ANNUAL REPORT
& ACCOUNTS 2014
CONTENTS
Strategic report
Financial review
and risk
Governance
Financials
Welcome
At a glance
Chairman’s message to shareholders
Chief Executive’s review
Our vision, mission, strategy and values
Business model
Our markets
Key performance indicators
Principal risks and uncertainties
Business review
Old Mutual Emerging Markets
Nedbank
Old Mutual Wealth
Institutional Asset Management
Financial disclosure supplement
Group Executive Committee
Financial review
Risk and capital management
Board of Directors
Corporate governance
Directors’ Remuneration Report
Group financial statements
Financial statements of the Company
Shareholder information
1
2
4
6
13
24
26
30
32
36
36
40
43
46
48
50
54
62
70
72
94
120
229
238
Find out more about Old Mutual
Corporate website
www.oldmutual.com
Annual Report
www.oldmutual.com/reportingcentre
Responsible Business Report
www.oldmutual.com/reportingcentre
How are we integrating responsible
business throughout the Annual Report?
This year, our Annual Report does not have
a standalone responsible business section.
Our work on responsible business can be
found throughout the report, from our KPIs
to our Business Unit reviews. This reflects our
Group Strategy, with responsible business
the fourth pillar.
Follow us on
For more information
www.twitter.com/oldmutual
www.facebook.com/oldmutual
www.youtube.com/oldmutual
Online:
www.oldmutual.com
WELCOME TO OUR
ANNUAL REPORT 2014
Our story
Our vision
Our mission
Our values
Our strategy
Old Mutual began in Cape Town in 1845
as South Africa’s first mutual life insurance
company, offering financial security in
uncertain times.
Today, 170 years on, we build on this heritage
of trust and accountability by meeting a broad
range of our retail and commercial customers’
financial services needs at each stage of
their lives.
We take a long view, aiming ultimately to
enable a positive future for all our stakeholders.
To be our customers’ most trusted partner –
passionate about helping them achieve their
lifetime financial goals
To enable a positive future for all
our stakeholders: our customers, employees,
communities, environment and shareholders
Accountability, Integrity, Respect, Pushing
Beyond Boundaries
Creating enterprise value through growing in
markets of greatest opportunity and where we
have a strong competitive positioning, while
becoming recognised as the financial services
leader in responsible business
Old Mutual plc
Annual Report and Accounts 2014
1
Strategic report GROUP AT A GLANCE
Our Group operates in over 30 countries.
Group
Highlights
■ Strong operating performance in all operations
■ Successful product innovation and roll-out in South Africa and
the UK
■ IPO of OM Asset Management on the New York Stock Exchange,
providing financial flexibility to grow
■ Significant capital commitments in Africa and in the UK:
— Ecobank Transnational Inc – 20% ownership for £305 million,
providing banking access across 36 African countries
— Old Mutual Finance – acquired further 25% stake for £63 million,
a major distribution channel for the mass foundation market
— Quilter Cheviot, a UK discretionary investment manager for
up to £585 million.
Group AOP by geography
(post-tax and NCI)
9%
South Africa
UK, Europe & cross-border
United States
Africa (excluding South
Africa)
Other markets
2014
628
195
94
48
21
+/-%1
(4%)
3%
16%
(14%)
11%
Position
Leading investment, savings, insurance and banking group.
Financial highlights
AOP (pre-tax and NCI)
FUM
www.oldmutual.com
2014
£1,605m
+/-%1
–
(+16% in constant currency)
£319.4bn
+9%
20%
64%
2%
5%
Customer numbers
AOP by business unit (pre-tax and NCI)
Employees by business unit
17.5m
£1,605m
61,583
Old Mutual Emerging Markets 55%
Nedbank 40%
Old Mutual Wealth 5%
Institutional Asset Management3
Old Mutual Emerging Markets 38%
Nedbank 48%
Old Mutual Wealth 14%
Institutional Asset Management 8%
Interest and central costs (8)%
Old Mutual Emerging Markets 42%
Nedbank 50%
Old Mutual Wealth 5%
Institutional Asset Management 2%
Other 1%
2
Old Mutual plc
Annual Report and Accounts 2014
We operate under the following
four business divisions.
Old Mutual Emerging Markets
We provide
Innovative long-term savings, protection, investment and
lending solutions.
Position
No.1 in total life sales in South Africa
Financial highlights
AOP
FUM
2014
£617m
£50.3bn
+/-%2
+23%
+8%
Highlights
■ Grew the South African Wealth offering significantly, adding new
products and services.
■ Acquired majority share in Old Mutual Finance to accelerate
distribution in core Mass Foundation market.
■ Launch of 2-IN-ONE, a new savings product allowing clients to save
for their long term goals while providing flexible access to funds.
■ Winner of the Deloitte Best Company to Work for Survey in 2014
(large company category).
www.oldmutual.co.za
p36
Nedbank
We provide
A wide range of wholesale and retail banking services and a growing
insurance, asset management and wealth offering.
Position
2014 South African Bank of the Year (The Banker, a member of the
FT Company)
Financial highlights
AOP
FUM
2014
£770m
£12.6bn
+/-%2
+14%
+11%
Highlights
■ Invested in Africa through acquisition of stake in Banco Único in
Mozambique and the exercise of right to subscribe for 20%
shareholding in Ecobank Transnational Inc, further strengthening our
strategic alliance in Africa.
■ Announced creation of an integrated corporate and investment bank
to enable better client service and unlock additional revenue growth.
■ Our early action to reduce our home and personal loan portfolios
has resulted in significantly improved impairments in 2014.
■ We have advanced R1.2 billlion to affordable housing developments
across South Africa and R113 million to enterprise development.
www.nedbank.co.za
p40
Old Mutual Wealth
We provide
Integrated wealth management products, services and advice,
combining asset management as well as saving and investment
solutions to affluent and high net worth clients in the UK, Europe and
selected international markets.
Position
2014 Global Group of the Year – Old Mutual Global Investors
(Investment Week Fund Manager of the Year)
Financial highlights4
AOP
FUM
2014
£199m
£82.5bn
+/-%1
+11%
+12%
Highlights
■ Accelerated strategy to build the UK’s leading vertically-integrated
retail investment business through the acquisition of Intrinsic, the UK’s
largest distribution network, and Quilter Cheviot, a strong
discretionary investment management business.
■ Strengthened Old Mutual Global Investors through the hire of UK
equity, Asian equity, pan-European small company and fixed income
absolute return asset management capabilities.
Institutional Asset Management
We provide
A diverse range of investment strategies and products, operating
as OM Asset Management in the United States, and delivered via
a multi-boutique model to institutional investors around the world.
Position
Leading Institutional Asset Manager
Financial highlights
AOP
FUM
2014
£131m
£174.0bn
+/-%2
+24%
+5%
Highlights
■ Successful partial IPO of Old Mutual Asset Management in the
United States.
■ Strong sales into non-US equity and alternatives during the year,
improving asset mix and margin.
■ The Global Distribution initiative generated $6 billion of assets
(funded in 2014). Global Distribution is an important channel to
generate future positive cash flows.
www.omam.com
■ Completed sale of non-core European businesses in Poland, Austria,
Germany, Liechtenstein, France and Luxembourg.
p46
www.oldmutualwealth.co.uk
p43
1 Reported currency movement against prior year
Local currency movement against prior year
2
Institutional clients
3
4 Old Mutual Wealth financial highlights exclude European businesses sold during 2014
Old Mutual plc
Annual Report and Accounts 2014
3
Strategic report CHAIRMAN’S MESSAGE
TO SHAREHOLDERS
“ I am pleased to report on the steady
transformation of the Old Mutual Group.
Our vision is to be our customers’ most
trusted partner in financial services, taking
firm steps as a responsible business leader
in each of our markets, while being clear
in our strategic choices.”
Patrick O’Sullivan
Chairman
4
Old Mutual plc
Annual Report and Accounts 2014
Overview of the year
The Group delivered excellent underlying
results despite volatile market conditions and
further currency depreciation in our major
market. We also made significant progress
towards our strategic targets. Among the
year’s highlights were the launch of OM
Asset Management plc, our US institutional
asset manager, on the New York Stock
Exchange and Nedbank’s acquisition of
a 20% stake in Ecobank Transnational Inc.,
with its wide footprint of businesses in Nigeria
and other sub-Saharan African countries.
Old Mutual Wealth acquired independent
financial adviser group Intrinsic Financial
Services and agreed the acquisition of UK
wealth adviser Quilter Cheviot, and we
disposed of several Skandia legacy businesses
in continental Europe. These are all important
steps towards our vision of securing strong,
value-adding and differentiated positions in
the chosen markets in which we have
competitive advantage and the opportunity
to thrive.
Our adjusted operating earnings per share
were 17.9 pence, 3% lower than in 2013 –
but up by 13% on a constant currency basis.
In South Africa, the rand’s average exchange
rate against sterling fell by 18% over the year,
reducing our reported earnings in sterling.
The strengthening of the Group balance
sheet over the past few years provides us
with an appropriate foundation on which
to transition during 2015 to the Solvency II
regime, effective from January 2016.
Elevating good governance
The Board embraces good governance as
a driver of culture and outperformance in
the long term. I welcome the focus that our
businesses are placing on treating customers
fairly, ethical values, strong capital and risk
management. People in our businesses also
appreciate this, as evidenced by our culture
survey results and our ‘top employer’ ratings
in many markets.
Board developments
The main Board changes during 2014
have been in executive roles: Ingrid Johnson
succeeded Philip Broadley as Group Finance
Director and Paul Hanratty joined as Chief
Operating Officer. Reuel Khoza will be retiring
as a non-executive director at our AGM in
May 2015, and also stepping down as
Chairman of Nedbank. We are very grateful
for his contribution to the Board and to
Nedbank over the past nine years. His
understanding of our markets and his own
“ As a responsible business
with a view to the long term,
we focus on areas where
we can make a material
impact and create
meaningful change.”
finely developed leadership ideas have been
of great benefit to the Group. He will be
replaced on the Old Mutual Board by Vassi
Naidoo, his successor as Nedbank Chairman.
Diversity is one of our strengths, and we were
pleased to be recognised recently for having
one of the FTSE 100’s most improved Board
gender profiles, with female membership
now at 38%.
Responsible business
We recognise that we have a responsibility
and opportunity to give customers easier access
to appropriate financial services products that
deliver real value, financial security and peace
of mind. As a responsible business with a view
to the long term, we focus on areas where
we can make a material impact and create
meaningful change. In this way we deliver
better service to our customers, support the
communities in which we operate, and play
an important role in helping to create a
regenerative economic cycle. We need to
upgrade our efforts in this area continually,
and I am delighted that Gail Klintworth has
joined our senior executive management team
as Group Customer Director. Her previous
experience with Unilever will ensure that
Old Mutual takes major strides with its social
responsibilities in the years ahead. Our
Responsible Business Report gives further
details of our targets and progress in this area.
Conclusion
As shareholders will appreciate, the
Old Mutual Group has been radically
restructured over the past several years.
When our recent acquisitions are integrated,
it will be evident that we have created
significant medium-term growth opportunities.
Our challenge now is to deliver. As always, we
are entirely dependent on our employees to
win in the markets we serve. On behalf of my
Board colleagues, I thank them for everything
they do and look forward to delivering on
our commitments.
Patrick O’Sullivan
Chairman
Gail Klintworth
Group Customer Director
We are clear about the role we play in society,
and our responsibility to help drive positive
change. Our purpose is to enable our
customers to thrive by helping them achieve
their lifetime financial goals, while we invest
their funds to secure a positive future for them,
their families, their communities and the world
at large.
Old Mutual’s focus on responsible business is
nearly 170 years old. It is now being refreshed
through many positive initiatives across our
five pillars of being responsible to customers,
employees, communities, the environment
and in our investments. But we have more to
do. We will be raising our ambitions, especially
in making a difference through our unique
contribution of enabling financial wellbeing
and driving responsible investment. We look
forward to partnering with our many
stakeholders on this journey.
Old Mutual plc
Annual Report and Accounts 2014
5
Strategic report CHIEF EXECUTIVE’S REVIEW
This year has seen further progress
in the transformation of Old Mutual.
“ This has been a good year for Old Mutual
with strong underlying financial performance,
significant strategic developments and
continued operational delivery.”
Julian Roberts
Group Chief Executive
A strong financial
performance
This has been a good year for Old Mutual
with strong underlying financial performance,
significant strategic developments and
continued operational delivery. Net client
cash flows (NCCF) for the Group, excluding
our non-US affiliate, were £11.2 billion. Gross
sales of £26.3 billion were up 11% in constant
currency, with funds under management
(FUM) up 6% to £319.4 billion also in constant
currency. Profits grew strongly in the year up
16% in constant currency to £1.6 billion, flat in
reported currency. Group return on equity
(RoE) at 13.3% was within our target range
of 12-15%.
Equity markets performed strongly in South
Africa and the United States with the JSE All
Share up 18% on average and the Russell
1000 Value up 16% on average in the year.
Equity market performance was more muted
in the UK, with the average level of the FTSE
100 up 3%. We saw a further weakening of the
rand with the average rate declining by 18%
against sterling in the period while the closing
year-end rand exchange rate declined only
3%. This has had a negative impact on our
sterling reported results.
In mixed macro-
economic conditions
Macro-economic conditions in South Africa
remained relatively weak with GDP growing
by 1.5%, mainly due to labour disputes in the
mining and manufacturing sectors. Power
shortages are expected to continue in 2015
Group highlights
£11.2 bn
Net client cash flows (NCCF) for the
Group excluding our non-US affiliate
£26.3 bn
Gross sales of £26.3 bn were up
11% in constant currency
16%+
Profits grew strongly in the year,
up 16% in constant currency
13.3%
Group return on equity (RoE) at 13.3%
was within our target range of 12-15%
6
Old Mutual plc
Annual Report and Accounts 2014
with the consequence that GDP is forecasted
to grow moderately by 2.1%. However, a
prolonged period of low oil prices could
benefit the South African consumer as a
significant proportion of disposable income at
the lower end of the socio-economic scale is
spent on transport and food costs, both of
which should reduce. Sub-Saharan Africa
continued to experience strong growth of
4.8%, with growth predicted to increase
marginally in the region to 4.9% in 2015.
In the UK, the economy grew by 2.6% in 2014,
the fastest since 2007, and similar levels of
growth are expected in 2015. Inflation fell
during the year and unemployment continued
to fall. The US experienced GDP growth of
2.4% which is forecast to accelerate to 3.6%
in 2015.
Strategic overview
Strategic delivery in our
chosen markets
This year has seen further progress in the
transformation of Old Mutual. We have
reshaped the business and in time this should
lead to a different earnings profile for the
Group. We have a simple, focused strategy
based on growing in our chosen markets
where we have significant competitive
advantage: building an African financial
services champion; building the leading retail
investment business in the UK, and growing
our multi-boutique asset management
business in the US.
The final substantive part of our streamlining,
simplification and de-risking programme,
embarked on in 2010, was completed with the
minority Initial Public Offering (IPO) of OM
Asset Management (OMAM) on the New York
Stock Exchange on 9 October 2014. We also
disposed of a number of non-core European
businesses in the year: the Skandia businesses
in Austria, Germany, Poland and Liechtenstein,
with France and Luxembourg sold on
2 February 2015.
We have invested in the Group via acquisitions
and operational improvements to maintain
and enhance our performance. Significant
investments include: Quilter Cheviot for up to
£585 million in February 2015, including £42
million in new equity, to provide Old Mutual
Wealth with a high quality discretionary
investment management capability, which
was financed via the disposal of non-core
European assets and from the proceeds of
OMAM’s IPO; in Africa, we announced our
intention to acquire a majority stake in UAP
Holdings (UAP), an East African insurance
business for £162 million; we purchased an
additional 25% of Old Mutual Finance for
£63 million; and Nedbank bought a 20%
stake in Ecobank Transnational Incorporated
(ETI) for £305 million. Operationally, we are
investing in new platform technology in the
UK which will transform our customers’
experience, boost product capability and
lower our cost base from 2017 onwards.
Our focus now is on integrating the acquisitions,
delivering operational improvements and
creating value from these investments.
Following the completion of the UAP transaction
in 2015, we will have deployed R3.6 billion of
the R5 billion we identified to fund acquisitions.
We are investing in Africa for the medium-to
long-term and, while quality insurance assets
in Africa have become increasingly scarce, we
have maintained a disciplined approach to
acquisitions, only deploying capital in line with
our allocation criteria. Additionally, we ensure
that any business we acquire has a strong
cultural fit with Old Mutual.
We are building an African
financial services champion
At the heart of our strategy to build an African
financial services champion is our strong
southern African franchise. We are making
good progress in aligning Old Mutual,
Nedbank and Mutual & Federal (M&F) to
become the leading financial services group
in southern Africa. We are seeing more
cross-selling between our businesses, with,
for example, our South African Retail Affluent
and Mass Foundation businesses selling more
iWYZE products. We have previously stated
that we were targeting pre-tax AOP revenue,
cost and capital synergies of R1 billion by
the end of 2017 and we are making good
progress having identified more than 50%
of the synergies. We are making a significant
investment in our technology in South Africa
and the rest of Africa to improve the
experience for customers and intermediaries,
to provide simpler and more efficient back
office processes, support growth in the rest of
Africa and integrate platforms across our life,
property & casualty and banking businesses.
We have addressed areas which we needed
improving: for example, new product launches
have contributed to an increase in single
premium sales in our Retail Affluent business
by 29%; Old Mutual Investment Group
(OMIG) continues to deliver good investment
performance in our key equity funds, including
Old Mutual Investors Fund and the Old Mutual
Active Quant Fund, and is showing improving
performance in our key multi asset class fund,
the Old Mutual Balanced Fund; and at M&F
we are continuing to see the benefits of price
remediation and claims savings initiatives
proving particularly successful.
The regulatory environment in South Africa
is expected to undergo significant
transformation in the medium term as changes
such as the proposed Retail Distribution
Review (RDR), Solvency Assessment and
Management, Pensions Reform, Treating
Customers Fairly and Twin Peaks regulatory
reform are implemented. We continue to
engage constructively with the various
regulatory authorities in this regard.
Our offering in East Africa, where we are
looking to buy controlling stakes in financial
services businesses with both retail and
wholesale capabilities, was significantly
strengthened when we agreed to buy a
majority stake of 60.7% in UAP Holdings,
subject to various regulatory approvals. UAP
has a strong position in East and Central
Africa and a product offering that is highly
complementary to our existing businesses. It is
a sizeable business and one that provides a
platform for us to expand in the fast growing
East African region. In Kenya, UAP has the
third largest property & casualty (P&C) market
share; the second largest health insurance
business; a substantial property investment
portfolio and a fast growing life assurance
business, which, when combined with our
existing Kenyan life business, will be the fourth
largest in the country. It has well established
and diverse distribution networks. In Uganda,
it has the second largest P&C and health
insurance businesses, and the third largest life
business. It also has small P&C businesses in
Rwanda, Tanzania and South Sudan, and an
insurance brokerage in the Democratic
Republic of Congo.
We expect the acquisition to complete in the
first half of 2015, and following completion we
will look to combine our Kenyan businesses to
have one integrated financial services
provider. Our focus initially will be on revenue
generating initiatives. For example, we see
excellent opportunities to offer P&C products
utilising UAP expertise to Faulu’s large retail
client base, which is broadly similar to our
Mass Foundation Cluster (MFC) in South Africa.
In West Africa our life and P&C businesses
have been growing organically and will look
to grow further via partnerships and distribution
deals. We have also rolled out new products
in Nigeria, leveraging our South African
expertise and tailored to local needs and
culture, including a retail risk product and
savings product. In Ghana, we launched a
Old Mutual plc
Annual Report and Accounts 2014
7
Strategic report CHIEF EXECUTIVE’S REVIEW
continued
“ This year has seen
further progress in the
transformation of
Old Mutual. We have
reshaped the business and
in time this should lead to
a different earnings profile
for the Group.”
8
Old Mutual plc
Annual Report and Accounts 2014
funeral policy in June and a credit life product
sold via the Ecobank branches in July. We have
also added a further 226 advisers in Ghana,
bringing the total to 327.
Nedbank exercised its right to subscribe for
a 20% stake in ETI for a sum of £305 million.
The transaction strengthens the already strong
strategic alliance between the two banks,
which was established in 2008, to provide
their respective clients a seamless one bank
experience across 39 countries and comprising
more than 2,000 branches. Nedbank has
appointed a Director to the Board of ETI
and a programme of collaboration has been
put in place to realise synergies and drive
cross-border collaboration between the
two organisations.
Building the UK’s best retail
investment business
Two years ago, we made the decision to build
a modern, capital-light, advice-led vertically-
integrated business based on our core UK
operation. We wanted leading customer
offerings in each layer of the wealth
management value chain: advice and
distribution; platform wraps; wealth solutions;
and asset management. We took this decision
due to the fundamental shift in UK retail
financial services.
Over the past several years, a number of
factors have combined to cause a shift from
traditional life assurance to a new more
customer-focused, capital-light model. These
include structural factors such as the introduction
of significant new regulatory frameworks, for
example Solvency II, RDR and, more recently,
the liberalisation of the UK pensions regime.
The introduction of quantitative easing and the
resulting sustained period of low interest rates
has been significant as the long-term liability
for guarantee products has been harder to
match, leading to these products disappearing
and investment risk being pushed back on
to customers.
These factors have had several consequences.
New regulatory regimes have led to the
development of capital-efficient products as
old style products are proving too capital
intensive. Pricing transparency has caused
margin compression, and hence the need for
businesses to participate in more of the value
chain. Following the introduction of new rules
on the provision of financial advice, the high
street banks, historically providers of this
service have largely taken the decision to exit
and therefore financial adviser networks have
become more popular – particularly given the
significant changes in retirement provisions.
RDR is encouraging financial advisers to
switch from independent to restricted advice,
so the need for investment providers to have
their own distribution network is becoming
increasingly important. Additionally, financial
advisers are focusing on providing financial
planning and pensions advice and outsourcing
investment management to discretionary
investment managers.
Customer demands have also forced changes
on the sector. Products need to be designed
to meet specific outcomes that customers
desire in their retirement – retirements that
are becoming increasingly long as longevity
increases. Customers now expect their
financial services provider to be digitally
accessible necessitating significant investment
in IT overhauls.
These changes to the industry provide a
compelling opportunity for businesses which
have the right customer offering, which we
believe must include advice given changing
regulations and the complexity of the
current landscape.
In asset management, we have scaled up
Old Mutual Global Investors (OMGI) by hiring
expertise in certain asset classes, with the
consequence of FUM reaching £21.0 billion
at the end of 2014, up from £12.6 billion when
OMGI was created in August 2012. During the
year we added capabilities in Asian Equities,
Fixed Income Absolute Return and European
Equities. We will continue to add capabilities
selectively. Additionally, our purchase of
Quilter Cheviot provides Old Mutual with a
leading position in discretionary investment
management, with 165 investment managers
directly managing customers’ money through
a bespoke advisory service.
