees. During 2004 there were no significant accidents, and no material health or safety issues at work were reported from around the Group. FTSE4GOOD/JSE SRI INDICES Old Mutual plc is a member of the FTSE4Good Index, the selection criteria for which include working towards environmental sustainability, developing positive relationships with stakeholders, and upholding and supporting universal human rights. Old Mutual and Nedcor both qualified for inclusion in the JSE Securities Exchange South Africa’s Socially Responsible Investment Index launched in the second quarter of 2004. The JSE SRI Index will measure participant companies’ commitment and performance against a triple bottom line of sustainability in terms of environmental, economic and social impacts. CODE OF BUSINESS CONDUCT AND ETHICS The Old Mutual Group has adopted and aims to abide by a Code of Business Conduct and Ethics. This Code is provided to staff, is accessible on the Company’s website and may also be obtained free of charge upon request from the Company Secretary at the registered office. Martin C Murray Group Company Secretary 28 February 2005 Old Mutual International continued to support the Guernsey Maths Challenge during 2004. Staff from Fairbairn Private Bank (IoM) Limited, in Douglas, raised money for three Manx registered charities, the Manx Cancer Help Association (Lisa Lowe Centre), The Isle of Man Children’s Society and The Koru Hospital Fund, which provides support for the construction and operation of a hospital in Koru, Kenya, raising a total of over £3,000. ENVIRONMENT As a financial services provider, the Group’s primary aim is to meet the financial needs of its clients. In doing so, the Group recognises that it has an impact on the environment, both directly through the running of its offices and indirectly through meeting the investment needs of its clients. The Group introduced its environmental policy three years ago and designated Julian Roberts, the Group Finance Director, as the member of the Board responsible for the Group’s environmental performance. Objectives were set and individuals named at business unit level to oversee environmental issues. Monitoring and reporting against Key Performance Indicators (KPIs) fall under these individuals’ control and this discipline is, where possible, being applied across the Group. The Group’s KPIs and environmental targets are reviewed annually to ensure their continuing appropriateness. The Group’s environmental objectives are: • to ensure compliance at local, national and international levels; • to minimise the consumption of energy, water and materials across operations; • to minimise solid waste generation by waste re-use and recycling wherever possible; • to avoid the use of materials that may cause harm to the environment; • to promote internal awareness of environmental issues with staff; and • to support environmentally-related initiatives by employees and relevant external groups. These objectives are applied across the Group at the business unit level, using best practice in environmental management. Where appropriate, business units have introduced policies more specific to their operations. Raising environmental awareness continued throughout 2004 and, with the introduction of Environmental Management Systems (EMSs) at many key sites across the Group, specific targets and management plans were put in place to deal with any impact considered significant. The EMSs in place all follow ISO14001 guidelines. Certification is achieved on a site basis and therefore the number of certified sites is increasing as roll-out continues across the Group. EMSs establish guidelines and procedures that, when followed, aid site-specific objectives, target-setting and monitoring. EMSs require regular reviews and this in turn requires the Group to revisit its impacts frequently. The systems in place speed up data collection and enable the Group to track improvements and issues more easily. Data is gathered centrally at least twice a year and reported to the Board. The roll-out of EMSs and raising of employee awareness will continue during 2005. Data disclosure occurs through both Old Mutual South Africa and Nedcor, which each report separately on resource use in their Corporate Citizenship and Sustainability Reports. The Group has little contact with materials that could do great damage to the environment. It has ensured, where relevant, that it has avoided using materials that may cause harm. 26 | Corporate Governance and Directors’ Report Corporate Governance and Directors’ Report INDEX TO THIS SECTION OF THE REPORT Introduction and Combined Code compliance Board of Directors • Membership and directors’ interests • Rotation and re-election of directors • • Mandate, governance and Skills, experience and review Scheme of Delegated Authority Executive and non-executive roles Independence of non-executive directors 2004 operations and Turnbull statement • • • Committees • Group Audit Committee • Actuarial Review Committee • Remuneration Committee • Nomination Committee • Chairman’s Selection Committee • • Group Capital Management Committee • Executive Committee Terms of reference Attendance record Auditors Annual General Meeting • Results of the AGM and Court Meeting in 2004 Internal Control Environment • Approach to risk management • Risk governance • Risk appetite • Group risk principles • Risk methodologies South Africa – Life business Management of Specific Risks • • Old Mutual Asset Managers (South Africa) • Nedcor • Mutual & Federal • US businesses • UK Policy matters • Relations with shareholders and analysts • Employment matters Supplier payment policy • • Charitable contributions Environmental matters • Other Directors’ Report matters • Political donations • Dividend • • • Going concern Share capital Substantial interests in shares 26 26 31 33 33 33 35 37 39 41 INTRODUCTION AND COMBINED CODE COMPLIANCE The directors of Old Mutual plc submit their report and the audited financial statements of the Group for the year ended 31 December 2004. 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), banking and general insurance. The Chief Executive’s Statement, the Group Finance Director’s Review and the Business Reviews contained in this document include a review of the year and the outlook for the Group. The Group’s profit, appropriations and financial position are shown in the financial statements. The Group is committed to the objective of achieving high standards of corporate governance. In the year ended 31 December 2004 and in the preparation of this Annual Report and Accounts, the Company has complied with the main and supporting principles and provisions set out in the Combined Code on Corporate Governance of the Financial Reporting Council (the Combined Code) as described in the following sections of this Report. The Company’s compliance with Combined Code provisions C1.1, C2.1, C3.1, C3.2, C3.3, C3.4, C3.5, C3.6 and C3.7 and the statement relating to the going concern basis adopted in preparing the financial statements have been reviewed by the Company’s auditors, KPMG Audit Plc, in accordance with guidance published by the Auditing Practices Board. BOARD OF DIRECTORS Membership and directors’ interests The Board currently has ten members, consisting of two executive and eight non-executive directors. All of the current directors except for Mr M J P Marks and Mr R P Edey (who were appointed to the Board on 1 February and 24 June 2004 respectively) served throughout the year ended 31 December 2004. Mr C F Liebenberg retired from the Board as a non-executive director on 2 October 2004, upon reaching his seventieth birthday. The Company has recently announced the appointment of an additional non-executive director, Professor Wiseman Nkuhlu, who will join the Board from 1 March 2005. Mr M J Levett is the Chairman of the Board and Mr C D Collins is the current senior independent director. 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 quoted securities of its subsidiaries at the beginning and end of the year under review are set out in the following tables, whilst their interests in share options and restricted share awards are described in the section of the Remuneration Report entitled “Directors’ Interests Under Employee Share Plans”. There have been no changes to any of these interests between 31 December 2004 and 28 February 2005. Corporate Governance and Directors’ Report | 27 Old Mutual plc Number of shares Nedcor Limited Number of shares Mutual & Federal Insurance Company Limited Number of shares – 19,000 2,416 30,700 5,541 – 5,465,130 – 250,103 815,996 – – – 2,849 – – 17,804 – – – – – – – – – 5001 – 5001 – Old Mutual plc Number of shares Nedcor Limited Number of shares Mutual & Federal Insurance Company Limited Number of shares – 19,000 2,416 30,700 5,541 – 4,159,518 – 178,948 766,689 – – – 2,000 – – 12,333 – – – – – – – – – 864,1001 – 5001 – At 31 December 2004 N D T Andrews R Bogni N N Broadhurst W A M Clewlow C D Collins R P Edey M J Levett M J P Marks J V F Roberts J H Sutcliffe At 1 January 2004 (or date of appointment as a director, if later) N D T Andrews R Bogni N N Broadhurst W A M Clewlow C D Collins R P Edey M J Levett M J P Marks J V F Roberts J H Sutcliffe Note: 1 Included in the above interests are non-beneficial interests in 500 shares in Mutual & Federal Insurance Company Limited held as qualification shares by each of M J Levett and J V F Roberts at both 1 January and 31 December 2004. No director had a material interest in any significant contract with the Company or any of its subsidiaries during the year. Rotation and re-election of directors The Articles of Association of the Company require that any newly- appointed directors be subject to election at the next following Annual General Meeting and also that at least one-third of the directors (excluding those appointed by the Board during the year) shall retire by rotation each year. These provisions are applied in such a manner that each director will submit himself for election or re-election at regular intervals and at least once every three years. The Nomination Committee considered the candidates who are standing for election or re-election at this year’s Annual General Meeting (as referred to in Ordinary Resolutions 3 (i) to (iv) in the Notice of Annual General Meeting on pages 160 to 164 of this document) at its meeting in February 2005. In accordance with its findings, it recommends to shareholders the election of each of Mr Edey and Professor Nkuhlu and the re-election of Mr Collins as non-executive directors (and, in the case of Mr Collins, as Chairman to succeed Mr Levett) based upon their professional qualifications, prior business experience and actual or prospective contribution to the Board, and the re-election of Mr Sutcliffe as Chief Executive on the basis of his satisfactory performance since being promoted to that role in November 2001. Biographical details of each of the candidates are contained in the descriptions accompanying their photographs on pages 42 and 43 of this document. Skills, experience and review The balance of skills and experience and of executive and non-executive representation on the Board, the independence of non-executive directors and the overall size of the Board are each kept under review by the Nomination Committee. All of these aspects are currently believed by that Committee to be satisfactory and appropriate for the requirements of the Group’s business. Whilst there are currently only two executive directors, the Board has regular contact with the other most senior executive management (including the chief executives of the six most significant business units of the Group, together with the Director of Group HR and Strategy) through the periodic attendance at or participation in Board meetings by those executives. The Board also receives copies of Minutes of Management Board meetings, which are attended by those executives, the Chief Executive and the Group Finance Director and at which high-level business matters are considered and debated. Plans for refreshing and renewing the Board’s composition are proactively managed by the Nomination Committee so as to ensure that changes take place without undue disruption. 28 | Corporate Governance and Directors’ Report Corporate Governance and Directors’ Report Continued Mandate, governance and Scheme of Delegated Authority The Board’s role is to provide entrepreneurial leadership to the Company within a framework of prudent and effective controls which enables risk to be assessed and managed. The Board sets the Company’s strategic aims, ensures that the necessary financial and human resources are in place for it to meet its objectives and reviews management performance. It regularly reviews strategic issues through the Chief Executive’s report and has a two-day strategy session during the second quarter of each year at which high-level strategic matters are thoroughly debated. The Board sets the Company’s values and standards, and ensures that its obligations to its shareholders and others are understood and met. The Board acknowledges its collective responsibility for the success of the Company. It receives a wide array of information on the Group’s businesses on a regular basis. Detailed monthly management accounts are circulated to each member of the Board, usually within three weeks of the month-end, and these contain detailed analysis of the businesses’ financial performance, including comparisons against budget. Any issues arising from these are addressed at Board Meetings or can be raised directly with management. There is a Board calendar which ensures that all key matters are dealt with over the course of the year. These include presentations on the Group’s major businesses, and one or more Board meetings are held each year in the overseas territories where the Group operates. The Board has oversight of the Group’s wholly-owned businesses but also: (i) delegates specific responsibilities for certain matters to its committees (Executive, Group Capital Management, Nomination, Chairman’s Selection, Remuneration, Group Audit, and Actuarial Review), subject to their respective terms of reference; and (ii) receives assurance from boards (and their respective committees) at the Group’s subsidiaries, Old Mutual Life Assurance Company (South Africa) Limited, Old Mutual (US) Holdings, Inc. and Old Mutual Financial Services (UK) plc (the Principal Subsidiaries). The governance relationships with the Group’s majority-owned subsidiaries, Nedcor Limited and Mutual & Federal Insurance Company Limited, are somewhat different, in recognition of their own governance expectations as separately listed entities on the JSE Securities Exchange South Africa and the fact that they each have minority shareholders. With respect to Nedcor, the Company entered into a relationship agreement in February 2004 setting out the Company’s requirements and expectations as its majority shareholder. The full text of that relationship agreement is available on the Company’s website, www.oldmutual.com. Among the matters covered are: (i) transactions involving members of the Nedcor group that require prior consultation with or agreement by the Company; (ii) provision of information, including that required for assuring the Company about various aspects of corporate governance; (iii) consultation over senior appointments; and (iv) business co-operation. The policyholders’ funds of the Group’s South African and Zimbabwean 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 purely as investments, and the companies concerned are not subject to the governance or control structures of the Group. The Chairman and Company Secretary are both involved in ensuring good information flows within the Board and its committees and between senior management and the non-executive directors, as well as in facilitating induction and encouraging non-executive directors to attend courses at the Company’s expense to update their skills and knowledge. On appointment, new directors receive induction, including a package of information about matters of immediate importance to the Group, such as the current budget, strategy document, management accounts, the Scheme of Delegated Authority and details of the Company’s directors’ and officers’ liability policy. They are also invited to have such meetings with other directors, senior management, external advisors (such as the auditors), and major shareholders as they wish. Processes are in place for any potential conflicts of interest to be disclosed and for directors to recuse themselves from participation in any decisions where they may have any such conflict or potential conflict. The directors may take independent professional advice at the Company’s expense, if necessary, for the furtherance of their duties, whether as members of the Board or of any of its committees. The Company maintains directors’ and officers’ liability insurance in respect of legal action against its directors. All directors have access to the Company Secretary, who is responsible to the Board for ensuring that Board procedures are complied with. There is an agreed list of matters reserved for the Board’s decision: these are set out in the Company’s Scheme of Delegated Authority and currently include, inter alia, the following: • payment or recommendation of dividends; • approval of results announcements, interim and annual reports and any other public statement relating to the Group’s financial position which is likely to have a material impact on the Group’s reputation; • approval of the Group’s budgets and the formulation of medium and long-term direction and strategy for the Group; • establishment of committees of the Board, their constitution and terms of reference; • monitoring of compliance with the Group’s environmental policies; • approval of the acquisition or disposal of any business or investment for a consideration of £25 million or more; • approval of expenditure by a Principal Subsidiary in excess of its respective delegated expenditure authority; • approval of significant changes to the accounting policies or practices of the Group; • approval of any proposal as a result of which either Nedcor Limited or Mutual & Federal Insurance Company Limited would cease to be a majority-owned subsidiary of the Company; Corporate Governance and Directors’ Report | 29 • approval of appointments to the Board and renewal of non-executive directors’ appointments, following prior review by the Nomination Committee; • approval of any major decision relating to the conduct or settlement of any material litigation involving the Company or its subsidiaries; Informal meetings among the non-executive directors, without the Chairman or any executive being present, are also facilitated by the Company. Among the activities carried out at such meetings is the annual review of the Chairman’s own performance, under the aegis of the senior independent non-executive director, who also obtains input for such purpose from the executive directors. • appointment and removal of the Company Secretary; • appointment or termination of appointment of key professional advisors to the Group; and • any other matters which are likely to have a material effect on the Group’s financial position, future strategy or reputation. Executive and non-executive roles The executive element of the Board is balanced by a strong independent group of non-executive directors, such that no individual or small group of individuals can dominate the Board’s decision making. The non-executive directors scrutinise the performance of management in meeting agreed goals and objectives, and monitor the reporting of performance. Procedures are in place to enable them to satisfy themselves on the integrity of the Group’s financial information and that financial controls and systems of risk management are robust and defensible. Those non-executive directors who are members of the Remuneration Committee are responsible for determining appropriate levels of remuneration for the executive directors, and members of the Nomination Committee have a primary role in recommending the appointment, and where necessary removal, of executive directors. The Board as a whole receives and considers regular reports on succession planning. Separately from the formal Board meeting schedule, the Chairman holds periodic meetings with the other non-executive directors, without any executives being present, in order to provide a forum for any issues to be raised. He also conducts, in consultation with the senior independent non-executive director, an annual performance evaluation of each of the other non-executive directors, the results of which are reported to the Nomination Committee. These are designed to ensure that each director is continuing to contribute effectively and to demonstrate commitment to the role (including commitment of time for Board and Committee meetings and any other duties). The outputs from these performance evaluations are taken into account by the Nomination Committee in deciding whether to recommend to the Board the extension of engagement of any non-executive director and also whether to recommend to shareholders the re-election of any non-executive director who is due to retire by rotation at the Annual General Meeting. They would also form the basis, if the need arose, for the Chairman to act to address any weaknesses identified in the Board by seeking the resignation of underperforming directors or proposing, through the Nomination Committee, that additional directors be appointed. Where directors have concerns that cannot be resolved about the running of the Company or a proposed action, they are encouraged to make their views known and these would be recorded in the Minutes of the Board meeting. No written statements on resignation containing matters of concern, such as are referred to in paragraph A.1.4 of the Combined Code, have been received by the Chairman. The division of responsibilities between the current Chairman, Mr Levett, and the Chief Executive, Mr Sutcliffe, is documented so as to ensure that there is a clear division of responsibilities between the running of the Board and executive responsibility for running the Company’s business. This was put in place and approved by the Board when Mr Sutcliffe succeeded Mr Levett as Chief Executive in November 2001 and a similar arrangement has been made for when Mr Collins succeeds Mr Levett as Chairman in May 2005. This, together with the Scheme of Delegated Authority and the matters reserved for decision by the Board, ensures that no one individual has unfettered powers of decision. For both Mr Levett as outgoing Chairman and Mr Collins as incoming Chairman, responsibilities include those contained in the Supporting Principle to paragraph A.2 of the Combined Code, namely that the Chairman is responsible for leadership of the Board, ensuring its effectiveness on all aspects of its role and setting its agenda; ensuring that the directors receive accurate, timely and clear information; ensuring effective communication with shareholders; facilitating the effective contribution to the Board of non-executive directors in particular; and ensuring constructive relationships between the executive and non-executive directors. The Board has determined that, in the absence of exceptional circumstances, no non-executive director’s three-year cycle of appointment (which is itself subject to re-election and to Companies Act provisions relating to the removal of a director) should be renewed more than twice, i.e. that non-executive directors should serve a maximum of nine years in that role, and that no non-executive director should continue beyond his seventieth birthday. The renewal of non-executive directors’ terms for successive three-year cycles is not automatic and the continued suitability of each non-executive director is assessed by the Nomination Committee before renewal of his appointment takes place. A particularly searching review is carried out at the end of six years. The section of the Remuneration Report entitled “Non-Executive Directors’ Terms of Engagement” describes the current position of each of the non-executive directors with respect to their maximum three terms of three years and how the extension process has been applied to the directors concerned. 30 | Corporate Governance and Directors’ Report Corporate Governance and Directors’ Report Continued The current Chairman, Mr Levett, was Chairman and Chief Executive until November 2001, when he was succeeded as Chief Executive by Mr Sutcliffe. His appointment as non-executive Chairman was carefully considered by the Board, which decided at that time that this was in the best interests of the Company in view of his long experience with the Group’s South African businesses, depth of relevant knowledge and wealth of ability. Mr Levett is a director of the Company’s 87%-owned general insurance subsidiary, Mutual & Federal Insurance Company Limited, and was, until the end of 2004, also a director of its 52%-owned banking subsidiary, Nedcor Limited and its main banking operation, Nedbank Limited. He is also a non-executive director of the non-Group companies, Barloworld Limited and Old Mutual South Africa Trust plc. Until July 2004 he was a non-executive director of SAB Miller plc. These external interests do not adversely affect his ability to discharge his duties as Chairman of the Board. The Board conducts an annual self-assessment exercise to evaluate the effectiveness of its procedures. For 2004, it decided to carry out this process through a detailed questionnaire exercise, with returns being submitted anonymously to the Company Secretary, who collated a report on the outputs for the Board. The areas covered by the survey included Governance and Processes (Board meetings, Board functions, Board structure, Board Committees, financial and operational reporting and compliance) and strategic matters (planning and objectives, risk management, new business opportunities and projects, and human resources). The feedback was generally positive, but where suggestions for improvements were made, these have been noted by the Board and efforts will be made to address them in 2005. Independence of non-executive directors Six of the seven non-executive directors other than the Chairman (Messrs Andrews, Bogni, Broadhurst, Collins, Edey and Marks) are considered by the Board to be independent within the meaning of, and having regard to the criteria set out in, paragraph A.3.1 of the Combined Code – i.e. independent in character and judgement and there being no relationships or circumstances which are likely to affect, or could appear to affect, their judgement. Professor Nkuhlu, who will join the Board as a non-executive director on 1 March 2005, is also considered by the Board to be independent. The Board decided in December 2004, following a review by the Nomination Committee, that it was no longer appropriate to classify Mr Clewlow as independent, in view of his increased involvement, as Chairman of Nedcor, in supporting the executive management of that company. He thereupon stepped down as a member of the Remuneration and Group Audit Committees so that all members of those Committees remained independent as required by the Combined Code. Mr Collins has served as the senior independent non-executive director since February 2003 and will be succeeded in that role by Mr Broadhurst when Mr Collins becomes non-executive Chairman of the Company at the end of the AGM in May 2005. The senior independent non-executive director is available to shareholders if they have concerns that are unresolved after contact through the normal channels of the Chairman, Chief Executive or Group Finance Director or where such contact would be inappropriate. His contact details can be obtained from the Company Secretary at the registered office. The terms and conditions for each of the non-executive directors are available in the Corporate Governance section of the Company’s website, www.oldmutual.com, and these include details of the expected time commitment involved (which each of the non-executive directors has accepted). Other significant commitments of potential appointees are considered by the Nomination Committee as part of the selection process and are disclosed to the Board when recommendation of the appointment is submitted. Non-executive directors are also required to inform the Board of any subsequent changes to such commitments, which must be pre-cleared with the Chairman if material. The executive directors are permitted to hold one external (i.e. non-Group) non-executive directorship (but not a chairmanship) of another listed company, subject to prior clearance by the Board and the directorship concerned not being in conflict or potential conflict with any of the Group’s businesses. Neither Mr Sutcliffe nor Mr Roberts currently holds such a directorship. 2004 operations and Turnbull statement The Board met on a scheduled basis regularly during the year. Meetings were co-ordinated with the Company’s reporting calendar to allow for detailed consideration of the interim and preliminary results and the first and third quarters’ trading updates. Two further sessions were specifically devoted to strategy and business planning respectively. The Board also met ad hoc as and when required to deal with specific matters requiring its consideration. During 2004, there were nine scheduled Board meetings and four ad hoc meetings. The scheduled meetings included a three-day site visit to the Group’s businesses in South Africa, which included presentations to the Board by Nedcor and Mutual & Federal as well as by Old Mutual South Africa. During the year the Board approved and adopted four core Group values – Integrity, Respect, Accountability and Pushing beyond Boundaries. These have been communicated throughout the Group and incorporated into management’s performance statements so as to ensure they are lived and observed by all key employees. The Board has reviewed the effectiveness of the system of internal control during and at the end of the year. This review covered all material controls, including financial, operational and compliance controls and risk management systems. The Board is of the view that there is a sufficient ongoing process 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 2004 and up to the date of approval of this Report. The process accords with the Turnbull guidance set out in “Internal Control Guidance for Directors on the Combined Code” and is regularly reviewed by the Board. The Company referred in its Directors’ Report for 2003 to civil suits that had been filed against a subsidiary, Pilgrim Baxter & Associates, Ltd (PBA) (now renamed Liberty Ridge Capital, Inc.), by the United States Securities and Exchange Commission (SEC) and the office of the New York State Attorney General (NYAG). In June 2004 PBA reached agreements with the SEC and the NYAG, which settled all charges brought by those authorities against PBA in relation to market timing in the US mutual fund business. PBA neither admitted nor denied any wrongdoing. Under the settlement PBA agreed to pay $40 million disgorgements of past fees plus $50 million in penalties. In addition PBA agreed to reduce fees to investors by approximately $10 million over the next five years. Corporate Governance and Directors’ Report | 31 Some class actions related to the above remain pending. It is not possible to determine what the outcome of these class actions will be and whether there will be any costs to the Group. The Directors’ Report for 2003 also made reference to Nedcor, whose 2003 results were poor due to the effect of adverse currency and interest rate movements, amongst other things. This resulted in Nedcor launching a rights issue to raise R5 billion of ordinary share capital to strengthen its capital position. During 2004 the bank’s interest rate and currency risks were minimised through proactive management. Nedcor’s results for 2004 also contributed to an improvement in its capital position. COMMITTEES The Board has a number of standing committees or sub-committees, to which it has delegated various matters in accordance with terms of reference contained in the Scheme of Delegated Authority. It also establishes committees on an ad hoc basis to deal with particular matters as and when thought fit: in doing so, it specifies a remit, quorum and appropriate mix of executive and non-executive participation. Further information on the main standing committees and sub-committees of the Board is set out below. Group Audit Committee Current members: N N Broadhurst (Chairman), N D T Andrews, R Bogni, C D Collins, R P Edey. Other member during part of 2004: WAMClewlow. Secretary: M C Murray All of the members of the Group Audit Committee are independent non-executive directors. The Chairman of the Committee, Mr Broadhurst, is a Chartered Accountant and has recent and relevant financial experience, having been Finance Director of Railtrack plc until 2000. The terms of reference of the Committee set out its role and responsibilities and these include: • monitoring the integrity of the financial statements of the Company and any formal announcements relating to the Company’s financial performance, including reviewing significant financial reporting judgements contained in them; • reviewing the Company’s internal financial controls; • monitoring and reviewing the independence and effectiveness of the Company’s internal audit function and its activities. An internal audit charter, reviewed and approved by the Committee, governs internal audit activity within the Group and is conducted in accordance with an annual audit plan. Progress against that plan is reported regularly to the Committee; • receiving and reviewing reports on risk. Management teams in each subsidiary and business unit have applied the Criteria of Control Model (CoCo) developed by the Canadian Institute of Chartered Accountants to produce a control integrity profile for successive assurances given at increasingly higher levels of management and finally to the Committee. This process is co-ordinated by the Group risk function; • making recommendations to the Board, for it to put to shareholders for their approval in general meeting, in relation to appointment, re-appointment and removal of the external auditors and approving their remuneration and terms of engagement; • reviewing and monitoring the external auditors’ independence and objectivity and the effectiveness of the audit process, taking into consideration relevant UK professional and regulatory requirements; • developing and implementing policy on the engagement of the external auditors to supply non-audit services, taking into account relevant ethical guidance regarding the provision of non-audit services by the external audit firm, and reporting to the Board any matters in respect of which it considers that action or improvement is needed and making recommendations as to the steps to be taken; and • reviewing “whistleblowing” arrangements – i.e. arrangements by which staff of the Group may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters – with a view to ensuring that these arrangements enable the proportionate and independent investigation of such matters and result in appropriate follow-up action. A number of audit or audit, risk and compliance committees operated at subsidiary level during 2004, including at Old Mutual Financial Services (UK) plc, Old Mutual Life Assurance Company (South Africa) Limited, 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 Committee. The Committee receives minutes of the proceedings and reports from subsidiary audit committees on a regular basis and Chairmen of these subsidiary audit committees are invited to attend meetings of and report to the Committee periodically. A planning meeting was held between the Chairman of the Committee and the Chairmen of the subsidiary audit committees mentioned above, the regional heads of internal audit and representatives of the Group’s auditors in October 2004 to co-ordinate the audit committees’ activities and to review and approve the scope of internal audit plans for 2005. Similar planning meetings will take place on an annual basis going forward. Actuarial Review Committee Current members: R Bogni (Chairman), M J Levett, J V F Roberts. Secretary: M Carey The Actuarial Review Committee is a sub-committee of the Group Audit Committee and covers the Group’s life operations worldwide. The role of the Committee is: (i) to review the actuarial content of the life assurance figures included in the Group’s externally published financial statements (annual and interim); (ii) to verify the appropriateness of the actuarial methods and assumptions used and changes thereto and the appropriateness of the financial results which depend on actuarial calculations; and (iii) to review the financial soundness of each of the life assurance companies within the Group. The Committee met four times during 2004 and each meeting was attended by all of the members. Upon Mr Levett’s retirement in May 2005, Mr Broadhurst will replace him as a member of this Committee and Mr Sutcliffe will replace Mr Roberts, so that there will continue to be a qualified actuary as a member of the Committee. Remuneration Committee Current members: C D Collins (Chairman), N D T Andrews, N N Broadhurst, M J P Marks. Other member during part of 2004: WAMClewlow. Secretary: M C Murray Details of the role and activities of the Remuneration Committee and how the Remuneration Committee and the Board have applied the main and supporting principles and the Code Provisions in Section B of the Combined Code are provided in the Remuneration Report. 32 | Corporate Governance and Directors’ Report Corporate Governance and Directors’ Report Continued Nomination Committee Current members: M J Levett (Chairman), N D T Andrews, R Bogni, N N Broadhurst, W A M Clewlow, C D Collins, R P Edey, M J P Marks, J H Sutcliffe. Secretary: M C Murray The Nomination Committee makes recommendations to the Board in relation to the appointment of directors, the structure of the Board and membership of the Board’s main standing committees. It also reviews development and succession plans for the most senior executive management of the Group and proposed appointments to the Boards and standing committees of principal subsidiaries where these are material in the context of the Group as a whole. It is chaired by the Chairman of the Board, Mr Levett, and a majority of its members (six out of nine) are independent non-executive directors. The Nomination Committee seeks to ensure that its process for identifying candidates for recommendation to the Board as new directors is formal, rigorous and transparent. Vacancies generally arise in the context of either planned refreshing and renewal of the Board, or replacing directors who are due to retire, or rebalancing the balance of knowledge, skills or independence of the Board. The two new independent non-executive directors appointed during 2004, Mr Marks and Mr Edey, were selected to increase the cadre within the Board who had direct experience of international financial services markets. External search agents were provided with guidelines on objective criteria for the individuals sought and recruitment of the two new non-executive directors followed a short- listing and interview process which involved a majority of members of the Board. Professor Nkuhlu, who is joining the Board from 1 March 2005, was selected from a short list of eligible South African candidates to replenish South African representation on the Board following Mr Liebenberg’s and ahead of Mr Levett’s retirements. In identifying candidates, appropriate regard is paid to ensuring that they will have sufficient time available in the light of their other commitments to devote to discharging their duties as directors of the Company. Chairman’s Selection Committee The question of Chairman’s succession was dealt with during 2004 through a separate committee established by the Board, comprising Messrs Andrews, Bogni, Broadhurst and Clewlow. Objective criteria for the successor were agreed by members of the Committee: these included an assessment of the time commitment expected (an average of two to three days per week) and the need for the person appointed to be available in the event of crises. The results of an external confidential search for potential candidates were reviewed against internal candidates. Having weighed up the respective merits of all potential candidates who had been identified, the Chairman’s Selection Committee recommended to the Board that Mr Collins be appointed as Chairman elect to succeed Mr Levett in May 2005. This recommendation was unanimously endorsed by the Board (in the absence of Mr Collins himself), subject to Mr Collins’ confirmation that he would, by the time the appointment took effect, have stepped down as Chairman of Hanson PLC, so as to avoid his being chairman of two FTSE 100 companies at the same time. This was subsequently confirmed. Mr Collins’ main other commitments are as Chairman of Forth Ports PLC and as a non-executive director of The Go-Ahead Group plc and Alfred McAlpine PLC. He has confirmed to the Company that these will not adversely affect his ability to discharge his role as Chairman of the Company. Executive Committee Current members : J V F Roberts, J H Sutcliffe The Executive Committee is a committee comprising the executive directors of the Company, to which executive control and decision- making are delegated, subject to reservation of matters that require approval by the Board itself. A quorum comprises the two executive directors. The Committee met 16 times during 2004. Group Capital Management Committee Current members : J V F Roberts (Chairman), DIHope, A Patterson, M Walton, J H Sutcliffe. Secretary: D I Hope The Group Capital Management Committee is a sub-committee of the Executive Committee. Its role is: (i) to set an appropriate framework and guidelines to ensure the appropriate management of the Group’s capital; (ii) to support the Business Planning and Quarterly Business Review process in terms of allocating capital to the Group’s businesses; and (iii) to monitor the return based on allocated capital per business relative to the hurdle rate and limit the allocation of capital to underperforming businesses, as appropriate. In addition, it is tasked: (i) to ensure that the strategic investment goals of the Group are clearly disseminated; (ii) to consider and approve the overall investment strategy of the Group’s shareholders’ funds, including those supporting regulatory and solvency capital, in order that the shareholders’ assets are managed prudently having regard to risk, liquidity, tax and the need to support the Group’s businesses; and (iii) to consider projects referred to it and to approve (or, where appropriate, refer up for approval) those deemed most likely to support the Group’s core strategies and to build shareholder value. The Committee met twice during 2004 and both meetings were attended by all of the members. Terms of reference The terms of reference of each of the principal committees of the Board are available in the Corporate Governance section of the Company’s website, www.oldmutual.com, and may also be obtained upon request free of charge from the Company Secretary at the registered office. The membership and chairmanship of the Board’s standing committees are regularly reviewed by the Nomination Committee so as to ensure that they are refreshed and that undue reliance is not placed on particular individuals. Each of the Group Audit, Remuneration and Nomination Committees conducted a self-assessment exercise during 2004 to address, inter alia, whether their respective terms of reference had been satisfactorily fulfilled during the year, whether the Committees had the necessary skills and resources and were receiving a satisfactory level of information in order to discharge their responsibilities, and whether their processes and methods could be improved. These were each conducted by anonymous questionnaires to members of the Committee concerned and other key participants in the Committee’s activities (including the external auditors, in the case of the Group Audit Committee) and the results were collated by the Company Secretary and reported to the Committees for consideration. Corporate Governance and Directors’ Report | 33 ATTENDANCE RECORD The following table sets out the number of meetings held and individual directors’ attendance records at the Board and its principal standing committees in 2004: • All projects in excess of £300,000 (R4.5 million) are to be subject to competitive tender and agreed by the Group Finance Director or the Group Chief Executive, and any projects in excess of £1,000,000 (R15 million) are to be pre-approved by the Group Audit Committee. Board (scheduled) Board (ad hoc) Group Audit Remuneration Nomination Committee Committee Committee No. of meetings held N D T Andrews R Bogni N N Broadhurst W A M Clewlow C D Collins R P Edey M J Levett C F Liebenberg M J P Marks J V F Roberts J H Sutcliffe 9 9/9 8/9 8/9 8/9 9/9 6/6 9/9 6/6 6/8 9/9 9/9 4 4/4 3/4 2/4 3/4 2/4 2/2 4/4 3/3 3/3 4/4 4/4 5 4/5 4/5 5/5 5/5 4/5 1/2 – – – – – 3 2/3 – 3/3 2/3 3/3 – – – 1/2 – – 5 – 4/5 5/5 4/5 5/5 – 5/5 4/4 – – 5/5 Messrs Levett, Roberts and Sutcliffe attended all of the Group Audit Committee Meetings held during 2004 at the invitation of the Chairman of that Committee (but were absent for the private sessions between members of that Committee and the auditors). Messrs Levett and Sutcliffe also attended all of the Remuneration Committee Meetings at the invitation of the Chairman of the Remuneration Committee, but absented themselves for any matters relating to their own respective remuneration arrangements. No one other than the Chairman and the members of the Group Audit Committee, Nomination Committee or Remuneration Committee has a right to be present at their respective meetings: attendance by others is always at the invitation of the Chairman of the Committee concerned. AUDITORS During the year ended 31 December 2004 fees paid by the Group to KPMG Audit Plc, the Group’s auditors, and its associates (KPMG) totalled £5.2 million for statutory audit services, £2.2 million for other audit and assurance services, and £4.9 million for tax and other services. In addition to the above, Nedcor paid a further £2.5 million to Deloitte & Touche in respect of joint audit arrangements. The primary component within the £4.9 million paid to KPMG for tax and other services was advisory work in connection with the Group’s transition to reporting under International Financial Reporting Standards. The following guidelines have been approved by the Group Audit Committee and are applied in placing non-audit work: • No non-audit work should be given to the external auditors where the consequences of using them would mean that they were effectively auditing their own work. However, this does not preclude the provision of accounting resources on contract or secondment, provided that those specific resources are not involved in the audit and would be managed by an individual/partner not involved in the audit. • All non-audit related work undertaken by the external auditors would normally be the responsibility of a partner not involved in the Company’s audit. However, there may be certain assignments which are so closely related to the audit (e.g. certificates, bad debt reviews, regulatory returns) or which involved a transaction (e.g. acquisition or disposal) that it would be sensible for the audit partner to undertake those assignments. • All non-audit projects in excess of £50,000 (R750,000) placed with the external auditors should be agreed by the Group Finance Director. • Cumulative non-audit fees (excluding audit-related fees such as review of regulatory returns) for the Group should not exceed total statutory audit and audit-related fees in any one year without the approval of the Group Audit Committee. • All non-audit work placed with the external auditors should be retrospectively reported to the appropriate audit committee. The Group Audit Committee considered the balance of audit and non-audit remuneration paid to KPMG at its meeting in February 2005 and declared itself satisfied that the non-audit work was awarded on arm’s length terms and did not compromise the independence of KPMG Audit Plc as auditors to the Company. KPMG Audit Plc has expressed its willingness to continue in office as auditors to the Company and, following a recommendation by the Audit Committee to the Board, a resolution proposing its re-appointment will be put to the Annual General Meeting (Resolution 4 in the Notice of Annual General Meeting). Arrangements have been made, in conjunction with KPMG, for appropriate audit partner rotation in accordance with recommendations of the Institute of Chartered Accountants in England and Wales. As a result of these, the current lead audit partner in the UK, Mr Richard Bennison, will be succeeded during 2005 by Mr Alastair Barbour. ANNUAL GENERAL MEETING The Board uses the Annual General Meeting (AGM) to provide an update on the Group’s first quarter’s trading. A full transcript of the AGM proceedings is made available on the Company’s website as soon as practicable after the end of the Meeting. All items of formal business at the AGM are now conducted on a poll, rather than by a show of hands. The Company has arrangements in place through its registrars, Computershare Investor Services, to ensure that all validly submitted proxy votes are counted, and a senior member of Computershare’s staff acts as scrutineer to ensure that votes cast are properly received and recorded. Each substantially separate issue at the AGM is dealt with by a separate resolution and the business of the AGM always includes a resolution relating to the approval of the Report and Accounts. All directors, including the Chairmen of the Group Audit, Remuneration and Nomination Committees (who are available to answer any questions on the matters covered by these Committees), are expected to attend the AGM and all of them did so in 2004. The notice of AGM and related materials contained in the Report and Accounts or Summary Financial Statements are sent out to shareholders in time to arrive in the ordinary course of the post at least 20 working days before the date of the AGM. Results of the AGM and Court Meeting in 2004 All resolutions considered at the Company’s AGM held on 14 May 2004 and the Meeting of Shareholders convened by order of the UK High Court (the Court Meeting) on 14 May 2004 to consider a scheme of arrangement to authorise the directors to extend the Company’s unclaimed shares trust arrangements were dealt with on a poll. The results of the polls on each of the resolutions were announced to the markets later on 14 May 2004 and were as follows: 34 | Corporate Governance and Directors’ Report Corporate Governance and Directors’ Report Continued ORDINARY RESOLUTIONS Resolution 1 To receive and adopt the directors’ report and accounts Against In favour 2,899,368 1,783,591,896 % in favour 99.84% Resolution 2 To declare a final dividend of 3.1 pence per ordinary share % in favour In favour 99.99% 1,826,191,939 Against 96,335 Resolution 3 (i) Election of Michael Marks as a director of the Company Against In favour 1,073,589 1,815,895,358 % in favour 99.94% Resolution 3 (ii) Re-election of Rudi Bogni as a director of the Company Against In favour 1,105,695 1,815,787,183 % in favour 99.94% SPECIAL RESOLUTIONS Resolution 8 Authority to allot equity securities up to maximum nominal aggregate amount of £19,187,000 In favour 1,394,035,668 Against 424,243,718 % in favour 76.67% Resolution 9 Authority in accordance with section 166 of the Companies Act 1985 to purchase up to 383,752,930 Ordinary Shares of 10p each in the Company by way of market purchase In favour 1,817,474,833 % in favour 99.73% Against 4,974,669 Resolution 10 (i) Approval of contingent purchase contract to enable shares to be bought back on the JSE Securities Exchange South Africa % in favour In favour 99.92% 1,817,316,278 Against 1,495,217 Resolution 3 (iii) Re-election of Norman Broadhurst as a director of the Company In favour 1,805,146,590 % in favour 99.65% Against 6,303,783 Resolution 3 (iv) Re-election of Julian Roberts as a director of the Company % in favour In favour 99.60% 1,809,742,666 Against 7,356,819 Resolution 4 Re-appointment of KPMG Audit Plc as auditors to the Company In favour 1,797,800,999 % in favour 99.58% Against 7,506,721 Resolution 5 To authorise the Audit Committee of the Company to settle the remuneration of the auditors In favour 1,804,581,632 % in favour 99.79% Against 3,823,078 Resolution 10 (ii) Approval of contingent purchase contract to enable shares to be bought back on the Namibian Stock Exchange In favour 1,816,549,384 % in favour 99.91% Against 1,674,309 Resolution 10 (iii) Approval of contingent purchase contract to enable shares to be bought back on the Zimbabwe Stock Exchange In favour 1,816,778,772 % in favour 99.91% Against 1,568,199 Resolution 10 (iv) Approval of contingent purchase contract to enable shares to be bought back on the Malawi Stock Exchange In favour 1,816,431,152 % in favour 99.91% Against 1,686,756 Resolution 6 To approve the Remuneration Report in the Company’s report and accounts In favour 1,649,850,335 Against 33,853,841 % in favour 97.99% Resolution 7* Authority to allot relevant securities up to an aggregate nominal amount of £127,917,000 In favour 1,350,584,574 Against 468,340,374 % in favour 74.25% Resolution 11 Adoption of amended Articles of Association In favour 1,861,828,092 Against 322,342 % in favour 99.98% Resolution 12 Approval of arrangements relating to the proposed extension of the Unclaimed Shares Trusts, including amendment of the Company’s objects clause In favour 1,853,573,012 % in favour 99.97% Against 607,237 *During the meeting the Chairman, Mr Levett, made the following statement: Each of the resolutions at the 2004 AGM was accordingly duly passed. “This Resolution, which is in accordance with UK institutional investors’ guidelines, does not accord with what is now regarded as best practice in South Africa. In the light of this, the Board undertakes that the Company will not use the authority to be granted by this resolution beyond 10% of the existing issued shares – that is, to an aggregate nominal value of £38,374,000 – without coming back to shareholders, notwithstanding the higher figure contained in the resolution.” Court Meeting relating to the Company’s Unclaimed Shares Trusts Resolution to approve the proposed scheme of arrangement In favour 1,711,443,781 % in favour 99.97% Against 527,488 The Court Meeting resolution was accordingly duly passed and the scheme of arrangement authorising the directors of the Company to extend the period within which claims can be made to certain entitlements that arose upon demutualisation of the Group was subsequently confirmed, without amendment, by the UK High Court. Corporate Governance and Directors’ Report | 35 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 the effective and efficient operation of the Group and its business units and aimed at enabling management 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 or fraud, ensuring that liabilities are identified and managed, and addressing any social, environmental or ethical matters that have significance for the Group’s businesses. 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. Approach to risk management Creating shareholder value is the Group’s overriding business objective, and the Group therefore derives its approach to risk management and control from a shareholder value perspective. As a result, the risk process covers a much broader range than the narrowly defined traditional risk categories and specifically includes strategic risk, also referred to as business risk, and Enterprise Risk Management (ERM). The Group’s overall approach is to understand the diversity and full breadth of risk and then to manage it, with a strong emphasis on implementing controls that reduce residual risk to a level calculated to optimise the level of return on investment. However, risk management is not limited solely to the downside or risk avoidance; it is about taking risk knowingly. The Group operates a risk management framework, which is based on COSO’s ERM Framework, and the Group is planning to transition more fully to the COSO framework. The current risk framework contains the following components: (i) a robust risk governance structure; (ii) risk appetites established at Group and subsidiary level; (iii) Group-wide risk policies; and (iv) methodologies that focus on risk identification, risk measurement, risk assessment, action plans, monitoring and reporting. Each component is explained in more detail below. Risk governance The formal governance structures described earlier in this report are complemented by a risk governance model based on three lines of defence. This model distinguishes between functions owning and managing risks, functions overseeing risks and functions providing independent assurance: • The Board sets the Group's risk appetite, approves the strategy for managing risk and is responsible for the Group's system of internal control. The Group Chief Executive, supported by the plc Management Board, has overall responsibility for the management of risks facing the Group and is supported in the management of these risks by management at the operating subsidiaries. Management and staff within each business have the primary responsibility for managing risk. They are required to take responsibility for the identification, assessment, management, monitoring and reporting of enterprise risks arising within their respective areas. • The second line of defence is provided by the Group Chief Risk Officer, supported by the Group risk function and other specialist in-house functions at Company and subsidiary levels, who provide technical support and advice to operating management to assist them with the identification, assessment, management, monitoring and reporting of financial and non-financial risks. The Group risk function recommends Group Risk Policies to the Board for approval, provides objective oversight and co-ordinates ERM activities in conjunction with other specialist risk-related functions. Group risk is not, however, accountable for the day-to-day management of financial and non-financial risks. • The third line of defence is designed to provide independent objective assurance on the effectiveness of the management of enterprise risks across the Group. This is provided to the Board through the Group Internal Audit function, the external auditors and the Group Audit Committee, supported by audit committees at subsidiaries. Risk appetite The fundamental purpose of the Group's risk appetite is to define how much risk the Group is willing to take. Risks or events falling outside the agreed risk appetite are identified for immediate remedial action and subjected to executive management and audit committee oversight. The Group's risk appetite framework is currently under development and will encompass: (i) a process for setting the Group risk appetite; (ii) a process for allocating the Group risk appetite among the business units, including the identification of existing appetites for risk within those businesses; (iii) risk reporting against those limits; (iv) application of stress and scenario testing; and (v) risk appetite governance laid down in a Group risk appetite policy. Some components of the Group risk appetite are dependent on the completion of the Group’s Economic Capital project, which is currently scheduled for completion in 2006. 36 | Corporate Governance and Directors’ Report Corporate Governance and Directors’ Report Continued Group risk principles Group risk principles have been established for each major risk category to which the Group is exposed. These are designed to provide management teams across the Group with guiding principles within which to manage risks. Business unit risk policies expand on these principles and contain detailed requirements and/or limits for the specific business concerned. Adherence to these principles provides the Board and the Company’s stakeholders with assurance that high-level common standards are consistently applied throughout the Group and also contributes to how the Group governs itself. Group risk principles are reviewed annually. Risk methodologies Risk identification Strategic objectives reflect management’s choice as to how the Group will seek to create value for its stakeholders. Strategic objectives are translated into business unit objectives. Risks (and risk events) are then identified that would prevent the achievement of both the strategic and business objectives, i.e. objective-setting is a pre-condition to the risk management process. For this reason, risk identification is part of the annual business planning process. The resultant risks are recorded in a risk register, with details of existing controls or actions to mitigate the risks and any associated time frame, details of who owns the control or action plans and a measure of the residual risk. Where the residual risk is deemed to be outside the risk appetite, it is transferred to a control log for remedial action. Risk assessment and measurement Various means of assessing and measuring enterprise risks and risk events are used throughout the Group. These include estimating the financial impact and the likelihood of risk occurrence, trend and traffic light assessments and high/medium/low assessments. With regard to credit risk, asset and liability risk and market risk, a mixture of quantitative and qualitative measurement methods is used by the business units commensurate with the complexity of the risk, such as exposures against limits, stress and scenario testing, sensitivity analysis and value-at-risk measures. Action plans Detailed action plans to mitigate the occurrence of a risk or to remedy a breakdown in control are recorded on risk and control logs maintained by each business grouping. Monitoring and control The Board reviews the effectiveness of the system of internal control. This review covers all material controls, including financial, operational and compliance controls and risk management systems. 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 function. Risk monitoring is also undertaken at Group, Principal Subsidiary and business unit level by management, ERM functions, specialised risk management functions, internal audit and subsidiary audit committees. The following are some of the other key processes of risk monitoring used around the Group: • The Group Finance Director provides the Board with monthly performance information, which includes key performance and risk indicators. These are complementary to the monthly management reports, which include a status report on key risks to the achievability of business objectives. • Items on risk logs and control logs (which contain details of any control failures) are reported pursuant to an escalation protocol to the appropriate level of management board or 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. • Exposure reporting, risk concentrations and solvency and capital adequacy reports are submitted to the relevant credit and capital management committees in the normal course of business. Where exposures are in excess of limits, they are treated in the same way as control breakdowns and reported on the relevant control log for audit committee review. • The Group’s internal audit function operates on a decentralised basis co-ordinated at Group level by the Group head of internal audit, who reports directly to the Chairman of the Group Audit Committee and the Group Chief Executive. It carries out regular risk-focused reviews of the system of internal control and reports to local executive management, with unrestricted access to the Chairman of the Group Audit Committee. Corporate Governance and Directors’ Report | 37 Reporting As part of the Board’s annual review process, the Chief Executive of each of the Group’s major businesses completes a letter of representation. This letter confirms that there has been no indication of any significant business risk occurring, nor any material malfunction in controls, procedures or systems during the reporting period, resulting in loss or reputational damage, which impacts negatively on the attainment of the business’s objectives during the year and up to the date of approval of the Annual Report. Exceptions are noted and reported. In addition the letter confirms that the business unit will continue as a going concern for the year ahead. The collated results of these letters are reported to the Group Audit Committee. Monthly management reports, reports by the Group Finance Director, risk logs, control logs and exposure reports described under “Monitoring and control” above also form part of the reporting process. For fixed annuities, market risks are managed by investing in fixed interest securities with a duration closely corresponding to those liabilities. Market risks on policies where the terms are guaranteed in advance and the investment risk is carried by the shareholders, principally reside in the South African guaranteed non-profit annuity book, which is closely matched with gilts and semi-gilts. 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 appropriate bonus declaration practices. 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 in excess of the statutory minimum to allow the Group to manage significant equity exposures. Credit risk is monitored by the business’s Credit Committee covering life and third party funds, which has established appropriate exposure limits. MANAGEMENT OF SPECIFIC RISKS At Company level, the principal risks are the volatility of the major currencies in which the Group operates (Rand and US$) to Sterling, and investment market and interest rate 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 for African currencies, 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 purposes of risk reduction or efficient portfolio management. Speculative activity is not permitted and all transactions must be fully covered by cash or corresponding assets and liabilities. The total income from all derivative instruments outside regulated entities is not material to the Group. The other principal risks managed by the Group’s businesses are described below. South Africa – Life business Underwriting risk is controlled by underwriting principles governing product repricing procedures and authority limits. The underwriting process takes into account actual and prospective mortality, morbidity and expense experience. The impact of HIV/AIDS is mitigated wherever possible by writing products that allow for repricing on a regular basis or are priced to allow for the expected effects of AIDS. The Group also conducts HIV and other tests for lives insured above certain values and offers reduced premiums for those willing to undergo regular testing. Old Mutual Asset Managers (South Africa) The exposure of the Group’s asset management businesses to market fluctuations gives rise to potential impacts on revenue levels, which are a function of the value of client portfolios. Investment risk is principally borne by the client. Compliance risks faced by these businesses are monitored and reviewed by compliance and risk committees established for this purpose. The risk of loss of key employees is managed by the use of long term incentive schemes aligned with shareholder value targets, and by competition restrictions in employment agreements. Nedcor Risk is an integral component and driver of Nedcor’s success in achieving shareholder value. Nedcor does not, however, look to avoid risk, but rather seeks to understand it, manage it effectively and measure it in the context of an appropriate system that derives its approach to risk management and control from a shareholder value perspective. Nedcor’s risk process covers the entire range of risk categories and specifically includes strategic risk and enterprise-wide risk management. As a bank, Nedcor’s core activity is risk taking, and accordingly risk management is seen as a core competency. Risks relating to trading and non-trading activities are managed through a 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. This structure is not heavily reliant on trading securities and derivatives, but focuses on using on-balance sheet mechanisms. 38 | Corporate Governance and Directors’ Report Corporate Governance and Directors’ Report Continued Interest rate risk for Nedcor is its net income exposure to adverse movements in rates arising as a result of mismatches in the repricing terms of assets and liabilities. Prospective repricing of assets and liabilities is assessed using gap analysis and earnings at risk modelling techniques to quantify 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 to satisfy client demands for funds. This 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. Credit risk is governed by policy guidelines and administered by an appropriately constituted committee at Nedcor, which approves all facilities in excess of 10% of capital, and also monitors other large exposures, risk limits, provisions and non-performing loans. Concentrations in country credit risk are similarly managed. Nedcor’s trading in foreign exchange and interest rate markets primarily involves interest rate swaps, forward rate agreements, bonds and bond options. Currency options, equities and equity derivatives are also traded on a limited basis. Trading exposures 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. Mutual & Federal Underwriting risks are controlled through a formal system of parameters within Mutual & Federal, which is 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 Mutual & Federal group. US businesses USLife Underwriting risk is controlled by underwriting principles governing product repricing procedures and authority limits. The underwriting process takes into account prospective mortality, morbidity and expense experience. A large amount of the mortality and morbidity risk is reinsured to highly rated companies. For fixed annuities, policyholder option risk is managed by investing in fixed securities with durations within a half-year of the duration of the liabilities. Cash flows in any period are closely aligned to ensure any mismatch is not material. Extensive interest rate scenario testing is required by regulatory authorities to ensure that the amounts reserved are sufficient to meet the guaranteed obligations. The guaranteed returns provided under Equity Index Annuities are dynamically hedged to ensure a close matching of option payoffs to the liability growth. Hedging positions are reviewed daily to re-adjust them as necessary. Credit risk is monitored by the business's Investment Committee, which has established appropriate exposure limits. US Asset Management The exposure of the Group’s US asset management businesses to market fluctuations gives rise to potential impacts on revenue levels, which are a function of the value of client portfolios. Investment risk is principally borne by the client. Compliance risks faced by these businesses are independently monitored and reviewed by compliance functions and committees, which also need to meet stringent US regulatory requirements. The risk of loss of key employees is managed by the use of long-term incentive schemes aligned with shareholder value targets, and by competition restrictions in employment agreements. UK The UK asset management business is exposed to market fluctuations in terms of the potential impacts on revenue levels, which are a function of the value of client portfolios. This exposure is reduced through product diversification, including through the portfolio of hedge funds managed by Old Mutual Asset Managers (UK). The business is exposed to operational risk. The means of managing this include: tight control environment, careful planning and controlled execution of business integration, stress testing and parallel running of new operational systems and software, monitoring of operational key risk indicators, performing regular audit reviews, and maintaining insurance policies. The Group’s UK businesses operate in a highly regulated and changing environment. Compliance risk is mitigated through embedded compliance procedures and controls, ensuring adherence to regulations, and ongoing compliance monitoring by internal compliance functions. The risk of loss of key employees is managed by the use of long-term incentive schemes aligned with shareholder value targets, and by competition restrictions in employment agreements. Corporate Governance and Directors’ Report | 39 POLICY MATTERS Relations with shareholders and analysts The Company is committed to a continuing open dialogue with investors and analysts in order to raise understanding and awareness of the Group’s strategy, operations, management and plans and to realise a fair valuation for the Company’s shares. Under the programme for 2004, the Chief Executive and/or the Group Finance Director hosted over 100 one-to-one meetings across South Africa, the UK, the USA and Europe with current and potential investors. A divisional executive accompanied them to almost half of these meetings, in order to offer greater insight into their specific business. The programme was complemented by educational seminars on the Group’s US life and asset management businesses held in the UK and South Africa. In addition to the above, the Corporate Affairs team carried out almost 100 meetings around the world, some in conjunction with the Treasury team on non-deal roadshows. Group strategy and performance are communicated to financial markets through annual and interim reports, news releases, speeches, transcripts and presentations, using a wide range of internal and external communication channels. The Company holds two results meetings a year, at the time of its preliminary and interim results, and these are hosted and webcast simultaneously in London and Johannesburg. In addition, in May and November the Company holds analyst teleconference calls to present its quarterly trading statements. Transcripts and materials are held on the Company’s website to allow access (subject to applicable legal restrictions) for those unable to be present. All major announcements by the Company are e-mailed to Corporate Affairs’ investor database as they are made public. The Company’s shares are now covered by 20 analysts in South Africa and the UK and they offer commentary and views on valuation in the Company’s two major listed regions. Corporate Affairs continued to strive during 2004 to increase the coverage of the Company’s shares outside South Africa so that a balanced spread of benchmarks and peer comparisons would be available. The Company’s website has undergone continued development in 2004, creating state-of-the-art tools for retail investors and allowing access to materials and records of all public presentations, as well as media and regulatory communications. Frequently asked questions are posted on the website and the Company responds to many direct requests for information and also provides answers to specific queries. The website offers a wide range of services for investors, including the Company’s share price, details of dividends, procedures for electing to receive communications electronically and other relevant data for shareholders. The Company’s share registrars in the UK and each country where its shares are listed offer 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 communication with, and provide other services for, the Company’s shareholders. The Board monitors investor relations matters closely and receives a report on the subject at each of its scheduled meetings. It also receives the results of an annual externally-conducted survey by Makinson Cowell, which seeks to capture the views of the Company’s largest shareholders on a wide range of issues. These include feedback on governance and strategy. The use of an external agency to collate these views enables shareholders to be more open about any concerns or issues they may have. In addition, the Chairman, the senior independent non-executive director and the other non-executive directors attend various functions during the year to which major shareholders are invited, thereby enabling them to understand any issues or concerns that such shareholders may wish to raise. Press cuttings and brokers’ and analysts’ comments on the Company are also provided to all of the directors on a weekly basis by the Corporate Affairs department. The senior independent non-executive director, Mr Collins, currently obtains an understanding of issues and concerns of major shareholders primarily through the Makinson Cowell survey referred to above, but he also dealt with direct representations or issues from shareholders and other stakeholders during 2004. Employment matters The Group’s employment policies are designed to promote a working environment that supports the recruitment and retention of highly effective employees, improves productivity and fosters relationships that build on the diversity of its workforce. They are regularly reviewed and updated to ensure their relevance for the locations to which they apply. Whilst local employment policies and procedures are developed by each business according to its own circumstances, the following key principles of employment are applied consistently throughout the Group: • employees are recruited, retained, trained 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 (whether in existence at the commencement of employment or developing subsequently) unrelated to the task at hand. In South Africa this principle is balanced with the requirement to address issues of employment equity, and the local businesses’ practices take due account of this; 40 | Corporate Governance and Directors’ Report Corporate Governance and Directors’ Report Continued • clear goals are established, together with training and feedback on performance, to deliver the Group or business objectives and to provide a satisfying working environment for employees; • a working environment is provided that meets the health and safety standards of the Group and local regulations and allows employees to work to the best of their abilities, free from discrimination and harassment; • employee involvement, consultation and communication are promoted The benefits of a continuous drive to promote performance management across the Group over the last three years are now being seen in improvements in performance management processes and culture, measurement of performance and delivery, and the relationship between performance and reward. Key initiatives at the Group’s South African businesses during 2004 included: through in-house publications, briefings, roadshows and internet- based channels; and • HIV/AIDS workplace programmes, which enable improved access to counselling of employees and their families on HIV/AIDS-related issues; • the efforts of employees in contributing to the success of the Group are appropriately recognised. Compensation systems are structured to recognise both the efforts of individuals and the performance of the sector of the business in which they work. • active involvement by Old Mutual South Africa and Nedcor in working through employer bodies to finalise proposals on the Financial Sector Charter dealing with Black Economic Empowerment and employment equity; and Various initiatives have been implemented to enhance talent management processes across the Group including: • acceleration of employment equity and management transformation through cultural diversity and voluntary early retirement programmes. • using the Top Leadership Group, which comprises approximately 100 senior people from across the Group, to develop, review, implement and communicate talent management as well as other strategic initiatives; • agreeing a common set of values to be applied consistently across the Group and encouraging their adoption and implementation through surveys, road shows, written media and incorporation into the performance appraisal cycle; • identifying international and other cross-business employment opportunities to develop talented individuals across the Group; • setting an objective for each of the Group’s businesses to be an employer of choice, supported by the creation of centres of excellence in human resource practice in the larger and more established businesses. These centres of excellence support and assist the development and implementation of world-class practice in the Group’s newer and smaller businesses; and • continuing to focus on leadership and management development, supported by the Old Mutual Business School in Cape Town. Supplier payment policy In most cases suppliers of goods or services to the Group do 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 Company has signed the Better Payment Practice Code, an initiative promoted by the Department of Trade and Industry in the UK to encourage prompt settlement of invoices. The total outstanding indebtedness of the Company (and its service company subsidiary, Old Mutual Business Services Limited) to trade creditors at 31 December 2004 amounted to £1,281,000, corresponding to 20 days’ payments when averaged over the year then ended. Charitable contributions The Company, its subsidiaries in the UK, and the Old Mutual Bermuda Foundation collectively made charitable donations of £234,000 during 2004 (2003: £222,000). In addition, the Group made a wide range of other significant donations to charitable causes and social development projects, as described in more detail in the Corporate Citizenship section of this document. Environmental matters A description of the Group’s environmental policy and activities during 2004 is contained in the Corporate Citizenship section of this document. Corporate Governance and Directors’ Report | 41 OTHER DIRECTORS’ REPORT MATTERS Political donations The Group made no EU political donations during the year. US political donations totalling $3,000 were made by the Group’s US businesses during 2004. Dividend The directors recommend a final dividend of 3.5p per share, which, together with the interim dividend of 1.75p per share paid in November 2004, makes a total dividend for the year of 5.25p per share. Subject to shareholders’ approval at the Annual General Meeting, the final dividend will be paid on 31 May 2005 to members on the register at the close of business on 22 April 2005. Shareholders on the South African, Malawi and Zimbabwe branch registers and the Namibian section of the principal register will be paid the final dividend in the respective local currencies of those territories by reference to the relevant exchange rates prevailing on 31 March 2005 (30 March 2005, in the case of Zimbabwe), as determined by the Company. The equivalents of the recommended Sterling dividend in these currencies will be announced by the Company on 1 April 2005. 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 therefore not be subject to the South African tax on foreign dividends in relation to it. The Board’s policy on dividends is to seek to achieve steadily increasing returns to shareholders over time, reflecting the underlying rate of progress and the cash flow requirements of its businesses. The Board anticipates declaring an interim dividend for the current year in August 2005, for payment in November 2005. Authorities from the shareholders for the Company to make market purchases of, 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 383,752,930 of its own shares were in force at 31 December 2004. No purchases of shares were made pursuant to any of those authorities during the year then ended. Substantial interests in shares At 28 February 2005, the following substantial share interests had been declared to the Company in accordance with Part VI of the Companies Act 1985: Barclays plc Legal & General Investment Management Limited Number of shares % of total issued shares 159,868,102 4.15% 131,113,007 3.40% Old Mutual Life Assurance Company (South Africa) Limited 274,950,790 7.13% Public Investment Commissioners of the Republic of South Africa 398,417,574 10.34% 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. Share capital The Company’s issued share capital at 31 December 2004 was £385,394,299.00 divided into 3,853,942,990 Ordinary Shares of 10p each (2003: £383,689,581.10 divided into 3,836,895,811 Ordinary Shares of 10p each). During the year ended 31 December 2004, a total of 17,047,179 shares in the Company were issued at an average price of 85.08p each under the Group’s share option schemes. By order of the Board Martin C Murray Group Company Secretary 28 February 2005 42 | Board of Directors Board of Directors The Board has ten members, with two executive and eight non-executive directors. Professor Nkuhlu joins the Board as an additional non-executive director on1 March 2005 2 6 10 3 7 11 4 8 1 5 9 Board of Directors | 43 1 MIKE LEVETT (65)2 B.Com., D.Econ.Sc. (hc), FIA, FFA, FASSA, is non-executive Chairman, having previously held the role of Chairman and Chief Executive until October 2001. He has also been Chairman of the Nomination Committee since February 2003. He joined the Group in 1959. He is a non-executive director of Barloworld Limited, Central Africa Building Society, Mutual & Federal Insurance Company Limited and Old Mutual South Africa Trust plc. 7 WARREN CLEWLOW (68)2 OMSG, CA(SA), D.Econ. (hc), has been a non-executive director of the Company since March 1999. He became Chairman of Nedcor Limited in May 2004, having previously been its Deputy Chairman. He has also been Chairman of Barloworld Limited since 1991. He was previously Chief Executive of the Barloworld group and has managed many of its various divisions. He is also a non-executive director of Sasol Limited. 2 JIM SUTCLIFFE (48)2 B.Sc., FIA, became Chief Executive in November 2001, having been appointed to the Board as Chief Executive of the Group’s life businesses in January 2000. He is also a non-executive director of Nedcor Limited and of Nedbank Limited. Before joining the Group, he was Chief Executive, UK, of Prudential plc and Chief Operating Officer of Jackson National, Prudential’s US subsidiary. 3 JULIAN ROBERTS (47) B.A., FCA, MCT, is Group Finance Director, a position he has held since joining the Group in August 2000. He is also a non-executive director of Mutual & Federal Insurance Company Limited and of Nedcor Limited. He was formerly Group Finance Director of Sun Life & Provincial Holdings PLC. Before joining Sun Life & Provincial Holdings PLC, he was a director and Chief Financial Officer of Aon UK Holdings Limited. 4 NIGEL ANDREWS (57)1, 2, 3 B.Sc., MBA, has been a non-executive director of the Company since June 2002. He is a non-executive director of the Company’s principal US holding company, Old Mutual (US) Holdings, Inc. and chairs that company’s Remuneration Committee. He is non-executive Chairman of Great Lakes Chemical Corporation, a member of the board of the Victory Funds and a governor of the London Business School. Previously he was an Executive Vice President and member of the office of the CEO of GE Capital, having spent 13 years with The General Electric Company Inc. 5 RUDI BOGNI (57)1, 2 D.Econ. (Bocconi), has been a non-executive director of the Company since February 2002. He chairs the Actuarial Review Committee. He is Chairman of Medinvest International SCA, Luxembourg and of the International Advisory Board of Oxford Analytica. He is also a member of the boards of the LGT Foundation, Common Purpose International Limited and Prospect Publishing, and of the governing council of the Centre for the Study of Financial Innovation. He served previously as a member of the Executive Board and Chief Executive, Private Banking of UBS AG, and before that he was Group Treasurer and a member of the Executive Committee of Midland Bank plc. 6 NORMAN BROADHURST (63)1, 2, 3 FCA, FCT, has been a non-executive director of the Company since March 1999 and will succeed Mr Collins as senior independent non-executive director in May 2005. He chairs the Group Audit Committee. He was Group Finance Director of Railtrack plc from 1994 to 2000. He is Chairman of Freightliner Limited and of Chloride Group plc. He is also a non-executive director of Cattles plc, Tomkins plc and United Utilities plc. 8 CHRISTOPHER COLLINS (65)1, 2, 3 FCA, has been a non-executive director of the Company since March 1999 and became the senior independent non-executive director in February 2003. He chairs the Remuneration Committee. He has been Chairman of Hanson PLC since 1998, a position that he will be relinquishing in April 2005 before succeeding Mr Levett as non-executive Chairman of the Company following the Annual General Meeting in May 2005. He is Chairman of Forth Ports PLC and a non-executive director of The Go-Ahead Group plc and of Alfred McAlpine PLC. 9 RUSSELL EDEY (62)1, 2 FCA, has been a non-executive director of the Company since June 2004. He is deputy chairman of N M Rothschild Corporate Finance Limited, a non-executive director of FKI plc and Chairman of Anglogold Ashanti Limited. He previously served on the boards of English China Clays plc, Wassall plc, Northern Foods plc and Express Dairies plc. His career began in the Finance Division of the Anglo American Corporation of South Africa Limited in Johannesburg. In the 1970s he was General Manager – Corporate Finance of Capel Court Corporation in Melbourne. He joined Rothschild in 1977 and was Head of Corporate Finance from 1991 to 1996. 10 MICHAEL MARKS (63)2, 3 CBE, has been a non-executive director of the Company since February 2004. He is one of the founding partners of New Smith Capital Partners LLP and is also a non-executive director of RIT Capital Partners PLC. Until February 2003 he had held a number of senior roles with Merrill Lynch, including Executive Chairman of Merrill Lynch Europe, Middle East and Africa and Executive Vice-President of Merrill Lynch & Co. Prior to joining Merrill Lynch in 1995, he had been Chairman of Smith New Court PLC, having earlier been responsible for the international operations of that company in New York, Hong Kong, Singapore and South Africa. He was also formerly a non-executive director of the London Stock Exchange, Chairman of the London Investment Banking Association and Vice-President of the British Bankers’ Association. 