We have introduced a number of wealth
solutions that can help our customers in the
accumulation phase of their life, as well as in
the decumulation phase. Managed portfolio
services (MPS), which allow financial advisers
to outsource the investment management
function, are proving particularly popular.
For example, WealthSelect, which provides
financial advisers with access to the most
comprehensive range of portfolio
management, solutions in the market, with a
free to the client MPS, has attracted around
£700 million of net new money in 2014.
We already have one of the leading wrap
platforms with £30.8 billion of FUM and a
wide selection of products available. Last year,
we took the decision to transform our platform
into one of the most flexible in the market, with
added functionality and product offering,
through an outsourcing agreement with IFDS.
The transformation will take time, cost and effort
but is critical to the success of the business.
On 1 July 2014 we bought Intrinsic, one of the
UK’s largest financial adviser networks with
over 3,000 advisers. The business is now
integrated in the Old Mutual Wealth model
and we are well placed to capitalise on the
RDR-driven trend towards restricted advisers
and financial planners. The UK Platform,
personal protection products and elements
of OMGI’s fund range have been added to
Intrinsic’s product panel for its 930 restricted
advisers, up from 699 at the end of 2013.
Quilter Cheviot also increases our distribution
reach, through financial advisers, professional
service firms and direct sales teams.
We believe that the liberalisation of the UK
pensions market will result in an increase in
the demand for advice as those approaching
retirement explore their options. When the
liberalised pension’s regime comes into force
from 6 April 2015, Old Mutual Wealth will be
able to offer a full suite of flexible options.
Through our Collective Retirement Account
(CRA) we already offer both capped and
flexible drawdown as well as investment
solutions for decumulation, and from April
we will offer all CRA customers flexible
access to their pensions savings.
We are pleased with the significant progress
that Old Mutual Wealth is making in its
transition to a vertically integrated business
and we are seeing evidence that the model
is working: more money is flowing into the
Platform from our adviser network and
moremoney is flowing from the Platform into
OMGI. We have set a target for the existing
Old Mutual Wealth businesses to achieve
£270 million of AOP by the end of 2015,
not including Quilter Cheviot, and we are
confident that we will achieve this.
Continuing to grow and improve
OM Asset Management
In 2010, we said that we were exploring a
minority IPO of our US asset management
business, with the timing determined by
our progress against our goals of growth,
improved margins and investment
performance, as well as by the conditions
of the equity markets.
OMAM has gone through a significant
transformation since that period to ensure it
met our criteria for listing. We brought in a
new management team to oversee the
transformation of the business. We took the
decision to focus on long-term, institutionally
driven, active asset management to generate
alpha for our clients, and we disposed of those
affiliates that were loss-making or did not
generate the returns we expect. We decided
to build a global distribution capability and
in 2014, this team raised $5.5 billion in total
assets funded in OMAM affiliates, and
non-US based clients now account for 20%
of FUM.
APE sales in MFC were up 11% on the prior
year, with a particularly strong performance in
the second half, due to the very successful
launch of the 2-IN-ONE savings product and
improved adviser productivity. We launched
2-IN-ONE in August 2014 in response to the
specific need of our customers to access a
portion of their savings in a way that would not
attract surrender charges, as well as being an
affordable alternative to short term loans.
Since launch, sales have totalled R630 million.
The MFC business has continued to grow, with
255,000 net new customers added in 2014 and
now has more than 2.8 million customers, with
an adviser force of 4,142.
As a result of health care intervention in
South Africa, we have seen a significant
improvement in the life expectancy of people
living with HIV. While this is an issue that
affects the whole of society, we have taken
the decision to release some of the reserves
we had previously set aside due to mortality
rates, and will be using a proportion of these
provisions to increase the level of cover for
our existing MFC customers. Additionally,
given the improved mortality experience in
South Africa, we will now be able to offer
customers products which are more
affordable and provide better value.
Gross sales in Corporate were up 46% to
R36.8 billion, with profits up 7% to R1.3 billion.
Corporate achieved strong recurring
premium growth in the year up 105%,
mainly due to strong Superfund and group
assurance sales. Corporate has made
excellent progress with transforming the
administration business following the launch
of the new Superfund umbrella.
OMIG delivered modest 2% profit growth,
mainly due to increased completion fees
following several successful deployments in
the Alternatives Boutiques, although offset
by lower OMSFIN profits. Low-margin
institutional outflows from listed asset
management boutiques led to an outflow of
R4.6 billion against R5.7 billion of net inflows
in the prior year.
On 9 October 2014, we announced the
IPO of 22,000,000 OMAM shares at $14
a share. The underwriters also exercised an
overallotment option on 2,231,375 OMAM
shares. As a consequence, Old Mutual plc
now owns 94,555,859 shares, or 78.8%, of
the issued share capital of OMAM. The gross
proceeds for the Group from the IPO process,
including the pre-IPO dividend, totalled
£317 million.
The purpose of the IPO was to enhance
OMAM’s financial and operating flexibility to
deploy capital to continue to grow, develop
further its multi-boutique asset management
business and provide the Group with
enhanced financial flexibility. We will remain
a supportive shareholder in this process.
Business review
The following business commentary refers to
the locally reported currency.
Old Mutual Emerging Markets
Old Mutual Emerging Markets had a very
strong year with AOP up 23% to R11.0 billion.
Gross sales were up 12% to R185 billion,
although NCCF was down 14% to R21.3 billion
due to a number of large institutional outflows.
FUM was up 8% to R905 billion.
In South Africa, gross sales were up 14% driven
primarily by product innovation. In our Retail
Affluent business, Annual Premium Equivalent
(APE) sales were 9% up on the previous year, as
single premium sales saw growth of 29%,
bolstered by strong XtraMAX sales. Regular
premium sales were down 6% as the tough
economic environment led to lower XtraMAX
savings and Greenlight sales. However
non-covered sales were up 16% due to higher
unit trust sales and strong flows into Wealth.
Old Mutual Wealth’s growth continued with net
inflows of R8.9 billion in the year.
Old Mutual plc
Annual Report and Accounts 2014
9
Strategic report CHIEF EXECUTIVE’S REVIEW
continued
Old Mutual Finance (OMF) grew loans by 20%
over the prior year to R9.9 billion. Its collections
ratio was 91.2% and together with loan growth
led to credit loss ratios reducing to 12.4% from
14%. Sales through the OMF branch footprint
now account for more than a quarter of MFC
life APE sales.
The combined clusters have developed
competitive client value propositions and
strong market positioning as reflected in
headline earnings growth of 19.3% and an
increased ROE of 19.7% (2013: 18.7%) against
a higher average total capital allocated at
R51.4 billion (2013: R45.5 billion).
P&C in South Africa continued to show
progress in its turnaround with an underwriting
margin of 0.9%, against (5.6)% last year,
and an underwriting profit of R81 million
compared to an underwriting loss of R469
million following price remediation and
improved claims management. Gross written
premium of R10.8 billion, up 2%, reflects the
active management of the quality of the book,
albeit at a cost in terms of market share. The
claims ratio of 69.5% is significantly better than
the prior year of 76.3%. We are exploring
direct insurance opportunities that the recent
acquisition in Kenya presents. In this regard
we have entered into an agreement with three
industry experts to consider the strategic
direction, innovation and centres of excellence
that would be necessary to facilitate the
successful implementation of this initiative.
Profits in Rest of Africa were up 5% as we
invested in distribution, IT, brand building
and improved our governance infrastructure.
On a like-for-like basis, APE sales were up 17%
on the previous year as a result of increased
adviser numbers in Kenya and the inclusion of
Ghana for the first time. Non-covered sales
were up 16% due to strong unit trust flows in
Zimbabwe and large sales to the National
Social Security Fund in Kenya.
Asia and Latin America profits grew by
39% due to a strong performance by
Colombia, improved results in China,
significant growth in AIVA and favourable
exchange rate movements.
Nedbank
Nedbank produced a strong set of results,
with headline earnings up 14% to R9.9 billion,
driven by good net interest income growth
and a lower credit loss ratio, despite
strengthening central provisioning and
increasing coverage levels. Net interest
income (NII) grew by 8% due to an increase
in average interest-earning banking assets.
Non-interest revenue (NIR) was up 5%,
with an improved second half performance.
Impairments were down 19% and the credit
loss ratio continued to improve with all clusters
now within or below their target levels.
Nedbank Capital grew headline earnings by
23.3%, with this strong performance driven
by good NII growth and improvements
in impairments. Lower NIR growth reflects
the high 2013 base in trading income
related to renewable-energy transactions.
Pre-provisioning operating profit growth was
12.0%. Headline earnings growth of 15.8%
in Nedbank Corporate was underpinned by
strong NII and NIR growth. The increase in NII
was supported by commercial mortgage and
corporate lending activities and endowment
benefits. The growth in NIR was from core
transactional income and private-equity
investments. Low levels of impairments
continue to reflect good risk management
across the portfolio.
Nedbank Business Banking’s strong increase
of 17.8% in headline earnings and improving
ROE follow the normalisation of impairments
from a large single-client default in 2013 and
solid NII growth from increased product
volumes and higher endowment earnings.
Lower NIR reflects the impact of maintaining
transactional fees at 2013 levels as well as
the proactive reduction of transactional
banking fees in alignment with market
practices. Pre-provisioning operating profit
was up 5.8%. Headline earnings in Nedbank
Retail grew 15.7% and benefited from an
improvement in impairments in personal loans
and home loans. NIR was influenced by the
strategic decision to slow down personal loans
and maintain transactional fees at 2013 levels.
Consequently, pre-provisioning operating
profit decreased by 4.1%.
Nedbank Wealth’s headline earnings growth
of 15.8% was off a high 2013 base. This was
largely due to record earnings growth in
Wealth Management and continued
momentum in Asset Management, partially
offset by relatively slower growth from
Insurance. The performance in Insurance
resulted from lower levels of sales of
traditional insurance products, including
homeowner’s cover and personal-loan-related
insurance products. The Rest of Africa Division,
previously included in the Centre, reported
earnings of R357 million (2013: R173 million),
showing strong growth, including associate
income from ETI as estimated by Nedbank
on a prudent basis effective from the fourth
quarter, as ETI reports later than Nedbank.
The division also reported stronger
performance from all five of its regional
subsidiaries.
Old Mutual Wealth
Old Mutual Wealth produced a good
performance with profits up 5% to
£227 million, from £217 million in 2013, with
strong performance from OMGI and the UK
Platform offset by the reduction in AOP from
the divested European businesses and lower
profits in our International business.
Excluding the divested European businesses,
profits were up 11%. Gross sales were up 11%
on the prior year at £16.0 billion, with NCCF of
£3.7 billion 61% higher than 2013, which led to
an increase in FUM to £82.5 billion.
In the UK, NCCF at OMGI of £2.5 billion
was significantly higher than in the prior year
(2013: £0.7 billion) with strong performance
across most funds. The Global Equity Absolute
Return fund was our top selling fund with net
flows of £1.4 billion, and the UK Alpha fund
attracted more than £0.8 billion of net flows.
Our adviser network Intrinsic contributed
£179 million of NCCF from July through to
December via Cirilium. OMGI’s FUM at the
end of the year was £21.0 billion, up 31%,
including £2.0 billion of FUM from Cirilium.
Gross flows into OMGI from the UK Platform
were £1.8 billion in the year (2013: £0.8 billion),
OMGI now manages 12% of the FUM on the
Platform, up from 8.5% in 2013. OMGI’s
success was recognised at the 2014 Investment
Week Fund Manager of the Year Awards
where it was awarded Global Group of
the Year.
The UK Platform saw gross sales of £5.1 billion
(2013: £4.7 billion) although NCCF was lower
than the prior year at £2.0 billion due to
increased re-registrations and one IFA moving
£153 million to their own discretionary fund
management solution. FUM on the Platform
now stands at £30.8 billion, up 13% since the
start of the year, which, along with flat costs
led to an operating profit of £19 million
(2013: £13 million).
Platform sales through Intrinsic restricted
advisers totalled £178 million, with £68 million
of NCCF. Sales are on an upward trend, with
£43 million in December against an average
of £27 million per month in the period since
acquisition. This represented 10% of Platform
sales in December, with more than 50% going
into the CRA.
10 Old Mutual plc
Annual Report and Accounts 2014
Non-US affiliate
Underperformance in 2013 and some
senior personnel turnover resulted in net
outflows during the year of £6.3 billion.
FUM now stands at £32.3 billion. Investment
performance in 2014 has improved
meaningfully relative to 2013, with 81% of
portfolios beating their benchmarks on an
asset weighted basis compared to 26% in
2013. The longer term track records also
remain strong across the product line for
three year, five year and longer periods.
The business has now completed a re-
organisation to provide stable management
and investment teams going forward and
future succession. It is confident that it now has
the right platform, products and performance
going forward, although a risk remains for
further outflows due to the delayed impact of
the legacy issues on certain client mandates.
For more information on our businesses, see
p36
A focus on financial
wellbeing and
responsible investment
We have committed a strategic priority to
be recognised as a leader in responsible
business in each of the markets in which we
operate, and we have appointed Gail
Klintworth as Group Customer Director to
run this process. We have many excellent
examples of our progress as a responsible
business, across the five pillars of being
responsible to our customers, communities,
employees, the environment and in our
investments, built on a strong foundation of
ethics and good governance. We are now
seeking to raise our ambition in the two
areas where we believe we can have the
most significant impact: financial wellbeing
and responsible investing and we will be
working with our partners, including the
Cambridge Institute for Sustainability
Leadership, to drive impactful action
through each of our business units.
International’s profits were disappointing at
£37 million, down 24% on the previous year,
due to foreign exchange movements restricting
profits and other one-off costs. Gross sales
were £1.8 billion, 4% lower than the prior year,
with sales in the UK and South Africa higher
than in the previous year but with lower sales
in all other regions. All regions, except the UK,
contributed to positive NCCF of £0.3 billion
and FUM of £15.6 billion.
The transaction to acquire Quilter Cheviot
completed on 25 February 2015 and we can
now start progressing with the integration of
the business into Old Mutual Wealth. Quilter
Cheviot performed in line with our expectations,
with NCCF of £1.1 billion leading to FUM of
£16.7 billion.
We also completed the rebrand from Skandia
to Old Mutual Wealth in September 2014.
The initial response to the rebrand has been
highly promising with consumer awareness
of Old Mutual Wealth at 30% and at 98%
amongst the financial adviser network.
Institutional Asset Management
OMAM
OMAM had a very good year with profits
up 32% to $211 million (2013: $160 million)
due to increases in management fees and
some performance fees. AOP margin
increased to 40% before affiliate key
employee distributions. NCCF was very strong
at $9.5 billion, with gross inflows of $32.0
billion driven by global equities, emerging
markets equities, international equities, US
dividend focus equities, US mid cap value
equities and real estate assets.
Our Global Distribution initiative performed
well, raising $5.5 billion in total assets funded
in OMAM affiliates, as we continue to expand
our non-US client base, which currently
account for 20% of FUM.
Old Mutual plc
Annual Report and Accounts 2014
11
Strategic report CHIEF EXECUTIVE’S REVIEW
continued
“ Our focus now is
on integrating
the acquisitions,
delivering operational
improvements and
creating value from
these investments.”
12 Old Mutual plc
Annual Report and Accounts 2014
Board changes
We were pleased to welcome Ingrid Johnson
and Paul Hanratty to the Board as Executive
Directors. Ingrid Johnson was appointed
Group Finance Director on 1 July 2014,
succeeding Philip Broadley who stepped
down from the Board on 31 August 2014.
Paul Hanratty was appointed Chief Operating
Officer and joined the Board on 1 July 2014.
We are also pleased to announce that on
1 May 2015 Vassi Naidoo will join our Board
as a non-executive director as well as the
boards of our banking subsidiaries, Nedbank
Group Limited and Nedbank Limited, as their
prospective new Chairman. He will succeed
Dr Reuel Khoza who has now served nearly
nine years on the Old Mutual Board and will
not be seeking re-election at this year’s Annual
General Meeting.
Outlook
In our main market of South Africa, economic
conditions are likely to remain challenging in
the short term particularly as the continuing
power shortages are expected to constrain
growth. However, a prolonged period of low
oil prices will keep inflation down which is
positive for the consumer. Our businesses in
South Africa are in good shape and we are
confident about their resilience in 2015, despite
these headwinds.
In the UK, we are well positioned to benefit
from investment from customers looking to
take advantage of the new pension
withdrawal rules that come into effect in April.
We expect demand for advice to increase as a
consequence of these changes.
In the US, our focus will remain on pursuing
growth initiatives, including further penetration
of non-US markets and through partnerships
with scale asset management boutiques and
building its business following the successful IPO.
We have invested significantly in our chosen
markets to grow profits over the long term
while maintaining appropriate levels of
capital and leverage. Our focus for 2015 is
on integrating the acquisitions, delivering
operational improvements and creating
value from these investments.
Black economic
empowerment
Old Mutual, through Old Mutual South Africa
(OMSA) and M&F, announced its Broad-
Based Black Economic Empowerment (BBBEE)
transaction in 2005. This was aligned with and
implemented in collaboration with Nedbank
(see announcement by Nedbank on 23
February 2015). All the resultant schemes had
the objective of creating sustainable value and
mutual benefits for the business and a broad
base of diverse partners and beneficiaries,
including strategic Black Business Partners
(BBPs), clients and community interest groups
affiliated with Old Mutual. The schemes were
also expanded to include employees at all
levels within Old Mutual.
The OMSA BBBEE (except for employee
schemes) transaction unwinds on 1 May 2015,
with the various schemes settling any
remaining debt due to Old Mutual under the
BBBEE transaction. It is envisaged that the
remaining Old Mutual plc shares in the
employee schemes will continue to be used to
attract and retain talented Black management
into Old Mutual, while the dividends received
on the remaining Old Mutual plc shares in the
client and community schemes will continue to
be distributed to beneficiaries. The BBPs will
take delivery of the remaining Old Mutual plc
shares in their schemes after 1 May 2015.
Discussions are ongoing between Old Mutual,
Nedbank and the BBPs on areas for
future collaboration.
Further details will be communicated post
expiry of the Old Mutual BBBEE transaction.
Dividend
The Board has considered the position in
respect of the final dividend for 2014 and is
recommending the payment of a final
dividend for 2014 of 6.25p per Ordinary
Share (or its equivalent in other applicable
currencies). Based on this recommendation
the full-year Ordinary dividend would be 8.7p,
a 7% increase on the prior year. No scrip
dividend alternative will be available in
relation to this dividend.
The Board reaffirms its policy of intending to
pursue a progressive dividend policy
consistent with our strategy, having regard to
overall capital requirements, liquidity and
profitability, and targeting a dividend cover in
the range of 2.0 to 2.25 times AOP earnings in
future. Interim dividends will routinely be set at
30% of the prior year’s full ordinary dividend.
OUR VISION, MISSION,
STRATEGY AND VALUES
Our vision
Our mission
To be our customers’ most trusted partner – passionate about helping them
achieve their lifetime financial goals
To enable a positive future for all our stakeholders: our customers, employees,
communities, environment and shareholders
Key long-term trends
influencing our strategy
■ Digitalisation, mobile technology and increasing transparency are transforming wholesale
and retail markets across banking, investment, life and P&C products
■ In emerging markets, rapidly rising numbers of entrepreneurs and aspiring middle market
consumers are stimulating an increased need for financial services products
■ In developed markets, demographics and regulatory reform are driving growth in retirement
demand with individuals needing to take more responsibility for retirement savings
■ Global and local impact of youth unemployment, social inequality and environmental
challenges are contributing to increasing volatility
■ Mass urbanisation and rapidly expanding mega cities are posing significant infrastructure
challenges, but also concentration opportunities for financial services providers.
Our strategy
Creating enterprise value by growing in markets of greatest opportunity and
where we have a strong competitive positioning, while becoming recognised as
the financial services leader in responsible business
Our strategic priorities
in our chosen markets 1
In Africa
Build a financial services champion
In Southern Africa, through continued organic growth and collaboration
in broad financial services markets
In the Rest of Africa, by creating leadership positions in wholesale and retail
financial services through inorganic and organic expansion and by building
value in delivering financial services via key long-term partnerships
2
In the UK
Build the leading retail investment business
By vertically integrating advice, platforms, wealth solutions and asset
management and offering these best-in-class wealth solutions in our
markets beyond the UK
3
4
In the US
Grow our multi-boutique institutional asset management business
Through organic growth, inorganic opportunities and expanding distribution
Across our markets
Become recognised as the financial services
leader in responsible business
By increasing our impact in enabling financial wellbeing and responsible investment
Our values
Accountability, Integrity, Respect, Pushing Beyond Boundaries
Old Mutual plc
Annual Report and Accounts 2014
13
Strategic report IN AFRICA
Build a financial services champion.
1
Our positioning
in Africa
We have a strong foundation in South Africa,
operate in eight of the 15 Southern African
Development Community (SADC) countries,
have a 170-year heritage and a trusted brand,
and are recognised as a leader in community
development. We have deep management
capability, capital available for expansion and
established expertise in serving and growing
developing markets. Our strong positioning
in southern Africa makes an ideal base for
expansion into sub-Saharan Africa’s growth
markets – notably Kenya, Ghana and Nigeria
– and for building an African financial
services champion.
Building a financial
services champion
In South Africa, we will maintain our
leading positions and continue to grow our
investment, savings, insurance and banking
businesses – while delivering collaboration
synergies among our businesses, particularly
in South Africa. The robust growth in the mass
and middle-income retail markets will continue
to support strong growth in our insurance and
banking businesses.
In the Rest of Africa, we will expand
through acquisition and through partnerships
as well as by organic growth and investment in
new technologies.
In East Africa and SADC, we intend to
expand the number of countries in which we
offer banking services: Nedbank’s recent
acquisition of a 36% stake in Banco Único in
Mozambique, and our recent acquisition of
micro-lender Faulu in Kenya are a start to this
programme. The majority stake we have
agreed to secure in the flagship Kenyan
insurer, UAP, combined with the existing
Old Mutual businesses in Kenya, gives us the
scale and product breadth to capitalise on
the significant insurance growth expected in
the region, particularly considering current
low penetration rates. The UAP acquisition
accelerates our entry in markets such as
Uganda, Tanzania and Democratic Republic
of Congo.
In West & Central Africa we will grow
banking through our partnership with
Ecobank. This relationship was cemented by
Nedbank’s 2014 acquisition of a 20% stake in
the business. Ecobank has the largest banking
network across Africa, comprising more than
2,000 branches, providing a highly attractive
platform for selling our insurance and P&C
products. In Ghana and Nigeria, we will
grow our insurance businesses through
bancassurance and our own distribution, while
exploring opportunities in other countries.
Africa
Our African footprint
Projected population 2016 1.2bn
Projected mobile phone
penetration 2016
~79%
The Gambia1
Senegal1
Cabo
Verde1
Guinea1
Guinea Bissau1
Sierra Leone1
Liberia1
Tunisia
Morocco
Algeria
Egypt
Niger1
Chad1
Mali1
Burkino
Faso1
Established market
Core growth market
Network market
1 Ecobank alliance
2 UAP presence
14 Old Mutual plc
Annual Report and Accounts 2014
Cote
D’Ivoire1
Nigeria1
Ghana1
Benin1
Togo1
Cameroon1
Central
African Republic1
South
Sudan1,2
Ethiopia1
Uganda1,2
Kenya1,2
Sao Tome and Principe1
Equatorial Guinea1
Gabon1
Democratic
Republic
of Congo1,2
Rwanda1,2
Burundi1
Malawi1
Congo-
Brazzaville1
Tanzania1,2
Angola1
Zambia1
Namibia
Zimbabwe1 Mozambique1
Botswana
South
Africa1
Swaziland
Lesotho
Becoming the number
one insurance business
By 2020 we aim to be the number
one or two business in our
established and core growth
markets in Africa, achieving an
ROE within the range of 20-25%.
Recent banking and
insurance acquisitions
36%
stake in Banco Único
in Mozambique, with
a pathway to control
stake in Ecobank
20%
60.7%
intended stake in UAP
Steady product
expansion
For our insurance business, we have set
aside R5 billion for expansion in Africa and
so far committed R3.6 billion. In the next
three years our priorities for insurance are to
maintain leadership in our well-established
SADC markets (South Africa, Namibia,
Botswana, Zimbabwe, Malawi and Swaziland),
deepen the bancassurance relationship with
Ecobank and build significant scale in our core
growth markets – Ghana, Nigeria and Kenya
– both organically and inorganically. A key
element in this is our recently announced
intention to increase our stake in UAP to 60.7%
for US$253 million. This acquisition positions
us within the top four life insurers and top three
general and health insurers in Kenya overall.
It also establishes our presence in four
additional East and Central African countries
including Uganda, Tanzania, Rwanda and
Democratic Republic of Congo.
We see particular opportunities to write
specialty business in P&C insurance on a
pan-African basis and are currently
developing plans to pursue this. In our
current markets there are opportunities for
cross-selling across the Group as well as
opportunities to leverage our relationships
with intermediaries and corporates to follow
our South African corporate clients as they
expand their African operations.
For banking expansion in Africa, we
are following a two-pronged strategy
over the next three to five years to give our
customers access to a wide sub-Saharan
banking capability.
Firstly, in West and Central Africa, we will
deepen the Ecobank alliance, exporting
capabilities and increasing collaboration
in priority countries across our own and
Ecobank’s footprint. We will also explore
further strategic alliances to access key
economic corridors in Africa.
Secondly, in the SADC and East Africa
regions, we will expand our existing banking
footprint of wholly-owned or controlled
banking businesses beyond the current
five countries that we operate in through
selective opportunities.
From little things bigger things can grow
If a business is too small to interest a
mainstream lender, how can it raise
the funding it needs to grow? That’s the
challenge Faulu, our Kenyan microfinance
business, exists to overcome. Carolyne
Chelegat, a typical customer, is a market
trader selling peanuts. Faulu gave her six
weeks’ business training, then a series of
affordable micro-loans. These enabled her
to increase her stocks and buy machines to
make peanut flour – and now, peanut butter.
Customers love the new products and business
is good, enabling her to provide for her family
and her community.
www.oldmutual.com/rb-inpractice
Faulu adviser: Agnes Wambugu (left)
Customer: Carolyne Chelegat,
Business woman (right)
TO BE
UPDATED
“Faulu has
really boosted
my business.
Now I’m
self-reliant.”
Carolyne Chelegat, Kenya
Old Mutual plc
Annual Report and Accounts 2014
15
15
Strategic report IN AFRICA
continued
In South Africa
Grow, improve and
align our investment,
savings, insurance
and banking
businesses.
Positioned for growth
In South Africa one of our major
opportunities remains the continued
rapid growth in the retail mass
market, which we will access
leveraging both Old Mutual’s
longstanding leading position in
this market and Nedbank’s
progressive digital capabilities.
In addition, Nedbank and OMSA
will both be driving growth in the
affluent market segments to
increase their combined domestic
market share.
Earnings in South Africa (2014)
£1,242m
Life & savings 31%
Banking & lending 59%
Property & casualty 2%
Asset management 8%
16 Old Mutual plc
Annual Report and Accounts 2014
Sustained performance
and growth
In South Africa we will continue to drive
organic growth and collaboration in broad
financial services. Despite challenging market
conditions, our insurance and banking
businesses in South Africa are performing
well and delivering strong earnings growth.
The businesses are well positioned in their
market segments and have robust strategies
for delivering value to shareholders, while
also creating long-term value for all
our stakeholders.
Our insurance businesses aim to continue
growing in the fast-expanding foundation,
mass and middle-income markets, developing
their leading wealth management proposition
for the affluent market, growing public-sector
distribution and using our corporate client
bases to acquire new retail customers.
In addition, our domestic P&C business,
Mutual & Federal, will continue its business
transformation, most notably improving claims
efficiency and reducing operating expenses,
improving underwriting in personal lines and
offering its products to the extensive South
African client bases of the wider Group.
Our banking businesses will grow their
transactional banking franchise across all
customer segments, drive growth through
client-centred innovation, optimise, simplify
and rationalise their operations to improve
efficiency, manage their loan book and
client base to maximise economic profit,
and increase collaboration with other
Group operations.
Accelerated momentum
in collaboration
Our businesses are making good progress
towards delivering their additional R1 billion
pre-tax target of identified collaboration
opportunities: a portion of senior managers’
long-term incentive rewards in all three
businesses is linked to delivery of this. In line
with the requirements of the new Twin Peaks
regulations, we also plan to establish a new
governance structure during 2015 for our
South African businesses, which will further
support collaboration.
Leading in technology
A win-win for our customers
Nedbank’s leading digital and mobile
technologies are a competitive advantage
enabling more customer-centric and
cost-effective ways to serve customers within
South Africa, but also in key growth markets
elsewhere in Africa, where digital access to
financial services is becoming an increasingly
popular channel. According to the 2014
findings of the Savings & Investment Monitor
~56% of Kenyan consumers and ~51% of
Nigerian consumers would consider buying
a financial product online, compared to
South Africa where 20% of consumers would
make a financial services purchase on the
internet, depending on the type of product.
In other emerging markets
Continue to build
our franchises and
partnerships.
Building on sound
foundations
Latin America
In our Latin American businesses we have
historically focused on products without
a life insurance wrapper – pensions, unit
trusts and institutional asset management
solutions. Going forward, we see good
prospects for life insurance, as per-capita
GDP steadily improves.
In Colombia we are the second largest
provider of voluntary pensions, with 60 years’
experience and a market share of 30%.
We will continue to build our Colombian
wealth and asset management capabilities.
In Mexico, we are one of the main players in
managing defined contribution pensions. We
will expand our onshore distribution through
our Uruguay-based business, AIVA, which
gives us strong distribution of offshore wealth
products in many countries across the region.
We are also leveraging AIVA’s franchises to
distribute onshore life and savings products in
Mexico. We continue to expand our retail mass
business in Mexico cautiously, applying our
South African experience in this market.
Asia
In Asia, we operate with joint venture partners
in both India and China, where we have life
insurance licences for protection, savings
and investment across various customer
segments. We are also seeking institutional
investment mandates.
In China, Old Mutual Guodian Life Insurance,
our 50:50 partnership with the respected
state-owned Guodian Group, is improving
its performance with new forms of distribution
and access, including telesales and online.
We continue to explore the best strategic
options for our joint venture to expand
distribution, improve profitability and use
our capital more efficiently.
In India, we continue to build our 26:74
joint venture with Kotak Mahindra Bank,
which has developed into a sustainably
profitable operation.
While recent regulation of India’s insurance
distribution has slowed sales growth, the
business has adapted well and is competitively
poised for growth. We welcome proposed
regulatory changes that will allow greater
flexibility around the ownership structure of
our joint venture.
Expanded banking
footprint in India
At the end of 2014, Kotak announced
plans to merge with ING Vysya to create
a pan-India banking network with
1,214 branches. The two banks offer a
widened geographic footprint across
which we hope to extend our life
insurance operations.
www.oldmutual.com/rb-inpractice
Enabling financial wellbeing in Colombia
As part of our Latin American rebranding
from Skandia to Old Mutual, we distributed
over 10,000 financial planning games and
2,500 financial education guides, with the
aim to improve financial wellbeing across
Colombia. These games were designed
to be played by families together, and
were sent to employees, retail customers
and advisers.
Focusing on life events and the financial
challenges that can come with these, the
game aims to provide a light-hearted
way to explain the importance of savings,
investment and protection at different
life stages.
Old Mutual plc
Annual Report and Accounts 2014
17
Strategic report IN THE UK
Build the leading retail
investment business.
2
Integrating our
newly acquired
capabilities.
Positioned to win
Our retail investment business in
the UK is growing rapidly, we are
particularly well positioned
following recent regulatory
changes and pension reforms and
we remain on track to deliver the
£270m profit goal from our
existing businesses in 2015.
18 Old Mutual plc
Annual Report and Accounts 2014
Transforming
Old Mutual Wealth
Our strategy is to build the UK’s leading
vertically-integrated retail investment business
with advice, investment platforms, wealth
solutions and asset management propositions
that are each outstanding in their fields and
which, when combined as an integrated
proposition, deliver superior outcomes for
customers and shareholders alike. We are
doing this by combining the existing capabilities
of Old Mutual Wealth and Old Mutual Global
Investors with the recently-acquired advice
capabilities of Intrinsic and the leading
discretionary investment management skills
of Quilter Cheviot.
In line with our strategy, we have transformed
our Wealth earnings profile by selling
non-core European assets in Poland,
Germany, Austria, France, Luxembourg and
Liechtenstein for a combined £245m during
2014, and by reinvesting the proceeds in
Intrinsic and Quilter Cheviot. We are focusing
our business on key UK and International
cross-border markets, upgrading our
technology platform and building our
vertically-integrated model.
Specifically, the strategic priorities for the
next three years are: building an integrated
business with a unifying culture and a trusted
brand; becoming recognised as a leading
responsible business; transforming our
platforms; building an outstanding asset
management capability; broadening our
proposition and diversifying distribution.
Integration across all four
elements of the value chain
Advice
Key acquisitions
A full set of building blocks
Acquiring Intrinsic, one of the UK’s largest
distribution networks with more than 3,000
financial advisers, has enabled us to
capitalise on the Retail Distribution
Review-driven shift to restricted advice.
We have strengthened our capabilities in
Old Mutual Global Investors by hiring UK
equity, Asian equity, pan-European small
company and fixed income absolute return
asset management capabilities. We also
acquired Cirilium as part of the
Intrinsic transaction.
We acquired Quilter Cheviot to provide
us with a discretionary investment
management capability, which has
completed the full set of building blocks
for an integrated wealth management
business.
Increasing
in-house flows
We aim to increase in-house flows
significantly between these businesses
Platforms
(Platform)
Wealth Management Solutions
(Platform)
Asset Management
IN THE US
Grow our multi-boutique institutional
asset management business.
3
Further developing
our US asset
management
business.
Our Institutional Asset
Management business
Our Institutional Asset
Management business (IAM)
consists of OMAM, which
completed its IPO on the NYSE
in 2014, and Rogge, a UK-based
fixed income manager. The IPO
of OMAM was an important
strategic action for Old Mutual
as it unlocks value for the Group.
Benefits of a
shared centre
Affiliates of OMAM benefit from
a powerful global distribution
model offering potential for
substantially increased net client
cash flows. It gives affiliates
access to marketplaces that they
would find difficult to reach on
their own.
2014 IPO enables
strong growth
Our Old Mutual Asset Management business
(OMAM) serves institutional investors
worldwide. It offers a diverse range of actively
managed strategies and products through
seven core affiliates. This multi-boutique
model combines the investment talent,
entrepreneurialism, focus and creativity of
leading asset management boutiques with the
expertise and capital of a larger firm.
This allows our affiliates to focus on delivering
superior investment performance, innovative
offerings, and excellent client service.
OMAM has a four-part growth strategy:
delivering core affiliate growth through strong
investment performance and positive net client
cash flows; investing in collaborative organic
growth of existing affiliates through product
diversification; expanding global distribution
to drive new flows; and establishing new
affiliate partnerships through merger and
acquisition activity.
The successful partial IPO of OMAM in
October 2014 enhances OMAM’s financial
and operating flexibility to deploy capital
to continue to grow and to further develop its
multi-boutique asset management business.
It also provides the Group with enhanced
financial flexibility.
Old Mutual will continue to be a supportive
shareholder of OMAM, recognising that its
current 78% shareholding in OMAM may be
further diluted as a result of OMAM’s strategy
of growth by acquisition.
We will continue to support the fixed income
specialist boutique, Rogge, which was
excluded from the IPO, as it completes its
management transition and the transformation
of its business.
Improving wildlife
Campbell Global, an OMAM affiliate, has
partnered with the US Fish and Wildlife
Service and Texas Parks and Wildlife
Department to enhance 1,500 acres of pine
forests and associated habitat. The project
is part of a plan to improve wildlife habitat
and conserve forests across Texas, including
partnerships with The Longleaf Alliance, The
Nature Conservancy and the National Wild
Turkey Federation. Campbell Global is also
working with partners on the West Coast of
the US on environmental enhancement
projects, including landscape restoration
with the Redwood Forest Foundation.
www.oldmutual.com/rb-inpractice
Old Mutual plc
Annual Report and Accounts 2014
19
Strategic report ACROSS OUR MARKETS
Become recognised as the financial services
leader in responsible business.
4
Lead in responsible
business across all
our markets.
Gender diversity
Executive composition
27%
Female 27%
Male 73%
Board composition
38%
Female 38%
Male 62%
20 Old Mutual plc
Annual Report and Accounts 2014
Building on our values
Since our inception 170 years ago, our reason
for existing has been to help our customers
achieve their lifetime financial goals, whilst
investing their funds in ways to enable a
positive future for all our stakeholders:
our customers, employees, communities,
environment and shareholders. We do this
by operating a responsible and sustainable
business and re-investing the funds we
accumulate into the development of local
economies. By serving our retail customers,
financing and funding enterprise of all sizes,
private and public, providing capital and
facilities and paying due tax we enable
economies to create long-term prosperity,
and so create a virtuous circle that uplifts
our communities, now and for generations
to come.
Our long-standing values of accountability,
integrity, respect, and pushing beyond
boundaries guide how we do business
every day and are woven into our culture.
Accountability is in
our DNA
Over the past years accountability has
consistently featured in our annual culture
survey results as our leadership’s top personal
value, top current value and most desired
organisational value.
Culture survey results
Accountability
ranking
Personal
value
Current
values
Desired
values
Old Mutual
Leadership Group
#1
#1
#1
This sense of accountability is the foundation
from which we aim to become recognised
as the financial services leader in
responsible business.
Leading in responsible
business
In South Africa, we have a history of being
recognised as a leader in community
development and responsible business and
we aim to be known this way across all our
markets. Our approach to achieving this is
two-fold, firstly through ensuring good
governance across our Group to safeguard
us and our stakeholders, and secondly
through making a positive difference to
society by acting responsibly to our customers,
employees, communities, environment and in
our investments.
With regards to being responsible to our
employees, we have significantly improved
gender diversity to 38% at Board and 27%
at Executive level.
In being responsible to our communities,
we adhere to human rights requirements,
as far as directly applicable to the way we
run our businesses, and go beyond these
by proactively developing our communities.
Going forward, our ambition is to make a
significant difference in each of our markets,
focusing our efforts in the areas where we
can have most impact: enabling financial
wellbeing and driving responsible investment.
Creating new
homes for Harare
The well-performing Housing Fund, started
in 2011, aims to create 15,000 low-cost
housing units in five years. Its first initiative is
the Budiriro Housing Project, launched by a
three-way agreement between the City of
Harare, Old Mutual and its wholly-owned
banking subsidiary, CABS.
This $62 million project shows how the
private sector can partner with local and
central government to address some of
society’s most basic needs. We focused on
housing for people on low incomes as they
are the worst affected by Zimbabwe’s huge
housebuilding backlog. The first batch
of houses were handed over in
September 2014.
www.oldmutual.com/rb-inpractice
Our approach to leading in responsible business
Ensuring good governance by
■ Always treating customers fairly
■ Adhering to strong ethical values and by leveraging the power of diversity
■ Ensuring strong capital and risk management capabilities.
Making a positive difference to society through our five pillars of responsible business
1
2
Responsible
to our
customers
■ Investment and
Savings Monitors
■ Smartmax, 2in1, iWyze,
MyFinancial Fitness,
OnTheMoney, TCF
■ Numerous Trust awards
Responsible
investment
■ Ideas Managed
Fund – R5.8bn
■ FutureGrowth – R6bn
■ 15 Equatorial Principle
Deals – $965m
■ Targeted Infrastructure
– R18bn since 2009
■ Nedbank Green Bond
■ Old Mutual Agricultural
Investment Fund
– target $500m
Responsible
to our
employees
■ Top Employer Status
■ Strong diversity and
BEE scores
Responsible
to our
communities
■ South Africa Schools
Investment fund
■ Masizizane youth
SME loans
■ Strong employee
volunteering
Responsible
environmental
management
■ CO2 targets for
Employees/Property
■ Nedbank Green
Affinity Banking
Increasing our impact through a focus on
3
Enabling the financial wellbeing
of our customers
We define financial wellbeing as:
Being and feeling financially secure, able to provide for yourself
and your family, now and in the future.
At Old Mutual we focus on enabling financial wellbeing through
improving access to financial services and financial education.
Driving responsible investment in each
of our markets
We define responsible investment as:
A cross cutting approach to investment that integrates the
consideration of material environmental, social and governance
factors into investment and ownership practices.
Old Mutual plc
Annual Report and Accounts 2014
21
Strategic report
DELIVERING ON OUR STRATEGY
We have made significant progress
in 2014 and for the period 2015-2017
will continue to deliver on our
key strategic priorities.
Priorities for 2014
Progress during 2014
Priorities for 2015-2017
Key management actions for 2015-2017
1 In South Africa
Align OMSA, Nedbank and
Mutual & Federal to become
the leading and most trusted
financial services group
2 In Africa
Build an African financial
services champion, while
continuing to grow in other
emerging markets
■ Good progress towards delivering the target of R1 billion of pre-tax synergies through
identified collaboration opportunities
■ Nedbank progressed tilting of its portfolio, avoided credit losses through pro-active
management of lending activity and took a leadership position in renewable energy loans
■ OMEM increased its 50% ownership with the purchase of a further 25% of Old Mutual Finance,
launched and rolled out its Wealth proportion to the higher affluent part of the market and its
2-IN-ONE product for the mass foundation market, reinvigorated its retail affluent product suite
and moved pension customers under more cost-effective corporate umbrella funds. It reorganised
its asset management business, Old Mutual Investment Group (OMIG) improved its investment
performance, and successfully integrated Mutual & Federal’s P&C business into OMEM.
■ Nedbank acquired an initial 36% stake in Banco Único in Mozambique, with a pathway
to control
■ Nedbank acquired 20% stake in Ecobank with Board representation
■ OMEM announced its intended acquisition of 60.7% stake in UAP and completed integration
of the Life and Property & Casualty businesses of Oceanic in Nigeria, Provident Life Assurance
in Ghana and Faulu Microfinance Bank Limited in Kenya
■ OMEM increased distribution through Bancassurance partnerships such as Ecobank in
Ghana and Nigeria, through additional modern channels such as mobile phones in Kenya,
is in the process of building a tied distribution capability in Nigeria and launched extensive
brand-building campaigns in Kenya and Nigeria.
3 Old Mutual Wealth
Transform to build the best
retail investment business
in the UK
4 US Asset Management
Continue to improve and grow
our multi-boutique asset
management business
■ Acquired Intrinsic to capitalise on RDR-driven shift to restricted advice
■ Acquired Quilter Cheviot for £585m to capture flows into discretionary investment
management and to add core capability
■ Strengthened asset management skills to increase own share of assets under management,
building UK equity, Asian equity, pan-European small company and fixed income absolute
return product capabilities, and acquired Cirilium as part of Intrinsic transaction
■ Transformed earnings profile by selling non-core European assets of Poland, Germany,
Austria, France, Luxembourg and Liechtenstein for a combined £245m
■ Continued to build IT capability
■ Successfully completed the rebrand of all Skandia businesses to Old Mutual Wealth and
Old Mutual International.
■ Successful IPO of OMAM on NYSE
■ Successful international distribution platform for affiliates
■ Achieved solid margins relative to peers and strong levels of net new money flows across
core affiliates
■ Continued active prospecting for new affiliate partnerships
■ Collaborated with OMIG in the Middle East and with Nedbank in Africa
■ Continued to attract, develop and retain key talent.
5 Responsible business
In each of our markets,
become the recognised
financial services leader
in responsible business
■ Appointed Group Customer Director & Responsible Business Lead at Group Exco level
■ Reviewed responsible business activities across the Group to agree key focus areas and
metrics for Old Mutual leading as a responsible business
■ Signed Partnering Against Corruption Initiative (PACI) anti-corruption pledge
■ Strategic partnership established with the Cambridge Institute for Sustainability Leadership
■ Improved leadership gender diversity (38% Board, 27% Executive female representation).
22 Old Mutual plc
Annual Report and Accounts 2014
1
In Africa
Build a financial
services champion
2
In the UK
Build the leading retail
investment business
In South Africa
■ Increase collaboration – progress towards synergy target of R1bn
■ Grow Mass Foundation, Middle Income and Wealth Insurance markets, and improve
profitability in Corporate
■ Deliver consistent investment performance at OMIG
■ Continue M&F transformation to restore profitability and market share
■ Grow transactional banking franchise; drive client-centred innovation; optimise, simplify
and rationalise the business; and tilt the portfolio to maximise economic profit.
In the Rest of Africa
■ Increase collaboration across insurance, banking and asset management businesses.
■ Insurance activities: integrate UAP and Old Mutual Kenya to create leading Kenyan
business; build on entry positions in other markets in East Africa; build existing businesses
in West Africa and explore inorganic opportunities to build scale in these markets; and
build towards target of 10 million customers in the Rest of Africa by 2020
■ Banking activities: deepen the Ecobank alliance, incorporate Banco Único into one
bank operating model, and target two to three acquisitions in priority countries in
SADC and East Africa.