11 WISEMAN NKUHLU (61) B.Com., CTA, MBA, has been appointed as a non-executive director from 1 March 2005. He is a qualified chartered accountant, Chief Executive of the New Partnership for Africa’s Development and a former economic adviser to South African President Thabo Mbeki. He is also a non-executive director of the Company’s South African life subsidiary, Old Mutual Life Assurance Company (South Africa) Limited. His previous appointments include presidency of the South African Institute of Chartered Accountants and chairmanship of the Development Bank of Southern Africa. Key: 1 Member of the Group Audit Committee 2 Member of the Nomination Committee 3 Member of the Remuneration Committee 44 | Remuneration Report Remuneration Report This Remuneration Report has been prepared by the Remuneration Committee (referred to in this report as the Committee) and has been approved by the Board of the Company. The figures included in the sections of this report headed “Directors’ Emoluments” on pages 49 to 51 and “Directors’ Interests Under Employee Share Plans” on pages 46 to 48 have been audited by KPMG Audit Plc as required by the Directors’ Remuneration Report Regulations 2002. Their audit report is set out on page 56. The information in the remainder of this report has not been audited. MEMBERSHIP AND ROLE OF THE COMMITTEE The Committee consists exclusively of non-executive directors who are considered by the Board to be independent. Mr C D Collins is Chairman of the Committee and the other members throughout 2004 were Mr N D T Andrews and Mr N N Broadhurst. Mr W A M Clewlow was a member of the Committee until 9 December 2004 and Mr M J P Marks joined the Committee from 1 July 2004. The Company Secretary, Mr M C Murray, acts as Secretary to the Committee. The Committee is responsible for: • determining the remuneration, incentive arrangements and benefits, including pension rights and any compensation payments, of the executive directors; • determining the remuneration of the Chairman of the Board and monitoring and approving the level and structure of remuneration of senior management who report directly to the Chief Executive, together with the Company Secretary; and • reviewing, monitoring and approving, or recommending for approval, share incentive arrangements (including option schemes) of the Company. The full terms of reference of the Committee are published on the Company’s website, www.oldmutual.com, and are also available free of charge on request from the Company Secretary. During the year under review, the Committee met on three occasions. The meetings were attended by all of the then members of the Committee, save for one from which Mr Clewlow was absent, one from which Mr Marks was absent and one from which Mr Andrews was absent. The Board accepted the recommendations made by the Committee during the year without amendment. The Committee retained Hewitt Bacon & Woodrow, a leading firm of UK remuneration consultants, as its independent advisers throughout 2004 and a representative of that firm attended all meetings. The terms of the letter of engagement of Hewitt Bacon & Woodrow are published on the Company’s website and are also available on request from the Company Secretary. Any work that the Company wishes Hewitt Bacon & Woodrow to do on its behalf, rather than for the Committee, is pre-cleared with the Chairman of the Committee with a view to avoiding any conflicts of interest. Hewitt Bacon & Woodrow advised the Company during the year in connection with certain aspects of its employee share plans. The Committee was also assisted during the year by Stephen Mulliner, Kevin Stacey and Judy Gathercole of the Group Human Resources department, a specialist function within head office. It provides supporting materials for the matters that come before the Committee, including comparative data and justifications for proposed salary, benefit, bonus and share awards and criteria for performance targets and appraisals against those targets. It uses the services of external advisers as necessary. The Chairman of the Committee has access to, and regular contact with, members of the Group Human Resources department independently of the executive directors. REMUNERATION POLICY The Company embraces the principles and complies with the provisions of the Combined Code relating to directors’ remuneration. The guiding principles which the Committee has applied during 2004, and which it intends to continue to apply, are as follows: • to take account of appropriate benchmarks, while using such comparisons with caution, recognising the risk of an upward ratchet of remuneration levels with no corresponding improvement in performance. Members of the UK FTSE 100 Index provide the benchmark for UK-based executive directors, with particular reference to peer companies; • to be sensitive in determining, reviewing, monitoring or approving matters under its remit to pay and employment conditions around the Group where relevant; • to make a significant percentage of potential maximum rewards conditional on both short-term and long-term performance. These rewards include share-based incentives, in order to align the executive directors’ interests closely with those of shareholders; • to provide an opportunity for overall remuneration packages to be in the upper quartile of the comparator group through payments under short-term and long-term incentive schemes if superior performance is delivered, while the fixed elements of remuneration remain benchmarked at or below appropriate median levels; • to use predominantly measured and targeted objectives to determine performance-related remuneration to focus attention on the main drivers of shareholder value; and • to attract, retain and motivate individuals of the exceptional calibre needed to lead the international development of the Group. The Committee’s policy is influenced by the need to be competitive with other international financial services groups, whilst also aiming to avoid paying more than is necessary. The Committee seeks, where it considers appropriate, the views of institutional investors (including representative groups such as the Association of British Insurers (ABI)) on any significant changes to remuneration structures applicable to the executive directors. During 2004, it consulted about the continued use of earnings per share-based targets for executive directors’ long-term incentives and obtained feedback that this was preferred to certain other proposals. In valuing share option awards, the Committee has regard to, but does not rely exclusively on, Black-Scholes modelling of share option values. DIRECTORS’ REMUNERATION PACKAGES Remuneration during 2004 for Mr Sutcliffe and Mr Roberts comprised a basic salary, a benefit allowance, an annual performance-based short-term incentive award paid partly in cash and partly in restricted shares, a bonus matching plan, and participation in the Company’s share option schemes. The Committee reviews the structure of the executive directors’ remuneration packages annually to satisfy itself that the balance between fixed and variable remuneration and short- and long-term incentives and rewards remains appropriate. Basic salary In setting the basic salary of each executive director, the Committee takes into account market competitiveness and the performance of the director concerned, together with any changes in role or responsibility. This is consistent with the reward structure in place for executives below Board level and that used by comparable companies. Mr Sutcliffe’s basic salary of £500,000 p.a. remained unchanged during 2004 from that paid in 2003 and 2002, whilst Mr Roberts’ basic salary was increased by approximately 3% from £340,000 to £350,000 p.a. Benefits and benefit allowance The Company has a cash-based package approach for the executive directors and other senior UK executives. The benefit allowance (equal to 35% of basic salary for Mr Sutcliffe and Mr Roberts) is provided in lieu of contributions to pension funds and certain other benefits that would be usual at their level. Recipients of the benefit allowance may use it to purchase benefits appropriate to their needs from independent suppliers of their choice or may, if they wish, participate at their own expense 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 Sutcliffe and Mr Roberts have both joined the defined contribution section of the Old Mutual Staff Pension Fund, and each made contributions to it from their benefit allowance in 2004. Life cover up to four times the UK statutory earnings cap and disability cover up to the free cover limit of £120,000 were provided to Mr Sutcliffe and Mr Roberts at the Company’s expense during the year as part of a Company-wide insurance policy. Remuneration Report | 45 Short-term incentive awards The executive directors’ short-term incentive scheme for 2004 was altered to provide a maximum potential award equal to 130% of basic salary, of which two-thirds was payable in cash and the balance in restricted shares of the Company. For the awards to be made in 2005 relating to performance during 2004, such restricted shares will be subject to the attainment of the same performance conditions as apply to the “bonus match” shares described below and will not attract dividends during the performance period. Achievement of financial targets based on the Group’s results for the year accounted for a potential maximum of 110% of basic salary for Mr Sutcliffe and 90% for Mr Roberts. These financial performance targets were subdivided between adjusted earnings per share (EPS), which accounted for 70% of the financial targets component, and return on average equity (RoAE), which accounted for the other 30%. The EPS component was calibrated in such a way that the maximum payment would only be made upon the attainment of EPS of 15.7p, and no part of this element of the bonus would be paid if EPS was less than 11.3p (which was 13% above the Company’s EPS in 2003). For RoAE, the range was 13% to 17%. The outcomes for EPS and RoAE were 15.3p and 19.1% respectively and the percentage of basic salary earned by Mr Sutcliffe was 103.8% and that by Mr Roberts was 85.0%. The balance of the maximum short-term incentive award, equal to 20% of basic salary for Mr Sutcliffe and 40% for Mr Roberts, was related to the fulfilment of specific personal objectives agreed by the Committee in advance. These were subject to a formal performance appraisal process at the end of 2004. Based on those performance appraisals, the Committee determined that, out of the maximum 20% for Mr Sutcliffe 15.4% should be paid and, out of the maximum 40% for Mr Roberts, 32% should be paid. The Committee reviews personal objectives each year in the light of what are considered to be the key deliverables for each member of the executive management under its remit. Bonus match The Committee has determined that both Mr Sutcliffe and Mr Roberts may elect to invest some or all of the cash element of their short-term incentive award for 2004 by purchasing shares in the Company and holding them for three years in order to receive a matching award of restricted shares. The value of the matching award will be equal to the gross value of the amount used to purchase shares, namely before deduction of tax and National Insurance. The matching shares will cease to be subject to restrictions on the third anniversary of the award date, provided that: (1) a performance condition has been satisfied, namely that (i) in relation to one-half of the matching shares, the Group’s EPS in Sterling increases by at least 9% above the increase in the UK Retail Price Index (UK RPI) over the three-year period commencing on 1 January in the year of the award; and (ii) as to the other half of the matching award, the Group’s EPS in Rand increases by at least 9% above the increase in the South African Consumer Price Index (SA CPI) over the same period; (2) the shares purchased using the recipient’s short-term cash award are retained until the third anniversary of the award date; and (3) the recipient remains employed by the Group until the third anniversary of the award date. 46 | Remuneration Report Remuneration Report Continued Long-term incentive awards Details of the executive directors’ long-term incentive awards are set out under the heading “Directors’ Interests Under Employee Share Plans” below. DIRECTORS’ INTERESTS UNDER EMPLOYEE SHARE PLANS Share Option and Deferred Delivery Plan (SOP) The SOP is generally used for the grant of executive options (or, until 2004, in the case of South African participants, deferred delivery shares) to qualifying senior employees. Regular annual grants were made under this plan in March 2004 and interim grants, for new appointments or promotions, were made in August 2004. Options and deferred delivery shares awarded during 2004 have a maximum life of six years. Mr Sutcliffe’s and Mr Roberts’ awards under the SOP in 2004 were over shares equal in value to 180% (out of a potential maximum of 200%) of their respective basic salaries at the time of grant. Awards under the SOP are phased annually so that no undue incentive arises in relation to any year of maturity. The quantum of annual awards made to the executive directors is decided by the Committee in the light of evaluation of performance of the recipients in the previous year. Grants made under the SOP in 2004 were subject to: (i) as to one-half of the shares comprised in each grant, a Sterling-denominated EPS performance target linked to UK RPI; and (ii) as to the other half of the shares comprised in each grant, a Rand-denominated EPS performance target linked to SA CPI. The minimum target for option grants of up to 100% of basic salary was that growth in EPS must exceed the accumulated growth in: (i) as to one-half of the shares, UK RPI over the three-year vesting period plus 9%; and (ii) as to the other half of the shares, SA CPI over the three-year vesting period plus 9%. Higher targets apply to grants in excess of 100% of basic salary, namely up to 12% above the relevant indices for multiples of between 100% and 200% of basic salary and up to 15% above the relevant indices for multiples (where applicable) of over 200% of basic salary. The Committee considers these to be demanding performance targets in the current market environment. Awards made under the SOP in 2000 and 2001 lapsed completely upon non-fulfilment of the performance targets, and those made in 2002 vested only partially, following partial fulfilment of the performance targets. Restricted Share Plan (RSP) The RSP is used: (i) to assist in recruiting and retaining key individuals by making awards of shares which are restricted for three or more years and are subject to forfeiture in the event of prior termination of employment, unless special circumstances apply; (ii) as an adjunct to the annual bonus arrangements for the executive directors, to provide contingent matching awards of shares, subject to performance targets and to some or all of the cash element of their short-term incentive awards being invested and retained for the three-year matching period in shares in the Company; (iii) to make contingent awards of shares subject to a three-year holding period as a form of payment of short-term incentive awards based upon performance evaluation for the prior year; and (iv) to make awards of restricted shares under long-term incentive plans for the Group’s US asset management business. Performance targets In choosing the performance targets for the SOP and the RSP, the Committee has considered the merits of EPS-based targets against alternative possibilities, such as comparative performance against a selected group of other companies or growth in embedded value. The Committee has determined that EPS is currently the most appropriate criterion, as the Company’s mix of businesses and geographical profile, together with the volatility of life peers, makes it difficult to establish a suitable basket of comparator businesses, and growth in embedded value would not, because of the way in which embedded value is calculated, reflect the full contribution to the Group’s performance of its important asset management and banking activities. Since 2002, in recognition of the location of the Company’s shareholding base, the Committee has decided that it would be more appropriate for EPS to be tested in both Sterling and Rand terms, and awards granted from 2002 onwards have therefore been split as to one-half UK RPI-based and as to the other half SA CPI-based. The Committee intends to continue to apply this during 2005, but will keep the suitability and incentivising effect of performance target-linked share-based remuneration under periodic review. It also recognises that the application of International Financial Reporting Standards (IFRS) to the Group’s results from 2005 onwards will affect reported EPS and the direct comparability between EPS for different years pre- and post-IFRS, which it will need to consider. In evaluating to what extent performance targets have been fulfilled, the Committee will use post-IFRS numbers adjusted to make them as closely comparable as possible to the base year. This will include the smoothing of long-term investment returns in the Group’s life assurance and general insurance businesses. It will liaise with the Group Audit Committee to ensure that the evaluation of the performance conditions is accurately validated. Savings-Related Share Option Scheme (Sharesave) The Group operates a savings-related share option scheme, which provides a savings and investment opportunity for full-time and part- time employees of the Group’s participating UK businesses. 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 date of invitation to participate. The following options and rights over shares in the Company were outstanding in favour of directors of the Company under the share schemes described above at 31 December 2004, those granted during the year then ended being highlighted in bold, and those that lapsed after the year-end being printed in italics: J V F Roberts J H Sutcliffe Remuneration Report | 47 Share plan Date of grant RSP SOP SOP RSP RSP Sharesave SOP RSP SOP RSP SOP SOP RSP RSP Sharesave SOP RSP SOP RSP 08.09.00 04.03.02 04.03.02 05.03.02 05.03.02 05.04.02 26.02.03 26.02.03 03.03.04 03.03.04 04.03.02 04.03.02 05.03.02 05.03.02 05.04.02 26.02.03 26.02.03 03.03.04 03.03.04 Number of shares 50,200 357,000 357,000 39,178 39,179 11,445 788,406 69,151 661,418 35,695 524,950 524,950 68,631 68,631 19,939 1,159,421 155,853 944,882 83,989 Exercise price nil 95.25p 95.25p nil nil 83.0p3 86.25p nil 95.25p5 nil6 95.25p 95.25p nil nil 83.0p3 86.25p nil 95.25p5 nil6 Date exercisable or receivable 21.08.051 Lapsed2 04.03.05 – 04.03.08 Lapsed2 05.03.05 01.06.05 – 30.11.05 26.02.064 – 26.02.09 26.02.064 03.03.074 – 03.03.10 03.03.074 Lapsed2 04.03.05 – 04.03.08 Lapsed2 05.03.05 01.06.07 – 30.11.07 26.02.064 – 26.02.09 26.02.064 03.03.074 – 03.03.10 03.03.074 Save as mentioned in the table above, there have been no changes in the directors’ interests in any of the Group’s employee share plans between 31 December 2004 and 28 February 2005. Notes: 1 Restricted shares, which are to be released on the fifth anniversary of Mr Roberts’ appointment (i.e. on 21 August 2005), subject to his still being in employment with the Group on that date. Mr Roberts is entitled to the dividends on these shares, pending vesting. 2 The SA CPI-related options granted under the SOP on 4 March 2002 and SA CPI-related restricted share awards made under the RSP on 5 March 2002 lapsed on 28 February 2005 because the performance condition (relating to growth in the Company’s Rand-denominated EPS between 2001 and 2004) was not fulfilled. 3 The Sharesave option price was determined as 20% below the average of the Company’s share price on 7, 8 and 11 March 2002. The Company’s share price at the date of grant (5 April 2002) was 109p. 4 Subject to the fulfilment of performance targets prescribed by the Committee, under which: • options granted on 26 February 2003 will only be exercisable if the Company’s EPS in the year ending 31 December 2005 increases by prescribed factors of between 9% and 15% in excess of as to one-half, UK RPI, and as to the other half, SA CPI, in comparison to EPS for the year ended 31 December 2002. The basic factor of at least 9% over UK RPI/SA CPI applies to multiples of up to one times basic salary, with a sliding scale up to 15% applicable to multiples over one times basic salary; • restricted shares awarded on 26 February 2003, in conjunction with the investment by the director concerned of some or all of his net bonus for 2002 in shares in the Company, will only be released if the Company’s EPS in the year ending 31 December 2005 increases by at least 9% in excess of as to one-half, UK RPI, and as to the other half, SA CPI, in comparison to EPS for the year ended 31 December 2002. No entitlement to dividends applies to these restricted shares, pending vesting; • options granted on 3 March 2004 will only be exercisable if the Company’s EPS in the year ending 31 December 2006 increases by prescribed factors of between 9% and 15% in excess of as to one-half, UK RPI, and as to the other half, SA CPI, in comparison to EPS for the year ended 31 December 2003. The basic factor of at least 9% over UK RPI/SA CPI applies to multiples of up to one times basic salary with a sliding scale up to 15% applicable to multiples over one times basic salary; • restricted shares awarded on 3 March 2004, in conjunction with the investment by the director concerned of some or all of his net bonus for 2003 in shares in the Company, will only be released if the Company’s EPS in the year ending 31 December 2006 increases by at least 9% in excess of as to one-half, UK RPI, and as to the other half, SA CPI, in comparison to EPS for the year ended 31 December 2003. No entitlement to dividends applies to these restricted shares, pending vesting. 5 Options granted under the SOP on 3 March 2004 were based on the closing middle market price of the Company’s shares on the London Stock Exchange on 1 March 2004. 6 The numbers of shares awarded under the RSP on 3 March 2004 were calculated by reference to a price of 95.25p per share, being the price at which shares were acquired for the account of the director concerned with some or all of his net of tax bonus for the year ended 31 December 2003. 48 | Remuneration Report Remuneration Report Continued During the year the following restricted shares awarded as joining grants under the RSP were released. Mr Roberts paid the associated income tax and employee’s National Insurance contributions arising from their receipt out of his own funds, enabling him to retain all of the shares. J V F Roberts Date of release Number of shares 23.08.04 50,200 Share price at date of release 100.50p Gross value at date of release £50,451 2005 REMUNERATION ARRANGEMENTS FOR THE EXECUTIVE DIRECTORS Mr Sutcliffe’s basic salary for 2005 has increased from £500,000 p.a. to £550,000 p.a. and Mr Roberts’ basic salary has increased from £350,000 p.a. to £385,000 p.a. Both increases were considered by the Committee to be appropriate in the light of comparative market data for the UK financial services sector, with particular reference to larger UK life assurance companies. The Committee took note of the fact that Mr Sutcliffe’s basic salary had not changed since his appointment as Chief Executive in November 2001 and that Mr Roberts’ basic salary had increased only twice and in each case by small percentage amounts since his appointment as Group Finance Director in August 2000. The structure of short-term and long-term incentives for 2005 has not been changed other than to remove the performance condition from the deferred element of any short-term incentive award receivable by the executive directors for their 2005 performance. This reflects the fact that the bonus has already been earned at the time of the award and is in line with practice at comparator companies. This does not affect the “bonus match” arrangements described on page 45 and the receipt of shares under those arrangements remains subject to the attainment of a performance condition. EXECUTIVE DIRECTORS’ SERVICE CONTRACTS Directors holding executive office have service contracts with the Company. Their terms are considered by the Committee to provide a proper balance of responsibilities and security between the parties. The Company’s policy is to fix notice periods for executive directors at a maximum of 12 months. Compensation for loss of office, where applicable, is tailored to reflect the Company’s contractual obligations and the obligation on the part of the employee to mitigate loss. Mr Sutcliffe and Mr Roberts have service contracts terminable by the Company on 12 months’ notice. If not terminated, these contracts can continue until the director attains the age of 60 (i.e. until 20 April 2016 for Mr Sutcliffe and 7 June 2017 for Mr Roberts). Their current contracts are dated 6 February 2002 and 15 November 2002 respectively. Mr Roberts’ contract contains a liquidated damages provision under which, if the Company terminates his employment other than for cause or if he is constructively dismissed, the Company is required to pay him compensation for the period of unexpired notice equal to three-quarters of his then annual salary and benefit allowance plus a further three- eighths of annual salary on account of potential bonus entitlement. This has been agreed to constitute a genuine pre-estimate of his loss over the notice period after taking into account appropriate mitigation. Mr Sutcliffe’s contract does not contain any provisions quantifying compensation that would be payable on early termination. NON-EXECUTIVE DIRECTORS’ TERMS OF ENGAGEMENT The terms of engagement of the seven non-executive directors (other than the Chairman, Mr Levett) provide for their positions to be held at the will of the respective parties, i.e. on terms that they may be terminated by either side without notice. However, it is envisaged that they will remain in place on a three-year cycle, in order to provide assurance to both the Company and the non-executive director concerned that the appointment is likely to continue. The same arrangement will apply to Professor Nkuhlu, whose appointment to the Board will begin on 1 March 2005. The Board has determined that, in the absence of exceptional circumstances, no non-executive director's cycle of appointment should be renewed more than twice, i.e. that non-executive directors should serve a maximum of nine years in that role, and that no non-executive director should continue in office beyond his seventieth birthday. The renewal of non-executive directors’ terms for successive three-year cycles is not automatic, with the continued suitability of each non-executive director being assessed by the Nomination Committee. A particularly searching review is carried out after the second three-year cycle. The second three-year cycles applicable to Messrs Broadhurst and Clewlow (both of whom were first appointed as directors from 25 March 1999) were due to expire on 24 March 2005. Having regard to the need for continuity and experience, balanced against progressive renewal, of the non-executive component of the Board, and having assessed positively their contribution, the Nomination Committee recommended to the Board, and the Board in January 2005 approved, the extension of Mr Broadhurst’s term of appointment for a further three years (expiring on 24 March 2008) and the extension of Mr Clewlow’s term of appointment for a further 15 months (to expire at the end of the Annual General Meeting in May 2006). Mr Collins was first appointed to the Board on 25 March 1999 and his second three-year term was due to expire on 24 March 2005. His contribution to the Board was assessed as part of the process leading to the Board’s decision to appoint him as Chairman elect to succeed Mr Levett. He entered into a new engagement letter with the Company in January 2005 setting out the terms applicable when he becomes Chairman in May 2005. Under these, subject to 12 months’ notice at any time given by either the Company or Mr Collins, to his being duly re-elected at any intervening Annual General Meetings and to the provisions of the Company’s Articles of Association relating to the removal of directors, Mr Collins’ appointment may continue until his seventieth birthday (19 January 2010). The first three-year cycles applicable to Mr Bogni and Mr Andrews expired or were due to expire on 31 January 2005 and 31 May 2005 respectively. Following a review by the Nomination Committee of their contribution to the Board and their continued suitability, the Nomination Committee recommended and the Board in January 2005 agreed to extend their expected periods of engagement for a further three years (i.e. until 31 January 2008 and 31 May 2008 respectively). Remuneration Report | 49 Mr Marks’ and Mr Edey’s appointments are each expected to last for an initial term of three years from their dates of appointment (i.e. until 31 January 2007 and 23 June 2007 respectively) and will then be considered for renewal. Mr Levett is due to retire as Chairman at the conclusion of the Annual General Meeting on 11 May 2005. No compensation or terminal payment is due to him from the Company in connection with his retirement. NON-EXECUTIVE DIRECTORS’ FEES The Company’s policy on remuneration for non-executive directors is that this should be fee-based and the Company has regard, in setting such fees, to market data on fees paid to non-executive directors by other members of the FTSE 100 Index, as well as considering the time commitment involved in fulfilling their roles. It is also the Company’s policy that neither the Chairman nor any of the other non-executive directors should receive share incentives geared to share price performance. The basic fee for non-executive directors (other than the Chairman) was £35,000 p.a. in 2004 and, following a review carried out in November 2004 by a sub-committee appointed for the purpose by the Board on which none of the non-executive directors whose fees were being determined sat, was increased to £36,500 p.a. from 1 January 2005. Additional fees were payable during 2004 for: Chairmanship (£14,000 p.a.) and membership (£5,000 p.a.) of the Group Audit Committee; Chairmanship (£9,000 p.a.) and membership (£3,000 p.a.) of the Remuneration Committee; membership of the Nomination Committee (£2,500 p.a.) (fees for the Chairmanship of this Committee having been waived by Mr Levett); and Chairmanship (£5,000 p.a.) and membership (£1,500 p.a.) of the Actuarial Review Committee. These additional fees remain unchanged in 2005. A fee of £235,000 p.a. will be paid to Mr Collins upon his becoming Chairman from 11 May 2005. In addition, the Company will provide him with an office at its headquarters in London. DIRECTORS’ EMOLUMENTS 1) Remuneration Remuneration for the years ended 31 December 2004 and 31 December 2003 (including, in each case, remuneration from offices held with the Company’s subsidiaries, Old Mutual Life Assurance Company (South Africa) Limited (OMLAC(SA)), Old Mutual (US) Holdings, Inc. (OMUSH), Nedcor and Mutual & Federal Insurance Company Limited (Mutual & Federal) and their respective subsidiaries, where relevant) was as follows: Year to 31 December 2004 M J Levett J V F Roberts J H Sutcliffe N D T Andrews R Bogni N N Broadhurst W A M Clewlow C D Collins R P Edey M J P Marks Former director C F Liebenberg Year to 31 December 2003 M J Levett J V F Roberts J H Sutcliffe N D T Andrews R Bogni N N Broadhurst W A M Clewlow C D Collins C F Liebenberg Former directors R C M Laubscher P G Joubert C M Stuart Salary and fees £000 Benefits and benefit allowance £000 Bonus £000 Pension £000 250 350 500 4 79 47 54 5 207 51 21 34 6 164 2 – 2 409 596 – – – – – – – – 1 1 1 1 57 121 215 17 1 9 1 9 – 11 10 10 1 1 1 3 3 – 20 18 – – – – – – – Total £000 307 900 1,329 96 56 63 207 62 31 44 1 6 – 170 Salary and fees £000 Bonus £000 Termination payment £000 Benefits and benefit allowance £000 Pension £000 235 340 500 4 80 45 50 105 48 6 251 5 9 331 65 24 – 2 68 2 80 – – – – – – 8 121 – – – – – – – – – – – 127 – – 1, 7 70 1 106 1 206 1 19 1 3 1 18 – 1 10 1 45 1 7 – – 3 3 – 20 18 – – – – – – 42 – – Total £000 305 534 804 99 48 68 105 58 296 628 65 24 50 | Remuneration Report Remuneration Report Continued Notes: 1 Benefits include cash allowances payable to the executive directors, as well as travel and accommodation costs for directors’ spouses to accompany them to certain Board meetings or other corporate events of the Company and its major subsidiaries. The amount of this expenditure is reported to and considered by the Committee, and procedures are in place for such costs to be authorised. The Committee is satisfied that such expenditure is reasonable and in the interests of the Company in enabling the directors concerned to fulfil their roles better. 2 The cash bonus amounts for 2004 (£273,000 for Mr Roberts and £397,000 for Mr Sutcliffe) are eligible for deferment, at the director’s election, into a bonus matching arrangement under the Restricted Share Plan. The bonuses for 2003 were applied net of tax, as to £34,000 gross (in the case of Mr Roberts) and as to £80,000 gross (in the case of Mr Sutcliffe) to purchase shares in the Company, which are held in trust for the director under the bonus matching arrangement under the Restricted Share Plan. 3 Pension contributions were deducted from the directors’ benefit allowance. 4 Includes fees of £36,000 (2004) and £40,000 (2003) from OMUSH. 7 Inclusive of the cost of accommodation in London provided by the Company until 19 April 2003. 8 Bonus paid by Nedcor to Mr Laubscher in March 2003, which related to the year ended 31 December 2002. 9 Includes fees of £19,000 from OMLAC(SA) and £25,000 from Nedcor. Certain of the directors waived fees for non-executive directorships held in subsidiary companies totalling £72,000 during the year ended 31 December 2004 in favour of the Company or its subsidiaries. These waivers are expected to continue in effect in the future. 2) Pension benefits Mr Sutcliffe and Mr Roberts continued to contribute from their benefit allowance to the Old Mutual Staff Pension Fund (which is a defined contribution scheme) during 2004. The accumulated value of Mr Roberts’ funds in that scheme was £96,000 at 31 December 2004 (£67,000 at 31 December 2003) and the accumulated value of Mr Sutcliffe’s funds in that scheme was £66,000 at 31 December 2004 (£41,000 at 31 December 2003). None of the other directors of the Company had any accrued pension fund benefits in any Group pension fund at 31 December 2004 and none of them contributed to any Group pension fund during 2004. 5 Includes fees of £34,000 (2004) and £34,000 (2003) from OMLAC(SA), and £127,000 (2004) and £23,000 (2003) from Nedcor. OTHER SHARE SCHEME INFORMATION 6 Includes fees of £13,000 (2004) and £14,000 (2003) from OMLAC(SA), £120,000 (including £46,000 of entitlements arising from previous years) (2004) and £191,000 (including £66,000 of entitlements arising from previous years) (2003) from Nedcor, and £3,000 (2004) and £5,000 (2003) from Mutual & Federal. A) Old Mutual Group Achievements (OMGA) Share Incentive Scheme During the year Mr Levett took delivery of his remaining interests under the OMGA Share Incentive Scheme, which operated prior to demutualisation of the Group in 1999. Details are set out in the following table: M J Levett Date of grant 01.10.98 01.10.98 Number of Company shares 607,068 698,544 Price per Company share under the grant R8.98 R9.07 Date of delivery 13.04.04 13.04.04 Price per Company share at date of delivery R12.44 R12.44 Note: The aggregate amount of unrealised gains made by Mr Levett in relation to the above at the date of delivery was R4,454,548. B) Subsidiaries’ Share Incentive Schemes The Company’s separately listed subsidiaries, Nedcor Limited (Nedcor) and Mutual & Federal Insurance Company Limited have their own share incentive schemes which are under the control of the remuneration committees of their respective boards. A former director, Mr Laubscher, had the following options over shares in Nedcor under the terms of the Nedcor Group (1994) Employee Incentive Scheme at 31 December 2004: R C M Laubscher Date of grant 01.06.99 06.11.01 15.04.02 11.06.03 10.05.04 Number of Nedcor shares Price per share R 110,000 43,000 40,600 22,500 90,041 125.00 131.00 125.00 94.00 45.00 Expiry date 01.06.051 30.06.051 30.06.051 30.06.051 30.06.052 Remuneration Report | 51 Notes: 1 Under his termination arrangements with Nedcor, Mr Laubscher was allowed to retain the above options on terms that, if not exercised by whichever was the earlier of their prescribed expiry dates and 30 June 2005, they would then lapse. The performance conditions originally applicable to the awards made in 2001, 2002 and 2003 no longer apply. 2 In accordance with the rules of the Nedcor Group (1994) Employee Incentive Scheme, all optionholders (whether still employed by the Nedcor Group or not) were entitled to receive an additional award of options in connection with Nedcor’s rights issue in May 2004 to compensate for the dilutive effect of that issue on pre-existing options. Details of the award made to Mr Laubscher were as follows: R C M Laubscher Date of grant 10.05.04 Number of Nedcor shares 161,457 Price per share R 45.00 Expiry date 30.06.05 Mr Laubscher exercised the following options over shares in Nedcor during 2004: R C M Laubscher Date of grant 01.03.94 10.05.04 08.11.94 10.05.04 Number of shares exercised Exercise price R 38,000 42,251 70,000 29,165 26.50 45.00 35.25 45.00 Price at exercise date R 61.08001 55.7339 65.7357 65.7357 Date of exercise 27.02.04 13.08.04 08.11.04 08.11.04 Notes: 1 Average price of shares sold on exercise date. 2 The aggregate amount of gains made by Mr Laubscher under the above exercises was R4,506,313. 3 Options granted to Mr Laubscher under the Nedcor Group (1994) Employee Incentive Scheme on 14 August 1998 over 101,400 Nedcor shares at an exercise price of R98.75 per share lapsed on 14 August 2004. Mr Laubscher exercised the following options over shares in Old Mutual plc during 2004: R C M Laubscher Date of grant 04.03.02 26.02.03 Number of shares exercised 210,000 231,885 Exercise price £ Price at exercise date £ 0.9525 0.8625 1.3275 1.3275 Date of exercise 22.12.04 22.12.04 The aggregate amount of gains made by Mr Laubscher under the above exercises was £186,576. Options granted to Mr Laubscher under the SOP on 8 March 2001 over 92,500 shares in Old Mutual plc at an exercise price of £1.6225 per share lapsed on 30 December 2004. C) Option exercises and releases of restricted shares during 2004 Save as set out in A) and B) above and for the release of restricted shares to Mr Roberts described under “Directors’ Interests under Employee Share Plans” earlier in this report, none of the directors of the Company exercised any options or received delivery of any share awards under any of the Group’s employee share schemes during 2004. 52 | Remuneration Report Remuneration Report Continued D) Employee Share Ownership Trusts The Group operates a number of Employee Share Ownership Trusts (ESOTs), through which it collateralises some of its obligations under employee share schemes relating to the Company’s shares. At 31 December 2004 the following shares in the Company were held in ESOTs: Trust Capital Growth Investment Trust1 Old Mutual Employee Share Trust2 OMGA Conversion Trust3 OMGA Limited Trust3 OMIOPT Limited Trust3 OMIOPT Share Trust3 OMSA Shares Trust3 Country Zimbabwe Guernsey South Africa South Africa South Africa South Africa South Africa Old Mutual plc shares held in trust 2,031,338 2,848,742 1,558,872 25,588,503 160,813 1,085,226 63,721,194 Notes: 1 The Capital Growth Investment Trust is used to satisfy restricted share awards or Deferred Delivery Shares in Zimbabwe. Any surplus shares held in trust because of non-vesting are taken into account when purchasing shares in respect of future grants. 2 The Old Mutual Employee Share Trust is primarily used to satisfy awards under the Old Mutual Restricted Share Plan around the Group (excluding South Africa and Zimbabwe). The strategy is to hold shares approximately equal to the number of shares awarded, but not yet vested, at any time. Any surplus shares held in trust because of non-vesting are taken into account when purchasing shares in respect of future grants. 3 There are various trusts in existence in South Africa relating to various current and historic share incentive schemes. The strategy for each scheme has been to ensure that sufficient shares are acquired to match at least 90% of the obligations of each share incentive grant. Where excess shares are held by any of the trusts, transfers between them are made to rebalance holdings appropriately. The general practice of the ESOTs mentioned above is not to vote shares held at shareholder meetings, although beneficiaries of restricted shares may in principle give directions for those shares to be voted. COMPANY SHARE PRICE PERFORMANCE The market price of the Company’s shares was 132.5p (R14.30) at 31 December 2004, ranging from a low of 90.25p (R10.80) to a high of 136p (R15.30) during the year then ended. The graphs in the adjacent column show the total shareholder return on the Company’s shares (in green) over the five-year period from 1 January 2000 to 31 December 2004, firstly in Sterling on the London Stock Exchange, compared to the average total shareholder return of other members of the FTSE 100 Index, and secondly in Rand on the JSE Securities Exchange South Africa, compared to the other members of the Index of 40 leading companies listed on that exchange (the ALSI 40). The Company’s opening share price has been re-based to 100 in each case for the purposes of these graphs. Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Dec 04 Old Mutual (LSE listing) total shareholder return Total shareholder return of the FTSE 100 Index Source: Bloomberg 120 110 100 90 80 70 60 50 40 150 130 110 90 70 50 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Dec 04 Old Mutual (JSE listing) total shareholder return Total shareholder return of the ALSI 40 Source: Bloomberg and i-Net Bridge In the opinion of the directors, the FTSE 100 Index and the ALSI 40 are the most appropriate indices against which to measure total shareholder return of the Company, as they are indices of which Old Mutual plc is in each case a member and relate to the two markets where most of the Company’s shares are held and traded. The Board and Committee also have regard to a variety of other, sector-specific, comparators in reviewing the Company’s performance. SHAREHOLDER APPROVAL OF THE REMUNERATION REPORT An advisory vote on the Remuneration Report will be put to shareholders at the Annual General Meeting on 11 May 2005 in accordance with the Directors’ Remuneration Report Regulations 2002. Christopher Collins Chairman of the Remuneration Committee, on behalf of the Board 28 February 2005 Statement of Directors’ Responsibilities | 53 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 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. The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company 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. 54 | Summary Consolidated Profit and Loss Account Summary Consolidated Profit and Loss Account for the year ended 31 December 2004 The following table summarises the Group’s results in the profit and loss accounts on pages 57 to 59. Adjusted operating profit represents the directors’ view of the underlying performance of the Group. This summary does not form part of the statutory financial statements. Adjusted operating income Life assurance – gross premiums written General insurance – gross premiums written Asset management – total revenue Banking – total operating income Adjusted profit and loss account South Africa Technical result Long term investment return Life assurance Asset management Banking General insurance United States Life assurance Asset management United Kingdom and Rest of World Life assurance Asset management Banking Other shareholders’ income/expenses Debt service costs Adjusted operating profit** Goodwill amortisation and impairment Loss on disposal of investment in Dimension Data Holdings plc Restructuring and integration costs Change in credit provisioning methodology Fines and penalties Short term fluctuations in investment return Investment return adjustment for own shares held in policyholders’ funds Operating profit on ordinary activities before tax Non-operating items Profit on ordinary activities before tax Tax on profit on ordinary activities Profit on ordinary activities after tax Minority interests – equity – non-equity Profit for the financial year Dividends paid and proposed Retained profit for the financial year £m Rm Year to 31 December 2004 Year to 31 December 2003 (Restated)* Year to 31 December 2004 Year to 31 December 2003 (Restated)* 4,901 624 639 1,280 4,577 526 688 1,107 57,818 7,360 7,551 15,109 56,520 6,486 8,500 13,671 313 167 480 53 177 89 799 96 89 185 18 10 14 42 1,026 (33) (37) 956 (110) – (21) – (49) 226 (94) 908 (35) 873 (286) 587 (44) (59) 484 (182) 302 260 178 438 55 (10) 73 556 85 81 166 20 (8) 4 16 738 (40) (48) 650 (206) (5) (32) (87) – 143 12 475 (32) 443 (241) 202 117 (46) 273 (166) 107 3,697 1,974 5,671 639 2,099 1,057 9,466 1,126 1,050 2,176 206 117 158 481 12,123 (390) (437) 11,296 (1,290) – (246) – (596) 2,662 (1,115) 10,711 (418) 10,293 (3,374) 6,919 (519) (696) 5,704 (2,001) 3,703 3,210 2,198 5,408 678 (118) 909 6,877 1,050 1,000 2,050 248 (95) 48 201 9,128 (494) (593) 8,041 (2,544) (60) (394) (1,074) – 1,767 148 5,884 (404) 5,480 (2,976) 2,504 1,445 (568) 3,381 (2,006) 1,375 Notes 5(b)(i) 5(e) 5(c)(i) 5(d)(i) 5(b)(iii) 5(c)(i) 5(d)(i) 5(e) 5(b)(iii) 5(c)(i) 5(b)(iii) 5(c)(i) 5(d)(i) 5(f) 7 18 5(d)(ii) 5(d)(iii) 11 8(a) 5(b)(iv) 17(b) 15(b) 29(a) 4 Summary Consolidated Profit and Loss Account | 55 £m Rm Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2004 Year to 31 December 2003 Notes 15(b) 29(a) 956 (240) 716 (83) (59) 574 11,296 (2,834) 8,462 (980) (696) 6,786 650 (224) 426 (7) (46) 373 p 8,041 (2,763) 5,278 (96) (568) 4,614 c Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2004 Year to 31 December 2003 Notes 3 3 3 4 3 3 15.3 14.1 14.1 5.25 3,748 3,432 10.0 8.0 8.0 4.8 3,727 3,411 181.1 166.2 166.2 58.5 3,748 3,432 123.8 99.1 99.1 56.0 3,727 3,411 The adjusted operating profit after tax and minority interests is determined as follows: Adjusted operating profit Tax on adjusted operating profit Minority interests – equity – non-equity Adjusted operating profit after tax and minority interests Earnings and dividend per share attributable to equity shareholders Earnings per share Adjusted operating earnings per share** Basic earnings per share Diluted earnings per share Dividend per share*** Adjusted weighted average number of shares – millions Weighted average number of shares – millions * 2003 comparatives have been restated to be consistent with the current year segmental presentation. ** For life assurance and general insurance businesses, adjusted operating profit is based on a long term investment return and includes investment returns on own shares held within the policyholders’ funds. For banking business, adjusted operating profit excludes the loss on disposal of investment in Dimension Data Holdings plc, restructuring and integration costs and the transitional impact of the change in credit provisioning methodology. For all businesses, adjusted operating profit excludes goodwill amortisation and impairment, and fines and penalties. Adjusted operating earnings per share is similarly based, but is stated after tax and minority interests, with the calculation of the weighted average number of shares including own shares held in policyholders’ funds. The segmental analysis within the summary consolidated profit and loss account has been prepared on a gross of inter-segment transactions basis. Details of the inter-segment revenue and expenses are set out in note 5. *** Indicative only – the actual amount of the final dividend per share in Rand will be determined by reference to the exchange rate prevailing on 31 March 2005 and will be announced by the Company on 1 April 2005. 56 | Independent Auditors’ Report Independent Auditors’ Report to the Members of Old Mutual plc for the year ended 31 December 2004 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 and the part of the directors’ remuneration report to be audited. 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 and the part of the directors’ remuneration report to be audited 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 and the part of the directors’ remuneration report to be audited. OPINION In our opinion: • the financial statements give a true and fair view of the state of affairs of the Company and the Group as at 31 December 2004 and of the profit of the Group for the year then ended; and • the financial statements and the part of directors’ remuneration report to be audited have been properly prepared in accordance with the Companies Act 1985. KPMG Audit Plc Chartered Accountants Registered Auditor 8 Salisbury Square London EC4Y 8BB 28 February 2005 We have audited the financial statements set out on pages 57 to 137. We have also audited the information in the directors’ remuneration report that is described as having been audited. This report is made solely to the Company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS The directors are responsible for preparing the Annual Report and the directors’ remuneration report. As described on page 53, 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 whether the financial statements and the part of the directors’ remuneration report to be audited have been properly prepared in accordance with the Companies Act 1985. 