In other Emerging Markets
■ Continue to invest and grow selectively in Latin America and Asia
■ Expand franchises in Colombia and Mexico
■ Continue to build joint venture with Kotak Mahindra in India
■ Continue to partner with Guodian Group in China.
■ Build one integrated business with a unifying culture and a trusted parent brand
■ Successfully transform platform administration through delivery of IT project
■ Build an outstanding asset management capability to drive increasing internal share
of assets under management
■ Expand product proposition, particularly for at-retirement products
■ Diversify distribution through digital, Quilter Cheviot and Intrinsic
■ Continue to deliver operational efficiency.
3
4
In the US
Grow our multi-boutique
institutional asset
management business
■ Generate core affiliate growth through strong investment performance and
positive net client cash flows
■ Invest in collaborative organic growth of existing affiliates
■ Increase global distribution flows and prospecting for affiliates
■ Establish new affiliate partnerships
■ Continue to deliver operational efficiency.
Across our markets
Become recognised as the
financial services leader
in responsible business
■ Integrate being a responsible business into the core strategies of each of our businesses
■ Focus on enabling financial wellbeing and responsible investing in every market,
and set appropriate targets.
Priorities for 2014
Progress during 2014
Priorities for 2015-2017
Key management actions for 2015-2017
1 In South Africa
Align OMSA, Nedbank and
Mutual & Federal to become
the leading and most trusted
financial services group
2 In Africa
Build an African financial
services champion, while
continuing to grow in other
emerging markets
■ Good progress towards delivering the target of R1 billion of pre-tax synergies through
identified collaboration opportunities
■ Nedbank progressed tilting of its portfolio, avoided credit losses through pro-active
management of lending activity and took a leadership position in renewable energy loans
■ OMEM increased its 50% ownership with the purchase of a further 25% of Old Mutual Finance,
launched and rolled out its Wealth proportion to the higher affluent part of the market and its
2-IN-ONE product for the mass foundation market, reinvigorated its retail affluent product suite
and moved pension customers under more cost-effective corporate umbrella funds. It reorganised
its asset management business, Old Mutual Investment Group (OMIG) improved its investment
performance, and successfully integrated Mutual & Federal’s P&C business into OMEM.
■ Nedbank acquired an initial 36% stake in Banco Único in Mozambique, with a pathway
to control
■ Nedbank acquired 20% stake in Ecobank with Board representation
■ OMEM announced its intended acquisition of 60.7% stake in UAP and completed integration
of the Life and Property & Casualty businesses of Oceanic in Nigeria, Provident Life Assurance
in Ghana and Faulu Microfinance Bank Limited in Kenya
■ OMEM increased distribution through Bancassurance partnerships such as Ecobank in
Ghana and Nigeria, through additional modern channels such as mobile phones in Kenya,
is in the process of building a tied distribution capability in Nigeria and launched extensive
brand-building campaigns in Kenya and Nigeria.
3 Old Mutual Wealth
Transform to build the best
retail investment business
in the UK
4 US Asset Management
Continue to improve and grow
our multi-boutique asset
management business
■ Acquired Intrinsic to capitalise on RDR-driven shift to restricted advice
■ Acquired Quilter Cheviot for £585m to capture flows into discretionary investment
management and to add core capability
■ Strengthened asset management skills to increase own share of assets under management,
building UK equity, Asian equity, pan-European small company and fixed income absolute
return product capabilities, and acquired Cirilium as part of Intrinsic transaction
■ Transformed earnings profile by selling non-core European assets of Poland, Germany,
Austria, France, Luxembourg and Liechtenstein for a combined £245m
■ Continued to build IT capability
Old Mutual International.
■ Successfully completed the rebrand of all Skandia businesses to Old Mutual Wealth and
■ Successful IPO of OMAM on NYSE
■ Successful international distribution platform for affiliates
■ Achieved solid margins relative to peers and strong levels of net new money flows across
core affiliates
■ Continued active prospecting for new affiliate partnerships
■ Collaborated with OMIG in the Middle East and with Nedbank in Africa
■ Continued to attract, develop and retain key talent.
5 Responsible business
In each of our markets,
become the recognised
financial services leader
in responsible business
■ Appointed Group Customer Director & Responsible Business Lead at Group Exco level
■ Reviewed responsible business activities across the Group to agree key focus areas and
metrics for Old Mutual leading as a responsible business
■ Signed Partnering Against Corruption Initiative (PACI) anti-corruption pledge
■ Strategic partnership established with the Cambridge Institute for Sustainability Leadership
■ Improved leadership gender diversity (38% Board, 27% Executive female representation).
1
In Africa
Build a financial
services champion
2
In the UK
Build the leading retail
investment business
In South Africa
■ Increase collaboration – progress towards synergy target of R1bn
■ Grow Mass Foundation, Middle Income and Wealth Insurance markets, and improve
profitability in Corporate
■ Deliver consistent investment performance at OMIG
■ Continue M&F transformation to restore profitability and market share
■ Grow transactional banking franchise; drive client-centred innovation; optimise, simplify
and rationalise the business; and tilt the portfolio to maximise economic profit.
In the Rest of Africa
■ Increase collaboration across insurance, banking and asset management businesses.
■ Insurance activities: integrate UAP and Old Mutual Kenya to create leading Kenyan
business; build on entry positions in other markets in East Africa; build existing businesses
in West Africa and explore inorganic opportunities to build scale in these markets; and
build towards target of 10 million customers in the Rest of Africa by 2020
■ Banking activities: deepen the Ecobank alliance, incorporate Banco Único into one
bank operating model, and target two to three acquisitions in priority countries in
SADC and East Africa.
In other Emerging Markets
■ Continue to invest and grow selectively in Latin America and Asia
■ Expand franchises in Colombia and Mexico
■ Continue to build joint venture with Kotak Mahindra in India
■ Continue to partner with Guodian Group in China.
■ Build one integrated business with a unifying culture and a trusted parent brand
■ Successfully transform platform administration through delivery of IT project
■ Build an outstanding asset management capability to drive increasing internal share
of assets under management
■ Expand product proposition, particularly for at-retirement products
■ Diversify distribution through digital, Quilter Cheviot and Intrinsic
■ Continue to deliver operational efficiency.
3
4
In the US
Grow our multi-boutique
institutional asset
management business
■ Generate core affiliate growth through strong investment performance and
positive net client cash flows
■ Invest in collaborative organic growth of existing affiliates
■ Increase global distribution flows and prospecting for affiliates
■ Establish new affiliate partnerships
■ Continue to deliver operational efficiency.
Across our markets
Become recognised as the
financial services leader
in responsible business
■ Integrate being a responsible business into the core strategies of each of our businesses
■ Focus on enabling financial wellbeing and responsible investing in every market,
and set appropriate targets.
Old Mutual plc
Annual Report and Accounts 2014
23
Strategic report BUSINESS MODEL
Our responsible approach to business
generates value for all our stakeholders.
We are focused on becoming
our customers’ most trusted
partner...
Customers’ needs
We focus on our
customers’ long-term
needs. Customers need to
protect themselves and
their families against
critical life events and to
provide for future education,
healthcare and retirement
needs, particularly against
a backdrop of reduced
government and employer
capacity to provide
these services.
Customer relationships
Our brand’s strong
reputation reflects our
experience in the markets
in which we operate,
strong customer and
adviser relationships and
our focus on gathering
feedback. This feedback
allows us to improve our
products and services and
design new products to
better meet the needs of
our customers.
17.5m
Customers across
our markets
Sales direct/
intermediaries/
digital
Payments claims
and interest
Highlights
+59%
Increase in customers
in Rest of Africa
£4.9bn
Net client
cash flow
...by providing a range of products that help
them to achieve their lifetime financial goals.
Investments and savings
We provide appropriate and tax-
efficient investment products that help
our customers accumulate assets to
safeguard their futures.
£319bn
Funds under
management
Fees (funds under
management x margin)
£10.8bn
Risk reserves
Insurance
Our protection business provides life
assurance and general insurance products
that offer financial security against single
or multiple risks including death, disability
and property & casualty risks.
Underwriting income and
investment gains (premiums
and investment income – claims)
£36.2bn
Deposits
Banking
Our banking services include
retail and wholesale lending,
deposit taking, transactional
banking and savings/
current accounts.
Interest (average banking
assets x net interest margin)
Our customers and our
markets are influenced
by several key trends:
Fast expanding
foundation and mass
segments leading to
middle-income market
growth in South Africa
Strong growth
opportunities on
the African continent,
where financial
services penetration
is low
Changing
regulatory
environment
driving product
innovation and
vertical integration
Focus on responsible
business, particularly
financial wellbeing and
responsible investment
24 Old Mutual plc
Annual Report and Accounts 2014
We use our expertise and
innovation to meet the needs
of our customers...
Skills and expertise
We are committed to
developing our
employees’ skills and
expertise. We actively
foster customer-centric
culture that allows us to
better meet our
customers’ needs.
Financial strength
We have strong capital
cover in our core
businesses and at Group
level. Our financial
strength gives customers
confidence to save, invest
and protect themselves
with us.
...enabling us to generate value for
all our stakeholders.
Relationships
We deliver value in its wider sense.
Our operations generate
employment, investment and tax
revenues around the world. We
support the communities in which we
operate and work with partners to
build skills and jobs. We actively
engage with governments and
regulators to help shape the future
operating environment.
Reinvestment into
our business
■ In Africa acquire and partner to
grow life, P&C, asset management
and banking operations
■ In the UK integrate our
platform, advice, wealth
management solutions and asset
management businesses
■ In the US grow our multi-boutique
asset management business.
£1,605m1
Adjusted
operating profit
Highlights
£1.0bn
Cash held
£2.0bn
Capital strength
(EU Financial
Groups Directive)
13.3%
Return on equity
Highlights
£411m
Returns to shareholders
£78m2
Returns to bondholders
£1,309m3
Taxes to
governments
Reinvestment
into our business for
future growth £845m4
Employee
development
and reward over
£1,860m
Investment
in our communities
of £17m5
Interest repaid on our debt during period
1 Pre-tax and NCI
2
3 Taxes paid and collected
4
Includes capital investment and new
business strain on covered business
5 Donations made through our foundations
and other community investment projects
(excludes employee donations
through workplace fundraising)
Old Mutual plc
Annual Report and Accounts 2014
25
Strategic report OUR MARKETS
An overview of the dynamics driving our key markets:
retail and wholesale in sub-Saharan Africa, UK retail
investment, and US wholesale institutional investment.
Key long-term trends impacting
our strategy
■ Digitalisation, mobile technology and
increasing transparency are
transforming wholesale and retail
markets across banking, investment, life
and P&C products
■ In emerging markets, rapidly rising
numbers of entrepreneurs and aspiring
middle market consumers are stimulating
an increased need for financial
services products
■ In developed markets, demographics
and regulatory reform are driving
growth in retirement demand with
individuals needing to take more
responsibility for retirement savings
■ Global and local impact of youth
unemployment, social inequality and
environmental challenges are
contributing to increasing volatility
■ Mass urbanisation and rapidly
expanding mega cities are posing
significant infrastructure challenges, but
also concentration opportunities for
financial services providers.
Sub-Saharan Africa’s GDP
to reach US$2.3 trillion
by 2020
Growth in Africa’s GDP1
2020F
2015F
2010
2005
2000
1995
1990
1985
0 500 1,000 1,500 2,000 2,500
US$bn
Source: IMF Regional Economic Outlook 2012
1
Includes South Africa
26 Old Mutual plc
Annual Report and Accounts 2014
Our business and strategy reflect demographic
and regulatory trends in our largest markets.
Populations are growing in all our markets –
and mostly, living longer. However, age
distribution varies significantly, so we match
our products and distribution to local
demand dynamics.
Living standards and expectations have also
risen. In the more developed markets people
will spend longer in retirement, so need higher
pension savings to fund their desired standard
of living and healthcare. In emerging markets,
economic empowerment and urbanisation are
driving demand for a broad range of flexible
protection, savings and investment products.
Dramatic increases in entrepreneurial activity
and trade liberalisation are taking place within
and between our emerging markets. This is
stimulating international interest in participating
in these markets. As a consequence we expect a
rapid rise in demand for wholesale financial
services and products.
Regulation and digitisation present both threats
and opportunities for us. Generally, regulation
drives more transparent product pricing, with
more explicit consideration of what products
and services deliver for customers. Technology
is providing new and cheaper ways to access
and transmit money and information to service
both wholesale and retail customers, and to
increase financial inclusion. Existing sources
of economic profit pools are challenged by
these developments, but by reorganising and
reprogramming business models and structures
we can develop new sources of profitable
growth and access to new and emerging
markets. Changes in our business models will
now be continuous and radical and our Group’s
interactions with stakeholders will also need
to adapt.
Overall, we can see all these themes as
opportunities – as long as we are dynamic and
agile while maintaining control over our risks.
We are well positioned in our markets, continue
to offer and develop the products that
customers need, and are building effective
distribution channels.
Africa
In a global economic context, Africa is
currently modest, but in natural resources
and opportunities, it offers great potential.
Emerging economies have outstripped
developed economies’ GDP growth for some
years. GDP per capita in both South and
sub-Saharan Africa more than doubled
between 2003 and 2013, and annual GDP
growth in sub-Saharan Africa exceeded 4% in
seven of those 10 years2. The IMF has forecast
that sub-Saharan Africa’s GDP will reach
US$2.3 trillion by 2020. We aim to attract a
proportion of that discretionary income into
savings. Our work on financial wellbeing and
literacy in the region supports the development
of this new market.
As emerging markets develop, average
incomes rise and demand for financial services
evolves from simple funding and transactional
products to more sophisticated protection and
savings. Our strategy is to shape our offering to
fit the wider macro marketplace and improve
access to our products and services. However,
current GDP levels trail those of Europe, the
US and developed Asian markets and the
proportion of GDP spent on financial services
is relatively low.
Like Asia, Africa is becoming increasingly
urbanised. McKinsey has forecast that by
2020 more than half of African households will
have discretionary income, up from 85 million
households to almost 130 million. Our African
operations are generally based in countries
where urban populations have high or
fast-growing per-capita incomes.
Across the continent, large groups of younger
consumers are reaching working age. This
should drive growing demand for financial
services and rising GDP per capita. The shift
has been evident in South Africa for some time,
profoundly changing both consumption
patterns and service delivery to retail
consumers. Given more stable regulatory
and economic conditions and improved
infrastructure, large numbers of enduring
commercial enterprises are emerging –
driving demand for local and cross-border
financial services.
Africa’s considerable natural resources are
mostly untapped, including some 60% of the
world’s uncultivated arable land. The US
Geological Survey estimates that Africa
will expand its production of 15 important
metals by 78% between 2010 and 2017. The
application of technology should accelerate
sustainable social and economic development,
giving Africa the opportunity to realise its full
potential by improving efficiency, enabling
citizens, and creating jobs and opportunities.
2 World Bank Development indicators
South Africa
At present South Africa faces continued
relatively slow growth, fiscal and current
account deficits, electricity constraints and
socio-political challenges. Economic growth
was weak in 2014, but in 2015 to 2017 is
set to improve to between 2.5% and 3.0%1.
Unemployment averaged over 25% between
2000 and 2014. Real incomes at the lowest
levels of society have benefited from increased
social grants and above-inflation public sector
wage growth, but there is still significant
disparity between upper and lower
income levels.
These effects, coupled with high debts and
servicing costs, continue to put pressure on
consumers’ disposable incomes – squeezing
their savings rates, ability to service their debt,
and propensity to buy and retain insurance
and other financial services products.
1 South African National Budget
Saving for the future
The 2-IN-ONE savings plan allows customers
to save for their long-term goals (like paying
for their children’s education) while having the
flexibility to access some of the funds in the
short term if they need it.
The need for this product was reinforced by
the findings from the latest Old Mutual Savings
and Investment Monitor, which indicated that
consumers are experiencing immense financial
pressure and that their savings have become
a lot more short-term focused.
S
t
r
a
t
e
g
i
c
r
e
p
o
r
t
However, South African corporations
generally remain well capitalised, with low
gearing and loan demand. Credit servicing
ratios are strong and credit losses are at
historically low levels.
The healthy corporate sector contrasts with
stretched government finances and personal
income inequality, indicating long-term
structural issues. These are being addressed
through the National Development Plan.
Major infrastructure projects now in progress
are aimed at boosting economic growth.
The rand fell significantly against international
benchmarks in 2013, stabilising in late 2014.
This reflected the relatively weak economic
outlook – and also, in the US, moves to reduce
monetary stimulus and raise domestic interest
rates, which reduced appetite for emerging
market currencies. The rand is deeply liquid,
so generally reacts ahead of other emerging
market currencies. This has amplified inflation
in the South African economy, but falls in
imported fuel costs reduced the pressure in
early 2015.
This is exactly where the 2-IN-ONE savings
plan comes into its own.
www.oldmutual.com/rb-inpractice
Senior adviser: Liziwe Zondi (left)
Customer: Benjamin Peter Nyanyatsi (right)
“The plan allows me
to access money
should I need it,
without tapping into
or penalising my
long-term savings.”
Sherry-Ann Abrahams, South Africa
Old Mutual plc
Annual Report and Accounts 2014
27
OUR MARKETS
continued
“ For 2015, it is about
execution. Good
execution of the
integration of the
businesses we have
bought. Good execution
to carry on improving
and growing our UK
business. I think we are
very well positioned in the
markets that we are in.”
Julian Roberts
Group Chief Executive
28 Old Mutual plc
Annual Report and Accounts 2014
10,000 clicks to
make a soccer field
We like to help people achieve their goals
– sometimes quite literally. In Cazucá, one
of the most deprived parts of Colombia’s
capital, Bogotá, many children lack basic
schooling and easily fall prey to drugs and
gang culture. Local charity Tiempo de
Juego (Game Time) offers sports coaching
as a healthier alternative. In support, we
offered to build them a soccer field – if the
community backed us by giving us 10,000
clicks on a specially created website. The
story went viral, we easily passed our
10,000-clicks goal, many locals became
volunteer helpers – and the kids got their
soccer field.
www.oldmutual.com/rb-inpractice
Asia
Asian growth remains strong relative to the rest
of the world but has slowed in absolute terms,
mainly as Chinese reported growth has eased.
Government financial conditions are generally
sound, with low levels of international debt.
In the major economies of India and China,
consumer power is beginning to shift the
regulatory and economic trends towards
retail products and services. Greater freedom
of expression, spurred by technological
developments, is also driving more scrutiny
of industry activity and its long-term
environmental impacts.
Financial services provision continues to be
dominated by banks, with insurance companies
often using distribution agreements. Regional
asset management markets are increasingly
important, creating collective savings pools,
and regulation is supporting this.
Asian cultures still tend to support self-provision
for health care, education and retirement.
While financial services penetration is rising,
large populations bases such as those in
Indonesia remain under-serviced.
Latin America
Latin American economic activity declined in
2014, largely due to falling raw material prices
and financial strain from high government
debt. Brazil is by far the region’s largest
economy, accounting for nearly half the
continent’s GDP. But per-capita GDP is similar
in several other countries, and 30% higher in
Chile and Uruguay – so the opportunities for
financial services extend well beyond Brazil.
While bank distribution is important in most
countries, technological developments such
as mobile phones offer alternative channels.
In most cases, market share is highly
concentrated among the top five players.
Product sets are broad in asset management
and life assurance, with pensions, mutual funds
as well as traditional life protection being
offered. Banking products include term
deposits, saving accounts and varied forms
of retail and corporate loans.
US
Despite heightened volatility in public
securities markets, US equities markets
continued to recover in 2014 – the S&P 500
rose 11% – contributing to overall growth in
US corporate profits.
Non-US developed and emerging markets
were challenged: the MSCI EAFE index
declined 7% over the year and the MSCI
Emerging Markets index declined 5%.
Key factors were the US Federal Reserve’s
tapering of quantitative easing (QE) and
currency weakness resulting from the strength
of the US dollar.
Strong equity performance and continued
low interest rates impacted bond markets as
investors shifted asset allocations in favour of
equities. Non-US developed markets may face
further challenges in 2015 if US interest rates
rise as QE tapering ends.
Generating
superior
investment returns
OMAM’s unique aligned partnership
model provides the stability and
foundation for strong affiliate growth
as it offers affiliates key economic
incentives such as equity ownership
and profit sharing, along with
operational autonomy, within a
partnership structure that promotes
and supports affiliate growth. OMAM
shareholders and affiliate employees’
economic interests are aligned to support
long-term profit.
UK
The UK is now recovering strongly from a
significant loss of economic output after the
global financial crisis. Government finances
remain heavily stretched, following the
largely government-funded recapitalisation
of the banking sector and a significant fall in
tax revenues.
Equity and debt markets have recovered from
their lows but have not shown significant
long-term growth over 2009 levels.
The UK has undergone considerable reforms
of both the wholesale and retail financial
services sectors. These have covered both
conduct of business and regulation of capital
levels required in the industry.
The investable asset pool in the UK is some
£4.4 trillion, of which about £3.3 trillion is
relevant for the life and wealth industry. This is
expected to reach around £5 trillion by 2020.
Significant changes announced in pensions
regulation are likely to boost demand for asset
management and drawdown products for the
decumulation stage of retirement provision.
Demographic developments are adding to the
growth in demand for retirement income as
large numbers of people reach the immediate
pre- and post-retirement phases of their lives.
Low interest rates, constrained by government
economic policy, have cut the incomes of many
relying on annuity pensions or interest on
savings. This is increasing the attraction and
development of new savings products – for
example there is strong interest in the potential
returns offered by equity income and
higher-yielding assets.
Old Mutual plc
Annual Report and Accounts 2014
29
Strategic report KEY PERFORMANCE INDICATORS (KPIs)
Financial and non-financial KPIs that we use
to monitor the performance of our business.
Non-financial KPIs
Our customers
Customer numbers (m)
Target 2015
2014
2013
2012
OMEM
Total
10m
8m
7m
17.5m
16.1m
14.4m
Emerging market customers
Other customers
Description
Customer numbers are an
indication of the scale of our
business. A growth indicates that
we have an attractive proposition
for new customers, and are
meeting the needs of our
existing customers.
Net promoter score (NPS)*
OMEM
Nedbank
Old Mutual Wealth
52%
75%
32.8%
* NPS is a measure of customer advocacy
– it is not measured for IAM
Responsible investment
Investment capabilities applying our RI Standard
2014
Description
This figure shows the percentage
of business units that have
reported full compliance to the
application of the Group
Responsible Investment (RI)
Standard through our bi-annual
Letter of Representation. Our RI
Standard drives the integration of
ESG factors into our business.
Target 100%
%
40
Target
Our target is 100% integration of
ESG factors into our investment
decisions by 2017.