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 regarding directors’ remuneration and transactions with the Group is not disclosed. We review whether the Corporate Governance and Directors’ Report on pages 26 to 41 reflects the Company’s compliance with the nine provisions of the 2003 Financial Reporting Council Code specified for our review by the Listing Rules, 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 the unaudited part of the directors’ remuneration report, 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. Consolidated Profit and Loss Account for the year ended 31 December 2004 Technical account – long term businesses Earned premiums, net of reinsurance Premiums written Gross amount Outward reinsurance premiums 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 Net operating expenses Investment expenses and charges Other technical charges Tax attributable to the long term business Long term business allocated investment return transferred to the non-technical account Balance on the technical account – long term business Analysis of balance on the technical account – long term business Technical result before investment return Long term investment return on shareholders’ funds Balance on the technical account – long term business Technical account – general business Earned premiums, net of reinsurance Premiums written Gross premiums written Outward reinsurance premiums Consolidated Profit and Loss Account | 57 £m Rm Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2004 Year to 31 December 2003 Notes 5(b)(i) 6 5(b)(v) 4,901 (84) 4,817 2,547 1,445 84 8,893 4,577 (44) 4,533 1,984 1,078 94 57,818 (991) 56,827 30,051 17,042 991 7,689 104,911 56,520 (543) 55,977 24,499 13,312 1,161 94,949 (3,920) 113 (3,807) (147) (3,580) 62 (3,518) (15) (46,251) 1,333 (44,918) (1,734) (44,208) 766 (43,442) (185) (3,954) (3,533) (46,652) (43,627) (2,117) 6 (2,111) (1,484) (2,445) 46 (2,399) (401) (24,978) 71 (24,907) (17,509) (30,193) 568 (29,625) (4,952) (3,595) (2,800) (42,416) (34,577) (520) (31) (33) (263) (188) 309 137 172 309 624 (57) 567 (498) (24) (88) (227) (6,136) (366) (389) (3,104) (6,149) (296) (1,087) (2,802) (143) (2,213) (1,766) 376 3,635 4,645 193 183 376 526 (72) 454 1,610 2,025 3,635 2,385 2,260 4,645 7,360 (669) 6,691 6,486 (888) 5,598 9 7 15(a) 8(a) 8(a) 5(e) 58 | Consolidated Profit and Loss Account Consolidated Profit and Loss Account for the year ended 31 December 2004 continued Technical account – general business continued Changes in the provision for unearned premiums, net of reinsurance Gross amount Reinsurers’ share Allocated investment return transferred from the non-technical account Claims incurred, net of reinsurance Claims paid Gross amount Reinsurers’ share Changes in the provision for claims, net of reinsurance Gross amount Reinsurers’ share Net operating expenses Balance on the technical account – general business Analysis of balance on the technical account – general business Technical result before investment return Long term investment return on shareholders’ funds Balance on the technical account – general business Non-technical account – banking business Interest receivable Interest payable Net interest income Dividend income Fees and commissions receivable Fees and commissions payable Other operating income Operating income Administrative expenses Depreciation Goodwill amortisation and impairment Loss on disposal of investment in Dimension Data Holdings plc Restructuring and integration costs Other net operating charges Banking result before provisions Provisions (including impact of change in credit provisioning methodology) Share of associated undertakings’ operating profit Banking operating profit/(loss) £m Rm Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2004 Year to 31 December 2003 Notes 12 (8) 4 571 45 (360) 28 (332) (35) (2) (37) (369) (158) 89 44 45 89 11 (5) 6 460 47 (329) 28 (301) (32) 11 (21) (322) (112) 140 (95) 45 6,736 530 (4,245) 330 (3,915) (410) (18) (428) (4,343) (1,866) 73 1,057 135 (59) 76 5,674 580 (4,064) 347 (3,717) (395) 145 (250) (3,967) (1,378) 909 26 47 73 527 530 1,057 329 580 909 2,029 (1,385) 2,270 (1,723) 23,944 (16,342) 28,030 (21,276) 644 12 456 (61) 235 1,286 (850) (72) (55) – (21) (58) 230 (120) 110 11 121 547 12 415 (38) 171 1,107 (675) (81) (146) (5) (32) (133) 35 (321) (286) 10 (276) 7,602 143 5,379 (715) 2,773 15,182 (10,031) (850) (648) – (246) (681) 2,726 (1,451) 1,311 125 1,436 6,754 152 5,120 (473) 2,118 13,671 (8,335) (1,000) (1,803) (60) (394) (1,642) 437 (3,960) (3,523) 121 (3,402) 5(e) 8(a) 5(e) 9 8(a) 5(d)(i) 5(d)(i) 18 5(d)(ii) 5(d)(i), (iii) 5(d)(i) Consolidated Profit and Loss Account | 59 Notes 15(b) 5(c)(i) 11 6 7 18 17(b) 10 15(b) 29(a) 4 £m Rm Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2004 Year to 31 December 2003 309 202 511 89 121 135 (49) 46 52 188 (45) (37) 4 (52) (55) 908 (35) 873 (286) 587 (44) (59) 484 (182) 302 3,635 2,383 6,018 1,057 1,436 1,603 (596) 543 614 2,213 (530) (437) 46 (614) (642) 10,711 (418) 10,293 (3,374) 6,919 (519) (696) 5,704 (2,001) 3,703 376 185 561 73 (276) 120 – 41 15 143 (47) (48) 2 (49) (60) 475 (32) 443 (241) 202 117 (46) 273 (166) 107 p 4,645 2,284 6,929 909 (3,402) 1,485 – 506 186 1,766 (580) (593) 25 (606) (741) 5,884 (404) 5,480 (2.976) 2,504 1,445 (568) 3,381 (2,006) 1,375 c Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2004 Year to 31 December 2003 Notes 3 3 3 4 3 3 15.3 14.1 14.1 5.25 10.0 8.0 8.0 4.8 3,748 3,432 3,727 3,411 181.1 166.2 166.2 58.5 3,748 3,432 123.8 99.1 99.1 56.0 3,727 3,411 Non-technical account – insurance, asset management and banking businesses Technical account – long term business Tax attributable to shareholders’ profits on long term business Technical account – general business Banking operating profit/(loss) Asset management result before goodwill amortisation, and fines and penalties Fines and penalties Other non-technical account Investment income Unrealised gains on investments Allocated investment returns transferred from the technical account – Long term business – General business Investment expenses and charges Other income Other charges Goodwill amortisation (insurance and asset management) Operating profit on ordinary activities before tax Non-operating items Profit on ordinary activities before tax Tax on profit on ordinary activities Profit on ordinary activities after tax Minority interests – equity – non-equity Profit for the financial year Dividends paid and proposed Retained profit for the financial year Earnings and dividend per share attributable to equity shareholders Earnings per share Adjusted operating earnings per share after tax and minority interests Basic earnings per share Diluted earnings per share Dividend per share (Rand dividend indicative only for 2004) Adjusted weighted average number of shares – millions Weighted average number of shares – millions 60 | Consolidated Statement of Total Recognised Gains and Losses Reconciliation of Movements in Consolidated Equity Shareholders’ Funds Consolidated Statementof Total Recognised Gains and Losses for the year ended 31 December 2004 Profit for the financial year Foreign exchange movements Total recognised gains and losses for the year Prior year adjustment Total recognised gains and losses since last annual report £m Rm Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2004 Year to 31 December 2003 Notes 27 1 484 141 625 27 652 273 176 449 5,704 (1,879) 3,825 – 3,825 3,381 (2,574) 807 Reconciliation of Movements in Consolidated Equity Shareholders’ Funds for the year ended 31 December 2004 Total recognised gains and losses for the year Dividends paid and proposed Issue of new capital Shares issued under share incentive schemes Net sale of shares held in ESOP Trusts and Policyholders’ funds Net increase/(decrease) in equity shareholders’ funds Equity shareholders’ funds at the beginning of the year Equity shareholders’ funds at the end of the year £m Rm Year to 31 December 2004 Year to 31 December 2003 (Restated)* Year to 31 December 2004 Year to 31 December 2003 (Restated)* Notes 4 27 27 27 625 (182) 443 – 15 33 491 2,754 3,245 449 (166) 283 37 4 6 330 2,424 2,754 3,825 (2,001) 1,824 – 177 327 2,328 32,874 35,202 807 (2,006) (1,199) 457 49 76 (617) 33,491 32,874 * Comparative figures have been restated to reflect the adoption of Urgent Issues Taskforce Abstract 38 “Accounting for ESOP Trusts”. The effects of this restatement are reductions in equity shareholders’ funds at 31 December 2004 and 31 December 2003 of £127 million (R1,380 million) and £109 million (R1,301 million) respectively, representing the original cost of these shares of £143 million (R1,380 million) (2003: £136 million (R1,301 million)) less cumulative foreign exchange losses of £16 million (Rnil) (2003: £27 million (Rnil)). Details of the changes are set out in notes 1, 3 and 27. Consolidated Balance Sheet at 31 December 2004 Intangible assets Goodwill Insurance and other assets Investments Land and buildings Other financial investments Assets held to cover linked liabilities Reinsurers’ share of technical provisions Provision for unearned premiums Long term business provision Claims outstanding Debtors Debtors arising from direct insurance operations Debtors arising from reinsurance operations Other debtors Other assets Tangible fixed assets Cash at bank and in hand Present value of acquired in-force business Other assets Prepayments and accrued income Accrued interest and rent Deferred acquisition costs Other prepayments and accrued income Total insurance and other assets Banking 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 shares and other variable yield securities Interests in associated undertakings Tangible fixed assets Land and buildings Other assets Prepayments and accrued income Total banking assets Total assets Consolidated Balance Sheet | 61 £m Rm At 31 December 2004 At 31 December 2003 (Restated)* At 31 December 2004 At 31 December 2003 (Restated)* Notes 18 1,152 1,264 12,497 15,088 19 20 20 5(i) 31 21 22 23 24 25 26(a) 26(b) 26(c) 26(f) 26(g) 26(h) 22 19 24 773 25,840 26,613 7,977 34,590 677 22,756 23,433 5,860 8,386 280,317 288,703 86,536 8,081 271,631 279,712 69,949 29,293 375,239 349,661 14 269 70 353 173 22 305 500 74 504 164 425 19 301 54 374 225 7 470 702 81 695 194 332 152 2,918 759 3,829 1,877 239 3,309 5,425 803 5,467 1,780 4,610 227 3,593 645 4,465 2,686 84 5,610 8,380 966 8,296 2,315 3,963 1,167 1,302 12,660 15,540 210 665 123 998 184 427 127 738 2,278 7,214 1,334 10,826 2,196 5,097 1,516 8,809 37,608 32,409 407,979 386,855 926 1,485 2,522 17,174 1,934 259 91 223 160 2,456 270 27,500 1,025 888 2,092 15,136 1,420 317 144 221 141 2,396 262 10,055 16,110 27,358 186,316 20,976 2,811 987 2,423 1,738 26,638 2,933 12,235 10,600 24,972 180,674 16,952 3,784 1,719 2,638 1,683 28,602 3,126 24,042 298,345 286,985 66,260 57,715 718,821 688,928 * Comparative figures have been restated to reflect the adoption of Urgent Issues Taskforce Abstract 38 “Accounting for ESOP Trusts”. Details of the changes are set out in notes 1, 3 and 27. 62 | Consolidated Balance Sheet Consolidated Balance Sheet at 31 December 2004 continued Capital and reserves Called up share capital Share premium account Merger reserve Profit and loss account Reserve in respect of own shares held in policyholders’ funds Equity shareholders’ funds Minority interests Equity Non-equity Subordinated liabilities Insurance and other liabilities Technical provisions Provision for unearned premiums Long term business provision Claims outstanding Technical provisions for linked liabilities Provisions for other risks and charges Creditors Creditors arising from direct insurance operations Creditors arising from reinsurance operations Other creditors including tax and social security Amounts owed to credit institutions Convertible loan stock Accruals and deferred income Total insurance and other liabilities Banking liabilities Deposits by banks Customer accounts Debt securities in issue Other liabilities Provisions for deferred tax Subordinated liabilities Convertible loan stock Total banking liabilities Total liabilities Commitments Contingent liabilities £m Rm At 31 December 2004 At 31 December 2003 (Restated)* At 31 December 2004 At 31 December 2003 (Restated)* Notes 27 27 27 27 27 27 27 27 31 32 33(a) 33(b) 34 34(a)(i) 35 36 37 38 39 30 34(a)(ii) 386 600 184 2,444 3,614 (369) 3,245 384 587 184 2,000 3,155 (401) 2,754 4,187 6,509 1,996 26,103 38,795 (3,593) 4,584 7,007 2,196 22,995 36,782 (3,908) 35,202 32,874 869 658 652 658 9,427 7,138 7,783 7,854 1,527 1,310 16,565 15,637 – 15 – 179 77 23,138 680 23,895 7,977 639 305 10 1,783 467 332 2,897 181 80 20,660 417 21,157 5,860 551 478 3 1,806 377 357 3,021 135 835 251,006 7,376 259,217 86,536 6,932 3,308 108 19,346 5,065 3,602 31,429 1,964 955 246,612 4,978 252,545 69,949 6,576 5,706 36 21,550 4,501 4,261 36,054 1,611 35,589 30,724 386,078 366,735 2,821 17,508 1,563 3,228 95 678 6 25,899 4,381 13,976 468 3,200 229 648 10 30,607 189,933 16,956 35,025 1,030 7,358 67 52,295 166,827 5,586 38,199 2,732 7,745 119 22,912 280,976 273,503 66,260 57,715 718,821 688,928 44 45 1,072 1,907 1,017 2,422 11,629 20,688 12,144 28,910 * Comparative figures have been restated to reflect the adoption of Urgent Issues Taskforce Abstract 38 “Accounting for ESOP Trusts”. Details of the changes are set out in notes 1, 3 and 27. Company Balance Sheet at 31 December 2004 Fixed assets Investments Shares in Group undertakings Loans due from Group undertakings Shares in associated companies Shares and other variable yield securities Deposits with credit institutions Current assets Debtors Other debtors Amounts owed by Group undertakings Other prepayments and accrued income Cash at bank and in hand Creditors: amounts falling due within one year Amounts owed to credit institutions Amounts owed to Group undertakings Other creditors including tax and social security Accruals and deferred income Dividends payable Net current liabilities Total assets less current liabilities Creditors: amounts falling due after one year Amounts owed to credit institutions Provisions for liabilities and charges Net assets Capital and reserves Called up share capital Share premium account Profit and loss account Equity shareholders’ funds Company Balance Sheet | 63 £m Rm At 31 December 2004 At 31 December 2003 (Restated)* At 31 December 2004 At 31 December 2003 (Restated)* 731 2,290 16 45 135 3,217 2 1 4 11 18 5 1,332 27 10 56 1,430 722 2,014 15 23 45 2,819 – 5 4 12 21 28 1,169 52 11 49 1,309 7,930 24,843 174 488 1,465 34,900 22 11 43 119 195 54 14,450 293 111 607 15,515 8,618 24,041 179 275 537 33,650 – 60 48 143 251 334 13,954 621 131 585 15,625 1,412 1,288 15,320 15,374 1,805 1,531 19,580 18,276 402 21 1,382 386 600 396 295 26 4,360 3,522 228 310 1,210 14,992 14,444 384 587 239 4,187 6,509 4,296 4,584 7,007 2,853 1,382 1,210 14,992 14,444 Notes 40 40 34 4 34 32(b) 27 27 28 * Comparative figures have been restated to reflect the adoption of Urgent Issues Taskforce Abstract 38 “Accounting for ESOP Trusts” as described in note 1. These financial statements have been approved by the Board and signed on its behalf by: Julian V F Roberts Group Finance Director 28 February 2005 64 | Consolidated Cash Flow Statement Consolidated Cash Flow Statement for the year ended 31 December 2004 Operating activities Net cash inflow from insurance and other operating activities Net cash outflow from banking operating activities Net cash inflow from operating activities Net cash outflow from returns on investments and servicing of finance Total tax paid Net cash (outflow)/inflow from capital expenditure and financial investment Net cash (outflow)/inflow from acquisitions and disposals Equity dividends paid Net cash (outflow)/inflow before financing activities Net cash inflow from financing activities £m Rm Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2004 Year to 31 December 2003 952 (412) 540 (113) (293) (2) (31) (181) (80) 284 916 (679) 237 (128) (174) 227 83 (178) 67 231 11,239 (4,863) 6,376 (1,334) (3,457) (23) (366) (2,132) (936) 3,346 11,312 (8,387) 2,925 (1,580) (2,149) 2,804 1,025 (2,198) 827 2,851 Notes 47 47 47(a) 47(a) 47(a) 47(a) 47(a) Net cash inflow of the Group excluding long term business 204 298 2,410 3,678 Cash flows relating to insurance and other activities were invested as follows: (Decrease)/increase in cash holdings Increase in net portfolio investments Cash flows relating to banking activities were invested as follows: Decrease in cash and balances at central banks Net cash inflow of the Group excluding long term business 47(b),(c) 47(b),(c) 47(d) (157) 546 389 (185) 204 36 616 652 (1,852) 6,442 4,590 445 7,605 8,050 (354) 298 (2,180) (4,372) 2,410 3,678 The cash flows presented in this statement exclude all cash flows relating to policyholders’ funds for the long term business. Notes to the Financial Statements for the year ended 31 December 2004 1 ACCOUNTING POLICIES BASIS OF PREPARATION – GROUP The Group’s consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of certain assets as required by the Companies Act 1985 and applicable accounting standards. A summary of the significant Group accounting policies is set out below, together with an explanation of where changes have been made to previous policies on adoption of new accounting standards issued during the year. The accounting policies adopted reflect applicable accounting standards under UK Generally Accepted Accounting Practice (UK GAAP) which includes UK accounting standards, Urgent Issues Task Force (UITF) Abstracts and companies legislation. The Group’s operations include life assurance, general insurance, asset management and banking. Due to the diverse nature of the operations, these are separately disclosed where it is considered appropriate. The results and balance sheet of the Group’s insurance and asset management operations have been prepared in accordance with the provisions of Section 255A of, and the special provisions relating to insurance companies of Schedule 9A to, the Companies Act 1985 and with the Statement of Recommended Practice issued by the Association of British Insurers in November 2003 (the ABI SORP), except for treatment of deferred acquisition costs (see note 1, long term business (iv) below). The results of the Group’s banking operations have been prepared in accordance with the requirements of Schedule 9 (Special Provisions for Banking Companies and Groups) to the Companies Act 1985 and the British Bankers’ Association Statements of Recommended Practice (BBA SORPs) on Advances (1997), Securities (1990), Derivatives (2001), Contingent Liabilities and Commitments (1996) and Segmental Reporting (1993). This disclosure takes the form of the non-technical banking profit and loss account, separation of banking items within the consolidated balance sheet and appropriate notes to the financial statements. As a result of the increase in the Group’s holding in Mutual & Federal Insurance Company Limited during the year and in accordance with the ABI SORP, a general business technical account has been presented in the financial statements. The results were previously reported within the long term business technical account – other technical income. Notes to the Financial Statements | 65 CHANGES IN ACCOUNTING POLICIES Comparative figures have been restated to reflect the adoption of UITF Abstract 38 “Accounting for ESOP Trusts”. This Abstract requires that the Group’s holdings in own shares held by Employee Share Ownership Plan Trusts (ESOP Trusts) be accounted for as a deduction from shareholders’ funds rather than recorded as an asset. In addition, purchases and sales of such own shares should be shown as changes in shareholders’ funds (as a deduction from the profit and loss reserve) such that no profit or loss is recognised. In the majority of cases, the ESOP Trusts have waived their rights to dividends such that there is no impact on operating profit after tax. Shares held in ESOP Trusts were previously held at cost such that the only impact was due to foreign exchange movements recognised within the statement of total recognised gains and losses in respect of shares held on the South African register. The reductions in equity shareholders’ funds at 31 December 2004 and 31 December 2003 were £127 million (R1,380 million) and £109 million (R1,301 million) respectively, representing the original cost of these shares of £143 million (R1,380 million) (2003: £136 million (R1,301 million)) less cumulative foreign exchange losses of £16 million (Rnil) (2003: £27 million (Rnil)). The adoption of the ABI SORP has not had a material impact on the annual financial statements. BASIS OF CONSOLIDATION The Group accounts include the assets, liabilities and results of the Company and its subsidiary undertakings. Unless otherwise stated, the acquisition method of accounting has been adopted. Under this method, the results of subsidiary undertakings acquired or disposed of in the year are included in the consolidated profit and loss account from the date of acquisition or up to the date of disposal. All intercompany transactions are eliminated on consolidation, except for certain fees negotiated on an arm’s length basis between operationally and functionally distinct segments of the Group. Elimination of these fees would result in a misleading presentation of the segmental results. These fees are described in more detail in note 42. An associate is an undertaking in which the Group has a long term interest, usually from 20% to 50% of the equity voting rights, and over which it exercises significant influence. The Group’s share of the profits less losses of associates outside the long term business fund is included in the consolidated profit and loss account and its interest in their net assets is included in investments in the consolidated balance sheet. Investments in associated undertakings attributable to long term business are accounted for as investments. 66 | Notes to the Financial Statements Notes to the Financial Statements for the year ended 31 December 2004 continued 1 ACCOUNTING POLICIES continued BASIS OF CONSOLIDATION continued The results of the Group’s US life assurance subsidiaries are determined initially using United States Generally Accepted Accounting Practice (US GAAP) bases of accounting with subsequent adjustments where necessary to comply with the Group’s accounting and other business policies. In accordance with the ABI SORP, policyholder liabilities of the Group’s US life subsidiaries are incorporated into the Group’s accounts on a US GAAP basis. For investment accounting, however, the US GAAP results are adjusted to comply with UK GAAP. SEGMENTAL ANALYSIS The segmental disclosure of results by geography is determined by the origin of business transacted. This is not materially different to the segmental disclosure determined by market destination. Business transacted with South African residents in terms of their personal offshore allowances is conducted by the Group’s offshore companies and is therefore disclosed under the Rest of World segment. BASIS OF PREPARATION – COMPANY 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, the Company has taken advantage of the exemption from presenting its own profit and loss account. As described above, comparative figures have been restated to reflect the adoption of UITF Abstract 38 “Accounting for ESOP Trusts”. This has resulted in the £5 million (R54 million) (2003: £5 million) (R60 million) of own shares held in ESOP Trusts previously held as an asset on the Company’s balance sheet being deducted from the Company’s profit and loss reserve. There was no impact on the profit and loss account in either period. No note of historical cost profits has been prepared, as the Company’s only material gains or losses on assets relate to the holding and disposal of Company investments. Shares in subsidiary undertakings are included in the Company balance sheet at historical cost, adjusted for any impairment. INSURANCE BUSINESS (i) Investments 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. Investments in own shares held in policyholders’ funds have been deducted from equity shareholders’ funds. Investment properties are accounted for in accordance with Statement of Standard Accounting Practice 19 as follows: a) Investment properties are revalued annually at open market values by internal professional valuers. Surpluses and deficits arising are taken to the profit and loss account for the year. b) No depreciation or amortisation is provided in respect of freehold investment properties and leasehold investment properties with over 20 years to run. This treatment, as regards certain of the Group’s investment properties, may be a departure from the requirements of the Companies Act 1985 concerning depreciation of fixed assets. However, these properties are not held for consumption but for investment, and the directors consider that systematic annual depreciation would be inappropriate. The accounting policy adopted is therefore necessary for the accounts to give a true and fair view. Depreciation or amortisation is only one of the many factors reflected in the annual valuation and the amount which might otherwise have been shown cannot be separately identified or quantified. Securities borrowed and lent that are collateralised by cash are included in the balance sheet at amounts equal to the collateral advanced or received. 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 securities lending and borrowing is recognised in the non-technical account on an accruals basis over the term of the related loans. 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 shareholder assets supporting the long term business. The long term investment return for relevant categories of investments takes into account past performance, current trends and future expectations. Notes to the Financial Statements | 67 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 accounts. For the US business, the long term business provision is calculated using the net premium method, based on assumptions as to investment yields, mortality, withdrawals and policyholder dividends. Assumptions are set at the time the contract is issued. For the US long term business, due to the nature of its products, investment risk is borne by the shareholders. Therefore, in determining the operating profit for the business, the investment return earned by the whole of the portfolio is smoothed on the basis of a market rate appropriate to the portfolio of investments, management philosophy and US market conditions for each reporting period. 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 The results are prepared on a modified statutory solvency basis, as set out in the ABI SORP. 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 Claims paid include maturities, annuities, surrenders, death and disability. Maturity and annuity claims are recorded as they fall due for payment. Death and disability claims and surrenders are accounted for when notified. Reinsurance recoveries are accounted for in the same period as the related claim. (iii) Long term business provision Long term business provisions for South African and other African businesses have been computed using a gross premium valuation method. 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 Professional Guidance Note (PGN) 104 (2001). Under this guideline, 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. Universal life and deferred annuity reserves are computed on the retrospective deposit method, which produces reserves equal to the cash value of the contracts. Reserves on immediate annuities and guaranteed payments are computed on the prospective deposit method, which produces reserves equal to the present value of future benefit payments. For other territories, the valuation bases adopted are in accordance with the local actuarial practices and methodologies. Whilst the directors consider that the gross long term business provision and the related reinsurance recovery 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 amount provided. The provision estimation techniques and assumptions are periodically reviewed, with any changes in estimates reflected in the long term business technical account as they occur. Liability adequacy testing is performed to ensure that the carrying amount of technical provisions (less related deferred acquisition costs and intangible assets) is sufficient in view of estimated future cash flows. When performing the liability adequacy test, contractual cash flows are discounted and compared to the carrying value of the liability. Where a shortfall is identified an additional provision is made. (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 for these businesses. For the US life business, an explicit deferred acquisition costs asset has been established in the balance sheet. Deferred acquisition costs are amortised over the period that profits on the related insurance policies are expected to emerge. Acquisition costs are deferred to the extent that they are deemed recoverable from available future profit margins. Deferral of costs on other long term business is limited to the extent that there are available future margins. 68 | Notes to the Financial Statements Notes to the Financial Statements for the year ended 31 December 2004 continued 1 ACCOUNTING POLICIES continued LONG TERM BUSINESS continued (v) Present value of acquired in-force business The present value of acquired in-force business is calculated by performing a cash flow projection of the long term fund and the in-force policies in order to estimate future after-tax profits attributable to shareholders. These profits are then discounted at a rate of return allowing for the risk of uncertainty of the future cash flows. This calculation is particularly sensitive to the assumptions regarding discount rate, future investment returns and the rate at which policies discontinue. The present value of acquired in-force business is capitalised in the consolidated balance sheet as an asset and amortised over the expected profit recognition period on a systematic basis over the anticipated lives of the related contracts which the directors consider to be 30 years. The amortisation charge is stated net of any unwind in the discount rate used to calculate the asset. The carrying value of the asset is reviewed annually for impairment. The amortisation charge and any adjustments to reflect impairments are recorded in the long term business technical account under “Other technical charges”. GENERAL INSURANCE BUSINESS All classes of general business are accounted for on an annual basis. (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. Liability adequacy testing is performed to ensure that the carrying amount of claim liabilities (less related deferred acquisition costs) is sufficient in view of estimated future cash flows. Where a shortfall is identified an additional provision is made. (iii) Acquisition costs Acquisition costs, which represent commission and other related expenses, are deferred and amortised over the period in which the related premiums are earned. BANKING BUSINESS (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 over the relevant period. Other operating income is derived from township development and computer-related services, including distribution and servicing of equipment. The net income from these activities is accounted for on the accruals basis and included within “Other operating income”. (ii) Advances and provisions for doubtful debts Certain advances are held for trading purposes and are not held to maturity. Such advances are held in the balance sheet at fair value and any change in the fair value of these instruments are accounted for through the profit and loss account. Notes to the Financial Statements | 69 All operating companies make provisions for bad and doubtful debts where required on a prudent basis. Advances are designated as non- performing based on credit risk management tools and indicators as well as management judgement as to the ultimate collectability of the principal or interest. When an advance is designated as non-performing, interest is suspended and specific provisions raised where required. There are two basic types of provision, specific and general, each of which is assessed in terms of the charge and the amount outstanding. The provisions made during the year, less recoveries of advances previously written off, are charged to the profit and loss account. The Group creates a specific provision for impairment when there is objective evidence that it will not be able to collect all amounts due. The amount of such impairment is the difference between the carrying amount and the recoverable amount, calculated as the present value of expected future cash flows, including amounts recoverable from guarantees and collateral, discounted at the effective interest rate of the advance. The Group creates an additional general provision where there is objective evidence that components of the advances portfolio contain probable losses at the balance sheet date, which will only be identified in the future. The estimated probable losses are based on historical information and take into account historical patterns of losses in each component, the credit ratings allocated to the borrowers and the current economic climate in which the borrowers operate. Provisions are deducted from advances in the balance sheet. Interest on non-performing loans is charged to the customer’s account and recorded as income, provided that there is a realistic prospect of interest being paid at some future date. However, where interest to be recovered is considered to be doubtful, the interest is suspended and is not credited to income but to an interest reserve account in the balance sheet, which is included as part of specific provisions and deducted from advances in the balance sheet. Where the probability of receiving interest payments is remote, interest is no longer accrued. (iii) Instalment transactions Instalment credit agreements are regarded as financing transactions and total instalments, less unearned finance charges, are included in loans and advances. Lease income and finance charges are determined at the commencement of the contractual periods and are recognised in income in proportion to the net cash investment capital balances outstanding. Unearned lease income and finance charges are carried forward as deferred income and deducted from advances. (iv) Investments 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 and 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 impairment in value. Freehold and leasehold buildings and buildings occupied for own use are depreciated over their estimated useful lives. Land is not depreciated. Unsold properties in possession are included under advances and valued at the lower of cost or net realisable value. Cost includes the outstanding balance on repossession, which may or may not include capitalised interest incurred by the client, together with other charges relating to the repossession. Where securities sold under agreements to repurchase at future dates are recorded in the financial statements, the corresponding liability to repurchase those securities is included in deposits from banks or customers as appropriate. Securities purchased under agreements to resell at future dates are treated as secured loans and reflected on the balance sheet. Profits and losses arising from these transactions are treated as interest and accounted for over the period 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 liabilities under acceptances. 70 | Notes to the Financial Statements Notes to the Financial Statements for the year ended 31 December 2004 continued 1 ACCOUNTING POLICIES continued BANKING BUSINESS continued (v) Debt securities in issue and subordinated debt instruments issued Premiums and discounts incurred in the issue of debt securities and fixed rate subordinated liabilities are accounted for as an adjustment to the amount of the liability and amortised over the relevant period to maturity. (vi) Financial instruments Financial instruments on the balance sheet include cash and bank balances, investments, receivables and trade creditors. These instruments are generally carried at fair value and the accounting treatment for each is disclosed in the accounting policy note for that particular balance. In addition, the banking business uses a variety of derivative financial instruments including forwards, swaps, options and exchange traded financial futures. Transactions in the foreign exchange, interest rate and equity markets are negotiated directly with customers, with the banking business acting as a counterparty, or can be dealt directly through exchanges. Accounting for financial instruments is dependent on whether the transactions are undertaken for trading or non-trading purposes: (a) Trading activities Trading transactions include transactions undertaken for market- making, to service customers’ needs and for propriety purposes, as well as any related hedges. Transactions undertaken for trading purposes are measured at fair value, including an allowance for credit and market risk, and the resulting profits and losses are accounted for in the non-technical account. Fair values are based on quoted market prices when available. 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. (b) Non-trading activities Non-trading transactions are those that are held for hedging purposes as part of the banking business’ overall risk management strategy as a means of managing exposure to price, foreign currency and interest rate risk. To qualify as a hedge: a) the transaction must be reasonably expected to match or eliminate a significant proportion of the risk inherent in the assets, liabilities, other positions or cashflows being hedged and which results from potential movements in interest rates, exchange rates and market values, both at the inception and over the life of the contract; b) adequate evidence of the intention to hedge and linkage with the underlying risk inherent in the assets, liabilities, other positions or cashflows being hedged, must be established at the start of the transaction; and c) there must be a continual assessment of whether the market value of the hedge instrument matches the market value of the hedged item. If these criteria are met, the derivative is accounted for in the non- technical account on the same basis and over the same period as the underlying hedged item to which it relates. Qualifying hedges, which cease to be effective or are terminated prior to the end of the life of the underlying hedged item, are measured at fair value and transferred to the trading portfolio. Any resulting gain or loss is deferred and amortised to earnings over the original life of the underlying item. Off balance sheet financial instruments are measured on a basis consistent with on balance sheet instruments. Potential losses arising on these instruments are recognised as contingent liabilities. Where the banking business has entered into legally binding contracts with a counterparty that permits offsets, positive and negative values of derivatives are offset within the balance sheet totals. ASSET MANAGEMENT BUSINESS Asset management revenue includes gross fees and commissions which are credited as earned. Performance fees are recognised once all contractual obligations have been satisfied and the fees are expected to be collected. Any fees collected in advance are deferred and recognised as income over the period earned. Expenses are recognised as they are incurred. Notes to the Financial Statements | 71 ALL BUSINESSES (i) Tax Tax is charged on all taxable profits arising during the year and is determined in accordance with the relevant tax legislation. The tax charge attributable to long term business includes the tax expense for both policyholders and shareholders, at rates applicable to those parties. The tax attributable to shareholders’ profits on long term business, calculated at the effective tax rate of the underlying businesses, is added to the balance on the long term business technical account to present life assurance profits on a pre-tax basis, and is then included in the tax expense on profit on ordinary activities in the non-technical account. Deferred tax assets and liabilities arise from timing differences between the recognition of gains and losses in the financial statements and their recognition for tax purposes. Deferred tax liabilities are fully recognised and deferred tax assets are recognised when the Group believes it is more likely than not that the asset will be recoverable. Deferred tax assets and liabilities are recognised on an undiscounted basis. (ii) Goodwill Purchased goodwill (representing the excess of the fair value of the consideration given for acquired businesses and associated costs over the fair value of net assets acquired) is capitalised and amortised to nil by equal annual instalments over its estimated useful life, normally 20 years. On the subsequent disposal or termination of a business, the profit or loss on disposal or termination is calculated after charging the unamortised amount of any related goodwill. The carrying value of goodwill is reviewed periodically for indicators of impairment in value. In determining if any impairment is required, recoverable amounts are assessed on a value in use basis. Where businesses are acquired as part of the same investment, these are combined for the purposes of determining recoverabilty of the related goodwill. Adjustments to reflect an impairment in value are recognised in the non-technical account in the period in which the impairment is determined. (iii) Tangible fixed assets Tangible fixed assets, principally computer equipment and software, motor vehicles, fixtures and furniture, are capitalised and depreciated by equal annual instalments over their estimated useful lives. (iv) General provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, for which it is probable that an outflow of economic benefits will occur, and where a reliable estimate can be made of the amount of the obligation. Where the effect of discounting is material, provisions are discounted and the discount rate used is a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. (v) Pension plans and post retirement benefits 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. (vi) Employee share ownership plans The Group offers share award and option plans to management and certain key employees. The Group offers Save As You Earn plans for all UK-based employees of participating Group companies. Further details are provided in the Remuneration Report. The assets, liabilities, income and expenses of employee share ownership plans (ESOPs) are incorporated into the financial statements. Own shares held in ESOP Trusts are shown as a deduction from shareholders’ equity at cost. 72 | Notes to the Financial Statements Notes to the Financial Statements for the year ended 31 December 2004 continued 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 the UK Companies Act 1985 and to provide the users of the accounts in South Africa with illustrative information. The principal exchange rates used to translate the operating results, assets and liabilities of key foreign business segments to Sterling are: Profit and loss account (average rate for the year) Balance sheet (closing rate, at 31 December) 2004 11.7986 10.8482 Rand 2003 12.3487 11.9367 2004 1.8327 1.9158 US$ 2003 1.6354 1.7833 Foreign currency transactions are translated at 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. Exchange differences arising on the translation of foreign integrated operations are taken through the non-technical profit and loss account. Exchange differences on trading activities are included in the profit and loss account. 3 EARNINGS AND EARNINGS PER SHARE Basic earnings per share is calculated based upon the profit after tax attributable to equity shareholders. The directors’ view is that adjusted operating earnings per share, derived from adjusted operating profit or loss after tax and minority interests, provides a better indication of the underlying performance of the Group. For life assurance and general insurance businesses, adjusted operating profit is based on a long term investment return and includes investment return on own shares held in policyholders’ funds. For banking business, adjusted operating profit excludes the loss on disposal of investment in Dimension Data Holdings plc, restructuring and integration costs and the transitional impact of the change in credit provisioning methodology. For all businesses, adjusted operating profit excludes goodwill amortisation and impairment, and fines and penalties. Adjusted operating earnings per share is similarly based, but is stated after tax and minority interests, with the calculation of the weighted average number of shares including own shares held in policyholders’ funds. A table reconciling operating profit on ordinary activities after tax and minority interests to adjusted operating profit after tax and minority interests is set out below: Profit on ordinary activities after tax and minority interests Goodwill amortisation and impairment net of minority interests Loss on disposal of investment in Dimension Data Holdings plc net of tax and minority interests Restructuring and integration costs net of tax and minority interests Change in credit provisioning methodology net of tax and minority interests Fines and penalties net of tax Short term fluctuations in investment returns net of tax and minority interests Investment return adjustment for own shares held in policyholders’ funds Non-operating items net of tax and minority interests Adjusted operating profit after tax and minority interests £m Rm Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2004 Year to 31 December 2003 Notes 484 83 – 8 – 41 (162) 94 26 574 273 128 3 13 31 – (95) (12) 32 5,704 971 – 92 – 499 (1,907) 1,115 312 373 6,786 3,381 1,581 30 160 376 – (1,170) (148) 404 4,614 5(d)(ii ) 5(d)(iii ) 11 5(b)(iv) 17(b) Notes to the Financial Statements | 73 3 EARNINGS AND EARNINGS PER SHARE continued Basic earnings per share after tax and minority interests Impact of inclusion of own shares held in policyholders’ funds in weighted average number of shares Goodwill amortisation and impairment net of minority interests Loss on disposal of investment in Dimension Data Holdings plc net of tax and minority interests Restructuring and integration costs net of tax and minority interests Change in credit provisioning methodology net of tax and minority interests Fines and penalties net of tax Short term fluctuations in investment return net of tax and minority interests Investment return adjustment for own shares held in policyholders’ funds Non-operating items net of tax and minority interests p c Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2004 Year to 31 December 2003 14.1 8.0 166.2 99.1 (1.2) 12.9 2.2 – 0.2 – 1.1 (4.3) 2.5 0.7 (0.7) 7.3 3.4 0.1 0.3 0.8 – (2.5) (0.3) 0.9 (14.0) 152.2 26.0 – 2.5 – 13.3 (50.9) 29.7 8.3 (8.4) 90.7 42.4 0.8 4.3 10.1 – (31.3) (4.0) 10.8 Adjusted operating earnings per share after tax and minority interests 15.3 10.0 181.1 123.8 Basic earnings per share is calculated by reference to the profit on ordinary activities after tax and minority interests of £484 million (R5,704 million) for the year ended 31 December 2004 (2003: £273 million (R3,381 million)) and a weighted average number of shares in issue of 3,432 million (2003: 3,411 million). The weighted average number of shares is calculated as follows: Total weighted average number of shares in issue Shares held in ESOP Trusts Adjusted weighted average number of shares Shares held in policyholders’ funds Weighted average number of shares millions At 31 December 2004 At 31 December 2003 3,844 (96) 3,748 (316) 3,432 3,824 (97) 3,727 (316) 3,411 In accordance with UITF Abstract 37 “Purchases and Sales of Own Shares”, shares in the Company held in policyholders’ funds are not included in the weighted average number of shares used in basic earnings per share calculations. No adjustment is required in respect of UITF Abstract 38 “Accounting for ESOP Trusts” as the shares in the Company held in ESOP Trusts have already been excluded from the calculation as, in the majority of cases, the ESOP Trusts have waived their rights to dividends on these shares. The diluted earnings per share calculation reflects the issue of shares in respect of the ESOP Trusts and the US Dollar Guaranteed Convertible Bond. 74 | Notes to the Financial Statements Notes to the Financial Statements for the year ended 31 December 2004 continued 4 DIVIDENDS Group Final dividend proposed: 3.5p (38.0c*) (2003: 3.1p (36.5c)) per 10p share Interim dividend paid: 1.75p (20.5c) (2003: 1.7p (19.5c)) per 10p share Company Final dividend proposed: 3.5p (38.0c*) (2003: 3.1p (36.5c)) per 10p share Interim dividend paid: 1.75p (20.5c) (2003: 1.7p (19.5c)) per 10p share £m Rm Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2004 Year to 31 December 2003 Notes 122 60 182 56 28 84 106 60 166 49 26 75 1,323 678 2,001 607 316 923 1,265 741 2,006 585 321 906 Provision has been made in the Group financial statements for a final dividend of 3.5p (38.0c*) per share calculated using the number of shares in issue at 31 December 2004 of 3,854 million (2003: 3,837 million) less 92 million (2003: 97 million) shares in Employee Share Ownership Plans, which have waived their rights to dividends and 291 million (2003: 316 million) shares held in policyholders’ funds of Group companies. The dividend will be paid on 31 May 2005 to shareholders on the register at the close of business on 22 April 2005, being the record date for the dividend. 