70%
of proxy votes cast in listed
equity investments
Our employees
Cultural entropy (%)
2014
2013
2012
Description
Cultural entropy measures the
amount of negative or limiting
values that exist within an
organisation which results in
unproductive work (the lower the
score the healthier the culture).
Our communities
Community investment (% of pre-tax AOP)
Target range 9-13%
12.3%
11.7%
11.4%
2014
2013
2012
Target 1%
%
Total
1.1
1.0
1.0
£17.1m
£16.1m
£14.0m
Target
We aim to have cultural entropy
of between 9 and 13% across all
our business units, which we define
as a healthy working culture.
75.2%
of our employees recommend
Old Mutual as a place to work
Description
The value of Old Mutual’s
community investment made
through our Foundations and
other community projects
(excluding employee donations
through workplace fundraising
and in-kind donations).
Target
Our target is to donate 1%
of our pre-tax AOP to
charitable organisations.
18%
of our employees volunteer
during working hours
Environmental management
Carbon emissions (tonnes of CO2e)
Governance
Inclusion in indices related to operating as a responsible business
Base
2010
2014
4.17
0.21
3.60
0.20
Target
2020
3.336
0.168
Target
Based on our 2010 figures, we
aim to reduce our carbon
emissions by 20% by 2020 in both
our employee-occupied sites and
investment property portfolio.
Our Group carbon intensity for
2014 was 1.7 tonnes CO2e/£m
FUM (2013: 3.0).
Per employee in our employee
occupied properties
Per m2 in our property portfolio
Description
Our carbon emissions cover our
Scope 1 and 2 emissions in our
employee-occupied locations and
Old Mutual investment property.
Scope 1 are direct emissions from
sources that are owned or controlled
by the Group. Scope 2 emissions are
indirect emissions resulting from
the use of power (such as electricity)
purchased by the Group.
30 Old Mutual plc
Annual Report and Accounts 2014
FTSE4Good
JSE SRI Index
Base
2012
Yes
Yes
Description
We invest time and effort to put
in place appropriate processes,
policies and governance structures
to ensure we meet and aim to
exceed internationally recognised
responsible business practices.
2013
Yes
Yes
2014
Yes
Yes
Target
2015
Yes
Yes
Target
Our target is to maintain our
listing on the FTSE4Good and
JSE SRI Index.
Financial KPIs
Adjusted Operating Earnings per Share (p)
Return on Equity (%)
Performance
2015-2017 LTI
Target range 5-10%
2014
2013
2012
2011
2010
Performance
Actual Growth
17.9p
18.4p
17.5p
15.7p
14.3p
-3%
+5%
+11%
+10%
+23%
2014
2013
2012
2011
2010
Relevance
Adjusted Operating Earnings per
Share (EPS) is an indicator of
our profitability that measures
how much we earn for the
average number of ordinary
shares in issue during the period.
The trend in the movement of EPS
demonstrates our rate of growth.
Performance
against targets
Sustainable growth in earnings
per share through continued
revenue growth and
operational efficiency.
Long-term incentive (LTI):
5% to 10% compound annual
growth between 2015-2017
(17.5% weighting for sterling
profit growth and 17.5%
weighting for rand profit growth).
Relevance
Return on Equity is an indicator
of our profitability and capital
efficiency in using the resources
provided by our shareholders.
2015-2017 LTI
Target range
13.3%
13.6%
13.0%
14.6%
14.2%
Performance
against targets
We will continue to drive
profitability throughout our
businesses and make the
best possible use of the
capital invested.
Long-term incentive (LTI):
12% to 15% Return on
Equity (35% weighting).
For more information on Adjusted Operating Earnings see p54
For more information on RoE see p56
Net client cash flow/opening funds under
management (%)
Capital strength (£bn)
Performance
Performance
0
2014
2013
2012
2011
2010
1.7%
5.9%
1.9%
-3.9%
-2.5%
Relevance
Net client cash flow/opening
funds under management
measures our success in
attracting new business and
retaining existing customers,
and provides a good indication
of investor confidence in our
ability to manage their funds
effectively.
Performance
against targets
Grow funds under management
through positive net cash flows
(cash inflows e.g. premiums,
deposits and investments
greater than cash outflows
e.g. paying out claims,
annuities and redemptions).
2014
2013
2012
2011
2010
£2.0bn
£2.1bn
£2.1bn
£2.0bn
£2.1bn
Relevance
Capital strength measured
under the EU Financial
Groups Directive.
Performance
against targets
Retain regulatory capital at its
current level, whilst complying
with local statutory requirements.
For more information on NCCF/FUM see p38, p44 and p46
For more information on Capital strength see p56
Old Mutual plc
Annual Report and Accounts 2014
31
Strategic report PRINCIPAL RISKS AND UNCERTAINTIES
The Group has remained resilient and the risk
management focus is now on execution given
a number of recent strategic changes.
Our principal risks have been determined
by assessing the possible effects on our
reputation, our stakeholders, our earnings,
capital and liquidity, and the future
sustainability of our business. They are
summarised in the table below. These risks
are largely strategic in nature. They are closely
monitored and overseen by Group
management and are reported to the Board
on a regular basis.
During the year the Group underwent a
number of strategic changes. The pace and
scale of these changes mean that strategic
execution risk is now our key principal risk.
As in previous years, economic conditions in
South Africa, the changing location of credit
risk across the Group and the level of currency
translation risk remain principal risks
impacting Old Mutual. The risk of changing
customer needs and regulatory change
remains important for Old Mutual and
its peers.
Our business is also affected by a number of
risks inherent to the products we offer, such as
exposure to market levels, interest rates and
insurance liability risk. These drive a significant
proportion of our capital requirements and
earnings volatility exposure. Given the nature
of our product offering, market risk is material,
as we are exposed to the impact of market
movements on asset-based fees – which are
generated from client-selected investments.
More information on our risk and capital
management and risk profile is contained in
the ‘Risk and capital management’ section of
this Annual Report. Additional risk information
is disclosed in the consolidated financial
statements, note E, in this Annual Report.
1. Strategic execution risk and pace of change across the Old Mutual Group
How it impacts Old Mutual
2014 and beyond
Risk mitigation and management actions
Strong governance structures exist,
combining Group executives, local executive
leadership and non-executive directors with
the requisite blend of skills and experience to
challenge key strategic initiatives effectively.
Within the business units, oversight committees
exist at both executive and Board levels to
oversee strategic IT and outsourcing projects.
For key projects across the Group, there is
centralised oversight at Group level over and
above the business unit oversight.
The impact of these changes on the risk
profile of the business is managed
dynamically through Group risk governance
and monitoring processes.
We mitigate the increased operational risk
by maintaining our focus on the control
environment and prompt escalation.
Currently, and for the foreseeable future,
there is a high degree of execution risk
associated with the pace and scale of
change across the Group. Most notably:
■ Nedbank and Old Mutual Emerging
Markets are simultaneously expanding
into key African growth markets. At the
same time they are increasing collaboration
across the South African investment, savings,
insurance and banking businesses. In
addition, significant investment is planned
in updating and enhancing technology
within these businesses
■ Old Mutual Wealth is focusing on the
integration of recent acquisitions, growing
its asset management capability and
implementing its outsourcing of technology
and administration to IFDS
■ OM Asset Management plans to expand
and grow a multi-boutique asset
management business through
acquisitions of additional affiliates
■ Across the Group we aim to become
recognised as the financial services leader
in responsible business across our markets.
This will require operational, performance
and management changes throughout
the business.
As part of delivering our growth strategy,
we announced and completed various
acquisitions and partnerships in 2014.
Old Mutual Emerging Markets acquired stakes
in a number of businesses across Africa during
2014. Work will continue on integrating these
businesses. Acquisitions are planned to
continue, with the intended acquisition of the
majority holding in UAP expected to complete
during 2015.
In 2014 Nedbank finalised the acquisition
of a 36% shareholding in Banco Único in
Mozambique and exercised its option to
take a 20% share in Ecobank. Further strategic
partnerships and acquisitions will be pursued.
The Old Mutual Wealth strategy seeks to
transform the business into a simpler, vertically
integrated business with updated IT systems.
While the level of operational risk in
Old Mutual Wealth is within risk appetite, it
remains high in the short-term, reflecting the
execution of the outsourcing arrangement with
IFDS and the acquisitions of Intrinsic and
Quilter Cheviot.
The partial IPO of the OM Asset Management
business was completed in 2014. OM Asset
Management set out its growth agenda in the
IPO. It will identify and seize opportunities as
they arise, in line with the key risks outlined at
the time of its listing. The additional litigation
and regulatory risks introduced by listing are
managed through our ongoing risk
management processes.
32 Old Mutual plc
Annual Report and Accounts 2014
2. Uncertain economic conditions in South Africa
How it impacts Old Mutual
2014 and beyond
Risk mitigation and management actions
A significant portion of our earnings comes
from our South African businesses.
In our insurance and investment businesses,
our earnings are at risk if our customers are
unable to keep up premiums, cancel existing
policies or withdraw their savings earlier
than anticipated. Additionally, our future
profits will be at risk if customers do not buy
insurance policies from us or invest their
savings with us at the levels we anticipate.
Low interest rates may also negatively impact
endowment income in our banking businesses.
All our businesses are exposed to increased
expense growth from high levels of inflation.
A weak economic environment impacts
credit risk in our investment, insurance and
banking businesses. (Credit risk is discussed
further below.)
We have exposure to South African
sovereign debt and parastatals, but only
within the South African businesses, in line
with market and regulatory expectations.
The global economic outlook remains
uncertain. The South African economy is
integrated in the global economy but is also
impacted by domestic factors.
During 2014 South Africa’s economic growth
forecasts were revised downwards after
protracted labour disputes and power
shortages. These also prompted a sovereign
credit downgrade by rating agencies.
If sovereign credit was further downgraded,
the impact on the Group’s business outside
South Africa would be limited. Within South
Africa the impact would be reflected in
consequential changes in underlying economic
and market-related factors, such as the level of
interest rates, foreign exchange rates and
international capital flows.
Subdued global demand and persistent
infrastructure constraints are expected to limit
growth in the South African economy. This will
continue to weigh on household disposable
income in the medium term. However, a
prolonged period of low oil prices, leading to
lower transport and food costs, could help
support disposable income and spending.
We monitor multiple external economic
factors and incorporate them into stress and
scenario testing to understand our earnings
and capital resilience to severe macro-
economic events.
We offer solutions to help clients in tougher
times, and focus on understanding individual
customers’ financial positions at the point of
sale. For example, the 2-IN-ONE savings
product for the mass foundation market
launched in 2014. See the case study in the
‘Our markets’ section on page 27.
Our businesses manage premium collections
and credit payments, while monitoring for
early indicators of financial distress.
We manage our cost base judiciously, while
investing sustainably for the future.
The Group’s plan to grow the sources of
earnings outside South Africa, in the
medium-term, is expected to diversify its
exposure to this risk.
3. Credit risk and location of credit risk across the Group (continued overleaf)
How it impacts Old Mutual
2014 and beyond
Risk mitigation and management actions
One of our largest risks to Group earnings
is our exposure to banking credit risk from
lending and other financing activities
through our ownership of Nedbank, and
to a lesser extent our exposure within
Old Mutual Emerging Markets. Credit risk
exposure within Old Mutual Emerging
Markets is growing as a proportion of this
division’s own risk exposure.
Despite tight controls and processes,
banking profits remain sensitive to relatively
small movements in credit loss ratios.
Our exposure to Nedbank is primarily risk to
earnings, as Nedbank’s capital and liquidity
requirements are both met from its own
available resources.
Credit risk across the Group increased during
2014 due to the acquisition of Faulu and an
increase in Old Mutual Emerging Markets’
stake in Old Mutual Finance from 50% to 75%.
Although Nedbank’s 20% ownership of
Ecobank is accounted for as an equity share,
this indirectly increases our credit risk.
Our credit risk remains within appetite.
However, the high levels of personal
indebtedness and pressure on consumers in
South Africa remain a challenge, as do other
macro-economic factors outside our control,
such as commodity prices.
Our lending credit exposure is concentrated in
secured lending through Nedbank.
We monitor credit loss ratios on an ongoing
basis and they are broadly within target
range. In addition, we review the quality of
credit portfolios to ensure credit impairment
provisions are adequate.
For unsecured lending, Nedbank and
Old Mutual Finance continue to focus on
quality of business through regular
adjustment of affordability and credit
scorecards and risk-based product metrics
(loan term, size and interest rates), based on
changing market conditions.
Stress testing is carried out at both Nedbank
and Old Mutual Emerging Markets to
understand exposure to credit events.
Our portfolio tilt strategy in our banking loan
exposures is designed to provide more
robust long term returns with lower volatility
for deteriorating credit experience.
Old Mutual plc
Annual Report and Accounts 2014
33
Strategic report PRINCIPAL RISKS AND UNCERTAINTIES
continued
3. Credit risk and location of credit risk across the Group continued
How it impacts Old Mutual
2014 and beyond
Risk mitigation and management actions
Large concentrations are monitored at
Group level. These relate primarily to
investment credit, as there is little
concentration or aggregation of individual
credit exposures outside Nedbank and
Old Mutual Emerging Markets.
Unsecured lending exposure is small in
comparison to the total lending book. Within
Old Mutual Finance we have experienced
controlled growth in unsecured lending from
a low base, applying stringent affordability
requirements and strict credit criteria. Within
Nedbank, unsecured lending growth is
expected to remain slow.
We are planning to further grow our lending
businesses in Faulu, CABS, Old Mutual
Finance and Old Mutual Specialised Finance,
and this will be underpinned by strong credit
risk management together with risk oversight
and governance.
Within Old Mutual Emerging Markets,
banking credit risk is expected to increase
due to planned growth. Banking credit risk
arises in:
■ Our unsecured lending business,
Old Mutual Finance
■ Faulu, a Kenyan consumer finance
business acquired in 2014
■ A building society in Zimbabwe known
as CABS.
Investment credit risk arises in:
■ Old Mutual Specialised Finance
■ The South African life business,
predominantly through the management
of assets backing annuity products.
There is also credit risk exposure within
Mutual & Federal through holdings in the
credit guarantee insurer, CGIC.
Credit risk outside Nedbank and Old Mutual
Emerging Markets is relatively limited.
4. Currency translation risk and location of capital
How it impacts Old Mutual
2014 and beyond
Risk mitigation and management actions
At Group level our earnings, dividend and
regulatory surplus capital are expressed in
sterling but the majority of the Group’s
earnings and its surplus capital are
denominated in South African rand.
The translation of our rand earnings will be
affected by movements in exchange rates.
From a capital perspective, our capital is
held where our risks are located and the risk
would only be realised if we were to require
a transfer of surplus capital between regions
during periods of stress.
Our philosophy is to maintain strongly
capitalised subsidiaries reflecting local
regulatory capital requirements. Our
principal balance sheet businesses in South
Africa (including their own subsidiaries) are
appropriately capitalised for the
international standards of Basel III and
expected Solvency II equivalent regimes.
In 2014, the rand depreciated from R17.43 to
R18.00 against the pound, following a 27%
depreciation during 2013. This reflects the
relative weakness of South Africa’s economic
outlook and also, in part, a reduction in US
appetite for emerging market currencies.
We see macro-economic factors that point
to possible further rand weakness in the
medium term. These include the current
account deficit and the possibility of capital
outflows from South Africa as some external
investors may sell their holdings of South
African government bonds should global
interest rates rise.
We are preparing to comply with Solvency II
and SAM regulatory requirements, which will
be effective from January 2016. The rules have
yet to be finalised. We expect greater clarity to
emerge during 2015.
We hold our capital resources (including
the Group’s issued debt) to meet capital
requirements in matched currencies
and service interest on debt with
matching earnings.
The balance of cash flows earned in rand
and other currencies is closely monitored
and the dividend policy, through its link to
earnings, in part addresses this risk.
We use forward currency contracts to hedge
expected rand cash flows needed to make
dividend payments in sterling.
Regular stress and scenario testing supports
understanding and monitoring of the
resilience of the Group’s capital and capacity
to pay dividends in the event of significant
currency movements or restrictions (however
remote) on the flow of funds from South Africa.
The Group’s plan to broaden the source
of earnings in currencies other than the rand
is expected to provide more diversified
earnings by currency, although this is
a longer-term mitigant.
34 Old Mutual plc
Annual Report and Accounts 2014
5. Changing shape of the industry due to changing customer needs and regulations,
particularly consumer-focused regulations
How it impacts Old Mutual
2014 and beyond
Risk mitigation and management actions
Our customers’ needs are evolving.
Consumers want to be more in control of their
finances. As digital technology advances, they
increasingly rely on and prefer technological
tools for a variety of tasks.
Despite this, the need for individual attention
remains. Consumers seek quality as well as
original offerings that meet their personal
needs, and it is important that service remains
convenient in terms of both time and effort.
Regulators in many jurisdictions continue to
focus on the fair treatment of customers and
both principles and appropriate regulation in
this area are evolving. In particular, there is
increased focus on product design, advice, and
the product life cycle after the sales process.
Products and practices which might in the past
have been considered normal might no longer
be acceptable. There will be a need to adapt
and evolve new products and operations –
while remaining mindful that the long-term
nature of the business means legacy products
will take time to run off.
Strategic initiatives across the Group are
streamlining our business so we can adapt
more easily to changing customer needs and
regulations. They include implementation of
IT solutions that allow us to deploy new
products and system changes more quickly,
making use of outsourcing partners where
IT is not our core competitive proposition.
In addition, our brand promise and
commitment to operating as a responsible
business, with a strong customer focus and
culture, position us well to respond to
consumer-focused regulation.
Where similar regulatory themes are
developing, we transfer knowledge from
different geographies across the Group to
anticipate and implement new regulations.
We proactively prepare for anticipated
regulatory changes and engage with
regulators to avoid or mitigate unexpected
adverse impacts.
A group-wide Information Security
Steering Committee considers cyber security,
with particular focus on education,
awareness, monitoring and understanding
of the threat environment.
Our ACT NOW! Leadership Behaviours,
which are formally measured as part of our
performance management system, include
a metric for ‘putting the customer first’.
We measure our culture around treatment of
customers annually through our group-wide
culture survey.
Attracting new and retaining existing
customers is key to the delivery of our strategy.
New and evolving consumer-focused
regulation, non-traditional distribution
methods, new technologies, changing
demographics and changing customer
needs and preferences are altering the
distribution and competitive landscape
across our geographies. This may place
business plans and our growth strategy at
risk if our business model is not flexible
enough to let us adapt quickly and effectively
to the changing landscape.
Within Old Mutual Wealth our acquisition of
Intrinsic increases the risks associated with
providing advice to customers, such as
litigation and regulatory intervention.
Specific consumer-focused regulation
impacting Old Mutual includes:
■ In the UK, the ongoing impacts of the
Retail Distribution Review (RDR) and new
pension withdrawal rules effective from
April 2015
■ In South Africa, Treating Customers Fairly,
Retirement Fund Reform and a review of
adviser remuneration models similar to the
UK’s RDR. In addition, the planned move
to Twin Peaks regulation.
Furthermore, increasing regulatory
requirements impact the cost and complexity
of doing business.
Consumers’ use and preference for digital
technology is increasing. Maintaining
adequate cyber security, with appropriate
protection for client assets and data, is also a
key risk for Old Mutual’s retail businesses
given the external threat environment and
increasing reliance on technology.
Old Mutual plc
Annual Report and Accounts 2014
35
Strategic report OLD MUTUAL
EMERGING MARKETS
BUSINESS REVIEW
Rest of Africa
Outside South Africa, we operate in Namibia,
Zimbabwe, Malawi, Kenya, Swaziland,
Botswana, Nigeria and Ghana, where we
offer various corporate and retail solutions in
life and savings, property and casualty, asset
management and banking. Our products are
supported by sound financial advice, efficient
service and value for money for our customers.
In East Africa, we have agreed to acquire a
60.7% stake in UAP Holdings (UAP), subject
to various regulatory approvals. UAP has a
strong position in East and Central Africa
and a product offering that is highly
complementary to our existing businesses.
Asia and Latin America
In Colombia we operate in the affluent
market, providing mandatory and voluntary
pensions, investment and saving solutions,
offshore investment products and institutional
asset management.
In Mexico we offer the corporate market
voluntary private pension plans and we
provide the retail market long-term savings and
risk products, customer solutions and advice.
AIVA is our Uruguay-based distribution
platform spanning the Latin American region.
It provides services to a network of independent
financial advisers, wealth managers and
other institutions.
Old Mutual-Guodian is a 50/50 joint venture
in China with Guodian, one of the country’s
largest power producers. It provides long-term
savings solutions through a tied adviser
force and a telesales company. Customers
include Guodian employees and affluent
bank customers.
Old Mutual Kotak Mahindra is our 26% owned
joint venture in India with Kotak Mahindra Bank,
providing life insurance, retirement pensions,
savings and investments.
Competitive environment
In South Africa, we rank first among our peers
(measured as total life sales), with over 25%
market share as at June 2014 and has been
growing steadily over the past five years.
In the rest of Africa, competition continues to
grow as companies seek to establish dominant
positions across the continent. Our primary
competitors in sub-Saharan Africa are a
combination of our large South African
insurance peers and large local firms, with
limited competition from the large
international insurers. We continue to defend
our dominant market positions in the Southern
Business review
Old Mutual Emerging Markets operates in
14 countries across Africa, Latin America and
Asia. We provide individuals, corporates and
institutions with long-term savings, protection,
lending, investment solutions and general
insurance in these geographies and through
these business segments:
South Africa
Retail Affluent offers a wide range of wealth
creation and protection products as well as
asset management products to middle-income
and high-net worth customers.
Mass Foundation offers a selection of savings
and protection products in the lower income
and foundation market, as well as lending
products through Old Mutual Finance (OMF).
Corporate segment caters for the needs
of institutional and corporate investors
and employers through retirement and
group risk products.
Old Mutual Investment Group (OMIG) is
a multi-boutique asset management and
investment business that offers clients access
to a full array of investment offerings, styles
and asset classes. Its priority is to deliver
performance through focus.
Mutual & Federal (M&F), our property &
casualty business, offers an extensive range
of insurance products and solutions to meet
personal, commercial and corporate needs.
It also provides cover for the agricultural,
engineering and marine sectors.
“ Solid operational delivery
and strategic progress
in Africa.”
Ralph Mupita
Chief Executive Officer
Old Mutual Emerging Markets
AOP (pre-tax)
+23%
+59%
Customers in Rest of Africa
36 Old Mutual plc
Annual Report and Accounts 2014
“ Improving data
connectivity and
affordability is a major
priority for the financial
services players… to
interact with and serve
their customers better.”
African Development Community (SADC)
region, while our businesses in the key growth
hubs of East and West Africa are developing
rapidly from a relatively small base.