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 that register on the record date for the dividend. * Indicative only – the actual amount of the dividend per share in Rand will be determined by reference to the exchange rate prevailing on 31 March 2005 and announced by the Company on 1 April 2005. Notes to the Financial Statements | 75 South Africa United States UK and Rest of World £m Total South Africa United States UK and Rest of World Rm Total 480 (3) 96 12 477 108 53 (10) 89 (11) 43 78 5(d)(i) 5(e) 5(f) 7 18 5(d)(ii) 11 8(a) 5(b)(iv) 177 6 183 89 – (3) 789 (57) (21) – 134 (94) – – – – – – 186 (50) – (49) 85 18 2 20 10 4 14 14 – 14 – (33) (34) (19) (3) – – 7 594 11 5,671 (32) 1,126 137 206 25 7,003 130 605 5,639 1,263 231 7,133 152 (17) 639 (120) 1,050 (130) 117 47 1,806 (203) 135 519 920 164 1,603 191 6 2,099 73 197 2,172 89 (33) (37) 956 (110) (21) (49) 226 1,057 – (35) 9,352 (672) (246) – 1,582 – – – – – – 2,183 (583) – (596) 1,003 158 – 2,257 73 158 2,330 – (390) (402) (293) (35) – – 77 1,057 (390) (437) 11,296 (1,290) (246) (596) 2,662 – – (94) (1,115) – – (1,115) 751 172 (15) 908 8,901 2,007 (197) 10,711 479 43 107 125 – (3) 189 (17) – – – – 27 11 14 – (33) (34) 695 37 121 125 (33) (37) 5,657 519 1,278 1,482 – (35) 2,219 (212) – – – – 308 129 158 – (390) (402) 8,184 436 1,436 1,482 (390) (437) 751 172 (15) 908 8,901 2,007 (197) 10,711 5 SEGMENTAL ANALYSIS 5(a) Summary of operating profit on ordinary activities before tax Year to 31 December 2004 Life assurance Adjusted operating profit Inter-segment (revenue)/expenses Adjusted operating profit, net of inter-segment transactions Notes 5(b)(iii) Asset management 5(c)(i) Adjusted operating profit Inter-segment (revenue)/expenses Adjusted operating profit, net of inter-segment transactions Banking Adjusted operating profit Inter-segment (revenue)/expenses Adjusted operating profit, net of inter-segment transactions General insurance business Other shareholders’ income/expenses Debt service costs Adjusted operating profit/(loss), net of inter-segment transactions Goodwill amortisation and impairment Restructuring and integration costs Fines and penalties Short term fluctuations in investment return Investment return adjustment for own shares held in policyholders’ funds Operating profit/(loss) on ordinary activities before tax Analysed as: Life assurance Asset management Banking General insurance business Other shareholders’ income/expenses Debt service costs Operating profit/(loss) on ordinary activities before tax 76 | Notes to the Financial Statements Notes to the Financial Statements for the year ended 31 December 2004 continued South Africa United States UK and Rest of World Notes 5(b)(iii) 438 (7) 431 55 (2) 53 (10) – (10) 73 – (4) 543 (140) (5) (32) (87) (37) 12 85 11 96 81 (10) 71 – – – – – – 167 (57) – – – 196 – 20 4 24 (8) 4 (4) 4 – 4 – (40) (44) (60) (9) – – – (16) 5 SEGMENTAL ANALYSIS continued 5(a) Summary of operating profit on ordinary activities before tax Year to 31 December 2003 (restated) Life assurance Adjusted operating profit Inter-segment (revenue)/expenses Adjusted operating profit, net of inter-segment transactions Asset management 5(c)(i) 5(d)(i) 5(e) 5(f) 7 18 5(d)(ii) 5(d)(iii) 8(a) 5(b)(iv) Adjusted operating profit Inter-segment (revenue)/expenses Adjusted operating profit, net of inter-segment transactions Banking Adjusted operating profit Inter-segment (revenue)/expenses Adjusted operating profit, net of inter-segment transactions General insurance business Other shareholders’ income/expenses Debt service costs Adjusted operating profit/(loss), net of inter-segment transactions Goodwill amortisation Loss on disposal of investment in Dimension Data Holdings plc Restructuring and integration costs Change in credit provisioning methodology Short term fluctuations in investment return Investment return adjustment for own shares held in policyholders’ funds Operating profit/(loss) on ordinary activities before tax Analysed as: Life assurance Asset management Banking General insurance business Other shareholders’ income/expenses Debt service costs Operating profit/(loss) on ordinary activities before tax – 12 148 – – 148 254 306 (85) 475 3,154 3,779 (1,049) 5,884 402 53 (272) 75 – (4) 254 288 18 – – – – 306 12 (13) 4 – (44) (44) 702 58 (268) 75 (44) (48) 4,964 656 (3,350) 933 – (49) 3,556 223 – – – – 149 (159) 48 – (543) (544) 8,669 720 (3,302) 933 (543) (593) (85) 475 3,154 3,779 (1,049) 5,884 The 2004 segmental analysis has been prepared on a gross of inter-segment transactions basis. 2003 comparatives have been restated to be consistent with the current year presentation. £m Total 543 8 South Africa United States UK and Rest of World Rm Total 5,408 (86) 1,050 135 248 49 6,706 98 551 5,322 1,185 297 6,804 128 (8) 678 (22) 1,000 (123) (95) 47 1,583 (98) 120 656 877 (48) 1,485 (6) – (6) 73 (40) (48) (118) – (118) 909 – (49) – – – – – – 650 (206) 6,720 (1,730) 2,062 (703) (5) (32) (87) 143 (60) (394) (1,074) (456) – – – 2,420 48 – 48 – (494) (544) (741) (111) – – – (197) (70) – (70) 909 (494) (593) 8,041 (2,544) (60) (394) (1,074) 1,767 Notes to the Financial Statements | 77 South Africa United States UK and Rest of World £m Total South Africa United States UK and Rest of World Rm Total 633 940 2,169 205 1,573 2,374 434 299 733 – – – 135 46 181 18 22 40 2,937 1,191 7,467 11,088 25,594 2,415 1,597 544 34,658 14,047 4,128 18,555 28,009 2,141 48,705 452 321 773 5,116 3,532 8,648 – – – 213 252 465 5,329 3,784 9,113 2,306 2,374 221 4,901 27,203 28,009 2,606 57,818 563 833 1,396 715 294 1,009 2,405 1,815 186 2,001 – – – 87 51 2,465 1,070 6,952 10,286 22,413 2,297 1,074 630 30,439 13,213 138 3,535 17,238 24,710 1,704 43,652 20 13 33 735 307 8,829 3,631 1,042 12,460 – – – 247 161 9,076 3,792 408 12,868 2,001 171 4,577 29,698 24,710 2,112 56,520 633 157 790 434 15 449 2,169 58 2,227 – – – 135 8 143 18 2 20 2,937 223 7,467 1,858 25,594 679 1,597 97 34,658 2,634 3,160 9,325 26,273 1,694 37,292 452 17 469 5,116 182 5,298 – – – 213 21 234 5,329 203 5,532 5 SEGMENTAL ANALYSIS continued 5(b) Life assurance (i) Gross premiums written Year to 31 December 2004 Individual business Single Recurring Group business Single Recurring Total gross premiums Year to 31 December 2003 Individual business Single Recurring Group business Single Recurring Total gross premiums (ii) Gross new business premiums written Year to 31 December 2004 Individual business Single Recurring Group business Single Recurring Total gross new business premiums written 1,239 2,227 163 3,629 14,623 26,273 1,928 42,824 Annual premium equivalent 279 275 25 579 3,298 3,238 299 6,835 78 | Notes to the Financial Statements Notes to the Financial Statements for the year ended 31 December 2004 continued 5 SEGMENTAL ANALYSIS continued 5(b) Life assurance continued (ii) Gross new business premiums written continued Year to 31 December 2003 Individual business Single Recurring Group business Single Recurring South Africa United States UK and Rest of World 563 158 721 715 18 733 1,815 76 1,891 – – – 87 7 94 20 3 23 117 21 £m Total 2,465 241 2,706 735 21 756 South Africa United States UK and Rest of World Rm Total 6,952 1,951 8,903 8,829 222 9,051 22,413 939 23,352 1,074 86 1,160 30,439 2,976 33,415 – – – 247 37 284 9,076 259 9,335 3,462 17,954 23,352 1,444 42,750 583 3,751 3,180 255 7,186 Total gross new business premiums written 1,454 1,891 Annual premium equivalent 304 258 Annual premium equivalent is defined as one-tenth of single premiums plus recurring premiums. (iii) Life assurance adjusted operating profit Year to 31 December 2004 Individual business Group business Life assurance technical result Long term investment return Adjusted operating profit Inter-segment (revenue)/expenses Adjusted operating profit, net of inter-segment transactions Year to 31 December 2003 Individual business Group business Life assurance technical result Long term investment return Adjusted operating profit Inter-segment (revenue)/expenses Adjusted operating profit, net of inter-segment transactions South Africa United States UK and Rest of World 224 89 313 167 480 (3) 96 – 96 – 96 12 477 108 190 70 260 178 438 (7) 431 85 – 85 – 85 11 96 11 2 13 5 18 2 20 13 2 15 5 20 4 24 £m Total 331 91 422 172 594 11 South Africa United States UK and Rest of World 2,643 1,054 3,697 1,974 5,671 (32) 1,126 – 1,126 – 1,126 137 123 32 155 51 206 25 Rm Total 3,892 1,086 4,978 2,025 7,003 130 605 5,639 1,263 231 7,133 288 72 360 183 543 8 2,346 864 3,210 2,198 5,408 (86) 1,050 – 1,050 – 1,050 135 161 25 186 62 248 49 3,557 889 4,446 2,260 6,706 98 551 5,322 1,185 297 6,804 Inter-segment (revenue)/expenses represents investment management fees paid to the Group’s asset management companies and administration fees (received from)/paid to Group life assurance companies. Notes to the Financial Statements | 79 5 SEGMENTAL ANALYSIS continued 5(b) Life assurance continued (iv) Investment return adjustment for own shares held in policyholders’ funds Dividend income Realised gains on investment in own shares Unrealised gains/(losses) on investment in own shares Net investment gain/(loss) on own shares £m Rm Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2004 Year to 31 December 2003 16 2 76 94 14 – (26) (12) 190 28 897 1,115 173 – (321) (148) (v) Other technical income Other technical income of £84 million (R991 million) (2003: £94 million (R1,161 million)) principally consists of fees earned in respect of South African policyholders’ funds and fees earned for healthcare administration. 5(c)(i) Asset management Year to 31 December 2004 South Africa Fund management Old Mutual Asset Managers Old Mutual Unit Trusts Other Other financial services Nedcor Unit Trusts and Portfolio Management Note Revenue Adjusted Expenses operating profit Revenue Adjusted Expenses operating profit £m Rm 42 23 52 117 16 32 165 (24) (19) (42) (85) (3) (24) (112) 18 4 10 32 13 8 53 497 273 619 1,389 192 378 (282) (220) (495) (997) (40) (283) 1,959 (1,320) 215 53 124 392 152 95 639 US asset management 5(c)(ii) 367 (278) 89 4,330 (3,280) 1,050 UK & Rest of World Fund management Selestia investment platform Other financial services Nedcor Unit Trusts and Portfolio Management 48 7 18 34 107 (31) (12) (26) (28) (97) 17 (5) (8) 6 10 566 83 212 401 (366) (142) (307) (330) 1,262 (1,145) 200 (59) (95) 71 117 Adjusted operating profit 639 (487) 152 7,551 (5,745) 1,806 Inter-segment (revenue)/expenses South Africa US asset management UK & Rest of World Adjusted operating profit, net of inter-segment transactions South Africa US asset management UK & Rest of World (19) (11) – (30) 146 356 107 609 9 – 4 13 (103) (278) (93) (474) (10) (11) 4 (17) (224) (130) – (354) 104 – 47 151 43 78 14 1,735 4,200 1,262 (1,216) (3,280) (1,098) (120) (130) 47 (203) 519 920 164 135 7,197 (5,594) 1,603 80 | Notes to the Financial Statements Notes to the Financial Statements for the year ended 31 December 2004 continued 5 SEGMENTAL ANALYSIS continued 5(c)(i) Asset management continued Note Revenue Expenses £m Adjusted operating profit Revenue Expenses Rm Adjusted operating profit Year to 31 December 2003 South Africa Fund management Old Mutual Asset Managers Old Mutual Unit Trusts Other Other financial services Nedcor Unit Trusts and Portfolio Management US asset management 5(c)(ii) UK & Rest of World Fund management Private client – Gerrard Selestia investment platform Other financial services Nedcor Unit Trusts and Portfolio Management Adjusted operating profit Inter-segment (revenue)/expenses South Africa US asset management UK & Rest of World Adjusted operating profit, net of inter-segment transactions South Africa US asset management UK & Rest of World 37 21 16 74 42 36 152 347 43 91 3 10 42 189 688 (4) (10) – (14) 148 337 189 674 (20) (15) (12) (47) (24) (26) (97) (266) (37) (83) (12) (24) (41) (197) (560) 2 – 4 6 (95) (266) (193) (554) 17 6 4 27 18 10 55 81 6 8 (9) (14) 1 (8) 128 (2) (10) 4 (8) 53 71 (4) 120 458 259 200 917 519 445 (247) (185) (148) (580) (302) (321) 1,881 (1,203) 211 74 52 337 217 124 678 4,285 (3,285) 1,000 531 1,124 37 123 519 2,334 8,500 (52) (123) – (175) 1,829 4,162 2,334 8,325 (454) (1,025) (148) (296) (506) (2,429) (6,917) 30 – 47 77 (1,173) (3,285) (2,382) 77 99 (111) (173) 13 (95) 1,583 (22) (123) 47 (98) 656 877 (48) (6,840) 1,485 Adjusted operating profit includes £6 million (R73 million) (2003: nil) in relation to interest received on short-term funding provided to the Group’s banking subsidiary. The remainder of the inter-segment (revenue)/expenses represents, investment management fees (received from)/paid to the Group’s life assurance companies and other asset management companies. 5(c)(ii) US asset management Revenue Investment management fees Transaction, performance and other fees Expenses Remuneration expenses Other expenses Adjusted operating profit £m Rm Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2004 Year to 31 December 2003 311 56 367 121 157 278 89 304 43 347 117 149 266 81 3,669 661 4,330 1,428 1,852 3,280 1,050 3,754 531 4,285 1,445 1,840 3,285 1,000 5 SEGMENTAL ANALYSIS continued 5(d) Banking (i) Banking adjusted operating profit Year to 31 December 2004 Interest receivable Interest payable Net interest income Dividend income Fees and commissions receivable Fees and commissions payable Net other operating income Total operating income Specific and general provisions charge Net income Operating expenses Share of associated undertakings’ profit Adjusted operating profit Inter-segment (revenue)/expenses Adjusted operating profit, net of inter-segment transactions Year to 31 December 2003 Interest receivable Interest payable Net interest income Dividend income Fees and commissions receivable Fees and commissions payable Net other operating income Notes to the Financial Statements | 81 Notes South Africa UK and Rest of World £m Total South Africa UK and Rest of World Rm Total 26(d) 1,917 (1,320) 597 12 504 (59) 176 1,230 (116) 1,114 (942) 172 5 177 6 183 2,156 (1,643) 513 12 396 (36) 157 1,042 (232) 810 (824) (14) 4 (10) 112 (71) 41 – 11 (2) – 50 (4) 46 (38) 8 6 14 – 14 114 (80) 34 – 19 (2) 14 65 (2) 63 (65) (2) 6 4 2,029 (1,391) 22,619 (15,576) 1,325 (839) 23,944 (16,415) 638 12 515 (61) 176 1,280 (120) 1,160 (980) 180 11 191 6 7,043 143 5,940 (694) 2,082 14,514 (1,370) 13,144 (11,108) 2,036 63 2,099 73 486 – 133 (21) (3) 595 (45) 550 (454) 96 62 158 – 7,529 143 6,073 (715) 2,078 15,109 (1,415) 13,694 (11,562) 2,132 125 2,257 73 197 2,172 158 2,330 2,270 (1,723) 26,619 (20,295) 1,411 (981) 28,030 (21,276) 547 12 415 (38) 171 1,107 (234) 873 (889) (16) 10 (6) 6,324 150 4,891 (445) 1,946 12,866 (2,868) 9,998 (10,169) (171) 53 (118) 430 2 229 (28) 172 805 (18) 787 (807) (20) 68 48 6,754 152 5,120 (473) 2,118 13,671 (2,886) 10,785 (10,976) (191) 121 (70) Total operating income Specific and general provisions charge 5(d)(iii),26(d) Net income Operating expenses Share of associated undertakings’ profit Adjusted operating (loss)/profit Operating expenses include translation losses of £32 million (R372 million) (2003: £110 million (R1,356 million)). Adjusted operating profit includes £6 million (R73 million) in relation to inter-company interest payable for short term funding now repaid. 82 | Notes to the Financial Statements Notes to the Financial Statements for the year ended 31 December 2004 continued 5 SEGMENTAL ANALYSIS continued 5(d) Banking continued (ii) Restructuring and integration costs Costs before tax and minority interests Tax Costs after tax and before minority interests Minority interests Costs after tax and minority interests £m Rm Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2004 Year to 31 December 2003 21 (6) 15 (7) 8 32 (6) 26 (13) 13 246 (71) 175 (83) 92 394 (74) 320 (160) 160 Restructuring and integration costs incurred in connection with the acquisition of BoE by Nedcor Limited have been excluded from adjusted operating profit. (iii) Change in credit provisioning methodology Costs before tax and minority interests Tax Costs after tax and before minority interests Minority interests Costs after tax and minority interests £m Rm Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2004 Year to 31 December 2003 – – – – – 87 (26) 61 (30) 31 – – – – – 1,074 (322) 752 (376) 376 During 2003, the Group’s banking subsidiary, Nedcor Limited, implemented a revised methodology for the calculation of credit provisions for loans and advances in accordance with changes to local reporting requirements (AC133: “Financial Instruments – Recognition and Measurement”). The revised methodology requiring the discounting of future cash flows on advances is acceptable under UK GAAP reporting and was therefore adopted in preparation of the Group’s financial statements, resulting in a one-off increase in opening specific provisions due to the discounting effect. This adjustment has been taken to the profit and loss account in the Group’s financial statements, but excluded from adjusted operating profit. 5 SEGMENTAL ANALYSIS continued 5(e) General insurance result Year to 31 December 2004 Commercial Corporate Personal lines Risk financing Long term investment return Year to 31 December 2003 Commercial Corporate Personal lines Risk financing Long term investment return Notes to the Financial Statements | 83 £m Gross premiums written Earned premiums net of reinsurance Claims incurred net of reinsurance Adjusted operating profit Gross premiums written Earned premiums net of reinsurance Claims incurred net of reinsurance 235 45 249 95 624 201 54 212 59 526 219 19 244 89 571 185 17 206 52 460 (133) (10) (173) (53) (369) (123) (13) (150) (36) (322) 2,777 528 2,938 1,117 7,360 2,583 225 2,878 1,050 (1,579) (118) (2,039) (607) 6,736 (4,343) 2,482 667 2,618 719 6,486 2,284 210 2,543 637 5,674 (1,516) (156) (1,853) (442) (3,967) 29 4 8 3 44 45 89 17 (1) 6 4 26 47 73 £m Rm Adjusted operating profit 329 49 100 49 527 530 1,057 216 (15) 75 53 329 580 909 Rm 5(f) Other shareholders’ income/expenses Distribution from unclaimed share trust Provision for contributions to public benefit and charitable organisations Interest receivable Net corporate expenses Net other expenses Other shareholders’ income/(expenses) Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2004 Year to 31 December 2003 16 (16) 8 (41) – (33) – – 6 (41) (5) (40) 190 (190) 94 (484) – (390) – – 74 (506) (62) (494) In accordance with proposals announced by the Company on 23 February 2004, and approved by its shareholders on 14 May 2004, during the year the Company received £16 million (R190 million) from the Old Mutual (South Africa) Unclaimed Shares Trust. This amount represents accumulated dividends and interest accrued thereon in respect of shares of the Company unclaimed at 18 August 2004, being the expiry date for claims notified to the trustees of that trust following the fifth anniversary of the demutualisation of the South African Mutual Life Assurance Society. It is the firm intention of the Board that all of this money will eventually be contributed to public benefit and charitable organisations and, therefore, full provision has been made for the cost of making such contributions. Net corporate expenses include £6 million (R71 million) (2003: £5 million (R62 million)) in connection with the International Financial Reporting Standards conversion and Group-wide Economic Capital Projects. 84 | Notes to the Financial Statements Notes to the Financial Statements for the year ended 31 December 2004 continued 5 SEGMENTAL ANALYSIS continued 5(g) Net assets At 31 December 2004 Life assurance Asset management Banking General insurance Other Debt Preferred security Net assets At 31 December 2003 Life assurance Asset management Banking General insurance Other Debt Preferred securities Net assets South Africa United States UK and Rest of World 1,089 115 546 257 – 1,225 840 – – – 2,007 2,065 1,063 145 224 115 – 1,547 1,012 900 – – – 1,912 93 20 215 – 29 357 69 240 273 – (127) 455 £m Total 2,407 975 761 257 29 South Africa United States 11,814 1,248 5,923 2,788 – 13,289 9,112 – – – Rm Total 26,112 10,577 8,255 2,788 314 UK and Rest of World 1,009 217 2,332 – 314 4,429 21,773 22,401 3,872 48,046 (799) (385) 3,245 (8,668) (4,177) 35,201 2,144 1,285 497 115 (127) 12,689 1,731 2,674 1,373 – 12,080 10,743 – – – 823 2,865 3,259 – (1,516) 25,592 15,339 5,933 1,373 (1,516) 3,914 18,467 22,823 5,431 46,721 (749) (411) 2,754 (8,941) (4,906) 32,874 Preference shares issued by the Group’s banking subsidiary are included within banking net assets. US$750 million cumulative preferred securities have been separately identified and shown net of unamortised issue costs and undistributed profits due to minority interests. 5(h) Banking business average assets Nedbank Corporate Imperial Bank Nedbank Capital Nedbank Retail and Wealth Peoples Bank Shared services Capital management and central funding Inter-segment eliminations and other adjustments Average interest-earning assets Net interest margin (based on average assets) During 2004, the operations of Peoples Bank were integrated within the operations of Nedbank. £m Rm Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2004 Year to 31 December 2003 11,078 1,253 16,258 8,799 – 1,840 6,879 (22,326) 10,790 864 13,692 6,496 1,183 1,145 2,868 (13,472) 130,699 14,785 191,820 103,812 – 21,708 81,161 (263,419) 133,245 10,674 169,080 80,220 14,612 14,145 35,412 (166,366) 23,781 23,566 280,566 291,022 21,302 18,515 251,339 228,637 3.00 % 2.95 3.00 % 2.95 Notes to the Financial Statements | 85 5 SEGMENTAL ANALYSIS continued 5(i) Funds under management At 31 December 2004 Investments including assets held to cover linked liabilities SA asset management Fund management Old Mutual Asset Managers Old Mutual Unit Trusts Nedcor Unit Trusts Nedcor Portfolio Management Other financial services South Africa United States UK and Rest of World £m Total South Africa United States UK and Rest of World Rm Total 21,938 9,857 2,795 34,590 237,987 106,931 30,321 375,239 8,011 288 8,299 1,428 3,113 1,016 13,856 – – – – – – – – – – – – – – 8,011 288 8,299 1,428 3,113 1,016 86,905 3,124 90,029 15,491 33,770 11,022 13,856 150,312 – – – – – – – – – – – – – 86,905 3,124 90,029 15,491 33,770 11,022 – 150,312 US asset management – 80,289 6,561 86,850 – 870,991 71,175 942,166 UK and Rest of World asset management Fund management Selestia investment platform Nedcor Unit Trusts Nedcor Portfolio Management Other financial services – – – – – – – – – – – – 2,210 531 565 1,252 270 4,828 2,210 531 565 1,252 270 4,828 – – – – – – – – – – – – 23,975 5,760 6,129 13,582 2,929 23,975 5,760 6,129 13,582 2,929 52,375 52,375 Total funds under management 35,794 90,146 14,184 140,124 388,299 977,922 153,871 1,520,092 86 | Notes to the Financial Statements Notes to the Financial Statements for the year ended 31 December 2004 continued 5 SEGMENTAL ANALYSIS continued 5(i) Funds under management continued At 31 December 2003 Investments including assets held to cover linked liabilities (restated) SA asset management Fund management Old Mutual Asset Managers Old Mutual Unit Trusts Nedcor Unit Trusts Nedcor Portfolio Management Other financial services South Africa United States UK and Rest of World £m Total South Africa United States UK and Rest of World Rm Total 19,437 8,317 1,539 29,293 232,012 99,278 18,371 349,661 5,378 293 5,671 865 2,771 697 10,004 – – – – – – – – – – – – – – 5,378 293 5,671 865 2,771 697 64,196 3,497 67,693 10,325 33,770 8,320 10,004 119,415 – – – – – – – – – – – – – – 64,196 3,497 67,693 10,325 33,770 8,320 119,415 US asset management – 72,532 5,895 78,427 – 865,793 70,367 936,160 UK and Rest of World asset management Fund management Selestia investment platform Nedcor Unit Trusts Nedcor Portfolio Management Other financial services – – – – – – – – – – – – 2,027 213 707 4,210 345 7,502 2,027 213 707 4,210 345 7,502 – – – – – – – – – – – – 24,196 2,543 8,439 50,254 4,118 24,196 2,543 8,439 50,254 4,118 89,550 89,550 Total funds under management 29,441 80,849 14,936 125,226 351,427 965,071 178,288 1,494,786 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 – insurance and asset management businesses Income from other financial investments Gains on the realisation of investments £m Rm Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2004 Year to 31 December 2003 53 1,406 1,088 2,547 40 6 46 50 1,345 589 1,984 34 7 41 625 16,589 12,837 30,051 472 71 543 617 16,609 7,273 24,499 420 86 506 7 INVESTMENT EXPENSES AND CHARGES Technical account – long term business Interest payable Investment management expenses Non-technical account – insurance and asset management businesses Interest payable Other finance costs Notes to the Financial Statements | 87 £m Rm Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2004 Year to 31 December 2003 4 27 31 22 15 37 7 17 24 33 15 48 47 319 366 260 177 437 86 210 296 408 185 593 8 INSURANCE LONG TERM INVESTMENT RETURN ON SHAREHOLDERS’ FUNDS As permitted by the ABI SORP, balances on the long term business and general business technical accounts are stated after allocating an investment return earned by the insurance businesses, based on a long term investment return, to/from the non-technical account. For the South African and Namibian long term business, the return is applied to an average value of investible shareholders’ assets. For general insurance business, the return is an average value of investible assets supporting shareholders’ funds and insurance liabilities. For the US long term business, the return earned by assets, mainly bonds, has been smoothed with reference to the actual yield earned by the portfolio. Short term fluctuations in investment return represent the difference between actual return and long term investment return. The long term rates of investment return for equities and other investible assets are as follows: South Africa and Namibian long term and general insurance businesses – weighted average return Equities Cash and other investible assets – Rand denominated Cash and other investible assets – other currencies United States Year to 31 December 2004 Year to 31 December 2003 12.5% 14.0% 11.0% 8.0% 13.0% 14.0% 12.5% 9.0% 6.00% 6.04% The long term rates of return are based on achieved real rates of return adjusted for current inflation expectations and consensus economic investment forecasts, and are reviewed annually for appropriateness. The directors are of the opinion that these rates of return are appropriate and have 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. 88 | Notes to the Financial Statements Notes to the Financial Statements for the year ended 31 December 2004 continued 8 INSURANCE LONG TERM INVESTMENT RETURN ON SHAREHOLDERS’ FUNDS continued 8(a) Analysis of short term fluctuations in investment return Long term business Actual investment return attributable to shareholders Long term investment return credited to operating result General insurance business Actual investment return attributable to shareholders Long term investment return credited to operating result Other income Actual investment return attributable to shareholders Long term investment return credited to operating result £m Rm Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2004 Year to 31 December 2003 360 172 188 83 45 38 – – – 326 183 143 51 47 4 (3) 1 (4) 4,238 2,025 2,213 979 530 449 – – – 4,026 2,260 1,766 630 580 50 (37) 12 (49) Excess of actual return over longer term return 226 143 2,662 1,767 8(b) Five year comparison of long term investment return with actual investment return 2000-2004 1999-2003 2000-2004 1999-2003 £m Rm Long term business Actual investment return attributable to shareholders Long term investment return credited to operating result General insurance business Actual investment return attributable to shareholders Long term investment return credited to operating result Other income Actual investment return attributable to shareholders Long term investment return credited to operating result Excess of actual return over longer term return 1,030 862 168 1,400 877 523 12,655 10,634 2,021 15,614 10,453 5,161 267 212 55 31 30 1 224 414 223 191 113 51 62 776 3,130 2,635 495 481 340 141 2,657 4,419 2,657 1,762 1,289 547 742 7,665 United States The above table includes investment returns on the US life business since date of acquisition, 1 July 2001. 9 NET OPERATING EXPENSES Long term business Acquisition costs Administration expenses General insurance 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 Total fees payable to the Group’s auditors Statutory audit services Other audit and assurance services Tax services – advisory – compliance Other services Notes to the Financial Statements | 89 £m Rm Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2004 Year to 31 December 2003 181 339 520 112 46 158 2,136 4,000 6,136 1,316 550 1,866 179 319 498 78 34 112 £m 2,210 3,939 6,149 958 420 1,378 Rm Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2004 Year to 31 December 2003 93 27 1,379 1 103 65 12 1,097 319 16,270 12 1,216 767 145 15 14 1,105 18 113 53 11 £m 185 173 13,645 222 1,392 654 130 Rm Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2004 Year to 31 December 2003 5.2 2.2 7.4 0.4 0.1 4.4 4.5 3.5 8.0 0.4 0.1 2.0 61 26 87 5 1 52 56 43 99 5 1 25 12.3 10.5 145 130 Included in the above are audit fees payable by the Company of £0.4 million (R4.7 million) (2003: £0.4 million (R4.9 million)). In addition to the above, fees of £2.5 million (R30 million) (2003: £1.6 million (R20 million)) were payable to other auditors in respect of joint audit arrangements of certain banking subsidiaries. “Other services” consists primarily of advisory work in connection with the International Financial Reporting Standards conversion. 90 | Notes to the Financial Statements Notes to the Financial Statements for the year ended 31 December 2004 continued 11 FINES AND PENALTIES On 21 June 2004, one of the Group’s US asset management affiliates, Liberty Ridge Capital Inc. (formerly known as Pilgrim Baxter & Associates, Ltd (PBA)), reached agreements with the US Securities and Exchange Commission (SEC) and the office of the New York State Attorney General (NYAG) which settle all charges brought by these authorities against PBA in relation to market timing in the US Mutual Fund business. PBA agreed to pay US$40 million in disgorgement of past fees, as well as US$50 million in civil penalties. This has resulted in a charge of £49 million (R596 million) for the year, which has been taken to the profit and loss account in the Group’s financial statements, but excluded from adjusted operating profit. Tax deductions have been recognised on the disgorgement of past fees, resulting in a tax credit of £8 million (R97 million). In addition PBA will reduce fees to investors by approximately US$10 million over the next five years. There are several related private lawsuits arising from the conduct alleged in the civil suits filed by the SEC and NYAG. These class action lawsuits were consolidated into a single lawsuit along with all other cases against US parties alleging market timing and late trading violations. Proceedings in this case are at a preliminary stage and it is not possible to say, at this time, whether or not the amount of the ultimate liability to be borne by the Group will be material. As a result, no amount has been recognised for additional fines or other penalties that may arise, as significant uncertainty remains over the quantum of any settlement. 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, share options, long term incentive plans and pension arrangements, for the year to 31 December 2004 is shown in the Remuneration Report on pages 44 to 52. The interests of directors of the Company in shares of the Company and its quoted subsidiaries are shown in the Corporate Governance and Directors’ Report on page 27. At 31 December 2004, one director of the Company had a loan advance outstanding of £0.1 million (R1 million) (2003: 1 director, £0.1 million (R1 million)) with banking subsidiaries of the Group. This loan has been provided on normal commercial terms. 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 Asset management Banking General insurance Other £m Rm Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2004 Year to 31 December 2003 893 19 45 957 840 18 38 896 10,536 224 531 11,291 10,373 222 469 11,064 Year to 31 December 2004 Year to 31 December 2003 13,480 3,173 21,293 3,252 138 41,336 14,093 3,942 23,252 3,292 110 44,689 Notes to the Financial Statements | 91 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 last full actuarial valuations were performed for the various schemes between 30 June 2002 and 31 December 2004 and, in accordance with the transitional arrangements of FRS 17, have been updated by either internal or external actuaries at 31 December 2004. The major assumptions used in these valuations were: Inflation assumption Rate of increase in salaries Rate of increase in pensions in payment Discount rate At 31 December 2004 At 31 December 2003 At 31 December 2002 South African schemes UK schemes South African schemes UK schemes South African schemes UK schemes 4.0% 2.75 –3.0% 5.5% 5.0 – 4.75% 4.0% 2.7 – 3.0% 8.5% 2.25 – 2.3% 5.0% 2.0– 2.5% 6.5% 1.8– 2.5% 6.5% 4.0– 4.5% 7.5– 8.0% 3.5– 4.5% 4.8% 2.0– 3.0% 11.0% 1.8– 3.1% 9.5% 5.3– 5.5% 11.0–11.5% 5.5– 6.5% The assumptions used by the actuaries are the best estimates chosen from a range of possible actuarial assumptions which, due to the timescale covered, may not necessarily be borne out in practice. The fair value of and expected return on the schemes’ assets, which are not intended to be realised in the short term and may be subject to significant change before they are realised, and the present value of the schemes’ liabilities, which are derived from cash flow projections over long periods and thus inherently uncertain, were: At 31 December 2004 Equities Bonds Insurance policies and annuities Cash Total market value of assets Present value of liabilities Net pension surplus Associated deferred tax asset Net pension surplus after deferred tax Expected long term rate of return £m Rm South African schemes UK schemes Value of assets Value of assets 11.5% 7.5– 8.3% 8.5% 4.5–5.3% 5.3% 6.5% 9.5% 4.75–4.8% 129 91 150 12 382 (364) 18 (1) 17 1,399 987 1,627 130 4,143 (3,949) 194 (16) 178 92 | Notes to the Financial Statements Notes to the Financial Statements for the year ended 31 December 2004 continued 14 EMPLOYEE BENEFITS continued 14(a) Employee pension plans continued At 31 December 2003 Equities Bonds Insurance policies and annuities Cash Total market value of assets Present value of liabilities Net pension surplus At 31 December 2002 Equities Bonds Insurance policies and annuities Cash Total market value of assets Present value of liabilities Net pension deficit Expected long term rate of return £m Rm South African schemes UK schemes Value of assets Value of assets 12.5% 7.5% 9.5% 4.8– 5.5% 9.5% 4.8– 5.3% 7.5% 3.8– 4.8% 12.0–14.0% 7.5% 9.0–12.0% 4.5– 5.5% 12% 4.5–7.5% 10% 3.5– 4.5% 103 67 155 4 329 (324) 5 103 50 123 20 296 (299) (3) 1,229 797 1,850 48 3,924 (3,867) 57 1,423 691 1,699 276 4,089 (4,130) (41) Notes to the Financial Statements | 93 14 EMPLOYEE BENEFITS continued 14(a) Employee pension plans continued Movement during the year Net surplus/(deficit) in schemes at beginning of year Disposed operations Acquired operations Contributions Current service cost Finance income Expected return on pension scheme assets Interest on pension scheme liabilities Actuarial gain/loss* Foreign exchange translation Net surplus/(deficit) in schemes at end of year Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2002 Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2002 £m Rm 5 – – 8 (2) 27 (25) 2 3 18 (3) 12 – 4 (4) 31 (28) (13) 6 5 24 – 4 4 (3) 23 (18) (46) 9 (3) 57 – – 94 (24) 319 (295) 24 19 194 (41) 148 – 49 (49) 383 (346) (161) 74 57 423 – 55 55 (41) 318 (249) (635) 33 (41) *The actuarial gain for the year to 31 December 2004 represents 0.6% (2003: actuarial loss, 4.0%; 2002: actuarial loss, 15.4%) of the total present value of scheme liabilities. The actual return on pension scheme assets was £11 million (R130 million) more than the expected return (2003: £6 million (R75 million) less), representing 3.0% (2003: 1.8%) of the total scheme assets. Experience gains arising on scheme liabilities were £0.2 million (R2 million) (2003: £2 million (R25 million)). Changes in the assumptions underlying the present value of scheme liabilities resulted in an actuarial loss of £9 million (R106 million) (2003: £9 million (R111 million)). At 31 December 2004, the provision for pension contributions included in other provisions and charges in the Group’s balance sheet amounted to £55 million (R597 million) (2003: £53 million (R632 million)). The charges to the technical and non-technical accounts represent the regular pension cost, offset by the investment return on the surplus scheme assets, and variations from regular cost arising from the schemes’ surplus being amortised on a straight-line basis over the average expected remaining service lives of current employees. An analysis of the charge is presented below. Regular cost Variations from regular cost Profit and loss charge £m Rm Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2004 Year to 31 December 2003 51 (6) 45 52 (14) 38 602 (71) 531 642 (173) 469 94 | Notes to the Financial Statements Notes to the Financial Statements for the year ended 31 December 2004 continued 14 EMPLOYEE BENEFITS continued 14(b) Post retirement benefits Certain Group subsidiary undertakings provide medical and mortgage bond benefits to qualifying employees beyond the date of retirement. The charge and related liability included in the Group’s financial statements are presented below. Profit and loss (credit)/charge Provisions for other risks and charges £m Rm Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2004 Year to 31 December 2003 (1) 20 5 21 (12) 217 62 251 14(c) Employee share ownership plans (ESOPs) The ESOPs currently in use are described in the Remuneration Report on pages 44 to 52. As described in note 1, in accordance with UITF38, shares held by ESOP Trusts are no longer recognised as current assets in the balance sheet, but are shown as a deduction from shareholders’ equity. The number and market value of the Company’s ordinary shares held by ESOP Trusts at 31 December 2004 were 93 million (2003: 102 million) and £123 million (R1,333 million) (2003: £94 million (R1,122 million)), respectively. 15 TAX ON PROFIT ON ORDINARY ACTIVITIES 15(a) Technical account – long term business Current tax South Africa United States Rest of World Deferred tax £m Rm Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2004 Year to 31 December 2003 211 11 1 223 40 263 162 4 3 169 58 227 2,490 130 12 2,632 472 3,104 2,000 49 37 i 2,086 716 i 2,802 Notes to the Financial Statements | 95 15 TAX ON PROFIT ON ORDINARY ACTIVITIES continued 15(b) Non-technical account – insurance, asset management and banking businesses £m Rm Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2004 Year to 31 December 2003 United Kingdom tax UK corporation tax Double tax relief Overseas tax South Africa United States Rest of World Secondary tax on companies (STC) Adjustment in respect of prior periods Current tax for the year Current tax attributable to shareholders’ profits on long term business Total current tax on ordinary activities Deferred tax – non-technical account Deferred tax attributable to shareholders’ profits on long term business Reported tax charge The reported tax charge is analysed as follows: Adjusted operating profit Restructuring and integration costs Change in credit provisioning methodology Short term fluctuations in investment return Fines and penalties 51 (47) 4 72 – 5 10 87 1 92 162 254 (8) 40 286 240 (6) – 60 (8) 286 34 (24) 10 33 11 4 14 62 (8) 64 127 191 602 (555) 47 849 – 59 118 1,026 12 1,085 1,911 2,996 (8) 58 (94) 472 420 (296) 124 408 136 49 173 766 (99) 791 1,568 2,359 (99) 716 241 3,374 2,976 224 (6) (26) 49 – 241 £m 2,834 (71) – 708 (97) 3,374 2,763 (74) (332) 609 – 2,976 Rm 15(c) Reconciliation of tax charge Tax at UK rate of 30.0% (2003: 30.0%) on profit on ordinary activities before tax Untaxed and low taxed income (including tax exempt investment return) Disallowable expenditure STC Timing differences Other Current tax charge Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2004 Year to 31 December 2003 262 (83) 97 10 (32) – 254 133 (113) 179 14 (50) 28 191 3,088 (979) 1,144 118 (378) 3 2,996 1,644 (1,395) 2,210 173 (617) 344 2,359 96 | Notes to the Financial Statements Notes to the Financial Statements for the year ended 31 December 2004 continued 16 PROFIT/(LOSS) FOR THE FINANCIAL YEAR The Company’s profit for the financial year before dividends payable was £241 million (R2,843 million) (2003: loss of £100 million (R1,235 million)). 17 ACQUISITIONS AND DISPOSALS 17(a) Acquisitions Mutual & Federal Insurance Company Limited During the period the Group acquired an additional 37.0% of the equity share capital of its general insurance subsidiary, Mutual & Federal Insurance Company Limited, bringing its total holding to 87.6%. Cash consideration of £102 million (R1,343 million) was paid. At the year end the Group held 87.0% of the equity share capital. The table below shows the fair value of the assets and liabilities acquired. Goodwill Investments Technical assets Insurance debtors Other assets Minority interests Technical provisions Insurance creditors Provisions Other liabilities Total net assets of Mutual & Federal Insurance Company Limited Additional share of net assets acquired by the Group Cash consideration paid Goodwill arising on acquisition Book value on acquisition Fair value adjustments £m Rm Provisional fair value to Group Provisional fair value to Group 10 304 73 28 115 (3) (266) (12) (11) (25) 213 (10) – – – – – – – – – (10) – 304 73 28 115 (3) (266) (12) (11) (25) 203 75 102 27 – 4,214 1,006 394 1,589 (38) (3,692) (173) (155) (363) 2,782 1,029 1,343 314 In addition the Group’s banking business made a number of smaller acquisitions giving rise to a goodwill amount of £17 million (R205 million). Fair value adjustments In accordance with Financial Reporting Standard 7 “Fair Values in Acquisition Accounting”, the book value of goodwill has been deducted in determining the fair value of the net assets acquired as it is not a separately identifiable asset. There were no other fair value adjustments. Notes to the Financial Statements | 97 17 ACQUISITIONS AND DISPOSALS continued 17(b) Disposals (non-operating items) The following gains and losses on the disposal of business operations have been disclosed as non-operating: United States – asset management affiliates South Africa – banking subsidiaries South Africa – banking associates United Kingdom – asset management subsidiaries Loss on disposal before tax Tax on non-operating items Loss on disposal after tax Minority interests – South Africa banking subsidiaries and associates Loss on disposal after tax and minority interests £m Rm Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2004 Year to 31 December 2003 (5) (5) (13) (12) (35) – (35) 9 (26) (15) – – (17) (32) – (32) – (32) (59) (64) (153) (142) (418) – (418) 106 (312) (194) – – (210) (404) – (404) – (404) United States – asset management affiliates During December, the Group discontinued the operations of Sirach Capital Management Inc. incurring a loss of £8 million (R94 million) including goodwill disposed of £6 million (R71 million). In addition, credits totalling £3 million (R35 million) were booked in respect of provisions for contingent payments on prior year disposals no longer required. South Africa – banking subsidiaries During the period the Group disposed of various non-core subsidiaries for cash consideration of £29 million (R343 million). The profit on disposal was £5 million (R64 million) after charging goodwill of £14 million (R164 million). No tax was payable and the minority interest attributable was £2 million (R31 million). South Africa – banking associates The non-operating charge for the period includes £13 million (R153 million) in respect of Group adjustments following disposals of certain banking associates. The minority interest attributable was £7 million (R75 million). United Kingdom – asset management subsidiaries During 2004 additional costs relating to onerous lease provisions were incurred in connection with the sale of Gerrard Management Services Ltd and other disposals made in prior years. 98 | Notes to the Financial Statements Notes to the Financial Statements for the year ended 31 December 2004 continued 18 GOODWILL At beginning of year Additions arising on acquisitions in the period Adjustments in respect of prior year acquisitions* Disposals Amortisation and impairment for the year Foreign exchange and other movements At end of year Represented by: Cost less impairments Accumulated amortisation Analysed between: Life assurance Asset management General insurance Banking Note 17(a) £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 1,264 44 (1) (20) (105) (30) 1,152 1,432 (280) 1,152 60 745 41 306 1,598 – 81 (159) (194) (62) 1,264 15,088 519 (12) (206) (1,238) (1,654) 12,497 1,508 (244) 15,534 (3,037) 1,264 12,497 75 863 12 314 651 8,082 445 3,319 1,152 1,264 12,497 22,075 – 1,000 (1,898) (2,396) (3,693) 15,088 18,001 (2,913) 15,088 895 10,031 143 3,749 15,088 *Adjustments in respect of prior year acquisitions reflect the latest estimate of the deferred consideration payable for the purchase of certain US affiliates under various agreements which expire in 2007. As such the ultimate cost of purchase will remain uncertain, dependent on future events, and hence subject to further future adjustment. Amortisation and impairment for the year The total goodwill amortisation and impairment charge for the year of £110 million (R1,290 million) (2003: £206 million (R2,544 million)) comprises £55 million (R648 million) (2003: £146 million (R1,803 million)) attributable to banking businesses and £55 million (R642 million) (2003: £60 million (R741 million)) attributable to insurance and other businesses. Of this total charge, £105 million (R1,238 million) (2003: £194 million (R2,396 million)) is disclosed above and £5 million (R52 million) (2003: £12 million (R148 million)) is disclosed within investments in associated undertakings (note 26(h)). The charge for the period includes an impairment charge of £27 million (R319 million) in respect of Group adjustments associated with our banking subsidiaries. 