In Mexico we have a strong corporate
business, with 4% of the corporate pension
market. In Colombia we have circa. 29% of the
voluntary unit trust market. In India, Kotak Life
Insurance ranks 9th out of 23 life companies
and in China our joint venture with Guodian
ranks 9th out of 24.
Market trends
The South African regulatory environment is
undergoing significant transformation in the
medium term as changes such as the proposed
Retail Distribution Review (RDR), Solvency
Assessment and Management (SAM),
Retirement Fund Reform, Treating Customers
Fairly and the Twin Peaks regulatory reform
are implemented. We continue to engage
constructively with the various regulatory
authorities in this regard. There has been a
recent shift in the rise of non-traditional
competitors as a result of the regulatory
changes that allow for such non-traditional
players to participate in the insurance industry
resulting in our competitors expanding into the
rest of Africa.
In the affluent market, there has been a rapid
rise in the black middle income class in South
Africa, driven by economic growth, government
income redistribution programmes and
empowerment initiatives. Gauteng has the
highest number of high income and high net
worth customers in the country, as well as the
largest share of the growing black middle class.
As a result of health care intervention in South
Africa, there has been a significant
improvement in the life expectancy of people
living with HIV. While this is an issue that
affects the whole of society, Old Mutual has
taken the decision to release some of the
reserves previously set aside due to mortality
rates, and will be using a proportion of these
provisions to increase the level of cover for
existing mass foundation customers.
Additionally, given the improved mortality
experience in South Africa, we will now be
able to offer customers products which are
more affordable and provide better value.
In the rest of Africa, markets are characterised
by a youthful demographic. The number of
middle class households is on the rise and this
is expected to drive consumer spending and
fuel demand for financial services products.
Despite the growing prosperity, a large
proportion of the market still falls into the
lower income strata and this is where we see
the importance of technology in improving
accessibility. Similar to South Africa, there has
been a steady development of regulations
across emerging markets in the rest of Africa.
Colombia and Mexico markets are
undergoing a number of reforms. For
Colombia, the tax reform is aimed at
increasing its tax base to cover fiscal deficit by
preventing tax evasion and increasing
corporate tax rate. For Mexico, tax reform is
primarily focused on providing tax benefits for
private pension plans and personal
deductions for individual pension plans.
Through its pension fund reforms, Colombia
plans to set up a new compulsory state-run
pension fund to operate alongside those of
private insurers. In Mexico, ongoing financial
reforms are aimed at strengthening existing
financials laws and the regulator’s ability to
enforce these laws. This includes structural
changes to the banking and securities
commission. Implementation of Solvency II by
Mexican insurers is ongoing and is expected to
boost confidence in the insurance sector.
In India, despite the parliamentary committee’s
recommendation to raise the foreign
investment limit to 49%, the government failed
to pass the Insurance Bill via the normal route.
Consequently the government opted to pass
the FDI limit via an ordinance which was
approved by cabinet in December 2014. This is
positive for our business as it will allow us to
move from the current 26% ownership levels to
49% in the near term.
The China Insurance Regulatory Commission
released an updated draft on 2nd generation
solvency reforms. The draft shows that China
Risk Oriented Solvency System (C-ROSS) will
be implemented timeously in 2015. Currently,
the results from the C-ROSS impact study are
wide ranging but it is clear that it will increase
regulatory compliance and risk assessment
requirements on insurers. Insurers will need to
adjust their business structures in line with
capital requirements.
As technology evolves, smartphones and
mobile devices are becoming increasingly
affordable. Improving data connectivity and
affordability is a major priority for the
financial services players who are introducing
technology-enabled applications and tools to
interact with and serve their customers better.
Key to technology transformation and
improving the customer experience is the
transition from old business line-specific
platforms and IT to an integrated capability in
line with growing customer-centric demands.
Old Mutual plc
Annual Report and Accounts 2014
37
Strategic report OLD MUTUAL
EMERGING MARKETS
BUSINESS REVIEW continued
Performance
Pre-tax AOP increased by 28% (23% including
long-term investment return to R11.0 billion)
benefiting from impact of higher asset based
fees, life underwriting profits (including
favourable mortality experience), the
consolidation of OMF and the turnaround
from an underwriting loss to profit at
Mutual & Federal (M&F).
NCCF declined by R3.4 billion to R21.3 billion
mainly due to relatively low-margin institutional
client outflows in a number of OMIG listed
asset management boutiques. Corporate was
successful in securing large single premium
flows and delivered a net positive NCCF of
R8.6 billion.
FUM increased by 8% to R905 billion driven by
positive cash flows, strong market performance
and investment returns of the international
assets enhanced by a stronger US dollar.
Gross sales increased by 12% to R185 billion.
In South Africa, Retail Affluent, Mass
Foundation and Corporate business grew sales
10%, 12% and 46% respectively reflecting, good
sales performance. OMIG sales declined by 4%
mainly due to several large mandates secured
in 2013. New Markets (Asia and Latin America)
grew sales by 6% underpinned by improved
productivity and the weaker rand.
Strategic direction
Our strategic intent remains focused on building
an African financial services champion. At the
heart of this strategy is the strengthening of our
Southern African franchise, strategic
acquisitions in East Africa and organic
growth in West Africa through alliances and
partnerships. In South Africa we continue to
develop our growth markets and we are
making good progress in aligning Old Mutual,
Nedbank and Mutual & Federal (M&F) as we
drive group collaboration. Across all our
businesses, we are simplifying our IT platforms
to support our strategy of serving customers via
omni-channel, including digital.
In South Africa, our key strategic themes
include: deploying an integrated proposition for
our mass market customers, capturing niche
middle-income and affluent growth segments,
improving profitability and growing our
umbrella offering in the Corporate business,
delivering consistent long-term investment
performance in OMIG, and growing M&F’s
competitiveness through multi-channel
distribution and Group collaboration.
In Rest of Africa, the macro-economic
environment remains attractive with positive
demographic trends and sub-Saharan Africa’s
aggregate annual GDP growth expected to
exceed 5%. We have now committed R3.6
billion of our R5 billion allocation and will
continue pursuing our strategy to become
the African financial services champion.
Regionally, our focus areas include:
■ SADC – defend our leading market shares
through new products and channels and by
expanding our offering to reach key
market segments
■ East Africa – complete and integrate
integrate our recent acquisition of UAP,
subject to regulatory approvals, and fully
leverage and commercialise Faulu to
accelerate organic growth
■ West Africa – continue to build value from
our Ecobank partnership and investigating
additional inorganic opportunities.
In Asia, we continue to grow our joint ventures
with Kotak Mahindra and Guodian. In Latin
America, we continue to build on our strong
Highlights (including P&C)
AOP (pre-tax)¹
Covered sales (APE)
NCCF (Rbn)
FUM (Rbn)2
Gross sales (Rbn)
2014
11 033
9 706
21.3
904.9
185.0
Rm
2013
Change
8 969
8 442
24.7
840.8
165.0
23%
15%
(14%)
8%
12%
Pre-tax FUM operating margin3
126bps
114bps
12bps
IFRS profit after tax attributable to equity holders of the parent (£m)
395
339
17%
1
From January 2014, all P&C business has been reported as part of Old Mutual Emerging Markets. Comparatives have
been restated
2 Comparative information for FUM has been restated to include Property & Casualty FUM of R2.9 billion
3 Pre-tax operating margin is calculated as pre-tax AOP divided by average FUM and has been restated to include
Property & Casualty
38 Old Mutual plc
Annual Report and Accounts 2014
Supporting
economic
transformation
in South Africa
We believe we have a responsibility to
support the communities in which we
operate and we continue to invest
significantly in infrastructure and local
projects that will achieve sustainable
change in the lives of our stakeholders in
these communities.
■ Volunteerism is core to our culture with
well over 1,000 employees volunteering
for various community projects
■ Old Mutual Education Flagship Project
made an impact on teaching and
learning in 134 schools to the benefit of
4,100 educators and 105,000 learners
■ Since inception, Masisizane Fund has
disbursed R152 million to small and
medium enterprises (SME) with an
additional R36 million disbursed for
wholesale funding through micro finance
institutions
■ Our Housing Fund, Schools Fund, IDEAS
Renewables Energy Fund and Agri Fund
have collectively invested over
R1.1 billion
■ Old Mutual and Nedbank jointly
pledged $1 million towards the African
Union-Private Sector Ebola fund
■ Our current BEE deal with our Black
Business Partners expires in May 2015.
Old Mutual Emerging Markets and
Nedbank (together ‘OMEM and
Nedbank consortium’), Brimstone
Investment Corporation Limited,
Women’s Investment Portfolio Holdings
Limited and Izingwe Financial
Investments (Proprietary) Limited have
initiated discussions on the nature of their
future relationships, including on-going
commercial relationships and potential
co-investment in BEE operating businesses
■ Old Mutual South Africa has achieved
Level 2 BBBEE status for the fourth
consecutive year.
Many of these initiatives are aligned to
South Africa’s National Development Plan
and are aimed at positive sustainable
outcomes to be shared by a broad base
of communities.
www.oldmutual.com/rb-inpractice
businesses in Colombia and Mexico, in
particular growing the retail mass and
corporate businesses in Mexico by expanding
our onshore distribution through AIVA.
Risk
Our risk strategy is integrally linked with our
business strategy, with risk mitigating actions
designed to improve the prospects of
achieving our goals.
In pursuing growth across Africa, we take on
both execution risk in concluding acquisitions
and then integration risk. Our M&A processes
are designed to ensure that we understand
the risks in the businesses we target. Learnings
from the due diligence inform the business
integration programmes post-acquisition.
Specialists in the various aspects of integration
provide expertise to ensure a sound and
complete transition.
The regulatory landscape is changing across
many of the jurisdictions in which we operate
Some changes have far-reaching implications
for us, but also provide new opportunities.
Responding positively is vital to achieving
competitive advantage and reducing risk.
A central part of our strategy is to build
integrated financial services businesses in
our key markets. To support this we plan
to grow our lending businesses in Kenya
(Faulu), Zimbabwe (CABS) and South Africa
(Old Mutual Finance and Old Mutual
Specialised Finance). The growth in credit
risk exposure will be mitigated by strong risk
management as the first line of defence and
tight oversight and governance as the second
line. Our strategy includes specified credit risk
exposure limits.
A subdued South African economy and
high customer indebtedness levels present
challenges to growing our business in
South Africa. However these effects will not
be felt uniformly across the market, and we
will be smart in identifying sectors where
we can grow our customer base. In line with
responsible business practice, we will also
work with customers who overstretch
themselves, to help with their debt
rehabilitation where possible.
We closely monitor the extent to which energy
supply constraints could impact business
operations in South Africa and are putting
appropriate plans in place to mitigate this risk.
Given our significant asset-based fee income,
we are exposed to market risk and a market
correction may cause earnings volatility.
Where we have liabilities with guarantees,
our Balance Sheet Management team
actively manages the associated market risks.
Outlook
Emerging markets continue to operate in a
challenging economic and socio-political
environment. The energy constraints in South
Africa remain a concern and are likely to
dampen growth prospects in 2015. However,
lower oil prices are expected to result in a
sharp decline in inflation and therefore
higher disposable income for consumers,
particularly those in the retail mass segment.
GDP in South Africa is expected to rise 2.1%
in 2015.
In sub-Saharan Africa, growth is expected to
remain at similar levels as 2014. However, the
growth outlook has deteriorated in Nigeria as
lower oil revenue could slow down the economy
and force the government to cut expenditure. In
Ghana, real GDP growth will be strong over the
coming years, fluctuating between 6% and 8%.
Forthcoming IMF support will underpin investor
confidence and rising oil and gas output will
provide a significant boost to the economy.
Growth prospects for Colombia and Mexico
remain fairly positive, but downside risks to
the 2015 outlook persist if low oil prices are
prolonged – the slump could reduce the
attractiveness of opportunities for energy
investment and oil revenues. The Chinese
government is expected to continue its
economic reform this year, which implies
weaker but more balanced economic growth.
We are on track to meet our objective of
10 million customers in the Rest of Africa by
2020 and we continue to aim for an overall
RoE target of between 20% to 25%.
Improved life
expectancy
HIV/AIDS is considered one of the most
prevalent causes of deaths in South Africa.
However, due to the increased use of
anti-retroviral treatment, people who are
HIV positive are now living longer and the
insurance industry (including Old Mutual)
is paying fewer death claims, particularly
in the low income market.
The improvement in mortality experience
of Old Mutual South Africa (OMSA), has
led to the following:
1. Launching an innovative new funeral
product range that requires no medical
underwriting and provides customers
with excellent value for money. Key
features of the new products are:
■ Lower premiums for customers: eg a
typical 33 year old will pay 20% less in
premiums under the new funeral range
■ Higher cover levels
■ More regular cash-backs whilst
maintaining profitability to
the shareholder.
2. Enabling existing customers to benefit
from the improvement in long term
mortality experience: eg for the 2014
cover reviews, 322 916 low income
market customers received increases
of up to 17% of their sums assured.
OMSA has recognised the significant
improvement in the life expectancy of
their customers as a result of health care
intervention in South Africa, and has
responded by developing products that are
more affordable, more competitive and
attractive, without compromising
the interests of the shareholder.
Old Mutual plc
Annual Report and Accounts 2014
39
Strategic report NEDBANK
BUSINESS REVIEW
“ Strong headline earnings
growth of 14% and good
progress with our five
strategic focus areas.”
Mike Brown
Chief Executive Officer
Nedbank
Business review
Structure and services
Nedbank is positioned as a bank for all,
servicing multiple market segments. It provides
a wide range of wholesale and retail banking
services and a growing insurance, asset
management and wealth management offering
through three main business clusters: Nedbank
Retail & Business Banking, Nedbank Corporate
& Investment Bank and Nedbank Wealth.
Nedbank Group is listed on the Johannesburg
and Namibian Stock Exchanges, with a market
capitalisation of over R120 billion at the end of
2014. Old Mutual is the majority shareholder,
with a 54% stake at 31 December 2014.
Geographic presence
Headquartered in Sandton, Johannesburg,
the banking group has a regional branch
network of over 1,050 staffed outlets across
South Africa, banking subsidiaries in six
African countries – Namibia, Lesotho, Malawi,
Swaziland and Zimbabwe – and an initial
shareholding of 36.4% in Banco Único in
Mozambique. In addition, Nedbank has
representative offices in Kenya and Angola
and a presence in key financial centres
including London, the Isle of Man, Guernsey,
Toronto and Dubai.
Since 2008 we have had a strategic alliance
with Ecobank Transnational International (ETI),
a banking group based in Togo, West Africa.
This enables us to service our customers in
39 countries across Africa. During 2014 we
became a 20% shareholder in ETI.
Competitive position and
competitors
South Africa has a strong, four-pillar banking
industry: Standard Bank holds 25% of total
advances, First Rand 22%, Barclays Africa 21%
and Nedbank 19%.
Nedbank Group is the fourth largest South
African bank measured on market capitalisation,
total assets and headline earnings. We are a
top-two corporate bank and a market leader
in commercial property finance. Our
repositioned retail bank has gained 2.7 million
customers over the past few years to 6.9
million. And through our pan-African banking
alliance with ETI, we give our customers access
to Africa’s largest banking network.
We hold leadership positions in sustainability,
transformation and community development;
and our Fair Share 2030 strategy will ensure
we continue making a difference in the
communities we operate.
2014
13,757
9,880
22,961
20,312
3.52%
0.79%
15.8%
11.6%
Rm
2013
Change
14%
14%
8%
5%
12,026
8,670
21,220
19,361
3.57%
1.06%
15.6%
12.5%
Highlights
AOP (pre-tax)
Headline earnings
Net interest income
Non-interest revenue
Net interest margin
Credit loss ratio
Return on Equity
Common equity Tier 1 ratio1
Headline Earnings
+14%
+8%
Net Interest Income
40 Old Mutual plc
Annual Report and Accounts 2014
IFRS profit after tax atributable to equity holders of the parent (£m)
315
327
(4%)
1 Calculated by Nedbank on a Basel III basis including unappropriated profits
“ Nedbank’s favourable
financial results for 2014
are underpinned by a
strong balance sheet.”
Performance
In 2014 Nedbank produced strong headline
earnings growth of 14% to R9,880 million
(2013: R8,670 million). Growth was driven by
increased net interest income, improvements
in impairments, and growth in non-interest
revenue, particularly in H2. Headline earnings
included associate income from our
shareholding in ETI for Q4.
Return on average ordinary shareholders’
equity (ROE) increased to 15.8% (2013: 15.6%)
and ROE excluding goodwill was 17.2% (2013:
17.2%), supported by a higher return on assets
of 1.27% (2013: 1.23%).
Our balance sheet is well positioned. Our Basel
III common-equity tier 1 ratio of 11.6% (2013:
12.5%) after acquiring approximately 20% of
ETI is above the mid-point of our Basel III 2019
internal target range. Funding and liquidity
levels remain sound, with year-end statutory
liquid assets and cash reserves increasing
19% to R82.6 billion (2013: R69.7 billion).
Strategic direction
We made good progress with our five key
strategic focus areas:
■ Client-centred innovation: We continue
to introduce innovative products such as
Send-iMali™, the MyFinancialLife™ retirement
calculator, our Greenbacks Rewards
Programme SHOP Card and, for wholesale
clients, our world-class Plug and Transact™
token and Market Edge, a merchant analytics
tool. To date we have converted 171 outlets to
the Branch of the Future format and we plan
to convert 75% of outlets by 2017. Digital
channels are increasingly important – in 2014,
digitally enabled clients increased by 48%
while the value of Nedbank App Suite
transactions increased 66% to R58 billion. Our
ability to add functionality without clients
having to reinstall the Nedbank AppSuite™
helped to make Nedbank a finalist once again
for the MTN ‘Best Android Consumer App’
award in 2014. Our banking solutions also
won us the 2014 ‘African Banker Award for
Innovation’. The introduction of our new
transactional switch in 2014 will further
enhance our electronic transactional
capabilities in the future.
■ Growing our transactional banking
franchise: Our strategic decision to build
our franchise and client relationships by
freezing transactional fees at 2013 levels
and reducing selected fees in some
businesses delivered rapid results: client
attrition metrics improved, cross-sell
increased and client gains continued in both
total and main banked categories. In Brand
Finance South Africa’s Top 50 Most
Valuable Brands Survey, our brand value
increased 15% to R12.6 billion in 2014 and
Nedbank was rated the country’s third
most valuable bank brand.
■ Optimise and invest: Across Nedbank
we have launched various cost and
efficiency optimisation initiatives. Through
our ‘rationalise, standardise and simplify’
IT strategy we are cutting our core systems
from 250 to 60; we decommissioned
18 in 2014, bringing the total so far to 74.
On 1 January 2015 our replacement SAP
enterprise resource planning system went
live for finance and procurement – on time,
on budget and within scope; human
resources will follow later in the year. In
addition, we are working on a range of
alliances and synergies with other
Old Mutual Group businesses in South
Africa and have made substantial progress
towards the 2017 Group target of R1bn
for collaborative initiatives. We expect less
than 30% of this to accrue to Nedbank.
■ Strategic portfolio tilt: The benefits from
our early action to reduce our home loan and
personal-loan portfolios have been clear in
our 2014 results. We continue to prioritise
growing activities that generate economic
profit, such as transactional deposits,
transactional banking and investment in the
rest of Africa. This shift of emphasis over the
past four years has enabled the group to
maintain a sound balance sheet and reduce
impairments while delivering dividend
growth ahead of Headline Earnings per
Share growth.
■ Pan-African banking network: During
2014 we concluded the acquisition of an
initial 36.4% shareholding of Banco Único in
Mozambique, with a pathway to control in
2016. In our Rest of Africa subsidiaries we
made good progress in implementing a
standardised operating model, and plan to
introduce our Flexcube IT system in Namibia
in 2015. This has strengthened Nedbank’s
franchise and client proposition in the
Southern African Development Community
and East Africa. In West and Central Africa
our alliance with ETI continues to deliver
value, and in October 2014 we exercised
our rights to subscribe for a 20%
shareholding in ETI for US$493.4 million.
Old Mutual plc
Annual Report and Accounts 2014
41
Strategic report NEDBANK
BUSINESS REVIEW continued
Outlook
The South African economy is forecast to
improve modestly off a low base, although
growth will be constrained by disruptions to
power supply and weaker growth anticipated
in key export markets, particularly in the
eurozone and China.
GDP growth is currently forecast at 2.5% for
2015 as the economy recovers from the effects
of strike action and exports are boosted by
a weaker rand. Risk to this appears to be on
the downside. The sharp drop in global fuel
prices has improved the inflation outlook,
and interest rates are expected to remain
unchanged at current levels until late in the
year. The softer interest rate outlook and lower
borrowing costs should support consumer
credit demand and limit credit defaults in 2015,
notwithstanding the weak job market and still
high consumer debt levels.
Retail banking conditions are therefore likely
to improve modestly, but growth in wholesale
banking may moderate from current levels as
fixed-investment plans and credit demand will
be limited by the severity and extent of
infrastructure constraints, rising production
costs, soft global demand and low
international commodity prices.
Risk
Nedbank’s favourable financial results for
2014 are underpinned by a strong balance
sheet across all the core dimensions of capital
adequacy, liquidity and funding; credit asset
quality aided by the strategic portfolio tilt
strategy and appropriately conservative
provisioning; excellence in risk and balance
sheet management; an enabling but prudent
risk appetite framework; and a seamless
implementation of Basel III.
During 2014 Nedbank underwent a number
of strategic structural changes. Together with
volatile macro-economic conditions, level of
credit risk, changing consumer needs and the
impact of regulation, this will bring a high level
of execution risk. Execution risk will be given
heightened focus in a refresh of our best practice
Enterprise-wide Risk Management Framework
(ERMF), which underpins risk management. The
ERMF sets out our risk appetite, comprehensive
stress and scenario testing, and we have a robust
and strategic risk plan for the future.
Credit and liquidity risk remain a key focus and
our strategic portfolio tilt strategy over the last
four years has enabled us to maintain a sound
balance sheet and reduce impairments.
Our African strategy and recent further
investments in ETI and Banco Único make risk
management in our African investments and
operations a key focus area. Our pan-African
risk strategy allows us to address our risk
appetite holistically and contains extensive
initiatives to support risk frameworks and
programmes and enhance governance and
risk management in these investments.
We are well positioned to elevate
risk management to become a
competitive differentiator.
Fair Share 2030 – building
a better society
To be a thriving bank in the long term,
we need to operate in a thriving society.
Fair Share 2030 is Nedbank’s strategy
to get money working for the future we
all want. It provides an annual flow of
funding – starting with a target of R6 billion
in 2015 – to support new products, services,
and projects that promise to deliver
progress towards defined social and
environmental goals.
We want this lending to enable outcomes
that would otherwise not have happened
– so that we actively contribute to closing
the gap to the future we want, rather than
merely reclassifying existing business.
A Proof of Concept phase conducted in
2014 generated important insights that
have informed our business planning and
will prove invaluable as we scale up
through 2015 and beyond. In particular, we
now understand better how new products
and services can be developed and new
partnerships created to drive intentional
non-financial impacts while still generating
a decent financial return.
www.oldmutual.com/rb-inpractice
42 Old Mutual plc
Annual Report and Accounts 2014
OLD MUTUAL WEALTH
OLD MUTUAL WEALTH
BUSINESS REVIEW
BUSINESS REVIEW
wholesale channels and other Group
businesses, and are committed to providing
responsible investment options that meet our
customers’ needs
■ International cross-border: Focusing
on high-net worth and affluent local
customers and expatriates in key markets
across the world, our innovative, advice-led
product range serves their needs from a
number of international jurisdictions
■ Intrinsic: The UK’s largest distribution
network with over 3,000 financial advisers,
offering expert individual advice to help
our customers secure their financial future
■ Quilter Cheviot: One of the UK’s leading
discretionary investment managers, we
build and actively manage investment
portfolios tailored to the individual needs of
an affluent and high net-worth client base
■ Italy: Offers saving and investment
solutions for affluent and high net-worth
customers, distributed through private
banking partners.
Competitive environment
We operate in a dynamic and evolving
industry where we compete with traditional
insurers, asset managers and advice
propositions. Key competitors include
Hargreaves Lansdown, Standard Life and
St James’s Place. We have a market-leading
retail platform in the UK and our prominence
in asset management earned us top-10
rankings for UK net retail sales in the 2014
Pridham reports.
Among numerous awards in 2014, OMGI
won ‘Global Group of the Year’ at the 2014
Investment Week Fund Manager of the Year
Awards and our International business
received accolades for ‘Best New Product in
Asia’ for the Silk Life Plan and ‘Best Online
Proposition in Europe and UK Offshore’ for
Wealth Interactive.
Market trends
Investment markets in the UK and Europe were
volatile across 2014 and the prospects for
global economic recovery remain uncertain.
The popularity of risk-adjusted absolute return
asset classes has increased as investors look
for alternative investment options to earn
positive returns. Equity asset classes remain
more attractive than bond markets as interest
rates remain low. In equity markets we have
experienced strong flows as well as
strong returns.
Old Mutual plc
Annual Report and Accounts 2014
43
Business review
Structure
Old Mutual Wealth is one of the UK’s largest
investment and asset management businesses.
We provide advice-led investment solutions to
customers in the UK and a number of
international cross-border markets – including
the Far East, Middle East, Europe, Latin America
and South Africa – through our International
cross-border business. We also operate in Italy
and have a life book closed to new business
in Switzerland.
In the past year we have transformed the
business. We acquired the Intrinsic adviser
network in July 2014 and Quilter Cheviot, a
discretionary fund manager, in February 2015.
We also sold six of our European businesses in
2014 and early 2015, simplifying our operations
to focus on a select number of core growth
markets while reducing our operational and
regulatory risk exposure.
Products and services
■ UK: We are a leading provider of
platform-based retail investments, offering
innovative solutions for wealth building
and management. We serve a largely
affluent customer base through multi-
channel distribution
■ Old Mutual Global Investors (OMGI): A
leading UK-based investment manager, with
highly rated, experienced portfolio
managers and a strong long-term track
record. We distribute products through
“ Strong delivery while
significantly transforming
our business.”
Paul Feeney
Chief Executive Officer
Old Mutual Wealth
Net Client Cash Flows
+61%
+11%
AOP pre tax, excluding
divested European business
Strategic report OLD MUTUAL WEALTH
BUSINESS REVIEW continued
In the UK, our major market, we benefited
from the increase in ISA allowance in 2014 and
are well positioned to take advantage of the
new pension withdrawal rules outlined in the
2014 Budget, effective from April 2015. The
increased flexibility and changes in the
charging basis of the UK platform market
have resulted in higher levels of registration
and re-registration of non-insurance wrapped
business for us and the industry as a whole.
The Retail Distribution Review (RDR) requires
all platform customers to be migrated onto
transparent charging structures no later than
April 2016; we have committed to migrating
all customers by December 2015.
Performance
Old Mutual Wealth AOP increased by 5% to
£227 million (2013: £217 million). This reflected
strong growth in our asset management and
UK Platform businesses, partially offset by the
reduction in AOP from the divestment of some
of our European businesses. On a like-for-like
basis, AOP increased by 11%.
NCCF of £3.7 billion was up by 61% (2013:
£2.3 billion), with strong sales in OMGI, UK
Platform and Italy. Retention in our closed
book of business also improved.
FUM rose by 5% to £82.5 billion, due to good
fund performance and strong NCCF, despite
volatile market conditions. Excluding divested
operations, FUM grew by 12%.
Gross sales increased by 11% to £16.0 billion
(2013: £14.4 billion), with strong performances
by OMGI and the UK Platform.
Strategic direction
Our strategy is to create the UK’s leading
vertically-integrated retail investment business
in the UK, enabling positive futures for our
customers and with a focus on responsible
investment. We will achieve this by offering
advice, investment platforms, wealth solutions
and asset and investment management
propositions that are each outstanding in their
fields and which when combined as an
integrated proposition, deliver superior
outcomes for customers and shareholders
alike. We are doing this by combining our UK
44 Old Mutual plc
Annual Report and Accounts 2014
and International platforms with the existing
capabilities of OMGI and the recently-
acquired advice capabilities in Intrinsic and the
leading discretionary investment management
skills of Quilter Cheviot.
The priorities for Old Mutual Wealth over the
next three years are to:
■ Continue to build an integrated business
with a strong core culture and a trusted
brand. We will focus on the underlying
strengths of each of our businesses to
ensure we fully capitalise on the benefits of
integration, and build a central culture whilst
preserving our individual business identities
■ Become recognised as a responsible
business, including offering innovative
products and funds with responsible
investment features
■ Successfully transform our platforms to
be more profitable, flexible and competitive
through successful implementation of our
outsourcing agreement with IFDS and the
delivery of Wealth Interactive
■ Continue to build an outstanding asset
and investment management
capability to meet our customers’ investment
needs by bringing in new talent and
integrating new investment capabilities into
our product plan
■ Expand our product proposition through
an enhanced protection product suite, an
improved retirement offering to capitalise
on the UK Budget changes and
International solutions that meet customer
needs across many jurisdictions
■ Diversify our distribution to reach a
greater share of the market – capitalising
on the new customer channels gained
through the Intrinsic and Quilter Cheviot
acquisitions, supported with a digital
proposition online.
Risk
One of the key risks facing Old Mutual Wealth
is increased execution risk relating to the
acquisition and integration of Intrinsic and
Quilter Cheviot and the implementation of the
outsourcing arrangement with IFDS. Execution
risk arises as a result of our strategy to become
the leading retail investment business. We accept
this risk within reasonable limits to further our
strategic aims. We mitigate this risk by:
■ Ensuring that strong governance structures
and oversight of the integration of Intrinsic
and Quilter Cheviot and the implementation
of the IT outsourcing programme is in place
■ Implementing Group risk governance and
monitoring processes via specific check
points and aligned escalation procedure
within acquired companies
■ Maintaining our focus on the control
environment and prompt escalation to
mitigate operational risk arising
■ Ensuring customer service remains a priority
by monitoring performance against agreed
service standards and against measures of
customer and adviser satisfaction.
The environment in which we operate is
changing in relation to our customers’
needs and the growth of conduct regulation.
Our strategy has been designed to meet these
changing consumer needs and to react to
changing regulations. We proactively prepare
for anticipated regulatory changes and
engage with regulators to ensure we are
aligned and responsive to those changes.
Market risk is inherent to our business. Global
market volatility and economic uncertainty
may negatively impact fund-based revenues.
We seek to manage and mitigate this risk
through a comprehensive range of internally
Highlights
AOP (pre-tax)
NCCF (£bn)
FUM (£bn)
Gross sales
Platform FUM invested in OMGI (£bn)
Pre-tax revenue operating margin1
£m
2013
Change
2014
227
3.7
82.5
217
2.3
78.5
15,992
14,434
3.7
36%
2.3
36%
5%
61%
5%
11%
61%
–
IFRS profit after tax attributable to equity holders of the parent2
(37)
38
(197%)
1 Pre-tax operating margin is calculated as pre-tax AOP divided by net revenue
2
A full reconciliation of IFRS profit to AOP can be found on page 61. The main adjusting items include restructuring
costs associated with our outsourcing arrangement with IFDS, one-off losses from the disposal of our non-core
subsidiaries in Poland, Austria, Germany and Liechtenstein, as well as the amortisation and impairment of goodwill
and acquired intangibles
“ …we continue to
target £270 million of
pre-tax AOP for 2015
excluding earnings
from Quilter Cheviot.”
managed investment solutions, which are
designed to cater for a wide range of
economic conditions.
Outlook
We made significant progress in transforming
our business in 2014. Given stable markets,
we continue to target £270 million of pre-tax
AOP for 2015 excluding earnings from
Quilter Cheviot.
Following our acquisition of Quilter Cheviot
we will enhance our range of investment
services tailored to the growing affluent and
high-net worth customer segments and offer
further opportunities for our existing
customer base.
The addition of our UK Platform products
to the Intrinsic restricted advice panel has
already generated good growth over 2014
and we anticipate this will continue in 2015.
We expect sales of our protection products
through Intrinsic to gain traction next year and
further grow our business. We launched our
Practice Buy-Out initiative in early 2015, which
will encourage retention while growing our
adviser network, and will assess opportunities
to further scale our model as they arise.
In OMGI, the recent addition of new teams
and fund managers reflects continuing action
to broaden our product range. We plan
further development of our asset management
capabilities, in particular through our
offshore distribution strategy and the inclusion
of Cirilium.
WealthSelect is demonstrating popularity and
performance as an investment solution and we
expect that momentum to continue into 2015.
In the UK Platform we have removed our
pension drawdown fee and minimum platform
charge to ensure we are competitive and
well-positioned to attract new investment from
customers looking to take advantage of the
new pension withdrawal rules that come into
effect in April 2015.
With Wealth Interactive now implemented in our
International business, we can deliver flexible
and user-friendly products on an efficient
platform, while adapting to the challenging
regulatory environments in which we operate.
We expect our Silk Life Plan to boost sales
volumes in our Asian markets. In Hong Kong
we launched the Wealth Management Plan on
1 January 2015 to comply with new regulation
in the region. And in Florida we obtained an
offshore insurance exemption in 2014 which
we expect to increase local sales to non-
resident foreign nationals.
Our earning profile will continue to shift to our
new modern source of profits and away from
our heritage businesses. We believe we have
the right business model to drive substantial
growth, earnings and value.
Sustainable investments
for sustainable returns
of resources in a carbon constrained
environment. Current investment examples
include companies involved in railway
transportation, energy efficient solutions,
water infrastructure, recycling packaging,
and organic and natural food.
It was named Best New Entrant in the
Climate Change 2010 Awards and,
more recently, was shortlisted for a
performance award at the Professional
Adviser Awards 2015.
At Quilter Cheviot, we noticed investors were
realising that financing companies which
provide the products, services and technologies
to deliver a cleaner and more efficient
economy can deliver strong investment
performance. In response we launched
our sustainability investment strategy, the
Climate Assets Fund, in March 2010.
The Climate Assets Fund seeks to achieve
long-term capital appreciation and income
through multi-asset allocation – investing
in global equities along with fixed interest
and other alternative investments such as
green infrastructure funds. The investment
focus is on companies offering solutions
to the emerging global challenges of
delivering ‘more with less’ for a rapidly
growing population with a finite supply
www.oldmutual.com/rb-inpractice
Old Mutual plc
Annual Report and Accounts 2014
45
Strategic report INSTITUTIONAL ASSET MANAGEMENT
BUSINESS REVIEW
Old Mutual’s Institutional Asset Management business
consists of US-based affiliates (OM Asset Management)
and a non-US affiliate.
Market trends
Current institutional search activity favours
specialised strategies in asset classes such
as global equity, US equity and alternatives
(including real estate and timber). Investors
remain focused on products with potential
for meaningful outperformance (alpha
generation), as well as strategies to diversify
their investment portfolios.
Performance
OMAM generated strong 2014 results in
volatile equity markets, including increased
profits and FUM growth.
IFRS AOP of $211 million was up 32%
(2013: $160 million) – due largely to increases
in management fees resulting from higher
average FUM and increased
performance fees.
OMAM FUM grew 11% to $220.8 billion
(31 December 2013: $198.8 billion) with
$12.9 billion of market appreciation
contributing 6.5% growth and $9.5 billion
of positive net client cash flows contributing
4.8% growth.
The OMAM Global Distribution initiative
raised $5.5 billion in total assets funded in
2014 as we continued to work with our
affiliates to expand their non-US client base in
key markets and jurisdictions around the world.
OM Asset Management
(OMAM)
“ A successful IPO, strong
net client cash flows of
$9.5 billion and AOP up
by 32%, as business
momentum continues.”
Peter Bain
Chief Executive Officer
OM Asset Management
Business review
We are an institutionally driven active
investment management business,
working through a diversified multi-boutique
framework that seeks to generate consistent
and sustainable returns for clients around the
globe. We provide strategic capabilities to
our affiliates, helping them to become their
clients’ trusted partner by delivering superior
investment performance, innovative offerings,
and focused service.
We offer a broad range of investment
strategies through seven affiliated
investment firms:
■ Acadian Asset Management LLC
■ Barrow, Hanley, Mewhinney & Strauss, LLC
■ Campbell Global, LLC
■ Copper Rock Capital Partners LLC
■ Heitman LLC
■ Investment Counselors of Maryland, LLC
■ Thompson, Siegel & Walmsley LLC.
AOP pre-tax
+32%
40%
Operating margin before
affiliate key employee distributions
46 Old Mutual plc
Annual Report and Accounts 2014
Highlights: Old Mutual Asset Management1
AOP (pre-tax)
Operating margin, before affiliate key employee distributions
Operating margin, after affiliate key employee distributions
Net client cash flows ($bn)
Funds under management ($bn)
2014
211
40%
33%
9.5
2013
160
35%
30%
10.1
220.8
198.8
$m
Change
32%
(6%)
11%
IFRS profit after tax attributable to equity holders of the parent (£m)2
77
54
43%
1 2013 comparatives include Echo Point, which was discontinued in Q4 2013
2
Institutional Asset Management reported, includes non-US affiliate
Strategic direction
OMAM’s successful partial IPO in
October 2014 enhances our growth
potential by providing broader financing
options to support the execution of our
business strategy and provides a strong
platform for new partnerships.
We will continue to focus on the core
elements of our growth strategy:
■ Delivering core affiliate growth through
strong investment performance and positive
net client cash flows. Our affiliates are
recognised leaders in their respective
investment disciplines, and their superior
long-term investment performance
continues to attract new business from
around the globe.
■ Investing in collaborative organic growth
of existing affiliates through product
diversification. We work closely with our
affiliates to identify investment strategies
that build on their existing capabilities, while
enabling them to diversify their businesses,
product offerings and client bases. We are
currently working with several affiliates to
expand their product offerings to include
multi-asset class and liability-driven
investment strategies, as well as global
and non-US equity products.
■ Expanding global distribution to drive new
flows. Our global distribution platform now
services international marketplaces through
experienced professionals, each of whom
brings extensive investment and sales and
marketing experience.
■ Establishing new affiliate partnerships
through investments in additional affiliates.
Since our IPO, we have been very active in
identifying and developing relationships
with a wide range of high-quality investment
management boutiques. We will continue
to cultivate relationships with firms that
seek an engaged and supportive partner
to help them grow and enhance their
business for the long term.
Risk
Market risk is inherent to our business.
Global market volatility and economic
uncertainty may negatively impact asset-
based management fee revenues. This risk is
mitigated by the quality and diversity of the
investment products offered by our seven
affiliates. The new regulatory requirements
following our public listing are an important
area of focus for us and we are actively
engaged where needed to mitigate this
risk and proactively monitor the various
jurisdictions in which we operate for any
relevant regulatory changes. As part of our
strategy to grow the business we aim to
selectively pursue partnerships with additional
boutique asset management firms. Execution
of these growth opportunities creates change
risk and requires significant resource
commitment. These risks are mitigated through
extensive due diligence prior to executing a
transaction, including ensuring that target
firms have track records of operating as
successful, standalone enterprises as well as
demonstrating a strong cultural fit and shared
strategic vision with us.
Outlook
Our business continues to pursue growth
initiatives, including developing capabilities
in multi-asset class, liability-driven investment
and global/non-US equities and further
penetration of non-US markets through our
Global Distribution initiative. We also continue
to seek partnerships with at-scale asset
management boutiques with strong investment
and executive talent and a vision to enhance
and expand their business.
OMAM announced its inaugural quarterly
dividend of $0.08 per share based on a
25% payout on 2014 economic net income
of $1.26 per share.
Enhanced financial
flexibility
Rogge Global
Partners
Following its successful IPO, OMAM
has been trading on the New York Stock
Exchange since October 2014. The IPO will
enhance OMAM’s financial and operating
flexibility to deploy capital to continue to
grow, develop further its multi-boutique
asset management business and provide
the Group with enhanced financial flexibility.
The IPO included 22 million OMAM shares
at $14 a share. The underwriters also
exercised an overallotment option on a
further 2.2 million OMAM shares, reducing
Old Mutual plc’s shareholding to 78.8%.
The gross proceeds for the Group from the
IPO process totalled £317 million, including
the pre-IPO dividend.
Rogge Global Partners is a global
fixed-income specialist providing
sophisticated strategies to institutional
investors.
Underperformance in 2013 and some
senior personnel turnover resulted in
net outflows of £6.3 billion in 2014. FUM
now stands at £32.3 billion. Investment
performance improved meaningfully in
2014, with 80% of portfolios beating their
benchmarks on an asset-weighted basis
compared to 26% in 2013. The longer-term
track records also remain strong across the
product line for three-year, five-year and
longer periods.
The business has now completed a
re-organisation to provide stable
management and investment teams
going forward and future succession. It is
confident that it now has the right platform,
products and performance going forward,
although a risk remains for further outflows
due to the delayed impact of the legacy
issues on certain client mandates.
Old Mutual plc
Annual Report and Accounts 2014
47
Strategic report FINANCIAL DISCLOSURE
SUPPLEMENT
Five-year analysis of key shareholder metrics
covering profit, cash, capital and value.
Adjusted Operating
Profit (AOP) reflects the
underlying performance of
the business. It is intended
to exclude any distortions
from one-off items,
market volatility and
accounting treatments
that are not reflective of
Old Mutual’s performance.
Long-Term Investment
Return (LTIR) represents
that rate of return that is
expected to be earned
on assets in the long term.
This eliminates short- and
medium-term effects
of market volatility.
Excess assets – The value
of assets that exceed the
required assets to be held
for regulatory purposes.
Earnings
AOP core operations (£m)
Old Mutual Emerging Markets
Nedbank
Old Mutual Wealth
Institutional Asset Management
Finance costs
LTIR on excess assets
Net interest payable to non-core operations
Other net expenses
AOP
EPS (pence)
AOP (ZARm)1
EPS (cents)
Dividends declared
Special
Full year
Interim
Total (£m)
Dividend per share (pence)
Dividend per share (cents)1
Holding Company cash
plc opening balance
Operational remittances from business units
Net capital flows
Net debt (repaid)/raised
Interest paid
Group head office expenses4
Other operational flows4
Ordinary cash dividends
Special dividend
plc closing balance (£m)
2014
617
770
227
131
1,745
(78)
24
(5)
(81)
1,605
17.9
2013
594
797
217
111
1,719
(92)
43
(11)
(47)
1,612
18.4
2012
648
825
195
91
1,759
(130)
54
(18)
(53)
1,612
17.5
2011
659
755
223
67
1,704
(128)
37
(23)
(75)
1,515
18.02
20103
642
601
248
72
1,563
(128)
31
(39)
(56)
1,371
16.32
28,683
319.9
24,335
277.8
20,976
227.7
17,641
209.52
15,505
184.82
2014
2013
2012
915
2011
2010
293
115
408
8.70
279
98
377
8.10
155.48
122.28
2014
545
464
504
1,513
–
1,513
(64)
(55)
20
(411)
–
1,003
2013
472
544
114
1,130
(176)
954
(78)
(54)
58
(335)
–
545
238
79
1,232
25.00
325.30
2012
441
470
2,174
3,085
(1,073)
2,012
(142)
(54)
(117)
(268)
(959)
472
178
76
254
5.00
58.22
2011
438
748
(57)
1,129
(339)
790
(155)
(57)
(25)
(112)
–
441
145
54
199
4.00
45.24
2010
414
476
–
890
(110)
780
(138)
(60)
(36)
(108)
–
438
Note: Cash is as per plc holding company and does not include any free cash held in subsidiaries. Allocations between lines have been restated
where necessary to ensure a like-for-like comparison.
1 Sterling AOP, EPS and dividend per share are converted into ZAR multiplying the reported AOP, EPS and dividend per share by the average
ZAR:GBP rate of each year
2 Restated to reflect the share consolidation
3 Excludes Nordic, which was discontinued in 2010
4 Group costs reflect the income statement charge. Any subsequent recharges or recoveries from BUs are included in Other operational flows.
Comparatives have been restated to reflect this
48 Old Mutual plc
Annual Report and Accounts 2014
Total shareholder
return is an annualised
percentage that is
calculated by adding the
appreciation in the share
price and the total
dividends paid to
the shareholders.
Total shareholder return (rebased)
)
%
0
0
1
=
0
1
0
2
(
g
n
i
s
o
c
l
l
a
u
n
n
A
:
s
t
i
n
U
300
250
200
150
100
50
2010
2011
2012
2013
2014
Old Mutual plc – LSE
FTSE100
Share price indices (rebased)
Old Mutual plc – JSE
JSE All Share
)
%
0
0
1
=
0
1
0
2
(
g
n
i
s
o
c
l
l
a
u
n
n
A
:
s
t
i
n
U
300
270
240
210
180
150
120
90
2010
2011
2012
2013
2014
Measure of the Group’s
ability to meet its interest
payments by calculating
number of times a company
could make interest
payments on its debt using
pre-tax earnings excluding
African profits.
Measure of the Group’s
ability to meet its interest
payments by calculating
number of times a company
could make interest
payments on its debt using
pre-tax earnings excluding
African profits.