19 LAND AND BUILDINGS Insurance and other assets Market value At beginning of year Net disposals Market value movements Foreign exchange and other movements At end of year Notes to the Financial Statements | 99 £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 677 (24) 40 80 773 600 (33) 51 59 677 8,081 (283) 472 116 8,386 8,288 (408) 630 (429) 8,081 All land and buildings recognised under “insurance and other assets” are freehold. No land and buildings are occupied for own use. Banking Cost At beginning of year Net additions/(disposals) Foreign exchange and other movements At end of year Accumulated depreciation At beginning of year Charge for year Foreign exchange and other movements At end of year Net book value At end of year Analysed between: Freehold Long and short leasehold All land and buildings were occupied for own use. Market value Freehold Long and short leasehold Market value of land and buildings occupied for own use £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 164 20 12 196 (23) (5) (8) (36) 138 (4) 30 164 (7) (9) (7) (23) 1,958 236 (68) 2,126 (275) (59) (57) (391) 1,903 (49) 104 1,958 (97) (111) (67) (275) 160 141 1,735 1,683 156 4 160 1,692 46 1,738 134 7 141 £m 1,600 83 1,683 Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 202 4 206 150 7 157 2,191 43 2,234 1,791 84 1,875 100 | Notes to the Financial Statements Notes to the Financial Statements for the year ended 31 December 2004 continued 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 £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 8,890 14,561 591 1,138 660 25,840 8,083 12,406 782 886 599 96,440 157,961 6,411 12,345 7,160 96,484 148,087 9,334 10,576 7,150 22,756 280,317 271,631 In 2004, zero-interest policy loans have been reclassified so as to treat loans granted as disinvestments of life assurance policies. The effect of this change has been a reduction in “other loans” above and policyholder liabilities, included within technical provisions, of £373 million (R4,405 million). Comparative information has not been restated but the effect of this change on 2003 would have been a reduction in other assets and technical provisions of £314 million (R3,746 million). There is no impact on operating profit as a result of this reclassification. Market value of other financial investments listed on recognised stock exchanges included above Cost 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 Market value Cost 21 DEBTORS ARISING FROM DIRECT INSURANCE OPERATIONS Amounts owed by policyholders Amounts owed by intermediaries Outstanding securities realised Other £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 23,868 18,732 258,925 223,598 7,141 15,206 243 1,161 464 24,215 7,977 6,389 5,534 11,420 770 855 470 77,467 164,958 2,636 12,595 5,034 66,058 136,317 9,191 10,206 5,610 19,049 262,690 227,382 5,860 5,584 86,536 69,949 69,309 66,655 £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 59 13 19 82 173 99 10 18 98 640 141 206 890 225 1,877 1,182 119 215 1,170 2,686 22 TANGIBLE FIXED ASSETS Insurance and other assets Computer and other equipment, fixtures and vehicles Cost At beginning of year Disposed operations Additions Disposals Foreign exchange and other movements At end of year Accumulated depreciation At beginning of year Disposed operations Charge for year 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 Disposals Foreign exchange and other movements At end of year Accumulated depreciation At beginning of year Charge for year Disposals Foreign exchange and other movements At end of year Net book value At end of year Notes to the Financial Statements | 101 £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 214 (1) 42 (28) (3) 224 (133) 1 (31) 16 (3) (150) 201 (27) 44 (59) 55 214 (104) 22 (32) 37 (56) (133) 2,554 (12) 496 (330) (278) 2,430 (1,588) 12 (366) 189 126 (1,627) 2,777 (333) 543 (729) 296 2,554 (1,437) 272 (395) 457 (485) (1,588) 74 81 803 966 501 122 (79) 45 589 (280) (67) 25 (44) (366) 354 78 (31) 100 501 (196) (72) 21 (33) (280) 5,980 1,439 (932) (97) 6,390 (3,342) (791) 295 (129) (3,967) 4,890 963 (383) 510 5,980 (2,708) (889) 259 (4) (3,342) 223 221 2,423 2,638 102 | Notes to the Financial Statements Notes to the Financial Statements for the year ended 31 December 2004 continued 23 PRESENT VALUE OF ACQUIRED IN-FORCE BUSINESS Cost At beginning of year Foreign exchange movements At end of year Amortisation for the year At beginning of year Amortisation for the year Foreign exchange movements At end of year Net book value At end of year 24 OTHER ASSETS Insurance and other assets Deferred tax asset Other Banking Customer indebtedness for acceptances Deferred tax asset Derivative contracts – positive value Other £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 279 (19) 260 (85) (17) 6 (96) 307 (28) 279 (52) (41) 8 (85) 3,330 (509) 2,821 (1,015) (201) 175 (1,041) 4,241 (911) 3,330 (718) (506) 209 (1,015) 164 194 1,780 2,315 Notes 24(a) 24(c) 46(e) £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 309 116 425 139 109 1,742 466 2,456 253 79 332 70 256 1,720 350 2,396 3,352 1,258 4,610 1,508 1,182 18,893 5,055 26,638 3,020 943 3,963 836 3,056 20,531 4,179 28,602 Other assets include £1,742 million (R18,893 million) (2003: £1,720 million (R20,531 million)) that reflects the positive value of on-balance sheet trading derivative instruments. The negative value of these contracts is included within other liabilities. 24 OTHER ASSETS continued 24(a) Deferred tax asset – insurance and other assets At beginning of year Net credit for the year Foreign exchange and other movements At end of year The deferred tax asset arises as a result of: Insurance funds Unrelieved tax losses Accelerated capital allowances Short term timing differences Notes to the Financial Statements | 103 £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 253 69 (13) 309 156 31 27 95 309 323 4 (74) 253 69 23 47 114 253 3,020 814 (482) 3,352 1,692 336 293 1,031 3,352 4,462 49 (1,491) 3,020 824 275 561 1,360 3,020 The recovery of £309 million (R3,352 million) (2003: £253 million (R3,020 million)) of the total deferred tax asset above is dependent upon future taxable profits. 24(b) Deferred tax asset, unrecognised – insurance and other assets Unrelieved tax losses Accelerated capital allowances Insurance funds Short term timing differences £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 66 33 7 33 139 71 44 3 15 716 358 76 358 848 525 36 179 133 1,508 1,588 The unrecognised deferred tax assets will be recognised when appropriate taxable profits are reasonably expected to arise in the relevant jurisdictions. 24(c) Deferred tax asset – banking At beginning of year Net (charge)/credit for the year Foreign exchange and other movements At end of year The deferred tax asset arises as a result of: Unrelieved tax losses Short term timing differences Other timing differences £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 256 (29) (118) 109 235 (146) 190 109 50 7 199 256 189 7 60 256 3,056 (342) (1,532) 1,182 2,549 (1,584) 217 1,182 691 86 2,279 3,056 2,251 80 725 3,056 Other movements includes an adjustment of £169 million (R1,989 million) based on reclassification of deferred tax on structured finance transactions. There is a matching adjustment to the deferred tax liability accordingly. There were unrecognised banking deferred tax assets at 31 December 2004 of £18 million (R198 million) relating to unrelieved tax losses (2003: nil). 104 | Notes to the Financial Statements Notes to the Financial Statements for the year ended 31 December 2004 continued 25 DEFERRED ACQUISITION COSTS At beginning of year Arising on policies written during the year Amortisation Foreign exchange and other movements At end of year Analysed between: Life assurance General insurance 26 BANKING ASSETS 26(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 Additions Disposals Foreign exchange and other movements At end of year £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 427 323 (44) (41) 665 656 9 665 284 214 (30) (41) 427 420 7 427 5,097 3,811 (519) (1,175) 7,214 7,116 98 7,214 3,924 2,643 (370) (1,100) 5,097 5,013 84 5,097 £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 1,223 177 1,400 85 1,485 823 1,498 (1,023) 102 1,400 792 31 823 65 888 13,270 1,916 15,186 924 16,110 9,454 370 9,824 776 10,600 923 1,173 (1,367) 94 9,824 17,680 (12,071) (247) 12,750 14,484 (16,880) (530) 823 15,186 9,824 Investment securities are those intended for use on a continuing basis and not for dealing purposes. The market value of Treasury bills and other eligible bills at 31 December 2004 was £1,485 million (R16,110 million) (2003: £857 million (R10,228 million)). 26(b) Loans and advances to banks Remittances in transit Other loans and advances to banks Maturity profile Repayable on demand Repayable within one year but not on demand £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 37 2,485 2,522 1,016 1,056 2,522 18 2,074 2,092 1,711 381 2,092 406 26,952 27,358 11,023 16,335 27,358 215 24,757 24,972 20,424 4,548 24,972 Notes to the Financial Statements | 105 26 BANKING ASSETS continued 26(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 Provision for bad and doubtful debts 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 £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 Notes 26(e) 26(d) 5,699 2,682 53 532 8,165 1 648 17,780 (606) 17,174 1,436 1,739 1,486 5,725 7,394 (606) 4,738 2,967 54 511 6,324 9 1,132 61,827 29,100 579 5,768 88,573 16 7,031 56,556 35,416 645 6,100 75,488 107 13,512 15,735 (599) 192,894 (6,578) 187,824 (7,150) 15,136 186,316 180,674 3,697 1,123 906 4,761 5,248 (599) 15,573 18,868 16,124 62,106 80,223 (6,578) 44,130 13,409 10,811 56,826 62,648 (7,150) Loans and advances to customers after provisions 17,174 15,136 186,316 180,674 26(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 Recoveries of advances written-off in previous years Amounts written-off in year Foreign exchange and other movements At end of year General provisions At beginning of year Charge to profit and loss account Amounts written back in year Foreign exchange and other movements At end of year Total provision for bad and doubtful debts £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 635 (515) 120 542 121 (19) (210) 81 515 57 18 – 16 91 606 695 (542) 153 350 321 (8) (185) 64 542 124 8 (96) 21 57 599 7,488 (5,590) 1,898 6,470 1,430 (227) (2,474) 391 5,590 680 212 – 96 988 6,578 8,299 (6,470) 1,829 4,835 3,956 (98) (2,289) 66 6,470 1,713 102 (1,181) 46 680 7,150 106 | Notes to the Financial Statements Notes to the Financial Statements for the year ended 31 December 2004 continued 26 BANKING ASSETS continued 26(e) Loans and advances to customers – concentrations of exposure Loans and advances before provisions Individuals Manufacturing Asset management, insurance and real estate Other industries Loans and advances to customers before provisions Specific provisions Individuals Manufacturing Asset management, insurance and real estate Other industries Specific provisions against loans and other advances to customers 26(f) Debt securities Book value Investment securities Government securities Other public sector securities Private sector securities Other securities Government securities Other public sector securities Private sector securities £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 8,738 637 4,063 4,342 7,236 591 3,930 3,978 94,790 6,906 44,076 47,122 86,374 7,055 46,911 47,484 17,780 15,735 192,894 187,824 260 10 59 186 515 2,818 105 636 2,031 5,590 153 10 47 332 542 £m 1,826 119 561 3,964 6,470 Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 1,425 50 157 1,632 211 31 60 302 1,254 70 70 1,394 3 – 23 26 15,448 546 1,704 17,698 2,291 338 649 3,278 14,969 836 836 16,641 36 – 275 311 1,934 1,420 20,976 16,952 The market value of debt securities at 31 December 2004 was £1,941 million (R21,049 million) (2003: £1,437 million (R17,149 million)). Maturity profile – book value Due within one year Due one year and over Investment securities analysed by listing status Listed Unlisted 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 140 1,794 1,934 1,539 93 1,632 1,394 1,211 (1,209) 236 1,632 198 1,222 1,420 1,368 26 1,394 1,519 19,457 20,976 16,693 1,005 17,698 913 732 (331) 80 16,641 14,289 (14,267) 1,035 1,394 17,698 2,363 14,589 16,952 16,329 312 16,641 12,612 9,039 (4,087) (923) 16,641 26 BANKING ASSETS continued 26(g) Equity securities and other variable yield securities Book value Investment securities Listed on recognised investment exchanges Unlisted Market value Investment securities Listed on recognised investment exchanges Unlisted The movement in the book value of equity securities held for investment purposes was as follows: At beginning of year Additions Disposals Reclassification Foreign exchange and other movements At end of year 26(h) Investment in associated undertakings At beginning of year Share of associated undertakings’ retained profit Net (disposal)/acquisition of interests Goodwill amortisation Foreign exchange and other movements At end of year Represented by: Net asset valuation Unamortised goodwill on acquisition Notes to the Financial Statements | 107 £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 61 198 259 71 248 319 317 66 (161) – 37 259 665 2,146 2,811 774 2,686 3,460 3,784 784 (1,898) – 141 2,811 52 265 317 43 263 306 965 23 (61) (639) 29 317 £m 621 3,163 3,784 514 3,132 3,646 13,331 285 (754) (7,891) (1,187) 3,784 Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 Note 18 144 5 (43) (5) (10) 91 71 20 91 124 14 19 (12) (1) 144 117 27 144 1,719 56 (506) (52) (230) 987 770 217 987 1,713 173 235 (148) (254) 1,719 1,396 323 1,719 108 | Notes to the Financial Statements Notes to the Financial Statements for the year ended 31 December 2004 continued 27 EQUITY SHAREHOLDERS’ FUNDS Authorised 6,000,000,000 ordinary shares of 10p each £m At 31 December 2004 At 31 December 2003 600 600 The movement in consolidated equity shareholders’ funds for the year is shown below: Millions Allotted, called up and fully paid shares of 10p each Note Number of shares Share capital Share premium Merger reserve Reserve in respect of own shares held in Profit policyholders’ funds* and loss Year to 31 December 2004 Opening equity shareholders’ funds Prior year adjustment 1 Shares issued under share incentive schemes Net sale of shares from ESOP Trusts and policyholders’ funds Retained profit for the financial year Foreign exchange and other movements Closing equity shareholders’ funds Year to 31 December 2003 (restated) Opening equity shareholders’ funds Issue of new capital Shares issued under share incentive schemes Net sale of shares from ESOP Trusts Retained profit for the financial year Foreign exchange and other movements Closing equity shareholders’ funds * Represents original cost of shares in the Company held by policyholders’ funds. 3,837 – 3,837 17 – – – 3,854 3,783 50 4 – – – 3,837 384 – 384 2 – – – 386 378 5 1 – – – 384 587 – 587 13 – – – 600 552 32 3 – – – 587 184 – 184 – – – – 184 184 – – – – – 184 2,109 (109) 2,000 – 1 302 141 2,444 1,711 – – 6 107 176 2,000 (401) – (401) – 32 – – (369) (401) – – – – – (401) £m Total 2,863 (109) 2,754 15 33 302 141 3,245 2,424 37 4 6 107 176 2,754 27 EQUITY SHAREHOLDERS’ FUNDS continued Millions Note Number of shares Share capital Share premium Merger reserve Notes to the Financial Statements | 109 Reserve in respect of own shares held in Profit policyholders’ funds* and loss Rm Total Year to 31 December 2004 Opening equity shareholders’ funds Prior year adjustment 1 Shares issued under share incentive schemes Net sale of shares from ESOP Trusts and policyholders’ funds Retained profit for the financial year Foreign exchange and other movements Closing equity shareholders’ funds Year to 31 December 2003 (restated) Opening equity shareholders’ funds Issue of new capital Shares issued under share incentive schemes Net sale of shares from ESOP Trusts Retained profit for the financial year Foreign exchange and other movements Closing equity shareholders’ funds * Represents original cost of shares in the Company held by policyholders’ funds. 3,837 – 3,837 17 – – – 3,854 3,783 50 4 – – – 3,837 4,584 – 4,584 24 – – (421) 7,007 – 7,007 153 – – (651) 2,196 – 2,196 – – – (200) 24,296 (1,301) 22,995 – 12 3,703 (607) (3,908) – (3,908) – 315 – – 34,175 (1,301) 32,874 177 327 3,703 (1,879) 4,187 6,509 1,996 26,103 (3,593) 35,202 5,222 62 12 – – (712) 4,584 7,625 395 37 – – (1,050) 2,542 – – – – (346) 22,010 – – 76 1,375 (466) (3,908) – – – – – 33,491 457 49 76 1,375 (2,574) 7,007 2,196 22,995 (3,908) 32,874 Restatement of equity shareholders’ funds As described in note 1, in accordance with UITF Abstract 38 “Accounting for ESOP Trusts”, shares in the Company held in ESOP Trusts previously included as an asset are now accounted for as a deduction from the profit and loss reserve in arriving at equity shareholders’ funds. 110 | Notes to the Financial Statements Notes to the Financial Statements for the year ended 31 December 2004 continued 28 COMPANY RESERVES – PROFIT AND LOSS ACCOUNT At beginning of year Retained profit/(loss) for the year Foreign exchange movements taken directly to reserves At end of year £m Rm At 31 December 2004 At 31 December 2003 (Restated)* At 31 December 2004 At 31 December 2003 (Restated)* 239 157 – 396 414 (175) – 239 2,853 1,852 (409) 4,296 5,727 (2,161) (713) 2,853 * Comparative figures have been restated to reflect the adoption of Urgent Issues Taskforce Abstract 38 “Accounting for ESOP Trusts” as described in note 1. Distributable reserves of the Company at 31 December 2004 were £396 million (R4,296 million) (2003: £239 million (R2,853 million)). 29 MINORITY INTERESTS 29(a) Equity interests At beginning of year Minority interests’ share of profit/(loss) Minority interests’ share of dividends paid Net acquisition/(disposal) of interests Foreign exchange and other movements At end of year Reconciliation of minority interests share of profit/(loss) The minority interest charge/(credit) is analysed as follows: Adjusted operating profit Goodwill amortisation and impairment Loss on disposal of investment in Dimension Data Holdings plc Restructuring and integration costs Change in credit provisioning methodology Short term fluctuations in investment returns Non-operating items Reported charge/(credit) £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 652 44 (25) 121 77 869 783 (117) (61) (41) 88 652 £m 7,783 519 (295) 1,428 (8) 9,427 10,816 (1,445) (753) (506) (329) 7,783 Rm Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2004 Year to 31 December 2003 Note 5(d)(ii) 17(b) 83 (27) – (7) – 4 (9) 44 7 (78) (2) (13) (30) (1) – (117) 980 (319) – (83) – 47 (106) 519 96 (963) (30) (160) (376) (12) – (1,445) 29 MINORITY INTERESTS continued 29(b) Non-equity interests R2,000 million non-cumulative preference shares (banking subsidiary)1 R792 million non-cumulative preference shares (banking subsidiary)2 US$750 million cumulative preferred securities3 Other (general insurance subsidiary)4 Unamortised issue costs Undistributed profits due to minority interests Notes to the Financial Statements | 111 £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2004 184 73 391 7 655 (9) 12 658 168 69 421 3 661 (12) 9 658 2,000 792 4,247 76 7,115 (98) 121 7,138 2,000 825 5,020 36 7,881 (143) 116 7,854 Notes: 1 200 million R10 preference shares issued by Nedbank Limited (Nedbank), the Group’s banking subsidiary. These shares are non-redeemable and non-cumulative and pay a cash dividend equivalent to 75% of the prime overdraft interest rate of Nedbank. Preference shareholders are only entitled to vote during periods when a dividend or any part of it remains unpaid after the due date for payment and when resolutions are proposed that directly affect any rights attaching to the shares or the rights of the holders. Preference shareholders will be entitled to receive their dividends in priority to any payment of dividends made in respect of any other class of Nedbank’s shares. 2 77.3 million R10 preference shares issued at R10.68 per share by Nedbank on the same terms as the securities described in 1 above. Included in original proceeds were R33 million cumulative dividend paid during 2004. 3 US$750 million Guaranteed Cumulative Perpetual Preference Securities issued on 19 May 2003 by Old Mutual Capital Funding L.P., a subsidiary of the Group. Subject to certain limitations, holders of these securities are entitled to receive preferential cash distributions at a fixed rate of 8.0% per annum payable quarterly in arrear. The Group may defer payment of distributions at its sole discretion, but such an act may restrict Old Mutual plc from paying dividends on its ordinary shares for a period of 12 months. Arrears of distributions are payable cumulatively only on redemption of the securities or at the Group’s option. The securities are perpetual, but may be redeemed at the discretion of the Group from 22 December 2008. The costs of issue are being amortised over the period to 22 December 2008. 4 The Group has a general insurance subsidiary which offers clients a share of underwriting surpluses, in preference to ordinary shares, which accrue in respect of certain policies. 112 | Notes to the Financial Statements Notes to the Financial Statements for the year ended 31 December 2004 continued 30 SUBORDINATED LIABILITIES Insurance and other liabilities Insurance and other subordinated debt instruments of the Group are as follows: US$27.1 million repaid during 2004 Banking Subordinated debt instruments are repayable: Within one year Between two and five years After five years Comprising: US$40 million repaid during 2004 US$18 million repaid during 2004 R500 million repaid during 2004 R502 million repayable 20 September 2005 (8.564 per cent.) R515 million repayable 4 December 2008 (13.5 per cent.) R2.0 billion repayable 20 September 2011 (11.3 per cent.)1 R4.0 billion repayable 9 July 2012 (13.2 per cent.)1 R200 million repayable 30 November 2029 (interest free) £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 – 15 – 179 46 50 582 678 – – – 46 50 190 392 – 678 – 67 581 648 22 10 42 – 45 173 356 – 648 502 536 6,320 7,358 – – – 502 536 2,064 4,254 2 7,358 – 806 6,939 7,745 265 119 500 – 541 2,064 4,254 2 7,745 Note: 1 These notes are subordinated to all unsecured unsubordinated claims against the issuer, Nedbank Limited, but rank equally with all other unsecured subordinated obligations. Subject to prior approval by the South African Registrar of Banks, Nedbank Limited has the option to elect for early redemption of these notes. Notes to the Financial Statements | 113 Gross Reinsurance £m Net Gross Reinsurance Rm Net 77 23,138 393 287 23,895 80 20,660 192 225 21,157 (14) (269) (10) (60) (353) (19) (301) – (54) (374) 63 22,869 383 227 835 251,006 4,263 3,113 (152) (2,918) (108) (651) 683 248,088 4,155 2,462 23,542 259,217 (3,829) 255,388 61 20,359 192 171 20,783 955 246,612 2,292 2,686 252,545 (227) (3,593) – (645) 728 243,019 2,292 2,041 (4,465) 248,080 31 TECHNICAL PROVISIONS At 31 December 2004 Provision for unearned premiums Long term business technical provision Claims outstanding – long term business Claims outstanding – general business At 31 December 2003 Provision for unearned premiums Long term business technical provision Claims outstanding – long term business Claims outstanding – general business SOUTH AFRICA Valuation methods and assumptions 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). This means that the assumptions used for valuing liabilities are based on realistic expectations of future experience, plus prescribed margins for prudence and further discretionary margins to ensure that profits are released appropriately over the term of each policy. The assets and liabilities have been valued on bases that are consistent with each other. Where applicable, liabilities include provisions to meet financial options and guarantees. Certain individual life mortality assumptions were reduced to better reflect ongoing mortality experience. These were largely offset by an increase of £75 million (R819 million) in mortality discretionary margins so that profit continues to emerge over the terms of those policies. 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 valuation is sensitive to the rate of interest used to discount the liabilities for non-participating policies, assumed future mortality experience of policyholders and the level of discretionary margins. The principal assumptions used at 31 December 2004 and 31 December 2003 for the long term business are set out below: Rates of interest (gross of tax and charges) Mortality tables used Non-profit annuities Discounted on appropriate spot yield curve RMV92 with a percentage of CMI improvements (adjusted for own experience) With-profit annuities Interest rate on which premiums were based PA90 (adjusted in line with own experience) Assurances 11.0 per cent. per annum (2003: 11.0 per cent. per annum) Tables derived from own experience with allowance for increasing AIDS claims 114 | Notes to the Financial Statements Notes to the Financial Statements for the year ended 31 December 2004 continued 31 TECHNICAL PROVISIONS continued The gross interest rates were reduced as follows, where applicable: • to allow for tax; • to allow for the minimum margin of 0.25 per cent. per annum, as prescribed by the ASSA; • in the case of smoothed bonus business, by an additional margin equal to the excess over the 0.25 per cent. 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; and • in the case of certain non-profit annuities to allow for imperfect matching of assets and liabilities. 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 8.0 per cent. per annum (2003: 8.0 per cent.). In terms of the prescribed ASSA margins, the underlying expense assumption was increased by 10.0 per cent., and the expense inflation assumption was increased to 8.8 per cent. (2003: 8.8 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 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. UNITED STATES Valuation methods and assumptions The valuation was performed using the applicable standards for US GAAP products in keeping with the applicable professional guidance notes issued by the American Academy of Actuaries. This means that the assumptions used for valuing liabilities are based on realistic expectations of future experience to ensure that profits are realised appropriately over the term of each policy. The valuation is sensitive to the rate of interest used to discount the liabilities, assumed future mortality experience of policyholders and assumed policyholder lapse experience. The principal assumptions used for long term business are set out below. All products Rates of interest (gross of tax and charges) Mortality tables used 2004: 5.0 per cent. per annum (2003: 6.4 per cent. per annum) 75-80 SU Table with appropriate modifiers The gross interest rates were reduced for investment default assumptions and investment expenses. Renewal expenses Renewal expense assumptions (including renewal commissions) have been based on projected costs with assumed inflation rate of 3 per cent. Surrenders/lapses Where appropriate, allowance has been made for surrenders and lapses at rates consistent with past experience. UK AND REST OF WORLD Valuation methods and assumptions 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. Notes to the Financial Statements | 115 32 INSURANCE – PROVISIONS FOR OTHER RISKS AND CHARGES Deferred tax (note 32(a)) Pension and retirement obligations Other provisions Deferred tax (note 32(a)) Total Pension and retirement obligations Other provisions £m Group Year to 31 December 2004 At beginning of year 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 2003 At beginning of year Acquisition of subsidiaries Charge to the profit and loss account Utilised during the year Foreign exchange and other movements At end of year 295 87 – – (21) 361 231 89 – – (25) 295 74 8 (19) – 12 75 81 33 (64) – 24 74 182 56 (37) (7) 9 203 174 74 (55) (4) (7) 182 551 151 (56) (7) – 639 486 196 (119) (4) (8) 551 3,521 1,026 – – (631) 3,916 3,191 1,099 – – (769) 3,521 883 94 (224) – 61 2,172 661 (437) (83) (111) 814 2,202 1,119 408 (790) – 146 2,404 2,420 (1,469) (49) (1,134) Rm Total 6,576 1,781 (661) (83) (681) 6,932 6,714 3,927 (2,259) (49) (1,757) 883 2,172 6,576 The provision for pension and other retirement obligations relates to £55 million (R597 million) (2003: £53 million (R632 million)) for pension contributions referred to in note 14(a) and £20 million (R217 million) (2003: £21 million (R251 million)) for post retirement benefits referred to in note 14(b). Other provisions relate to provisions for impairment of various life operations within the Group, warranty provisions in respect of businesses sold, employee obligations, onerous property leases and obligations in respect of unclaimed share trusts (note 5(f)). 116 | Notes to the Financial Statements Notes to the Financial Statements for the year ended 31 December 2004 continued 32 INSURANCE – PROVISIONS FOR OTHER RISKS AND CHARGES continued 32(a) Deferred tax liability The deferred tax liability arises from: Deferred acquisition costs Other short term timing differences There were no unrecognised deferred tax liabilities as at 31 December 2004 (2003: nil). 32(b) Provisions for liabilities and charges – Company At beginning of year Charge to the profit and loss account Utilised during the year Foreign exchange and other movements At end of year Provisions for liabilities and charges primarily relate to employee obligations. 33 CREDITORS 33(a) Creditors arising from direct insurance operations Amounts owed to policyholders Amounts owed to intermediaries Outstanding securities purchased Other 33(b) Other creditors including tax and social security Falling due within one year Current taxation Dividends payable Loans and advances from policyholders Other creditors Falling due after one year Other creditors £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 244 117 361 2,647 1,269 3,916 183 112 295 £m 2,184 1,337 3,521 Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 26 12 (17) – 21 38 – (12) – 26 310 142 (201) (23) 228 525 – (148) (67) 310 £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 164 17 2 122 305 1,779 184 22 1,323 3,308 227 26 7 218 478 £m 2,710 310 84 2,602 5,706 Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2004 152 122 1,057 404 1,735 48 1,783 118 106 736 843 1,803 1,649 1,323 11,467 4,386 18,825 1,409 1,265 8,785 10,055 21,514 3 521 36 1,806 19,346 21,550 34 AMOUNTS OWED TO CREDIT INSTITUTIONS Group Bank and other loans Repayable within one year: Floating rate notes 1 Commercial paper Repayable between one and two years: Term loan4 Floating rate notes 2 Repayable between two and five years: Floating rate notes 1 Term loan Fixed rate notes5 Other 6 Repayable after five years: Floating rate notes 3 Other 6 Notes to the Financial Statements | 117 £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 5 – 5 24 24 48 5 – 182 52 239 167 8 175 467 11 17 28 – – – 6 25 196 48 275 68 6 74 377 54 – 54 260 260 520 54 – 1,974 564 2,592 1,812 87 1,899 5,065 131 203 334 – – – 72 298 2,340 573 3,283 812 72 884 4,501 118 | Notes to the Financial Statements Notes to the Financial Statements for the year ended 31 December 2004 continued 34 AMOUNTS OWED TO CREDIT INSTITUTIONS continued Company Bank and other loans Repayable within one year: Floating rate notes 1 Commercial paper Repayable between one and two years: Term loan4 Floating rate notes 2 Repayable between two and five years: Floating rate notes 1 Term loan Fixed rate notes5 Repayable after five years: Floating rate notes 3 £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 5 – 5 24 24 48 5 – 182 187 167 407 11 17 28 – – – 6 25 196 227 68 323 54 – 54 260 260 520 54 – 1,974 2,028 1,812 4,414 131 203 334 – – – 72 298 2,340 2,710 812 3,856 Floating rate notes: 1 US$10.5 million repaid on 18 January 2005, and US$10 million repayable September 2009. 2 £24 million repayable November 2006. 3 £28 million note repayable on 31 December 2010, with the holders having the option to elect for early redemption every six months, €30 million fixed rate bond due 2010 swapped into floating rate US Dollars, US$50 million note repayable September 2011, US$150 million note repayable September 2014, €10 million fixed rate bond due in 2010 and €20 million fixed rate bond due in 2013 (issued during 2003 with the capital and interest immediately swapped into floating rate US Dollars). Term loan: 4 US$45 million term loan repayable on 30 June 2006. Fixed rate notes: 5 €400 million Euro notes due 2007, capital and interest swapped into fixed rate US Dollars. Other: 6 Other amounts owed to credit institutions consist principally of preference shares issued by a Group subsidiary. During the year, the Company entered into a new £1.1 billion 5-year multi-currency Revolving Credit Facility, which matures in May 2009, and cancelled its existing £900 million, US$600 million and US$60 million Revolving Credit Facilities. The new facility was undrawn at 31 December 2004. Notes to the Financial Statements | 119 34 AMOUNTS OWED TO CREDIT INSTITUTIONS continued 34(a) Convertible loan stock (i) Insurance and other assets At 31 December 2004, the Group had in issue US$636 million (£332 million (R3,602 million) (2003: £357 million (R4,261 million)) 3.625 per cent. Convertible Bonds maturing on 2 May 2005, which are guaranteed by Old Mutual plc. Holders of the Bonds have the right to elect to convert the Bonds into ordinary shares in Old Mutual plc at a conversion price of 190p per share and an exchange rate of one US dollar to 69.52p Sterling. (ii) Banking Compulsory convertible loan maturing 6 November 2005 (13.75 per cent.) Compulsory convertible loan maturing 31 December 2005 (18.12 per cent.) £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 2 4 6 3 7 10 20 47 67 37 82 119 These debt instruments are convertible into BoE Bank Ltd ordinary shares. The Group has the option to purchase these shares. 35 DEPOSITS BY BANKS Items in the course of transmission to other banks Other deposits £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 59 2,762 2,821 17 4,364 4,381 643 29,694 30,607 203 52,092 52,295 All deposits by banks are repayable on demand other than other deposits of £23 million (R245 million) (2003: £13 million (R150 million)) which are due after more than one year. 36 CUSTOMER ACCOUNTS, MATURITY PROFILE Repayable on demand 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 £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 7,905 8,676 85,759 103,563 6,965 1,824 748 66 3,196 1,544 504 56 75,554 19,784 8,115 721 38,150 18,430 6,016 668 17,508 13,976 189,933 166,827 120 | Notes to the Financial Statements Notes to the Financial Statements for the year ended 31 December 2004 continued 37 DEBT SECURITIES IN ISSUE Bonds and medium term notes Other debt securities in issue 37(a) Bonds and medium term notes, maturity profile Bonds and medium term notes repayable: Within one year Between one and two years Between two and five years 37(b) Other debt securities, maturity profile Other debt securities repayable: Within one year Between one and two years Between two and five years 38 BANKING – OTHER LIABILITIES Current tax Liabilities under acceptances Securities sold under agreements to repurchase Derivative contracts – negative value Trade creditors and other liabilities Notes 37(a) 37(b) £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 1,563 – 1,563 16,956 – 16,956 173 295 468 £m 2,065 3,521 5,586 Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 1,524 38 1 1,563 16,536 414 6 16,956 13 39 121 173 £m 155 466 1,444 2,065 Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 – – – – 262 4 29 295 – – – – 3,127 48 346 3,521 £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 Note 46(e) 18 139 351 1,837 883 3,228 13 70 281 1,742 1,094 3,200 196 1,511 3,811 19,924 9,583 35,025 150 836 3,350 20,796 13,067 38,199 Other liabilities include £1,837 million (R19,924 million) (2003: £1,742 million (R20,796 million)) which reflects the negative value of on-balance sheet trading derivative instruments. The positive value of these contracts is included within other assets. All other liabilities are due within one year. 39 BANKING – PROVISION FOR DEFERRED TAX At beginning of year Additions from acquired operations Credit to profit and loss account Foreign exchange and other movements At end of year Comprising: Short term timing differences Leasing transactions Other Notes to the Financial Statements | 121 £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 229 – (15) (119) 95 18 – 77 95 105 49 (28) 103 229 16 137 76 229 2,732 3 (178) (1,527) 1,030 200 – 830 1,030 1,450 583 (347) 1,046 2,732 191 1,635 906 2,732 Other movements includes an adjustment of £169 million (R1,989 million) based on reclassification of deferred tax on structured finance transactions. There is a corresponding adjustment to the deferred tax asset accordingly. There were no unrecognised banking deferred tax liabilities at 31 December 2004 (2003: nil). 40 INVESTMENTS – COMPANY Year to 31 December 2004 At beginning of year Acquisitions Net amount advanced during year Foreign exchange movements At end of year Year to 31 December 2003 At beginning of year Acquisitions Disposals Net amount advanced during year Foreign exchange movements At end of year Shares in subsidiaries Loans to subsidiaries 722 9 – – 731 1,183 10 (471) – – 722 2,014 – 276 – 2,290 1,859 – – 155 – 2,014 £m Total 2,736 9 276 – 3,021 3,042 10 (471) 155 – 2,736 Shares in subsidiaries Loans to subsidiaries Rm Total 8,618 106 – (794) 24,041 – 3,256 (2,454) 32,659 106 3,256 (3,248) 7,930 24,843 32,773 16,342 123 (5,816) – (2,031) 25,680 – – 1,914 (3,553) 42,022 123 (5,816) 1,914 (5,584) 8,618 24,041 32,659 The Company’s principal subsidiaries at 31 December 2004 are set out in note 41. 122 | Notes to the Financial Statements Notes to the Financial Statements for the year ended 31 December 2004 continued 41 PRINCIPAL SUBSIDIARIES AND GROUP UNDERTAKINGS The following table lists the principal Group undertakings whose results are included in the consolidated financial statements. All shares held are ordinary shares and, except for OM Group (UK) Ltd and Kotak Mahindra Old Mutual Life Insurance Ltd, are held indirectly by the Company. Name Acadian Asset Management Barrow, Hanley, Mewhinney & Strauss, Inc. Clay Finlay, Inc. Dwight Asset Management Company First Pacific Advisors, Inc. Heitman LLC Liberty Ridge Capital Inc. Old Mutual Asset Managers (Bermuda) Ltd Old Mutual Asset Managers (Kenya) Ltd Old Mutual Asset Managers (South Africa) (Pty) Ltd Old Mutual Asset Managers (UK) Ltd Old Mutual Fund Managers (Guernsey) Ltd Old Mutual Group Ltd Old Mutual Investment Administrators (Pty) Ltd Old Mutual Investment Services (Pty) Ltd Old Mutual Specialised Finance (Pty) Ltd Old Mutual Unit Trust Management Company Namibia Ltd Old Mutual Unit Trust Managers Ltd Pacific Financial Research, Inc. Palladyne Asset Management B.V. Provident Investment Counsel, Inc. Selestia Life & Pensions Ltd Thompson, Horstmann & Bryant, Inc Thompson, Siegel & Walmsley, Inc Old Mutual Health Insurance Ltd Old Mutual Healthcare (Pty) Ltd Old Mutual (Netherlands) B.V. Old Mutual (South Africa) Ltd Old Mutual (US) Holdings, Inc. Old Mutual U.S. Life Holdings, Inc. OM Group (UK) Ltd OM Portfolio Holdings (South Africa) (Pty) Ltd Rodina Investments Ltd BoE Life Ltd Fidelity & Guaranty Life Insurance Company Fidelity & Guaranty Life Insurance Company of New York Kotak Mahindra Old Mutual Life Insurance Ltd Ned Life Assurance Company Ltd Old Mutual International (Guernsey) Ltd Old Mutual Life Assurance Company (Bermuda) Ltd Old Mutual Life Assurance Company (Malawi) Ltd Old Mutual Life Assurance Company (Namibia) Ltd Old Mutual Life Assurance Company (South Africa) Ltd Old Mutual Life Assurance Company Ltd Nature of business Asset management Asset management Asset management Asset management Asset management Asset management Asset management Asset management Asset management Asset management Asset management Asset management Asset management Asset management Asset management Asset management Asset management Asset management Asset management Asset management Asset management Asset management Asset management Asset management Health insurance Health insurance Holding company Holding company Holding company Holding company Holding company Holding company Holding company Life assurance Life assurance Life assurance Life assurance Life assurance Life assurance Life assurance Life assurance Life assurance Life assurance Life assurance Percentage holding* Country of incorporation 100 100 100 100 100 50 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 76 100 100 26 52 100 100 100 100 100 62 Massachusetts, United States of America Nevada, United States of America New York, United States of America Delaware, United States of America Massachusetts, United States of America Delaware, United States of America Delaware, United States of America Bermuda Kenya Republic of South Africa England and Wales Guernsey Bermuda Republic of South Africa Republic of South Africa Republic of South Africa Namibia Republic of South Africa Massachusetts, United States of America Netherlands Massachusetts, United States of America England and Wales New Jersey, United States of America Virginia, United States of America Republic of South Africa Republic of South Africa Netherlands Republic of South Africa Delaware, United States of America Delaware, United States of America England and Wales Republic of South Africa Republic of South Africa Republic of South Africa Maryland, United States of America New York, United States of America India Republic of South Africa Guernsey Bermuda Malawi Namibia Republic of South Africa Kenya Notes to the Financial Statements | 123 41 PRINCIPAL GROUP UNDERTAKINGS continued Name Old Mutual Life Assurance Company Zimbabwe Ltd Old Mutual Reassurance (Ireland) Ltd OMNIA (Bermuda) Ltd Mutual & Federal Insurance Company Ltd Nedinsurance Company Ltd Old Mutual Property Investment Corporation (Pvt) Ltd Old Mutual Properties (Pty) Ltd Fairbairn Private Bank Ltd Nedbank Ltd Nedcor Investment Holdings 101 Ltd Nedcor Peoples Bank Ltd * Effective holding of issued ordinary shares at 31 December 2004. Nature of business Life assurance Life assurance Life assurance General insurance General insurance Property holding Property management Banking Banking Banking Banking Banking Percentage holding* 100 100 100 87 52 100 100 67 52 52 52 52 Country of incorporation Zimbabwe Ireland Bermuda Republic of South Africa Republic of South Africa Zimbabwe Republic of South Africa Jersey Republic of South Africa Republic of South Africa Republic of South Africa Republic of South Africa A complete list of subsidiaries is filed with the UK Registrar of Companies with the annual return. All the above companies have a year end of 31 December, except for Kotak Mahindra Old Mutual Life Insurance Ltd, whose year end is 31 March. 42 RELATED PARTY TRANSACTIONS The Group provides certain pension fund, insurance, banking and financial services to related parties as set out below. These are conducted on an arm’s length basis and, other than US asset management fees payable in respect of insurance funds, 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. As set out in note 1, in order to represent the Group’s segmental results accurately, certain fees negotiated on an arm’s length basis between operationally and functionally distinct segments of the Group have not been eliminated. The principal transactions not eliminated are insurance services provided by the Group’s general insurance operation, Mutual & Federal, and banking services provided by the Group’s banking operation, Nedcor. No director had a material interest in any contract of significance with the Company or any of its subsidiaries during 2004, except for that described in note 12. 43 POST BALANCE SHEET EVENTS There are no material post balance sheet date events. 44 COMMITMENTS Undrawn formal standby facilities, credit lines and other commitments to lend Capital and other commitments £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 985 87 1,072 1,005 12 1,017 10,685 944 11,629 12,001 143 12,144 124 | Notes to the Financial Statements Notes to the Financial Statements for the year ended 31 December 2004 continued 45 CONTINGENT LIABILITIES Guarantees and assets pledged as collateral security Irrevocable letters of credit Secured lending Other contingent liabilities £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 994 325 539 49 1,907 1,039 503 735 145 2,422 10,783 3,526 5,847 532 20,688 12,402 6,004 8,773 1,731 28,910 Contingent liabilities arise principally from the normal operating activities of the Group’s banking operations. Group companies give indemnities and guarantees as a normal part of their operating activities or in relation to capital market transactions. Various Group companies have given guarantees, indemnities and warranties in connection with disposals of subsidiaries to parties outside the Group in recent years. Provision has been made for certain of these where a realistic estimate of the obligation can be made. In all other cases, in the opinion of the directors, no material loss will arise as a result of these guarantees, indemnities and warranties. On 21 June 2004, one of the Group’s US asset management affiliates, Liberty Ridge Capital Inc., (formerly known as Pilgrim Baxter & Associates, Ltd (PBA)), reached agreements with the US Securities and Exchange Commission (SEC) and the Office of the New York State Attorney General (NYAG) which settle all charges brought by these authorities against PBA in relation to market timing in the US mutual fund business. There are several related private lawsuits arising from the conduct alleged in the civil suits filed by the SEC and NYAG. These class action lawsuits were consolidated into a single lawsuit along with all other cases against US parties alleging market timing and late trading violations. Proceedings in this case are at a preliminary stage and it is not possible to say, at this time, whether or not the amount of the ultimate liability to be borne by the Group will be material. As a result, no amount has been recognised for additional fines or other penalties that may arise, as significant uncertainty remains over the quantum of any settlement. Notes to the Financial Statements | 125 46 FINANCIAL INSTRUMENTS 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 banking business 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. 46(a) Derivatives held for trading purposes Notional principal Positive fair value £m Negative fair value Notional principal Positive fair value At 31 December 2004 Exchange rate contracts Spot, forwards and futures Currency swaps Options purchased Options written Interest rate contracts Interest rate swaps Forward rate agreements Caps, collars and floors Options purchased Options written Futures Equity contracts Options purchased Options written Futures 1,637 529 21 13 2,200 30,236 17,835 564 43 66 1,007 49,751 474 2,748 132 3,354 131 72 9 – 212 1,130 40 1 4 – – 1,175 295 – 60 355 77 33 – 4 114 1,469 43 1 – – – 1,513 – 210 – 210 17,763 5,744 226 138 23,871 328,005 193,482 6,121 470 720 10,928 539,726 5,142 29,806 1,430 36,378 1,425 785 95 – 2,305 12,250 437 10 37 – 2 12,736 3,198 – 654 3,852 Rm Negative fair value 832 358 – 38 1,228 15,947 463 6 – 4 2 16,422 – 2,274 – 2,274 Balances arising from off-balance sheet financial instruments 55,305 1,742 1,837 599,975 18,893 19,924 126 | Notes to the Financial Statements Notes to the Financial Statements for the year ended 31 December 2004 continued 46 FINANCIAL INSTRUMENTS continued 46(a) Derivatives held for trading purposes continued Notional principal Positive fair value £m Negative fair value Notional principal Positive fair value At 31 December 2003 Exchange rate contracts Spot, forwards and futures Currency swaps Options purchased Options written Interest rate contracts Interest rate swaps Credit derivatives Forward rate agreements Caps, collars and floors Options purchased Options written Futures Balances arising from off-balance sheet financial instruments 46(b) Derivatives held for non-trading purposes At 31 December 2004 Exchange rate contracts Spot, forwards and futures Currency swaps Interest rate contracts Interest rate swaps Options purchased Options written 1,810 842 106 65 2,823 24,395 100 20,936 249 587 490 686 47,443 50,266 70 447 3 – 520 744 184 33 – 127 – 112 68 441 – 2 511 978 13 35 – – 126 81 1,200 1,720 1,233 1,744 21,605 10,051 1,265 776 33,697 291,196 1,191 249,907 2,972 7,007 5,849 8,189 566,311 600,008 836 5,336 36 – 6,208 8,881 2,196 394 – 1,516 – 1,337 14,324 20,532 Notional principal Positive value £m Negative value Notional principal Positive value 1,032 9,607 10,639 738 11 20 769 75 698 773 25 1 – 26 36 668 704 42 – 3 45 11,198 104,218 115,416 8,006 124 214 8,344 814 7,574 8,388 267 11 – 278 Rm Negative fair value 812 5,264 – 24 6,100 11,674 155 418 – – 1,504 967 14,718 20,818 Rm Negative value 394 7,243 7,637 458 – 31 489 Balances arising from off-balance sheet financial instruments 11,408 799 749 131,766 8,933 8,584 46 FINANCIAL INSTRUMENTS continued 46(b) Derivatives held for non-trading purposes continued At 31 December 2003 Exchange rate contracts Spot, forwards, futures and currency swaps Interest rate contracts Interest rate swaps Credit derivatives Notes to the Financial Statements | 127 Notional principal Positive fair value £m Negative fair value Notional principal Positive fair value Rm Negative fair value 13,298 618 601 158,745 7,377 7,174 718 43 761 15 34 49 667 20 – 20 8,571 519 9,090 179 405 584 239 – 239 621 167,835 7,961 7,413 Balances arising from off-balance sheet financial instruments 14,059 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. Maturity analysis of notional principal amounts of non-trading instruments entered into with third parties: 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 £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 10,321 317 1 10,639 193 329 247 769 12,963 334 1 111,967 3,434 15 154,747 3,987 11 13,298 115,416 158,745 130 373 258 761 2,097 3,564 2,683 8,344 1,552 4,452 3,086 9,090 128 | Notes to the Financial Statements Notes to the Financial Statements for the year ended 31 December 2004 continued 46 FINANCIAL INSTRUMENTS continued 46(c) Credit risk exposure on derivative contracts Exchange rate contracts Interest rate contracts Equity contracts Exchange rate contracts Total Interest rate contracts Equity contracts £m At 31 December 2004 Replacement cost of OTC derivatives – trading book only: Maturity analysis Under one year One to five years Over five years Counterparty analysis Financial institutions Non-financial institutions 141 46 25 212 190 22 212 106 599 470 1,175 1,061 114 1,175 169 186 – 355 340 15 355 416 831 495 1,742 1,591 151 1,742 1,533 502 270 2,305 2,066 239 2,305 1,147 6,495 5,094 12,736 11,507 1,229 12,736 1,834 2,018 – 3,852 3,692 160 3,852 Rm Total 4,514 9,015 5,364 18,893 17,265 1,628 18,893 Replacement cost is defined as the cost of replacing transactions that have a positive fair value. Notional principal of OTC derivatives – trading book only: Maturity analysis Under one year One to five years Over five years Counterparty analysis Financial institutions Non-financial institutions 1,797 321 83 2,201 2,165 36 2,201 25,436 16,967 7,350 49,753 39,156 10,597 49,753 534 819 2,001 3,354 3,257 97 3,354 27,767 18,107 9,434 19,494 3,477 900 275,931 184,059 79,736 5,789 8,887 21,702 301,214 196,423 102,338 55,308 23,871 539,726 36,378 599,975 44,578 10,730 23,489 382 424,775 114,951 35,332 1,046 483,596 116,379 55,308 23,871 539,726 36,378 599,975 Replacement cost of OTC derivatives – trading book only: At 31 December 2003 Maturity analysis Under one year One to five years Over five years Counterparty analysis Financial institutions Non-financial institutions 94 219 207 520 457 63 520 Exchange rate contracts Interest rate contracts £m Total 329 788 603 Exchange rate contracts Interest rate contracts Rm Total 1,122 2,614 2,472 6,208 5,455 753 6,208 2,805 6,792 4,727 3,927 9,406 7,199 14,324 20,532 12,486 1,838 14,324 17,941 2,591 20,532 235 569 396 1,200 1,720 1,046 154 1,200 1,503 217 1,720 Notes to the Financial Statements | 129 46 FINANCIAL INSTRUMENTS continued 46(c) Credit risk exposure on derivative contracts Notional principal of OTC derivatives – trading book only: Maturity analysis Under one year One to five years Over five years Counterparty analysis Financial institutions Non-financial institutions Exchange rate contracts Interest rate contracts 2,026 493 304 2,823 2,629 194 2,823 21,759 19,287 6,397 47,443 38,908 8,535 47,443 £m Total 23,785 19,780 6,701 50,266 41,537 8,729 50,266 Exchange rate contracts Interest rate contracts Rm Total 24,184 5,885 3,628 33,697 31,385 2,312 33,697 259,731 230,223 76,357 283,915 236,108 79,985 566,311 600,008 464,429 101,882 495,814 104,194 566,311 600,008 The following analysis summarises the timing mismatch of interest receivable on assets and interest payable on liabilities by reference to the earliest date on which repricing to market value can occur. 46(d) Non-trading book interest rate risk Notes Under three months Three to six months Six months to one year One to five years Trading book and Over non-interest bearing five years At 31 December 2004 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 Other liabilities Provision for liabilities and charges Subordinated liabilities Convertible loan stock Net position Off-balance sheet items Interest rate sensitivity gap Cumulative gap 133 402 728 14,658 73 – – – – – – 15,994 1,851 13,201 1,142 255 – – – 26(a) 26(b) 26(c) 26(f) 26(g) 26(h) 22 19 24 35 36 37 38 39 30 34(a) – 77 – 60 – – – – – – – 137 159 795 251 – – – – – 1 – 126 – – – – – – – 127 83 878 130 – – 46 6 – – – 1,446 1,156 – – – – – – 2,602 22 734 35 – – 601 – 16,449 1,205 1,143 1,392 – – – 866 94 – – – – – – 960 – 27 – 19 – – – 46 £m Total 926 1,485 2,522 17,174 1,934 259 91 223 160 2,456 270 793 1,005 1,794 18 611 259 91 223 160 2,456 270 7,680 27,500 706 1,873 5 2,954 95 31 – 2,821 17,508 1,563 3,228 95 678 6 5,664 25,899 (455) (1,404) (1,859) (1,068) 1,402 (1,016) 1,447 334 431 (1,859) (1,525) (1,094) 1,210 (867) 343 (751) 914 (578) 336 2,016 – 2,016 1,601 – – (415) 1,601 1,601 130 | Notes to the Financial Statements Notes to the Financial Statements for the year ended 31 December 2004 continued 46 FINANCIAL INSTRUMENTS continued 46(d) Non-trading book interest rate risk continued Notes Under three months Three to six months Six months to one year One to five years Over five years Trading book and non-interest bearing At 31 December 2003 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 Other liabilities Provision for liabilities and charges Subordinated liabilities Convertible loan stock Net position Off-balance sheet items Interest rate sensitivity gap Cumulative gap 26(a) 26(b) 26(c) 26(f) 26(g) 26(h) 22 19 24 35 36 37 38 39 30 34(a) – 524 2,092 12,189 305 – – – – – – 15,110 4,381 11,677 280 – – 74 – 16,412 (1,302) 1,355 53 53 – 199 – 173 9 – – – – – – 381 – 622 107 – – – – 729 – 71 – 257 20 – – – – – – 348 – 569 38 – – – – 607 – 40 – 1,367 854 – – – – – – 2,261 – 461 43 – – 211 10 725 – 41 – 707 172 – – – – – – 920 – 92 – – – 335 – 427 348 (33) (381) (328) 259 (22) (281) (609) 1,536 (669) 867 258 493 (631) (138) 120 1,025 13 – 443 60 317 144 221 141 2,396 262 5,022 – 555 – 3,200 229 28 – 4,012 1,010 – 1,010 1,130 £m Total 1,025 888 2,092 15,136 1,420 317 144 221 141 2,396 262 24,042 4,381 13,976 468 3,200 229 648 10 22,912 1,130 – – 1,130 Notes to the Financial Statements | 131 46 FINANCIAL INSTRUMENTS continued 46(d) Non-trading book interest rate risk Notes Under three months Three to six months Six months to one year One to five years Trading book and Over non-interest bearing five years Rm Total At 31 December 2004 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 Other liabilities Provision for liabilities and charges Subordinated liabilities Convertible loan stock Net position Off-balance sheet items Interest rate sensitivity gap Cumulative gap 26(a) 1,439 4,365 7,893 26(b) 26(c) 159,014 795 26(f) – – – – – – 26(h) 26(g) 19 22 24 – 833 – 650 – – – – – – – – 10 – 1,364 – – – – – – – – 4 – 15,687 12,543 – – – – – – – – – 9,393 1,024 – – – – – – 8,616 10,898 19,465 10,055 16,110 27,358 208 186,316 20,976 2,811 987 2,423 1,738 26,638 2,933 6,614 2,811 987 2,423 1,738 26,638 2,933 173,506 1,483 1,374 28,234 10,417 83,331 298,345 20,075 35 36 143,210 12,392 37 2,770 – – – 39 38 30 34(a) 1,728 8,620 2,718 – – – – 900 9,520 1,415 – – 500 67 243 7,961 383 1 – 6,515 – 178,447 13,066 12,402 15,103 2 294 3 211 – – – 510 7,569 30,607 20,328 189,933 16,956 35,025 1,030 7,358 67 45 32,043 1,030 343 – 61,448 280,976 (4,941) (15,230) (11,583) 15,209 (11,028) 15,698 13,131 (9,408) 9,907 (6,269) 21,883 – 17,369 – (20,171) 3,626 4,670 3,723 3,638 21,883 – (20,171) (16,545) (11,875) (8,152) (4,514) 17,369 17,369 132 | Notes to the Financial Statements Notes to the Financial Statements for the year ended 31 December 2004 continued 46 FINANCIAL INSTRUMENTS continued 46(d) Non-trading book interest rate risk Notes Under three months Three to six months Six months to one year One to five years Over five years Trading book and non-interest bearing Rm Total At 31 December 2003 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 Other liabilities Provision for liabilities and charges Subordinated liabilities Convertible loan stock Net position Off-balance sheet items Interest rate sensitivity gap Cumulative gap 26(a) 26(b) 26(c) 26(f) 26(g) 26(h) 22 19 24 35 36 37 38 39 30 34(a) – 6,256 24,972 145,497 3,641 – – – – – – 180,366 52,295 139,384 3,337 – – 884 – 195,900 – 2,375 – 2,065 107 – – – – – – 4,547 – 7,425 1,274 – – – – 8,699 – 848 – 3,068 239 – – – – – – 4,155 – 6,792 456 – – – – 7,248 – 477 – 16,317 10,194 – – – – – – – 489 – 8,439 2,053 – – – – – – 12,235 155 – 5,288 718 3,784 1,719 2,638 1,683 28,602 3,126 12,235 10,600 24,972 180,674 16,952 3,784 1,719 2,638 1,683 28,602 3,126 26,988 10,981 59,948 286,985 – 5,503 519 – – 2,515 119 8,656 – 1,098 – – – 4,000 – 5,098 – 6,625 – 38,199 2,732 346 – 52,295 166,827 5,586 38,199 2,732 7,745 119 47,902 273,503 (15,534) 16,175 (4,152) (394) (3,093) (263) 18,332 (7,986) 5,883 (7,532) 12,046 – 13,482 – 641 641 (4,546) (3,356) 10,346 (1,649) 12,046 – (3,905) (7,261) 3,085 1,436 13,482 13,482 46 FINANCIAL INSTRUMENTS continued 46(e) Fair value disclosures The fair value of the financial assets and liabilities of the Group’s banking subsidiaries comprises: Trading book financial assets and liabilities Assets Treasury bills and other eligible bills Debt securities Derivative contracts – positive value Liabilities Derivative contracts – negative value Non-trading book financial assets and liabilities Assets Treasury bills and other eligible bills Debt securities Equity securities Liabilities Debt securities in issue Subordinated liabilities Notes to the Financial Statements | 133 £m Rm Fair value at 31 December 2004 Fair value at 31 December 2003 Fair value at 31 December 2004 Fair value at 31 December 2003 797 250 1,742 – 26 1,720 8,650 2,709 18,893 – 311 20,531 1,837 1,742 19,924 20,796 688 1,691 309 1,563 678 857 1,411 306 7,462 18,340 3,352 10,228 16,838 3,646 468 648 16,956 7,358 5,586 7,745 The fair value of all of the Group’s financial assets and liabilities is the same as the book value of those assets and liabilities in all instances except for non-trading book debt securities with a book value of £1,691 million (R18,340 million) at 31 December 2004 (2003: £1,411 million (R16,838 million)) and non-trading book equity securities with a book value of £309 million (R3,352 million) at 31 December 2004 (2003: £306 million (R3,646 million)). 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. 134 | Notes to the Financial Statements Notes to the Financial Statements for the year ended 31 December 2004 continued 46 FINANCIAL INSTRUMENTS continued 46(f) Market risk – historical value-at-risk (VaR) (99%, one day) by risk type This risk measure estimates the potential loss in pre-tax profit over a given holding period for a specified confidence level. The VaR methodology is a statistically defined, probability-based approach that takes account of market volatilities as well as risk diversification by recognising offsetting positions and correlations between products and markets. The one day 99% VaR number represents the overnight loss that has less than a 1% chance of occurring under normal market conditions. While VaR captures the banking business’s exposure under normal market conditions, scenario analysis and, in particular, stress testing are used to add insight to the possible outcomes under abnormal market conditions. The banking business uses a number of stress scenarios to measure the impact on portfolio values of extreme moves in markets, based on historical experience as well as hypothetical scenarios. The stress test methodology assumes that all market factors move adversely at the same time and that no actions are taken during the stress events to mitigate risk, thereby reflecting the decreased liquidity that frequently accompanies market shocks. Key to the effectiveness of the scenario analysis programme is the timely review of the continued applicability of the scenarios, and this is built into the risk management process. Total VaR At 31 December Highest Lowest Average 47 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 intangible assets Unrealised investment gains Profits relating to long term business Investment return in the life business Cash received from long term business Increase/(decrease) in provisions for other risks and charges Increase in insurance technical provisions net of reinsurance Other (including amounts reinvested in long term business operations) Net cash inflow from insurance operating activities Profit from banking activities before tax and non-operating items Provision for bad and doubtful debts Depreciation and goodwill amortisation and impairment Decrease in accrued income, prepayments and other trading adjustments Net cash flow from banking trading activities Net decrease in collections/transmissions Net increase in loans and advances to banks and customers Net increase in deposits by banks and customer accounts Net (decrease)/increase in debt securities in issue Net increase in other operating assets Net decrease/(increase) in other operating liabilities Net cash outflow from banking operating activities £m Rm Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2004 Year to 31 December 2003 2 3 1 1 2 2 1 1 £m 17 33 10 14 19 26 8 16 Rm Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2004 Year to 31 December 2003 727 68 (35) (511) 172 336 37 24 134 952 78 139 127 110 454 (16) (859) 114 962 (788) (279) (412) 690 83 (161) (541) 183 261 (29) 18 412 916 (144) 321 239 277 693 (17) (997) 1,735 (2,081) (135) 123 8,578 802 (413) (6,018) 2,025 3,964 437 283 1,581 8,521 1,025 (1,988) (6,681) 2,260 3,223 (358) 222 5,088 11,239 11,312 920 1,640 1,498 1,298 5,356 (189) (10,135) 1,345 11,350 (9,297) (3,293) (1,778) 3,960 2,951 3,422 8,555 (210) (12,305) 21,425 (25,698) (1,663) 1,509 (679) (4,863) (8,387) 47 RECONCILIATION OF OPERATING PROFIT TO NET OPERATING CASH FLOWS continued 47(a) Analysis of cash flows Returns on investment and servicing of finance Net interest paid Dividends paid to minority interests Bank charges and other finance costs Net cash outflow from returns on investments and servicing of finance (113) (128) (1,334) Tax United Kingdom corporation tax Overseas tax Total tax paid Capital expenditure and financial investment Net disposal of banking investment securities Net purchase of tangible fixed assets Net cash (outflow)/inflow from capital expenditure and financial investment Acquisitions and disposals Acquisition of interests in subsidiary undertakings and revenue share payments Disposal of interests in subsidiary and associate undertakings Net cash movement on acquisition and disposals of subsidiaries Net cash (outflow)/inflow from acquisitions and disposals Financing Issue of ordinary share capital Issue of ordinary share capital of subsidiary undertakings to minority interests Net increase/(decrease) in amounts due to credit institutions Net increase/(decrease) in subordinated liabilities Repayment of convertible unsecured debt Non-equity preference shares and preferred securities issued – net of issue costs Net cash inflow from financing 47(b) Movement in portfolio investments, net of financing Cash flow (excluding long term business): Net cash inflow for the year Portfolio investments Movement arising from cash flow Movement in long term business 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 Notes to the Financial Statements | 135 £m Rm Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2004 Year to 31 December 2003 (22) (80) (11) (30) (95) (3) (260) (944) (130) 10 (303) (293) 71 (73) (2) (110) 79 – (31) 15 217 104 (48) (4) – 284 118 (3,575) (3,457) 838 (861) (23) (1,298) 932 – (366) 177 2,560 1,227 (566) (52) – 3,346 – (174) (174) 316 (89) 227 (67) 227 (77) 83 41 14 (365) 44 (14) 511 231 £m (370) (1,173) (37) (1,580) – (2,149) (2,149) 3,903 (1,099) 2,804 (827) 2,803 (951) 1,025 506 173 (4,507) 544 (175) 6,310 2,851 Rm Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2004 Year to 31 December 2003 (157) 546 389 96 2,504 2,989 24,128 27,117 36 616 652 8 3,401 (1,852) 6,442 4,590 1,133 439 445 7,605 8,050 99 2,652 4,061 20,067 6,162 288,008 10,801 277,207 24,128 294,170 288,008 136 | Notes to the Financial Statements Notes to the Financial Statements for the year ended 31 December 2004 continued 47 RECONCILIATION OF OPERATING PROFIT TO NET OPERATING CASH FLOWS continued 47(c) Movement in insurance and other cash, investments and financing Movement in cash and insurance portfolio investments Cash in hand and at bank Land and buildings Other financial investments Movement in financing Share capital Share premium and merger reserve Subordinated liabilities Amounts owed to credit institutions Convertible loan stock Preferred securities (including undistributed profits) Movement in cash and insurance portfolio investments Cash in hand and at bank Land and buildings Other financial investments Movement in financing Share capital Share premium and merger reserve Subordinated liabilities Amounts owed to credit institutions Convertible loan stock Preferred securities (including undistributed profits) Changes in long term business Changes to market value, currencies and other (42) 17 121 96 8 70 2,426 2,504 – – – – – – – – – – (14) (25) (19) (58) Cash flow (157) 9 537 389 2 13 (15) 104 – – 104 Cash flow Changes in long term business Changes to market value, currencies and other £m At end of year 504 773 25,840 27,117 386 784 – 467 332 392 2,361 Rm At end of year (1,852) 106 6,336 4,590 24 153 (179) 1,227 – – 1,225 (496) 201 1,428 1,133 (481) (2) 922 5,467 8,386 280,317 439 294,170 – – – – – – – (421) (851) – (663) (659) (655) 4,187 8,805 – 5,065 3,602 4,251 (3,249) 25,610 At start of year 695 677 22,756 24,128 384 771 15 377 357 411 2,315 At start of year 8,296 8,081 271,631 288,008 4,584 9,203 179 4,501 4,261 4,906 27,634 47 RECONCILIATION OF OPERATING PROFIT TO NET OPERATING CASH FLOWS continued 47(d) Movement in banking cash and changes in financing during the period Cash and balances at central banks Movement in financing Subordinated liabilities Convertible loan stock Non-equity preference shares (including undistributed profits) Notes to the Financial Statements | 137 At start of year 1,025 648 10 244 902 Changes to market value, currencies and other 86 63 – 22 85 Cash flow (185) (33) (4) – (37) At start of year Cash flow Changes to market value, currencies and other £m At end of year 926 678 6 266 950 Rm At end of year Cash and balances at central banks 12,235 (2,180) – 10,055 Movement in financing Subordinated liabilities Convertible loan stock Non-equity preference shares (including undistributed profits) 7,745 119 2,912 10,776 (387) (52) – (439) – – (25) (25) 7,358 67 2,887 10,312 138 | Supplementary Disclosures Supplementary Disclosures FRS 27 “Life Assurance” for the year ended 31 December 2004 In December 2004, the UK Accounting Standards Board (ASB) released Financial Reporting Standard 27 “Life Assurance” (FRS 27) with implementation for years ending on or after 23 December 2005. In keeping with industry practice, and in recognition of the Memorandum of Understanding signed by UK listed insurance companies, the Association of British Insurers and the ASB, key components of FRS 27 disclosures are provided as supplementary information for the year ended 31 December 2004. This information is not subject to audit and does not form part of the financial statements. The disclosures will be incorporated into the financial statements prepared under International Financial Reporting Standards for the year ending 31 December 2005 and subsequent years. CAPITAL POSITION STATEMENT The capital position of the Group’s significant life businesses, based on latest estimates, can be summarised as follows: Equity shareholders’ funds Adjustments on to regulatory basis: Inadmissible assets Other adjustments Total available capital resources Total capital requirements – local regulatory basis South Africa United States Rest of World South Africa United States Rest of World 3,357 1,228 85 36,418 13,318 922 £m Rm (33) (677) 2,647 1,013 (55) (716) 457 160 – (19) 66 26 (354) (7,340) 28,724 10,993 (600) (7,769) 4,949 1,738 – (206) 716 282 Overall capital excess 1,634 297 40 17,731 3,211 434 Long term business provision (net of reinsurance) Technical provisions for linked liabilities 14,168 6,599 20,767 8,331 147 8,478 370 817 153,697 71,587 90,376 1,595 4,015 8,863 1,187 225,284 91,971 12,878 Technical provisions for linked liabilities exclude £414 million (R4,491 million) in respect of other life businesses not included in the above analysis. South Africa The amounts disclosed above represent the capital position of Old Mutual Life Assurance Company (South Africa) Limited (OMLAC(SA)). The calculations have been determined in accordance with the requirements of the South African Financial Services Board, with estimates of the regulatory adjustments, as regulatory returns have yet to be completed. At 31 December 2004, OMLAC(SA)’s statutory capital cover was 2.6 times the statutory capital adequacy requirement (SCAR), after allowing for statutory limitations on the value of certain assets. The equity shareholders’ funds include OMLAC(SA)’s investments in Nedcor Limited (£928 million (R10,066 million)) and Mutual & Federal Insurance Company Limited (£486 million (R5,274 million)). In addition, £261 million (R2,831 million) is invested in the Group’s loan notes and £198 million (R2,153 million) is held in intercompany loans. There are no formal intra-Group arrangements that exist to provide capital to other subsidiaries. All intercompany loans are immediately repayable and subject to commercial terms and conditions, with the exception that interest may be waived in certain circumstances. The amount of the surplus available to be distributed as dividends to the ultimate parent, Old Mutual plc, is subject to available distributable reserves within the shareholders’ fund, maintaining the minimum statutory capital adequacy requirement and foreign exchange controls, as determined by the South African Reserve Bank. United States The amounts disclosed above represent the consolidated capital position of the US Life group of companies, including Fidelity & Guaranty Life Assurance Company, Fidelity & Guaranty Life Insurance Company of New York, Life Insurance Company of New York, OMNIA (Bermuda) Limited and Old Mutual Reassurance (Ireland) Limited. The calculations have been determined on the basis of local regulatory requirements for the United States, Bermuda and Ireland accordingly. There are no formal intra-Group arrangements that exist to provide capital to other subsidiaries. The amount of the surplus available to be distributed as dividends to the ultimate parent, Old Mutual plc, is subject to available distributable reserves within the entities and the requirement to maintain the minimum statutory capital requirements, being 100% of the risk-based capital (referred to as the Company Action Level). Supplementary Disclosures | 139 Rest of World The amounts disclosed above represent the capital position of the life business in Namibia and Old Mutual International, based in Guernsey. The statutory solvency requirement for Namibia is N$4 million (£0.4 million (R4 million)). The calculations have been determined on the South African statutory basis, which is more prudent. Old Mutual International has been included on the basis of the Guernsey regulatory requirements. There are no formal intra-Group arrangements that exist to provide capital to other subsidiaries. The amount of the surplus available to be distributed as dividends to the ultimate parent, Old Mutual plc, is subject to available distributable reserves within the shareholders’ fund, maintaining the minimum statutory capital adequacy requirement and foreign exchange controls. Capital management policies Capital is actively managed to ensure that the Group is properly capitalised and funded at all times, having regard to its regulatory needs, prudent management and the needs of all stakeholders. The Group has a business planning process that runs on an annual cycle with regular updates to projections. It is through this process, which includes risk and sensitivity analyses of forecasts, and the operations of the Group Capital Management Committee (GCMC) that the operating businesses gain approval from the Old Mutual plc Board for their requests for capital. The GCMC is a sub-committee of the Executive Committee of the Board, established to set an appropriate framework and guidelines to ensure the appropriate management of capital, allocation of capital to the various businesses, and monitoring of the return on allocated capital for each business relative to the agreed hurdle. The GCMC comprises the Executive Directors of Old Mutual plc together with certain executives drawn from Old Mutual plc and/or one or more subsidiaries. Meetings are held as regularly as circumstances require and in any event not less than half-yearly and approve requests for capital that are outside the business plans. Specifically, the Group has adopted the following capital management policies: Each regulated business is required to hold, as a minimum, capital sufficient to meet the requirements of any applicable regulator in respect of its business in the jurisdictions in which it operates and such additional capital as management believes is necessary to ensure that obligations to policyholders and/or clients can be met on a timely basis. Each business ensures that it maintains an appropriate level of liquidity at all times. Old Mutual plc further ensures that it can meet its expected capital and financing needs at all times, having regard to the Group’s business plans, forecasts and any strategic initiatives. The Group will always ensure it maintains adequate capital resources to ensure it satisfies its regulatory requirements. From 1 January 2005, the Group is subject to the UK Financial Services Authority’s Group capital adequacy requirements established following introduction of the EU Financial Groups Directive. Management regularly monitors the capital requirements of the Group, taking account of future balance sheet growth, profitability, projected dividend payments and any anticipated regulatory changes, in order to ensure that the Group is at all times able to meet the forecast future minimum capital requirements. Sensitivities The Group has both qualitative and quantitative risk management procedures to monitor, at the individual company and Group levels, the key risks and sensitivities of the business. This is achieved through stress tests, scenario analyses and individual risk assessments by the operating businesses. From an understanding of the principal risks, the Group defines appropriate risk limits and controls. The key risks affecting the surplus capital of the Group are: Market Risk – the risk of loss due to fluctuations in the financial markets (equity investment returns, interest rates or exchange rates). Credit Risk – the risk of a major counterparty no longer being able to pay its debt, including amounts due as a result of investment activities. Underwriting Risks – arise from higher claims being experienced than anticipated when premium, bonus rates and surrender value levels were set. Business Risks – arise from changes in structural, regulatory and/or competitive environments. For further details of the management of specific risks, refer to the Corporate Governance and Directors’ Report on pages 26 to 41. 140 | Statement of Directors’ Responsibilities Statement of Directors’ Responsibilities in respect of the preparation of the Achieved Profits Basis Supplementary Information The Guidance issued in December 2001 by the Association of British Insurers entitled “Supplementary Reporting for Long Term Insurance Business (the Achieved Profits Method)” (“the Guidance”) requires the directors to prepare supplementary information presented under the Achieved Profits Method. In preparing the Achieved Profits Supplementary Information, the directors are required to: • select suitable methodologies and then apply them consistently; • determine assumptions on a realistic basis, having regard to past, current and expected future experience and to any relevant external data, and then apply them consistently; • state whether applicable accounting standards have been followed in relation to the residual assets, subject to any material departures disclosed and explained in the supplementary information; and • prepare the supplementary information on the going concern basis unless it is inappropriate to presume that the Company will continue in business. Independent Auditors’ Report | 141 Independent Auditors’ Report to Old Mutual plc on the Achieved Profits Basis Supplementary Information for the year ended 31 December 2004 We have audited the supplementary information on pages 142 to 155 in respect of the year ended 31 December 2004. The supplementary information has been prepared in accordance with the guidance issued in December 2001 by the Association of British Insurers entitled “Supplementary Reporting for Long Term Insurance Business (the Achieved Profits Method)” (“the Guidance”) using the methodology and assumptions set out on pages 142 to 155. The supplementary information should be read in conjunction with the primary financial statements which are on pages 57 to 137. 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 supplementary information. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the supplementary information, and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed. This report is made solely to the Company in accordance with the terms of our engagement. Our audit work has been undertaken so that we might state to the Company those matters we have been engaged to state in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our audit work, for this report, or for the opinions we have formed. 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 supplementary information stated on the achieved profits basis is 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 the supplementary information. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS As described on page 140, the directors’ responsibilities include preparing the supplementary information on the achieved profits basis in accordance with the Guidance issued by the Association of British Insurers. Our responsibilities, as independent auditors, in relation to the supplementary information are established in the United Kingdom by the Auditing Practices Board, by our profession’s ethical guidance and the terms of our engagement. Under the terms of engagement we are required to report to the Company our opinion as to whether the supplementary information has been properly prepared in accordance with the Guidance using the methodology and assumptions set out on pages 142 to 155. We also report if we have not received all the information and explanations we require for this audit. OPINION In our opinion, the achieved profits supplementary information for the year ended 31 December 2004 has been properly prepared in accordance with the Guidance using the methodology and assumptions set out on pages 142 to 155. KPMG Audit Plc Chartered Accountants 8 Salisbury Square London EC4Y 8BB 28 February 2005 142 | Achieved Profits Basis Supplementary Information Achieved Profits Basis Supplementary Information for the year ended 31 December 2004 1 CONSOLIDATED PROFIT AND LOSS ACCOUNT ON AN ACHIEVED PROFITS BASIS South Africa Life assurance Asset management Banking General insurance United States Life assurance Asset management United Kingdom and Rest of World Life assurance Asset management Banking Other shareholders’ income/(expenses) Debt service costs Adjusted operating profit* Goodwill amortisation and impairment Loss on disposal of investment in Dimension Data Holdings plc Restructuring and integration costs Change in credit provisioning methodology Fines and penalties Short term fluctuations in investment return (including economic assumption changes) Life assurance Other Investment return adjustment for own shares held in policyholders’ funds Other life assurance changes** Operating profit on ordinary activities before tax Non-operating items Profit on ordinary activities before tax Tax on profit on ordinary activities Profit on ordinary activities after tax Minority interests – equity – non-equity Profit for the financial year Dividends paid and proposed Retained profit for the financial year £m Rm Year to 31 December 2004 Year to 31 December 2003 (Restated)*** Year to 31 December 2004 Year to 31 December 2003 (Restated)*** 623 53 177 89 942 104 89 193 22 10 14 46 1,181 (33) (37) 1,111 (110) – (21) – (49) 256 38 (94) (119) 1,012 (35) 977 (327) 650 (44) (59) 547 (182) 365 475 55 (10) 73 593 127 81 208 (2) (8) 4 (6) 795 (40) (48) 707 (206) (5) (32) (87) – 71 – 12 (86) 374 (32) 342 (211) 131 115 (46) 200 (166) 34 7,350 639 2,099 1,057 11,145 1,227 1,050 2,277 259 117 158 534 13,956 (390) (437) 13,129 (1,290) – (248) – (596) 3,020 449 (1,115) (1,404) 11,945 (418) 11,527 (3,859) 7,668 (518) (696) 6,454 (2,001) 4,453 5,872 678 (118) 909 7,341 1,569 1,000 2,569 (24) (95) 48 (71) 9,839 (494) (593) 8,752 (2,544) (60) (394) (1,074) – 872 – 148 (1,065) 4,635 (404) 4,231 (2,605) 1,626 1,420 (568) 2,478 (2,006) 472 Achieved Profits Basis Supplementary Information | 143 1 CONSOLIDATED PROFIT AND LOSS ACCOUNT ON AN ACHIEVED PROFITS BASIS continued The adjusted operating profit on an after-tax and minority interests basis is determined as follows: Adjusted operating profit* Tax on adjusted operating profit Minority interests – equity – non-equity Adjusted operating profit after tax and minority interests Earnings per share – achieved profits basis Adjusted operating earnings per share* Basic earnings per share Adjusted weighted average number of shares – millions Weighted average number of shares – millions £m Rm Year to 31 December 2004 Year to 31 December 2003 (Restated)*** Year to 31 December 2004 Year to 31 December 2003 (Restated)*** 1,111 (254) 857 (83) (59) 715 19.1 15.9 3,748 3,432 707 (250) 457 (9) (46) 402 p 10.8 5.9 3,727 3,411 13,129 (2,999) 10,130 (979) (696) 8,455 225.6 188.1 3,748 3,432 8,752 (3,087) 5,665 (111) (568) 4,986 c 133.8 72.6 3,727 3,411 * For life assurance and general insurance businesses, the adjusted operating profit is based on a long term investment return and includes investment returns on own shares held within the policyholders’ funds. For banking business, adjusted operating profit excludes the loss on disposal of investment in Dimension Data Holdings plc, restructuring and integration costs and the transitional impact of the change of credit provisioning methodology. For all businesses, adjusted operating profit excludes goodwill amortisation and impairment and fines and penalties. Adjusted operating earnings per share is similarly based, but is stated after tax and minority interests, with the calculation of the weighted average number of shares including own shares held in policyholders’ funds. The segmental analysis within the achieved profits consolidated profit and loss account has been prepared on a gross of inter-segment transactions basis. ** Refer to segmental analysis of results in section 7. ***2003 comparatives have been restated to be consistent with the current year segmental presentation. 2 CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES ON AN ACHIEVED PROFITS BASIS Profit for the financial year Foreign exchange movements Total recognised gains and losses for the year £m Rm Year to 31 December 2004 Year to 31 December 2003 (Restated)**** Year to 31 December 2004 Year to 31 December 2003 (Restated)*** * 547 250 797 200 307 507 6,454 (1,583) 4,871 2,478 (2,186) 292 ****Comparative figures have been restated to reflect the adoption of Urgent Issues Taskforce Abstract 38 “Accounting for ESOP Trusts”. The effect of this restatement is that consolidated achieved profits equity shareholders’ funds of £3,561 million (R42,503 million) before prior year adjustments have been decreased by £109 million (R1,301 million). 144 | Achieved Profits Basis Supplementary Information Achieved Profits Basis Supplementary Information for the year ended 31 December 2004 continued 3 RECONCILIATION OF MOVEMENTS IN CONSOLIDATED ACHIEVED PROFITS EQUITY SHAREHOLDERS’ FUNDS Total recognised gains and losses for the year Dividends paid and proposed Issue of new capital Shares issued under share incentive schemes Net sales of shares held in ESOP Trusts and policyholders’ funds Net increase/(decrease) in achieved profits equity shareholders’ funds Achieved profits equity shareholders’ funds at the beginning of the year Achieved profits equity shareholders’ funds at the end of the year 4 CONSOLIDATED BALANCE SHEET ON AN ACHIEVED PROFITS BASIS Assets Goodwill Insurance and other assets Banking assets Total long term in-force business asset Total assets Liabilities Achieved profits equity shareholders’ funds Minority interests Subordinated liabilities Insurance and other liabilities Banking liabilities Total liabilities Reconciliation of total long term in-force business asset Value of in-force business OMUSL statutory solvency adjustment OMI life subsidiaries statutory solvency adjustment Adjustment for discounting CGT Total long term in-force business asset £m Rm Year to 31 December 2004 Year to 31 December 2003 (Restated)* Year to 31 December 2004 Year to 31 December 2003 (Restated)* 797 (182) 615 – 15 33 663 3,452 4,115 507 (166) 341 37 4 6 388 3,064 3,452 4,871 (2,001) 2,870 – 177 389 3,436 41,202 44,638 292 (2,006) (1,714) 457 49 76 (1,132) 42,334 41,202 £m Rm At 31 December 2004 At 31 December 2003 (Restated)* At 31 December 2004 At 31 December 2003 (Restated)* 1,152 37,608 27,500 872 67,132 4,115 1,529 – 35,589 25,899 67,132 1,592 (716) (19) 15 872 1,264 32,409 24,042 700 12,497 407,979 298,345 9,460 15,088 386,855 286,985 8,353 58,415 728,281 697,281 3,452 1,312 15 30,724 22,912 44,638 16,589 – 386,078 280,976 41,202 15,662 179 366,735 273,503 58,415 728,281 697,281 1,276 (566) (17) 7 700 17,271 (7,767) (206) 162 9,460 15,227 (6,756) (203) 85 8,353 * Comparative figures have been restated to reflect the adoption of Urgent Issues Taskforce Abstract 38 “Accounting for ESOP Trusts” (UITF38). The effect of this restatement is that consolidated achieved profits equity shareholders’ funds of £3,561 million (R42,503 million) before prior year adjustments have been decreased by £109 million (R1,301 million). This supplementary information has been approved by the Board and signed on its behalf by: Julian V F Roberts Group Finance Director 28 February 2005 Achieved Profits Basis Supplementary Information | 145 5 BASIS OF PREPARATION This supplementary information has been prepared in accordance with the methodology for supplementary reporting for long term insurance business (the Achieved Profits Method) issued in December 2001 by the Association of British Insurers. The objective of the Achieved Profits Method is to recognise profit as it is earned arising from contracts of long term assurance business. The methodology is based on an attribution of the assets of a life assurance company between those backing long term assurance contracts (backing assets) and the residual assets representing unencumbered capital. The backing assets cover: (i) (ii) the solvency capital requirements in each country (or equivalent where there is no local requirement). the long term liabilities calculated in accordance with local supervisory requirements; and Under the Achieved Profits Method the profits of the long term assurance business comprise: (i) (ii) the movement over the accounting period in the present value of the expected future cash flows to the residual assets from contracts in-force the cash transfers to the residual assets from the backing assets as determined following the statutory valuation; at the balance sheet date and their backing assets; and (iii) the return on the residual assets. Shareholder profit arises fundamentally from: (i) the difference between (a) the amounts charged to policyholders for guarantees, expenses and insurance and (b) the actual experience of these items; and (ii) the investment return earned on capital. In addition for the United States business, the guarantees for interest credited to policyholders’ funds are reset periodically. The assumed future credited interest rates are consistent with investment earnings made and in line with recent Company policy. The treatment within this supplementary information of all business other than life assurance business is unchanged from the statutory financial statements. 146 | Achieved Profits Basis Supplementary Information Achieved Profits Basis Supplementary Information for the year ended 31 December 2004 continued 6 COMPONENTS OF ACHIEVED PROFITS EQUITY SHAREHOLDERS’ FUNDS Shareholders’ adjusted net worth Equity shareholders’ funds Adjustment to include OMUSL on a statutory solvency basis Adjustment to include OMI life subsidiaries on a statutory solvency basis Adjustment for discounting CGT Value of in-force business Value of in-force business before cost of solvency capital Cost of solvency capital Minority interest in value of in-force business Achieved profits equity shareholders’ funds Pro-forma adjustment to bring Group investments to market value Achieved profits equity shareholders’ funds Adjustment to bring listed subsidiaries to market value Adjustment to market value of own shares held in policyholders’ funds Adjusted embedded value £m Rm At 31 December 2004 At 31 December 2003 (Restated)* At 31 December 2004 At 31 December 2003 (Restated)* 2,525 3,245 (716) (19) 15 1,592 1,871 (279) (2) 2,178 2,754 (566) (17) 7 1,276 1,450 (174) (2) 27,391 35,202 (7,767) (206) 162 17,271 20,297 (3,026) (24) 26,000 32,874 (6,756) (203) 85 15,227 17,304 (2,077) (25) 4,115 3,452 44,638 41,202 4,115 876 368 5,359 44,638 9,502 3,994 58,134 3,452 288 275 4,015 p 41,202 3,444 3,283 47,929 c 1,249 Adjusted embedded value per share 139.1 104.6 1,508 Number of shares in issue at the end of the period including own shares held in policyholders’ funds – millions 3,854 3,837 3,854 3,837 * Comparative figures have been restated to reflect the adoption of Urgent Issues Taskforce Abstract 38 “Accounting for ESOP Trusts”. The effect of this restatement is that consolidated achieved profits equity shareholders’ funds of £3,561 million (R42,503 million) before prior year adjustments have been decreased by £109 million (R1,301 million). Shareholders’ adjusted net worth includes goodwill relating to OMUSL of £56 million (R608 million) (December 2003: £63 million (R752 million)). The table below sets out a geographical analysis of the value of in-force business. South Africa Individual business Group business United States United Kingdom and Rest of World Value of in-force business £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 1,005 698 307 512 75 824 507 317 393 59 10,903 7,577 3,326 5,554 814 9,832 6,053 3,779 4,691 704 1,592 1,276 17,271 15,227 Achieved Profits Basis Supplementary Information | 147 6 COMPONENTS OF ACHIEVED PROFITS EQUITY SHAREHOLDERS’ FUNDS continued The encumbered and unencumbered capital for South Africa and United States is shown in the table below. South Africa Encumbered capital Unencumbered capital United States Encumbered capital Unencumbered capital £m Rm At 31 December 2004 At 31 December 2003 At 31 December 2004 At 31 December 2003 1,692 1,016 676 456 160 296 1,551 1,021 530 391 153 238 18,350 11,020 7,330 4,948 1,736 3,212 18,513 12,186 6,327 4,666 1,822 2,844 For South Africa the average unencumbered capital applicable was £306 million (R3,606 million) (December 2003: £196 million (R2,419 million)). These average figures were used to determine the expected return on unencumbered capital. 7 SEGMENTAL ANALYSIS OF RESULTS Year to 31 December 2004 New business contribution Profits from existing business: Expected return on in-force business Expected return on encumbered capital Experience variances Operating assumption changes Expected return on unencumbered capital Life assurance adjusted operating profit before tax Investment return variances: On value of in-force On capital Effect of economic assumption changes Effect of changes in and cost of solvency capital Life assurance achieved profits before tax Attributed tax Life assurance achieved profits after tax South Africa United States UK and Rest of World £m Total South Africa United States UK and Rest of World Rm Total 98 193 114 74 106 38 623 43 111 71 (117) 731 (206) 525 88 45 9 (24) (28) 14 4 6 5 (2) 9 – 104 22 26 (9) – – 121 (36) 85 4 7 3 (2) 34 – 34 190 1,156 1,038 47 2,241 244 128 48 87 52 749 73 109 74 (119) 886 (242) 2,277 1,345 873 1,251 448 7,350 507 1,310 838 (1,380) 8,625 (2,431) 531 106 (283) (330) 165 1,227 307 (106) – – 1,428 (425) 644 6,194 1,003 71 59 (24) 106 – 259 47 82 35 (24) 399 – 399 2,879 1,510 566 1,027 613 8,836 861 1,286 873 (1,404) 10,452 (2,856) 7,596 148 | Achieved Profits Basis Supplementary Information Achieved Profits Basis Supplementary Information for the year ended 31 December 2004 continued 7 SEGMENTAL ANALYSIS OF RESULTS continued Year to 31 December 2003 (Restated)* New business contribution Profits from existing business: Expected return on in-force business Expected return on encumbered capital Experience variances Operating assumption changes Expected return on unencumbered capital Life assurance adjusted operating profit before tax Investment return variances: On value of in-force business On capital Effect of economic assumption changes Effect of changes in and costs of solvency capital Effect of FSV economic assumption changes Effect of BoE Life Life assurance achieved profits before tax Attributed tax Life assurance achieved profits after tax South Africa United States UK and Rest of World £m Total South Africa United States UK and Rest of World Rm Total 108 188 147 29 (23) 26 475 27 (36) 79 (59) (32) 5 459 (127) 322 57 39 11 (9) 15 14 127 20 (1) (11) – – – 135 (34) 101 2 6 5 (9) (6) – (2) 3 (12) 2 – – – (9) – (9) 167 1,334 704 25 2,063 233 163 11 (14) 40 600 50 (49) 70 (59) (32) 5 585 (161) 424 2,322 1,818 358 (284) 324 5,872 333 (450) 976 (729) (395) 59 5,666 (1,568) 4,098 482 136 (111) 185 173 74 62 (111) (74) – 2,878 2,016 136 (173) 497 1,569 (24) 7,417 247 (12) (136) – – – 1,668 (420) 1,248 37 (148) 25 – – – (110) – (110) 617 (610) 865 (729) (395) 59 7,224 (1,988) 5,236 * 2003 comparatives have been restated to be consistent with the current year segmental presentation. Expected return on the unencumbered capital for South Africa and the United States is 12.5% p.a. (2003: 13.4%) and 6.0% p.a. (2003: 7.0%) respectively. For South Africa the expected return is applied to the average unencumbered capital given in section 6. The South African operating assumption changes of £106 million (R1,251 million) for 2004 include: (a) £60 million (R708 million) before tax increase in the value of in-force business in respect of an increase in discretionary mortality margins in the Financial Soundness Valuation (FSV), which arose as a result of a reduction in Individual Business mortality assumptions, reflecting positive experience variances, (b) £62 million (R732 million) before tax increase in the value of in-force business in respect of sources of profit that have not previously been valued, and (c) other changes to valuation methodology and assumptions. The segmental results of the United States include the operating profit generated by Old Mutual Reassurance (Ireland) Limited (OMRe), which provides reinsurance to the United States life companies, and OMNIA Life (Bermuda) Limited. During 2004, all the deferred annuity business reinsured with OMRe was recaptured by the United States life companies. The effect of this recapture was to reduce the life assurance achieved profit for 2004 by £31 million (R366 million) before tax which is included within experience variances. The effect of changes in and cost of solvency capital for South Africa reflects changes in the amount of solvency capital required and in the mix of assets backing the solvency capital. The effect of FSV economic assumption changes in 2003 reflects the impact of reducing the economic assumptions for the South African actuarial liability valuation by 3% p.a. The effect of BoE Life in 2003 reflects the recognition of the initial value of the in-force business on acquisition. The difference between the total tax charge shown in the above segmental analysis and the total tax charge shown in the profit and loss account in section 1, represents the tax charge on the non-life businesses. 7 SEGMENTAL ANALYSIS OF RESULTS continued Tax on life assurance achieved profits South Africa – value of in-force – capital United States United Kingdom and Rest of World Tax on other businesses Tax on profit on ordinary activities Achieved Profits Basis Supplementary Information | 149 £m Rm Year to 31 December 2004 Year to 31 December 2003 Year to 31 December 2004 Year to 31 December 2003 163 43 36 – 242 85 327 119 8 34 – 161 50 211 1,923 508 425 – 2,856 1,003 3,859 1,469 99 420 – 1,988 617 2,605 150 | Achieved Profits Basis Supplementary Information Achieved Profits Basis Supplementary Information for the year ended 31 December 2004 continued 8 VALUE OF NEW BUSINESS The tables below set out a geographical analysis of the value of new business (VNB) for the year to 31 December 2004 and the year to 31 December 2003. Annual Premium Equivalent (APE) is calculated as recurring premiums plus 10% of single premiums. New business profitability, as measured by the ratio of the VNB to the APE, is also shown under “Margin” below. The value of new business is disclosed both on a gross and after tax basis. The assumptions and tax rates used to calculate the value of new business are set out in section 9. Year to 31 December 2004 £m Recurring premiums Single premiums Annual Premium Equivalent Value of new business before tax Value of new business after tax Margin before tax Margin after tax Rm Recurring premiums Single premiums Annual Premium Equivalent Value of new business before tax Value of new business after tax Year to 31 December 2003 £m Recurring premiums Single premiums Annual Premium Equivalent Value of new business before tax Value of new business after tax Margin before tax Margin after tax Rm Recurring premiums Single premiums Annual Premium Equivalent Value of new business before tax Value of new business after tax Individual business Group business South Africa United UK and Rest of World States Total 157 546 212 84 52 39% 24% 1,858 6,442 2,502 983 612 157 475 205 68 42 33% 21% 1,933 5,867 2,520 840 519 15 203 35 14 9 41% 25% 182 2,399 422 173 107 18 472 65 40 25 61% 38% 227 5,823 809 494 309 172 749 247 98 61 40% 25% 58 2,157 274 88 62 32% 23% 10 146 25 4 4 16% 16% 240 3,052 546 190 127 35% 23% 2,040 8,841 2,924 1,156 719 679 25,455 3,225 1,038 732 118 1,728 291 2,837 36,024 6,440 47 47 2,241 1,498 175 947 270 108 67 40% 25% 67 1,715 238 49 36 21% 15% 2,160 11,690 3,329 1,334 828 827 21,178 2,945 605 445 11 100 21 2 2 10% 15% 134 1,242 258 25 25 253 2,762 529 159 105 30% 20% 3,121 34,110 6,532 1,964 1,298 The new business shown above for 31 December 2004 for South African Group recurring premium business includes bulk new business into existing schemes, with value of new business of £1 million (R10 million) after tax and APE of £3 million (R33 million). The new business shown above for the United States for 31 December 2003 excludes the value of OMNIA Life (Bermuda) business that was acquired during 2003, and which is included within the value of new business shown in section 7. The value of new individual unit trust and some group market-linked business written by the life companies is excluded, as the profits on this business arise in the asset management subsidiaries. The value of new business also excludes premium increases arising from indexation arrangements in respect of existing business, as these are already included in the value of in-force business. The premiums shown for the United States exclude reinsurance ceded externally. Achieved Profits Basis Supplementary Information | 151 8 VALUE OF NEW BUSINESS continued A reconciliation of the new business premiums shown in the notes to the financial statements to those shown above, for the year to 31 December 2004, is set out below. New business premiums as stated in the notes to the financial statements Less: United States reinsurance ceded externally Group market-linked business not valued Unit trust business not valued Recurring premiums £m Single premiums Recurring premiums Rm Single premiums 240 3,389 2,837 39,987 – – – (12) (238) (87) – – – (139) (2,799) (1,025) New business premiums as per achieved profits supplementary information 240 3,052 2,837 36,024 152 | Achieved Profits Basis Supplementary Information Achieved Profits Basis Supplementary Information for the year ended 31 December 2004 continued 9 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 and United States businesses were as follows: South Africa Fixed interest return Cash return Equity return Property return Inflation Risk discount rate United States Treasury yield Inflation New money yield assumed Net portfolio earned rate Risk discount rate At 31 December 2004 At 31 December 2003 8.3% 7.0% 10.3% 9.3% 5.3% 10.8% 4.3% 3.0% 5.1% 5.9% 8.3% 9.4% – 11.4% 10.4% 6.4% 11.9% 4.3% 3.0% 6.0% 6.4% 8.3% • For the other operations, appropriate investment and economic assumptions were chosen on bases consistent with those adopted in South Africa. Where applicable, rates of future bonuses have been set at levels consistent with the investment return assumptions. Projected company taxation is based on the current tax basis that applies in each country. • For the South African business, full allowance has been made for STC that may be payable in South Africa. Account has been taken of the impact of CGT in South Africa. It has been assumed that 10% of the equity portfolio (excluding group subsidiaries) will be traded each year. For the United States business full allowance has been made for existing tax attributes of the companies, including the use of existing carry forwards and preferred tax credit investments. Achieved profits results are initially calculated on an after tax basis and are then grossed up to the pre-tax level for presentation in the profit and loss account and the segmental analysis of results. The tax rates used were the effective corporation tax rates of 37.8% for South Africa (2003: 37.8%), 30% for the United States (2003: 25%) and 0% for the United Kingdom and the Rest of World (2003: 0%) except for the investment return on South African capital, for which the attributed tax was derived from the primary accounts. • 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. The future expenses attributable to life assurance business do not include Group holding company expenses. Achieved Profits Basis Supplementary Information | 153 9 ASSUMPTIONS continued • No material allowance has been made for future development costs. • Future investment expenses are 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 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. • New schemes written on which recurring single premiums are expected to be received on a regular basis are treated as new business. The annualised premium is recognised as recurring premium new business at inception of the scheme and is determined by annualising the actual premiums received during the year in question. Subsequent recurring single premiums received in future years are not treated as new business, as these have already been provided for in calculating the value of in-force business. • The sensitivity of the value of in-force and value of new business to changes in key assumptions are set out in section 10. The principal exchange rates used to translate the operating results of key foreign business segments to Sterling are: Profit and loss account (average rate for the year) Balance sheet (closing rate at 31 December) 2004 11.7986 10.8482 Rand 2003 12.3487 11.9367 2004 1.8327 1.9158 US$ 2003 1.6354 1.7833 154 | Achieved Profits Basis Supplementary Information Achieved Profits Basis Supplementary Information for the year ended 31 December 2004 continued 10 ALTERNATIVE ASSUMPTIONS The tables below for South Africa and the United States show the sensitivity of the value of in-force at 31 December 2004 and the value of new business for the year to 31 December 2004 to changes in key assumptions. For each sensitivity illustrated, all other assumptions have been left unchanged. The value of new business is shown before tax. The sensitivity of the adjustment for discounting CGT, which is included in the shareholders’ adjusted net worth, to changes in the central discount rate is not material and is not included in the table below. South Africa Central assumptions Value before cost of solvency capital Cost of solvency capital Effect of: Central discount rate +1% Value before cost of solvency capital Cost of solvency capital Central discount rate –1% Value before cost of solvency capital Cost of solvency capital Pre-tax investment return assumptions –1%, with bonus rates changing commensurately Value before cost of solvency capital Cost of solvency capital £m Rm Value of in-force business at 31 December 2004 Value of new life business at 31 December 2004 Value of in-force business at 31 December 2004 Value of new life business at 31 December 2004 1,005 1,248 (243) 878 1,178 (300) 1,149 1,327 (178) 919 1,210 (291) 98 111 (13) 87 102 (15) 111 120 (9) 92 106 (14) 10,903 13,543 (2,640) 9,525 12,777 (3,252) 12,462 14,393 (1,931) 9,969 13,126 (3,157) 1,156 1,310 (154) 1,025 1,203 (178) 1,310 1,415 (105) 1,086 1,251 (165) Voluntary discontinuance rates +10% 984 90 10,675 1,062 Maintenance expense levels +10%, with no corresponding increase in policy charges Inflation assumption +1%, with no corresponding increase in policy charges Mortality and morbidity assumptions for assurances +10%, and mortality assumptions for annuities –10%, with no corresponding increase in policy charges For value of new business, acquisition expenses other than commission and commission-related expenses +10%, with no corresponding increase in policy charges 944 92 10,241 1,085 970 93 10,523 1,097 906 82 9,828 967 – 92 – 1,085 10 ALTERNATIVE ASSUMPTIONS continued United States Central assumptions Value before cost of solvency capital Cost of solvency capital Effect of: Central discount rate +1% Value before cost of solvency capital Cost of solvency capital Central discount rate –1% Value before cost of solvency capital Cost of solvency capital Pre-tax investment return assumptions –1%, with credited rates changing commensurately Value before cost of solvency capital Cost of solvency capital Voluntary discontinuance rates +10% Maintenance expense levels +10%, with no corresponding increase in policy charges Inflation assumption +1%, with no corresponding increase in policy charges Mortality and morbidity assumptions for assurances +10%, and mortality assumptions for annuities –10%, with no corresponding increase in policy charges Increasing Risk Based Capital to 200%, with 1% reduction in central discount rate Value before cost of solvency capital Cost of solvency capital For value of new business, acquisition expenses other than commission and commission-related expenses +10%, with no corresponding increase in policy charges Achieved Profits Basis Supplementary Information | 155 £m Rm Value of in-force business at 31 December 2004 Value of new life business at 31 December 2004 Value of in-force business at 31 December 2004 Value of new life business at 31 December 2004 512 543 (31) 489 525 (36) 537 562 (25) 481 515 (34) 479 88 102 (14) 83 98 (15) 94 105 (11) 81 96 (15) 5,554 5,891 (337) 5,305 5,695 (390) 5,825 6,097 (272) 5,222 5,586 (364) 1,038 1,203 (165) 979 1,156 (177) 1,109 1,239 (130) 956 1,133 (177) 82 5,194 967 491 85 5,321 1,003 510 86 5,531 1,015 508 88 5,509 1,038 512 562 (50) 83 105 (22) 5,553 6,097 (544) 979 1,239 (260) – 85 – 1,003 156 | Financial History Financial History Sterling Life assurance new business premiums Single Recurring Annual premium equivalent Summary consolidated profit and loss account South Africa Life assurance – Technical result – Long term investment return Asset management Banking General insurance United States Life assurance Asset management United Kingdom and Rest of World Life assurance Asset management Banking Other shareholders’ income/expenses Debt service costs Write-down of strategic investments Adjusted operating profit Goodwill amortisation and impairment Loss on disposal/write-down of investment in Dimension Data Holdings plc Restructuring and integration costs Change in credit provisioning methodology Fines and penalties Short term fluctuations in investment return Investment return adjustment for own shares held in policyholders’ funds Operating profit on ordinary activities before tax Non-operating items Profit on ordinary activities before tax Tax on profit on ordinary activities Profit/(loss) on ordinary activities after tax Minority interests (equity and non-equity) Profit/(loss) for the financial year Dividends paid and proposed Retained profit/(loss) for the financial year 2004 2003 (Restated) 2002 (Restated) 2001 (Restated) 2000 (Restated) £m 3,389 240 579 3,200 262 583 4,003 219 619 2,140 217 431 1,902 248 438 313 167 480 53 177 89 799 96 89 185 18 10 14 42 1,026 (33) (37) – 956 (110) – (21) – (49) 226 (94) 908 (35) 873 (286) 587 (103) 484 (182) 302 260 178 438 55 (10) 73 556 85 81 166 20 (8) 4 16 738 (40) (48) – 650 (206) (5) (32) (87) – 143 12 475 (32) 443 (241) 202 71 273 (166) 107 208 135 343 28 165 35 571 83 95 178 (3) 2 56 55 804 (22) (58) – 724 (120) (68) (14) – – (91) 42 473 (6) 467 (224) 243 (44) 199 (161) 38 249 148 397 37 290 46 770 13 116 129 (2) (3) 79 74 973 (29) (67) (21) 856 (632) (269) – – – 126 76 157 – 157 (319) (162) (26) (188) (158) (346) 250 215 465 46 269 44 824 – 44 44 13 34 58 105 973 (34) (28) – 911 (54) – – – – (180) (73) 604 356 960 (138) 822 (341) 481 (152) 329 Earnings and dividend per share Adjusted operating earnings per share Basic earnings per share Dividend per share Financial History | 157 p 2004 15.3 14.1 5.25 2003 (Restated) 2002 (Restated) 2001 (Restated) 2000 (Restated) 10.0 8.0 4.8 11.3 5.9 4.8 12.1 (5.8) 4.8 18.4 15.7 4.7 Adjusted weighted average number of shares – millions Weighted average number of shares – millions 3,748 3,432 3,727 3,411 3,670 3,354 3,550 3,234 3,373 3,057 Consolidated balance sheet Assets Intangible assets (goodwill) Insurance and other assets Banking assets Liabilities Equity shareholders’ funds Minority interests Subordinated liabilities Insurance and other liabilities Banking liabilities Funds under management Adjusted embedded value Exchange rates Sterling/Rand Average rate Closing rate Sterling/US Dollar Average rate Closing rate 2004 2003 (Restated) 2002 (Restated) 2001 (Restated) 2000 (Restated) £m 1,152 37,608 27,500 1,264 32,409 24,042 1,598 26,231 21,377 1,580 31,553 11,309 2,279 26,288 17,287 66,260 57,715 49,206 44,442 45,854 3,245 1,527 – 35,589 25,899 2,754 1,310 15 30,724 22,912 2,424 927 18 25,602 20,235 2,108 565 22 31,292 10,455 3,046 1,013 39 26,355 15,401 66,260 57,715 49,206 44,442 45,854 140,124 125,226 123,334 142,819 168,223 5,359 4,015 3,828 3,437 5,465 2004 2003 2002 2001 2000 11.7986 10.8482 12.3487 11.9367 15.7878 13.8141 12.3923 17.4286 10.5213 11.3148 1.8327 1.9158 1.6354 1.7833 1.5030 1.6105 1.4405 1.4542 1.5159 1.4937 The information contained in the above financial history is extracted from published accounts. Comparative years have been restated for the implementation of FRS 19 “Deferred Tax”, UITF Abstract 37 “Purchases and Sales of Own Shares” and UITF Abstract 38 “Accounting for ESOP Trusts”. 158 | Financial History Financial History Rand Life assurance new business premiums Single Recurring Annual premium equivalent Summary consolidated profit and loss account South Africa Life assurance – Technical result – Long term investment return Asset management Banking General insurance United States Life assurance Asset management United Kingdom and Rest of World Life assurance Asset management Banking Other shareholders’ income/expenses Debt service costs Write-down of strategic investments Adjusted operating profit Goodwill amortisation and impairment Loss on disposal/write-down of investment in Dimension Data Holdings plc Restructuring and integration costs Change in credit provisioning methodology Fines and penalties Short term fluctuations in investment return Investment return adjustment for own shares held in policyholders’ funds Operating profit on ordinary activities before tax Non-operating items Profit on ordinary activities before tax Tax on profit on ordinary activities Profit/(loss) on ordinary activities after tax Minority interests (equity and non-equity) Profit/(loss) for the financial year Dividends paid and proposed Retained profit/(loss) for the financial year 2004 2003 (Restated) 2002 (Restated) 2001 (Restated) 2000 (Restated) Rm 39,987 2,837 6,835 39,515 3,235 7,186 63,187 3,444 9,763 26,520 2,688 5,339 20,010 2,609 4,610 3,697 1,974 5,671 639 2,099 1,057 9,466 1,126 1,050 2,176 206 117 158 481 12,123 (390) (437) – 11,296 (1,290) – (246) – (596) 2,662 (1,115) 10,711 (418) 10,293 (3,374) 6,919 (1,215) 5,704 (2,001) 3,210 2,198 5,408 678 (118) 909 6,877 1,050 1,000 2,050 248 (95) 48 201 9,128 (494) (593) – 8,041 (2,544) (60) (394) (1,074) – 1,767 148 5,884 (404) 5,480 (2,976) 2,504 877 3,381 (2,006) 3,283 2,131 5,414 441 2,605 556 9,016 1,310 1,500 2,810 (47) 31 884 868 12,694 (347) (916) – 11,431 (1,895) (1,080) (227) – – (1,439) 663 7,453 (88) 7,365 (3,535) 3,830 (695) 3,135 (2,319) 3,085 1,830 4,915 458 3,593 570 9,536 161 1,437 1,598 (25) (38) 979 916 12,050 (359) (830) (260) 10,601 (7,832) (3,334) – – – 1,561 943 1,939 – 1,939 (3,948) (2,009) (322) (2,331) (2,433) 2,630 2,262 4,892 484 2,829 463 8,668 – 462 462 137 359 611 1,107 10,237 (357) (295) – 9,585 (568) – – – – (1,894) (763) 6,360 3,746 10,106 (1,455) 8,651 (3,588) 5,063 (1,595) 3,703 1,375 816 (4,764) 3,468 Financial History | 159 2004 2003 (Restated) 2002 (Restated) 2001 (Restated) 2000 (Restated) c 181.1 166.2 58.5* 3,748 3,432 123.8 99.1 56.0 3,727 3,411 179.0 93.5 66.0 3,670 3,354 149.1 (72.1) 72.3 3,550 3,234 194.3 165.6 49.5 3,373 3,057 Rm 2004 2003 (Restated) 2002 (Restated) 2001 (Restated) 2000 (Restated) 12,497 407,979 298,345 15,088 386,855 286,985 22,075 362,363 295,291 27,537 549,932 197,099 25,786 297,484 195,597 718,821 688,928 679,729 774,568 518,867 35,202 16,565 – 386,078 280,976 32,874 15,637 179 366,735 273,503 33,491 12,808 249 353,666 279,515 36,745 9,847 383 545,377 182,216 34,505 11,458 442 298,203 174,259 718,821 688,928 679,729 774,568 518,867 1,520,092 1,494,786 1,703,747 2,489,141 1,903,414 58,134 47,929 52,890 59,883 61,831 Earnings and dividend per share Adjusted operating earnings per share Basic earnings per share Dividend per share Adjusted weighted average number of shares – millions Weighted average number of shares – millions Consolidated balance sheet Assets Intangible assets (goodwill) Insurance and other assets Banking assets Liabilities Equity shareholders’ funds Minority interests Subordinated liabilities Insurance and other liabilities Banking liabilities Funds under management Adjusted embedded value * The dividend recommended (final 3.5p per share, making 5.25p per share for the year) will be converted, for payment to shareholders on the branch registers and the Namibian section of the principal register, into local currencies at exchange rates ruling at the close of business on 31 March 2005 (or 30 March 2005 in the case of Zimbabwe). 160 | Notice of Annual General Meeting Notice of Annual General Meeting The Annual General Meeting of Old Mutual plc (the “Company”) will be held in the Presentation Suite, 2nd Floor, Old Mutual Place, 2 Lambeth Hill, London EC4V 4GG on Wednesday 11 May 2005 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 2004. 2 To declare a final dividend of 3.5p per ordinary share. 3 (i) To elect Mr R P Edey as a director of the Company; (ii) To elect Professor W L Nkuhlu as a director of the Company; (iii) To re-elect Mr C D Collins as a director of the Company; (iv) To re-elect Mr J H Sutcliffe as a director of the Company. SPECIAL RESOLUTIONS 8 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 £19,272,000 for cash and/or where such allotment constitutes an allotment of equity securities by virtue of section 94 (3A) of that Act, 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 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. 4 To re-appoint KPMG Audit Plc as auditors to the Company. 9 That the Company be and is hereby authorised in accordance with 5 To authorise the Audit Committee to settle the remuneration of the auditors. As special business, to consider and, if thought fit, pass the following resolutions, those numbered 6 and 7 as Ordinary Resolutions and those numbered 8, 9 and 10 (i) to (iv) as Special Resolutions: ORDINARY RESOLUTIONS 6 To approve the Remuneration Report in the Company’s report and accounts for the year ended 31 December 2004. 7 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 £38,544,000 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 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. 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: (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 Resolutions 10 (i) to (iv) below) shall be 385,442,000; (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 2006, 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 either: (a) be cancelled immediately upon completion of the purchase; or (b) be held, sold, transferred or otherwise dealt with as treasury shares in accordance with the provisions of the Companies Act 1985. Notice of Annual General Meeting | 161 10 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 2006, 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 385,442,000 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 9 above or any of the other contingent purchase contracts referred to in Resolutions 10 (ii), (iii) and (iv)); (ii) contract between the Company and Investment House Namibia (Pty) Limited pursuant to which the Company may make off-market purchases from Investment House Namibia (Pty) Limited of up to a maximum of 385,442,000 Ordinary Shares in aggregate (such maximum number to be reduced by any purchases made pursuant to the authority in Resolution 9 above or any of the other contingent purchase contracts referred to in Resolutions 10 (i), (iii) and (iv)); (iii) contract between the Company and Imara Edwards Securities (Private) Limited pursuant to which the Company may make off-market purchases from Imara Edwards Securities (Private) Limited of up to a maximum of 385,442,000 Ordinary Shares in aggregate (such maximum number to be reduced by any purchases made pursuant to the authority in Resolution 9 above or any of the other contingent purchase contracts referred to in Resolutions 10 (i), (ii) and (iv)); (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 385,442,000 Ordinary Shares in aggregate (such maximum number to be reduced by any purchases made pursuant to the authority in Resolution 9 above or any of the other contingent purchase contracts referred to in Resolutions 10 (i), (ii) and (iii)). By order of the Board Martin C Murray Group Company Secretary 28 February 2005 Registered Office: 5th Floor Old Mutual Place 2 Lambeth Hill London EC4V 4GG 162 | Notice of Annual General Meeting Notice of Annual General Meeting Continued Notes: 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. A proxy need not be a member of the Company. A member who holds shares through Old Mutual Nominees may 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). Beneficial shareholders who have dematerialised or immobilised their shareholdings in STRATE, other than through Old Mutual Nominees, may provide their CSDP or broker with voting instructions in accordance with the applicable custody agreement or may apply to that CSDP or broker for a letter of representation from the registered shareholder to enable them to attend the meeting in person. CREST members who wish to appoint a proxy or proxies for the Meeting and any adjournment(s) of the Meeting may do so by utilising the procedures in the CREST manual. In order for a proxy appointment or instruction made using the CREST service to be valid, the appropriate CREST message (a “CREST Proxy Instruction”) must be properly authenticated in accordance with CRESTCo’s specifications and must contain the information required for such instructions, as described in the CREST manual. CREST personal members or other CREST sponsored members, and those CREST members who have appointed (a) voting service provider(s), should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf. 2 Pursuant to Regulation 41 of the Uncertificated Securities Regulations 2001, 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 9 May 2005 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 in favour of Old Mutual Nominees (see note 1 above) 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 envelope enclosed with the form of proxy or voting instruction form or by the Company’s Registrar, Computershare Investor Services PLC, The Pavilions, Bridgwater Road, Bristol BS99 7NH by not later than 11.00 a.m. (UK time) on 9 May 2005. If no return envelope is enclosed with the voting instruction form, this will be because the records available to the Company show your shareholding to have been dematerialised in the context of STRATE through a CSDP or broker other than under the Issuer-Sponsored Nominee Programme. In that case, you should contact your CSDP or broker to ascertain the return address for it to process your voting instructions. It is recommended that, because of the requirement for votes in relation to shares dematerialised or immobilised in the context of STRATE to be collated through CSDPs and brokers and then reconciled through PLC Nominees (Pty) Limited, voting instructions by beneficial owners of such shares be submitted so as to arrive at least 72 hours before the time of the meeting. The message appointing or instructing a proxy making use of the CREST service must be transmitted so as to be received by Computershare ID R009 not later than 48 hours before the time fixed for the meeting. For this purpose, the time of receipt will be taken to be the time (as determined by the timestamp applied to the message by the CREST applications host) from which the issuer’s agent is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. No messages received through the CREST network after this time will be accepted. CREST members and, where applicable, their CREST sponsors or voting service providers should note that CRESTCo does not make available any special procedures in CREST for any particular messages. Normal system timings and limitations will therefore apply in relation to the input of CREST Proxy Instructions. It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal member or sponsored member or has appointed (a) voting service provider(s), to procure that his CREST sponsor or voting service provider(s) take(s)) such action as shall be necessary to ensure that a message is transmitted by means of the CREST system by any particular time. In this connection, CREST members and, where applicable, their CREST sponsors or voting service providers are referred, in particular, to those sections of the CREST Manual concerning practical limitations of the CREST system and timings. The Company may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5)(a) of the Uncertificated Securities Regulations 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. Notice of Annual General Meeting | 163 Mr Collins and Mr Sutcliffe retire by rotation in accordance with Articles 95 and 96 of the Company’s Articles of Association and will be seeking re-election at the meeting. Mr Levett retires at the Annual General Meeting and will not be seeking re-election. Biographical details of each of the directors who are standing for election or re-election accompany their photographs on pages 42 and 43 of this Report. Each of the retiring non-executive directors is considered by the Board to be independent in character and free from any business or other relationship which could interfere with the exercise of his objective, unfettered and independent judgement. The Nomination Committee of the Company has also conducted an assessment of the performance of each of the retiring candidates and has reviewed the skills, knowledge, experience and diversity represented on the Board. Having received the results of that assessment and review, the Board recommends to shareholders the election or re-election of each of the retiring directors referred to in Resolutions 3 (i) to (iv). The election or re-election of directors is considered a significant matter, and approval of the elections and re-elections will therefore be carried out by separate ordinary resolutions. Subject to their being elected, Mr Edey’s and Professor Nkuhlu’s appointments are expected to last for an initial term of three years from their respective dates of appointment (i.e. until 23 June 2007 for Mr Edey and 29 February 2008 for Professor Nkuhlu) and will then be considered for renewal. Mr Collins has been chosen to stand for re-election in recognition of his prospective change of role from senior independent non-executive director to Chairman at the end of the Annual General Meeting. Further details of his current and prospective terms are contained in the Remuneration Report on pages 44 to 52. Details of Mr Sutcliffe’s employment contract are also contained in the Remuneration Report. DOCUMENTS AVAILABLE FOR INSPECTION Copies of the directors’ service contracts, the register of directors’ interests and the contingent purchase contracts referred to in Resolutions 10 (i) to (iv) are available for inspection at the registered office of the Company in London; at Mutualpark, Jan Smuts Drive, Pinelands 7405, South Africa; at Management Suite, 93 Grayston Drive, Sandton 2196, 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, One Bunhill Row, London EC1Y 8YY during normal business hours on each business day from the date of this notice until the Annual General Meeting and in the Presentation Suite, 2nd Floor, Old Mutual Place, 2 Lambeth Hill, London EC4V 4GG from at least 15 minutes prior to the Annual General Meeting until the conclusion of that meeting. These documents will also all be available in the AGM section of the Company’s website, www.oldmutual.com, until the conclusion of that meeting. ANNUAL GENERAL MEETING – EXPLANATORY NOTES Resolution 2 – Dividend A final dividend of 3.5p 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 at the close of business on 31 March 2005 (or 30 March 2005 in the case of Zimbabwe), as determined by the Company). Shareholders on the branch registers (or, in the case of Namibia, the relevant section of the principal register) in those 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 1 April 2005. Resolutions 3 (i) to (iv) – Election and re-election of directors Mr Edey and Professor Nkuhlu, 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 election at the meeting. 164 | Notice of Annual General Meeting Notice of Annual General Meeting Continued Resolutions 4 and 5 – Auditors KPMG Audit Plc has indicated its willingness to continue in office and Resolution 4 proposes the re-appointment of that firm as the Company’s auditors. Resolution 5 proposes that the Audit Committee be authorised to determine the auditors’ remuneration. Resolution 6 – Approval of the Remuneration Report In accordance with the Directors’ Remuneration Report Regulations 2002, an advisory resolution will be proposed to approve the Remuneration Report on pages 44 to 52. A summary of that Report is set out in the Annual Review and Summary Financial Statements. The Remuneration Report includes details of the members of the Remuneration Committee and the Company’s policy on directors’ remuneration, and reports on the remuneration arrangements in place for the executive directors and non-executive directors. The full version of the Remuneration Report can also be accessed on the Company’s website, www.oldmutual.com. Resolution 6 is of an advisory nature only, and failure to pass the Resolution will therefore not have any legal consequences relating to existing arrangements. However, the Board will take into consideration the outcome of the vote when considering the Company’s remuneration policy. Resolutions 7 and 8 – 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 10% (rounded down to the nearest £1,000 nominal) of the current issued ordinary share capital at 28 February 2005 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 192,720,000 ordinary shares, being 5% (rounded down to the nearest £1,000 nominal) of the issued ordinary share capital of the Company at 28 February 2005. Resolutions 9 and 10 (i) to (iv) – Purchase of own shares Under Resolution 9, 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 (rounded down to the nearest 1,000 shares). In addition, it is seeking shareholders’ approval (under Resolutions 10 (i) to (iv)) to renew for a further year four contingent purchase contracts, 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 9) 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 10 (i) to (iv), into the applicable local currency at the then prevailing exchange rate). Any shares purchased under the authority granted by Resolution 9 or pursuant to any of the contingent purchase contracts to be approved under Resolutions 10 (i) to (iv) will either be cancelled or may be held as treasury shares (see the following paragraph). In accordance with the Companies (Acquisition of Own Shares) (Treasury Shares) Regulations 2003, companies may now retain any of their own shares that they have purchased as treasury stock with a view to possible re-issue at a future date, rather than cancelling them. If the Company were to purchase any of its own shares pursuant to the authorities sought in Resolutions 9 and 10 (i) to (iv), it would consider holding them as treasury stock, provided that the number did not at any one time exceed 10% of Old Mutual plc’s issued share capital. This would give the Company the ability to re-issue treasury shares quickly and cost-effectively, and would provide the Company with additional flexibility in the management of its capital base. The authorities under Resolutions 9 and 10 (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. Shareholder Information Shareholder Information | 165 LISTINGS AND SHARE ANALYSIS The Company’s shares are listed on the London, Malawi, Namibian and Zimbabwe Stock Exchanges and on the JSE Securities Exchange South Africa. The primary listing is on the London Stock Exchange and the other listings are all secondary listings. The ISIN number of the Company’s shares is GB0007389926. The high and low prices at which the Company’s shares are recorded as having traded on the London Stock Exchange and the JSE Securities Exchange South Africa during 2004 and 2003 were as follows: London Stock Exchange JSE Securities Exchange South Africa High 136.0p R15.30 2004 Low 90.25p R10.80 High 108p R13.30 2003 Low 70p R9.10 At 31 December 2004, the geographical analysis and shareholder profile of the Company’s share register were as follows: Register UK South Africa Malawi Namibia Zimbabwe Total Range 1-1,000 1,001-10,000 10,001-100,000 100,001-250,000 250,001 + Total Total shares % of whole 1,594,326,285 2,170,353,709 5,922,856 9,905,340 73,434,800 41.37 56.32 0.15 0.26 1.90 Number of holders 12,468 52,1231 5,2851 9,1741 33,5281 3,853,942,990 100 112,578 Total shares % of whole 25,699,630 31,383,702 29,162,801 32,164,026 3,735,532,831 0.67 0.81 0.76 0.83 96.93 Number of holders 88,148 21,252 2,105 353 720 3,853,942,990 100.00 112,578 Note: 1 The registered shareholdings on the South African branch register included PLC Nominees (Pty) Limited, which held a total of 1,603,352,606 shares, including 525,137,062 shares held for the Company’s sponsored nominee, Old Mutual (South Africa) Nominees (Pty) Limited, for the benefit of 527,793 underlying beneficial owners. The registered shareholdings on the Malawi branch register included Old Mutual (Blantyre) Nominees Limited, which held a total of 43,400 shares as nominee for 150 underlying beneficial owners. The registered shareholdings on the Namibian section of the principal register included Old Mutual (Namibia) Nominees (Pty) Limited, which held a total of 6,072,500 shares as nominee for 8,436 underlying beneficial owners. The registered shareholdings on the Zimbabwe branch register included Old Mutual Zimbabwe Nominees (Pvt) Limited, which held a total of 783,700 shares as nominee for 3,521 underlying beneficial owners. 166 | Shareholder Information Shareholder Information Continued REGISTRARS The Company’s share register is administered by Computershare Investor Services in conjunction with local representatives in various jurisdictions. The following are the contact details: UK Computershare Investor Services PLC The Pavilions, Bridgwater Road Bristol BS99 7NH (PO Box 82, Bristol BS99 7NH) Tel: +44 (0)870 702 0000 e-mail: web.queries@computershare.co.uk South Africa Computershare Investor Services 2004 (Pty) Ltd 70 Marshall Street, Johannesburg 2001 (PO Box 61051, Marshalltown 2107) Tel: +27 (0)11 370 5000 Malawi Trust Finance Limited Michiru House, Ground Floor Victoria Avenue, Blantyre (PO Box 1396, Blantyre) Tel: +265 (0)623 856 Namibia Transfer Secretaries (Pty) Limited Kaiserkrone Centre Shop No. 12, Windhoek (PO Box 2401, Windhoek) Tel: +264 (0)61 227 647 Zimbabwe Corpserve (Private) Limited 4th Floor, Intermarket Centre Corner 1st Street and Kwame Nkrumah Avenue, Harare (PO Box 2208, Harare) Tel: +263 (0)4 758393/750711 e-mail: corpserve@corpserve.co.zw The Company’s South African Registrars, Computershare Investor Services, administer a telephone and postal sales service for 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 principal register. If you hold your shares in this way and wish to sell your shares by telephone, Computershare may be contacted on 0861 60 9000 (a South African number) between 8.00 a.m. and 4.30 p.m. (local time) on Mondays to Fridays, excluding public holidays. A service fee is payable based on the value of the shares sold. UNCLAIMED SHARES The shares of policyholders who qualified for free shares when the Company demutualised, but who have not yet claimed their shares by confirming their personal details, are being kept on their behalf in Unclaimed Shares Trusts. In order to claim such shares, persons entitled should contact the Trust Administration and Confirmation Department on 0861 61 9061 (a South African number) or on +27 (0)21 509 8383 between 8.30 a.m. and 4.30 p.m. (South African time) on Mondays to Fridays, excluding public holidays. STRATE Since 21 January 2002, all transactions in the Company’s shares on the JSE Securities Exchange South Africa have been required to be settled electronically through STRATE. Share certificates have no longer been good for delivery in respect of transactions entered into on the JSE Securities Exchange South Africa since 14 January 2002. The Company wrote to certificated shareholders on its South African branch register in October 2001 to inform them of these changes and of the courses of action available to them. The Company also wrote separately to certificated shareholders on the Namibian section of its principal register in January 2002 to explain the impact of STRATE. These included participating in Issuer-Sponsored Nominee Programmes to dematerialise (in the case of South Africa) or immobilise (in the case of Namibia) their previously certificated shareholdings in the Company. Shareholders who have any enquiries about these programmes or about the effect of STRATE on their holding in the Company should contact Computershare Investor Services in Johannesburg on +27 (0)861 10 0933. CHECKING YOUR HOLDING ONLINE An online service is situated at the Investor Centre option within the website address www.computershare.com which gives shareholders access to their account to confirm registered details, dividend mandate instructions, 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 Investor Services by e-mail. Shareholder Information | 167 ELECTRONIC COMMUNICATIONS/ELECTRONIC PROXY APPOINTMENT If you would like to receive future communications from the Company by e-mail, please log on to our website, www.oldmutual.com, select the “Shareholder Information” section, click on “Electronic Communications” and then follow the instructions for registration of your details. In order to register, you will need your shareholder reference number, which can be found on the payment advice notice or tax voucher accompanying your last dividend payment or notification. The number is also printed on forms of proxy (but not voting instruction forms) for the Annual General Meeting. Before you register, you will be asked to agree to the Terms and Conditions for Electronic Communication with Shareholders. It is important that you read these Terms and Conditions carefully, as they set out the basis on which electronic communications will be sent to you. You should bear in mind that, in accessing documents electronically, you will incur the cost of online time. Any election to receive documents electronically will generally remain in force until you contact the Company’s Registrars (via the online address set out earlier in this section of the Report or otherwise) to terminate or change such election. The use of the electronic communications facility described above is entirely voluntary. If you wish to continue to receive communications from the Company by post, then you do not need to take any action. Electronic proxy appointment is available for this year’s Annual General Meeting. This enables proxy votes to be submitted electronically, as an alternative to filling out and posting a form of proxy. Further details are set out on the form of proxy. Electronic submission is not, however, available for voting instruction forms. FINANCIAL CALENDAR The Company’s financial calendar for the forthcoming year is as follows: Currency conversion date for the final dividend (Zimbabwe) Currency conversion date for the final dividend (Malawi, Namibia and South Africa) Announcement of currency equivalents of the final dividend Ex-dividend date in Zimbabwe Ex-dividend date in Malawi, Namibia and South Africa Ex-dividend date on the London Stock Exchange Record date for the final dividend Annual General Meeting Final dividend payment date Interim results Interim dividend payment date Final results for 2005 30 March 2005 31 March 2005 1 April 2005 opening of business on 15 April 2005 opening of business on 18 April 2005 opening of business on 20 April 2005 close of business on 22 April 2005 11 May 2005 31 May 2005 August 2005 30 November 2005 February 2006 Note: No dematerialisation or rematerialisation within STRATE and no transfers between registers may take place in the period 18 to 22 April 2005 (15 to 22 April 2005 in the case of Zimbabwe), both dates inclusive. RULE 144A ADRs The Company has a Rule 144A American Depositary Receipt (Rule 144A ADR) facility through The Bank of New York. Each Rule 144A ADR represents 10 ordinary shares in the Company. At 31 December 2004, 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, NY 10286, USA. WEBSITES Further information on the Company can be found at the following websites: www.oldmutual.com www.oldmutual.co.za 168 | Designed and produced by 35, London, UK Printed by Ince (Pty) Ltd, Western Cape, SA OLD MUTUAL PLC Registered in England and Wales No. 3591559 and as an external company in each of South Africa (No. 1999/004855/10), Malawi (No. 5282), Namibia (No. F/3591559) and Zimbabwe (No. E1/99) Registered Office: 5th Floor Old Mutual Place 2 Lambeth Hill London EC4V 4GG www.oldmutual.com 

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