Old Mutual plc – LSE
FTSE100
Balance sheet and financing
Net assets (£m)
Net debt (£m)
Total interest cover
Hard interest cover
Net asset value per share
Regulatory capital
Old Mutual plc
OMLAC(SA)
Old Mutual Wealth
Nedbank (Total capital ratio)
FGD
FSV
Solvency I
Basel III/II.5/II
Old Mutual plc – JSE
Nedbank Group – JSE
JSE All Share
2014
9,545
467
16.8x
5.0x
140.3
2014
163%
3.1x
2.6x
14.6%
2013
9,037
746
14.4x
4.2x
137.7
2013
169%2
3.3x
2.6x2
15.7%
2012
9,773
1,000
8.8x
1.9x
145.8
2012
159%2
4.0x
2.3x2
15.1%
2011
9,147
2,002
7.7x1
1.7x1
140.21
2011
154%2
4.0x
2.0x2
14.6%
20101
9,736
2,436
8.1x
2.6x
151.0
2010
146%2
3.9x
2.8x2
15.0%
Note: Nedbank’s capital requirements: 2013 and 2012 – Basel III; 2011 – Basel II.5; 2010 and 2009 – Basel II.
1 Excludes Nordic, which was discontinued in 2010
2 As reported to the Prudential Regulatory Authority (PRA), previously Financial Services Authority (FSA)
Old Mutual plc
Annual Report and Accounts 2014
49
GROUP EXECUTIVE COMMITTEE
The Group Executive Committee comprises the
Group Chief Executive, the Chief Operating Officer,
the Group Finance Director and eight other members
of senior executive management of the Group.
4. Peter Bain (56)
President and Chief Executive Officer,
OM Asset Management plc
Peter Bain is President and Chief Executive Officer
of OM Asset Management plc, the 78.8%-owned
US-based institutional asset management business
of Old Mutual plc. He has more than two decades
of experience leading and advising firms in the
investment management industry. Previously he was
a Senior Executive Vice President at Legg Mason, Inc.,
where he held leadership positions from 2000 to
2009. Most recently he served as Head of Affiliate
Management and Corporate Strategy there, with
responsibility for overseeing the firm’s investment
managers. Prior to that, he was Chief Administrative
Officer, responsible for the firm’s overall
administration and operations.
7. Ian Gladman (50)
Group Strategy Director
Ian Gladman has been Group Strategy Director
since January 2012. He had previously worked at
UBS Investment Bank for 16 years, most recently as
Co-Head of Financial Institutions, EMEA, covering a
wide range of UK and European insurance
companies, banks and asset managers. He was
previously Head of Corporate Finance, South Africa
for UBS from 1998 to 2001, during which time he led
the local UBS team advising Old Mutual on its
demutualisation and original listing. He also
advised Nedbank on a number of assignments and
BoE on its acquisition by Nedbank. Prior to joining
UBS, he worked at Goldman Sachs and at
JP Morgan.
5. Mike Brown (48)
Chief Executive, Nedbank Group
Mike Brown has been Chief Executive of Nedbank
Group Limited since March 2010. He was previously
the Chief Financial Officer of Nedbank Group and
of Nedbank Limited from November 2004. Prior to
that, he headed Property Finance at Nedbank
and before that he was an executive director of
BoE Limited.
6. Paul Feeney (51)
Chief Executive, Old Mutual Wealth
Paul Feeney has been Chief Executive of Old Mutual
Wealth, a leading UK wealth and investment
management group, since July 2012. He joined
Old Mutual in January 2012 as CEO of Asset
Management within the Long-Term Savings Division
before moving into his present position. Prior to
joining Old Mutual, he was Executive Director and
Global Head of Distribution for BNY Mellon Asset
Management and, before that, Group Managing
Director of Gartmore Investment Management and
CEO of Natwest Private Banking.
8. Sue Kean (52)
Chief Risk Officer
Sue Kean has been Chief Risk Officer since January
2011, having joined Old Mutual in July 2010 as
Head of Governance and Regulatory Compliance.
She has over 25 years’ experience in insurance and
financial services. She previously worked at Friends
Provident and Aviva in a variety of risk and
regulatory roles. She also spent time at the Financial
Services Authority, and held positions in relation to
Solvency II on industry bodies such as the Chief Risk
Officer Forum and the European insurance trade
body, the Comité Européen des Assurances (CEA).
9. Gail Klintworth (51)
Group Customer Director
Gail Klintworth has been Group Customer Director
since August 2014. She had previously worked for
Unilever for 28 years, most recently as their Chief
Sustainability Officer from 2012 to 2014. She was
appointed Executive Vice President Global Savoury
Category, a €5 billion business with a presence in
150 countries, in 2010. Between 2007 and 2010, she
was CEO of Unilever South Africa, responsible for a
turnover of €1.2 billion. In 2004, she was appointed
Chairman of Unilever Home and Personal Care,
based in South Africa, with full executive responsibility
for operations there, in which capacity she also led
a cross-functional board team and was a member
of the Africa-Middle East regional board.
1. Julian Roberts (57)
Group Chief Executive
Also Chairman of NYSE-listed OM Asset
Management plc and a non-executive director of
Nedbank Group Limited, Nedbank Limited and
Old Mutual Emerging Markets.
Julian Roberts has been Group Chief Executive of
Old Mutual plc since 2008. He joined the Group in
August 2000 as Group Finance Director, moving on
to become CEO of Skandia following its purchase
by Old Mutual in 2006. He was previously Finance
Director of Sun Life & Provincial Holdings plc
(part of the AXA Group) and, prior to that,
Director and CEO of Aon UK Holdings Limited.
2. Paul Hanratty (53)
Chief Operating Officer and Chairman,
Old Mutual Emerging Markets
Also a non-executive director of Old Mutual Wealth
Management Limited
Paul Hanratty has been Chief Operating Officer
since July 2014 (having previously been Group
Operating Officer from March 2013) and Chairman
of Old Mutual South Africa (OMSA) since
September 2009. He joined OMSA in 1984. He is a
Fellow of the Institute of Actuaries and has held a
number of roles at Old Mutual, including Head of
Product Development, General Manager Finance
and Actuarial, Head of the Retail business of
OMSA, and CEO of Long-Term Savings. He joined
the Board of OMSA’s life business in 2003 and
became Managing Director of OMSA in 2006.
3. Ingrid Johnson (48)
Group Finance Director
Also a non-executive director of Old Mutual Wealth
Management Limited
Ingrid Johnson has been Group Finance Director
since July 2014. Prior to taking on this role, she had
20 years’ broad-based financial services
experience with Nedbank Group in both line and
financial roles. She was appointed to the Nedbank
Group Executive Committee in 2008. Her most
recent responsibility there, in addition to being a
Prescribed Officer, was as Group Managing
Executive: Retail and Business Banking. She assumed
this role in August 2009, taking responsibility for the
turnaround of the Retail Banking cluster and
managing the integration of Imperial Bank, in
addition to retaining her role of leading the
commercial cluster, Business Banking, which she had
held since 2005.
50 Old Mutual plc
Annual Report and Accounts 2014
10. Ralph Mupita (42)
CEO, Old Mutual Emerging Markets
11. Don Schneider (57)
Group Human Resources Director
Ralph Mupita has been CEO of OMEM since
February 2012, after joining Old Mutual in 2001.
His previous roles in Old Mutual include Managing
Director of Old Mutual Unit Trusts and OMSA’s
Strategy Director. In 2008, he was appointed
Managing Director of OMSA’s Retail Affluent
division and in April 2011 he became CEO of
Old Mutual Life and Savings. He is a director of
OMEM, OMLACSA, Old Mutual Africa Holdings
and OMIG, and serves on various external boards
such as the Association for Savings & Investments
SA, Business Leadership South Africa, and the
University of Cape Town (Graduate School of
Business) advisory board.
Don Schneider has been Group HR Director since
May 2009. He was previously Senior Vice President
and Head of Human Resources for the Global
Wealth Management Division of Merrill Lynch. Prior
to that, he headed HR for their Global Markets and
Investment Banking Division. He originally joined
Merrill Lynch in 1997 as Head of International
Human Resources, based in London, where he was
responsible for all HR activities outside the US. Prior
to that, he worked for Morgan Stanley for 13 years
and held a variety of senior HR roles in both
New York and London.
5
8
4
1
7
9
11
10
2
3
6
Old Mutual plc
Annual Report and Accounts 2014
51
Strategic report Contents
Financial review
Risk and capital management
54
62
52 Old Mutual plc
Annual Report and Accounts 2014
FINANCIAL REVIEW
AND RISK
In this section, we set out a review of our
financial performance during 2014, and our
risk and capital management framework.
53
Financial review and risk FINANCIAL REVIEW
Group financial highlights
Group highlights1
Adjusted operating profit (pre-tax, £m)2
Adjusted operating earnings
per share (pence)
Group net margin3
Return on equity4
Net asset value per share (pence)5
Old Mutual Emerging Markets
MCEV value (£m)
Net client cash flow (£bn)
Group customer numbers (millions)
Funds under management (£bn)
Total dividend for the year (pence)
IFRS profit after tax attributable to equity
holders of the parent
2013
(constant
currency)
1,388
15.9p
45bps
136.4p
2,860
14.6
301.7
–
2014
1,605
17.9p
47bps
13.3%
140.3p
3,108
4.9
17.5
319.4
8.7p
582
–
£m
change
–
(3%)
(1bps)
(30bps)
2%
5%
(68%)
9%
9%
7%
2013
(as reported)
1,612
18.4p
48bps
13.6%
137.7p
2,953
15.5
16.1
293.8
8.1p
705
(17%)
change
16%
13%
2bps
3%
9%
(66%)
6%
–
–
1 The figures in the table are in respect of core continuing operations only, unless otherwise stated
2 A full reconciliation of IFRS profit to AOP can be found on page 61
3
Ratio of AOP before tax to average funds under management in the period. Nedbank calculation also includes
average banking assets
4 RoE is calculated as core continuing operations AOP (post-tax) divided by average ordinary shareholders’ equity (ie
excluding the perpetual preferred callable securities). It also excludes the equity associated with non-core operations
5 Net asset value per share is calculated as ordinary shareholders’ equity (ie excluding the perpetual preferred
callable securities) divided by the actual shares in issue at the end of the period
AOP analysis
Financial results in this part are on a reported basis unless otherwise stated.
AOP analysis by line of business
Line of business
Life & Savings
Asset Management1
Banking & Lending2
Property & Casualty
Finance costs
Long-term investment return on excess assets
Net interest payable to non-core operations
Corporate costs
Other net (expenses)/income
Adjusted operating profit before tax
Tax on adjusted operating profit
Adjusted operating profit after tax
Non-controlling interests – ordinary shares
Non-controlling interests – preferred securities
Adjusted operating profit after tax attributable to
ordinary equity holders of the parent3
Adjusted weighted average number of shares (millions)
Adjusted operating earnings per share (pence)
2014
2013
% change
£m
610
301
799
35
1,745
(78)
24
(5)
(55)
(26)
1,605
(439)
1,166
(280)
(18)
868
645
264
806
4
1,719
(92)
43
(11)
(54)
7
1,612
(424)
1,188
(279)
(19)
890
4,845
17.9
4,836
18.4
(5%)
14%
(1%)
775%
2%
(15%)
(44%)
(55%)
2%
(471%)
–
4%
(2%)
–
(5%)
(2%)
–
(3%)
1
2
3
Includes Institutional Asset Management, OMGI, OMEM and Nedbank’s asset management businesses
Includes Nedbank, OMSFIN, Faulu in Kenya, CABS in Zimbabwe and from FY 2014 Old Mutual Finance
IFRS profit after tax attributable to equity holders of the parent was £582 million for the year ended 31 December
2014 (2013: £705 million). A full reconciliation of IFRS profit to AOP can be found in the Financial Performance review
“ Following a transformational
year of corporate activity
and capital reallocation to
our chosen markets, we are
well placed, with appropriate
levels of capital, liquidity and
gearing given regulatory
and economic uncertainties.”
Ingrid Johnson
Group Finance Director
54 Old Mutual plc
Annual Report and Accounts 2014
AOP by line of business
Life & Savings profits were 5% lower
following the sale of Austria, Germany and
Poland during the year and the impact of
the weaker rand notwithstanding a good
underlying performance in Old Mutual
Emerging Markets.
Asset Management earnings increased
by 14% with strong dollar profit growth
in OM Asset Management (OMAM);
a strong performance in the South African
Old Mutual Wealth business and
exceptional profit growth of 120% in
Old Mutual Global Investors (OMGI).
Banking & Lending profits were marginally
down with good local currency profit growth
in Nedbank’s banking and lending profits, up
16%, and increased lending profits in OMEM,
as a result of the increased contribution by
Old Mutual Finance, following its
consolidation from the beginning of the fourth
quarter, and the first time inclusion of Faulu.
These operational improvements were offset
by the weaker average rand rate.
Property & Casualty earnings rose strongly
driven by a turnaround in underwriting profits
in South Africa, which has benefited from
targeted management pricing actions and
claims initiatives, particularly in Personal
which has seen an exceptional turnaround.
Both Commercial and Corporate & Niche
also saw strong underwriting improvements.
Finance costs are down in 2014 following the
repayment of £176 million of debt in the fourth
quarter of 2013.
Long-term investment return (LTIR) on excess
assets decreased in 2014 as a result of a lower
asset base following acquisition activity in
Old Mutual Emerging Markets, as well as the
impact of the weaker rand.
Net interest payable to non-core operations
was lower in 2014 as a result of the
cancellation of Bermuda loan notes in the
second half of 2013 and 2014, as well as
lower prevailing interest rates.
Corporate costs marginally increased with
continued efficiency savings largely offsetting
ongoing Solvency II preparation costs.
Interest and head office costs incurred in the
UK can be offset against profits in Old Mutual
Wealth UK.
Looking forward, and depending on market
conditions and profit mix, we expect the ETR
on AOP in future periods to range between
25% and 28%.
AOP by business unit
Old Mutual Emerging Markets profits rose
modestly in sterling terms with good local
currency growth in Retail Affluent and Mass
Foundation businesses in South Africa and
improved overall underwriting performance.
Other net (expenses)/income decreased due to
lower fair value gains on seed capital as well
as brand-building costs for the Group through
investing in Old Mutual Wealth’s positioning
in the UK.
Nedbank profits fell marginally in sterling
terms despite strong growth in net interest
income, a substantial improvement in
impairments and moderate growth in
non-interest revenue.
Tax
The AOP effective tax rate (ETR) for the Group
has increased slightly to 27% (2013: 26%).
Because over 80% of the profits and tax
before non-controlling interests arise in
emerging markets and Nedbank, movements
in the ETR in these businesses have a large
impact on the Group ETR. The ETR in
Nedbank remained stable but the ETR in our
emerging markets businesses increased due
to a reduction in non-taxable and low taxed
income and the impact of non-deductible
losses in Africa.
The ETR for our Old Mutual Wealth
business is generally lower than those in
our emerging markets businesses given the
lower corporate tax rate in the UK and in
the International division.
Old Mutual Wealth profits rose, with strong
growth from the Platform and OMGI and
improvement in operating margins. Excluding
the European businesses divested during the
period, underlying profits rose 11%.
Institutional Asset Management profits
rose strongly as a result of increased
performance and management fees
earned in the period, benefiting from
rising levels of investment markets.
Net non-operating expenses increased to
£140 million from £107 million as a result of
lower investment returns off a lower asset
base and lower seed capital gains despite
a reduction in finance costs.
AOP analysis by business unit
Core operations
Old Mutual Emerging Markets1
Nedbank
Old Mutual Wealth
Institutional Asset Management
Net non-operating expenses
Adjusted operating profit before tax
1 Comparative has been restated to include Property & Casualty AOP of £4 million
2014
2013
% change
£m
617
770
227
131
1,745
(140)
1,605
594
797
217
111
1,719
(107)
1,612
4%
(3%)
5%
18%
2%
31%
–
Old Mutual plc
Annual Report and Accounts 2014
55
Financial review and risk Return on Equity
The Group RoE declined by 0.3% to 13.3%.
The average Group equity is flat at
£6,545 million (2013: £6,525 million) as a
result of the net retained profits for the period
being greater than the fall in the sterling value
of rand based net equity at the closing year
end exchange rates compared to that at the
start of the year as well as the Bermuda capital
repatriation. Reported currency earnings were
lower principally due to the movement in the
average rand/sterling exchange rates in the
period. Constant currency earnings grew
by 13%.
Capital
The Group’s capital position is managed
to ensure the subsidiary businesses are
appropriately capitalised under local and
Group capital rules, and subsidiary and
Group capital is resilient to stress scenarios.
The Group has an appropriate level of capital
for the current strategic plans, including 2015
acquisitions of Quilter Cheviot and UAP
Holdings and taking into account the evolving
regulatory regime. The Group capital position
is supported by debt and hybrid instruments
and the level of Group leverage is appropriate
and sustainable.
At an individual business unit level, each
business performed well in relation to their
expected medium and long-term RoE target
ranges. Old Mutual Emerging Markets,
Old Mutual Wealth and Institutional Asset
Management improved their RoE’s compared
with the prior year as a result of improved
earnings and stable capital bases. Nedbank
maintained its RoE (excluding goodwill) at
17.2%. Note that, for the purpose of the
calculation, goodwill and other intangibles
have been excluded from the individual
business returns and are shown in the holding
company as we sought to build scale and
competitive advantage in our business through
acquisition. As a consequence the Business
unit returns are higher than the Group return.
Business unit regulatory solvency strength
The Group’s subsidiary businesses continue
to have strong and resilient local capital.
This is consistent with the Group’s operating
model and capital philosophy to ensure
capital resides where the risks lie, including
risks for extreme scenarios. The table below
summarises the principal local statutory
capital positions.
Group regulatory capital – Financial
Groups Directive (FGD)
The Group currently measures its Group
solvency and regulatory capital in accordance
with the EU Financial Groups Directive (FGD).
The FGD methodology and framework differs
fundamentally to the new Solvency II regime to
which we will transition in 2016.
The Group’s regulatory capital surplus,
calculated under the FGD, was £2.0 billion
at 31 December 2014 (31 December 2013:
£2.1 billion) representing a statutory cover
of 163% (31 December 2013: 168%). The
reduction in surplus and coverage ratio is
due to an increase in capital requirements as
a result of growth in Nedbank’s risk weighted
banking assets and the continued growth in
the protection part of the Old Mutual
Emerging Markets insurance book. Capital
resources remained stable at £5.2 billion
reflecting the redeployment of proceeds from
business disposals and the IPO of Old Mutual
Asset Management to fund acquisitions.
30% of the Group FGD resources of
£5.2 billion comprise of qualifying debt
instruments (totalling £1.5 billion). These
provide additional liquidity as well as
optimising the Group’s Weighted Average
Cost of Capital (WACC) and consists of
£1.0 billion of debt instruments issued at the
Group holding company and £0.2 billion
at the Group’s South African subsidiary
Old Mutual Life Assurance Company
(South Africa) Limited (OMLAC(SA)) and
£0.3 billion at Nedbank.
Group and local RoE 2014
Old Mutual Emerging Markets
Nedbank
Old Mutual Wealth
Institutional Asset Management
Group Head Office
Group RoE
AOP
410
301
179
96
(118)
868
Shareholder
equity excluding
intangibles1
Return on
shareholder
equity excluding
intangibles2
1,654
1,811
928
(8)
2,4061,3
6,791
25.7%
17.2%
19.5%
49.3%
–
13.3%4
13.3%4
£m
Local RoE
22.8%
17.2%
16.5%
16.5%
–
1
Shareholders’ equity is at 31 December 2014. Business unit figures exclude the Group share of ‘Goodwill and other intangible assets’ per the segmental balance sheet; these have
been included at the GHO level
2 Calculated as AOP post-tax and NCI divided by average shareholders’ equity excluding ‘Goodwill and other intangible assets’
3
4 Group RoE is calculated using average ordinary shareholders’ equity (i.e. excluding perpetual preferred callable securities) and excludes non-core operations
Includes ‘Goodwill and other intangible assets’ and excludes the perpetual preferred callable securities and non-core operations
56 Old Mutual plc
Annual Report and Accounts 2014
FINANCIAL REVIEWcontinued Only when the Solvency II rules are fully
determined will the Group fully understand
the extent to which SAM and Solvency II
will align and whether South Africa will be
deemed to be a Solvency II-equivalent regime.
The formal Prudential Regulation Authority
application process will also provide clarity
in a number of other areas including the
approach to aggregating subsidiaries in the
Group calculations, contract boundaries, cross
border diversification benefits and the
equivalence of non-EU regulatory regimes
(other than South Africa).
During 2015, we will report to our regulators
under the interim arrangements and we
are preparing for the full Pillar 3 reporting
under Solvency II and SAM, which is required
from 2016 onwards when the new regimes
become effective. Preparing for reporting
under the new regulations will require
significant effort and investment in reporting
processes for our businesses.
Regulatory Capital has been assessed in
the context of various stress scenarios.
This analysis indicates that a 1% fall in the
ZAR/GBP exchange rate would result in a
£11 million reduction in the surplus (2013:
£13 million reduction), and if the ZAR/GBP
weakened to R25, the surplus would reduce
to £1.7 billion. The cover ratio is resilient to
movements in exchange rates in a stress
scenario because both the capital resources
and the capital requirement fluctuate with
changes in those same exchange rates.
Since the 2014 year end, the Group has
completed the acquisition of Quilter Cheviot
and announced the proposed acquisition of a
majority stake in UAP. These two transactions
will reduce Group FGD by £0.7 billion and
reduce the statutory cover ratio by
approximately 20 percentage points.
Future Regulatory Capital assessment –
Solvency II and Solvency Assessment
and Management (SAM)
We are actively engaged with the Group’s
regulators in the application process on
the future Solvency II capital regime. In line
with our regulators’ timetable, we will submit
our relevant applications in Q2 2015 and
anticipate receiving a response in the second
half of 2015 to facilitate implementation of
Solvency II in January 2016.
Irrespective of the outcome of Solvency II,
the capital strength relative to the risks of our
underlying business will remain unchanged.
However, the Solvency II regime will introduce
a different lens through which we look at
Group capital. The full Solvency II outcome
is not yet clear and will depend on the
assumptions and aggregation models used
in Solvency II calculations. The Solvency II
regime will use a more conservative 1 in
200 stress scenario in determining capital
requirements and apply a more rules based
determination of fungibility and transferability.
By comparison, the FGD regime is not a risk
based regime and assumes full fungibility and
transferability of capital across geographies.
Given the inherent conservatism of Solvency II
compared to the FGD regime, it is likely that
Solvency II will result in the reporting of lower
levels of surplus regulatory capital and lower
coverage ratios when compared with the
FGD regime.
The adoption of the standard formula
approach may also increase conservatism.
Old Mutual intends to apply the standard
formula approach for the purposes of
Solvency II because it is more relevant.
The standard formula model will be applied
in determining regulatory capital requirements
for SAM (in South Africa). Furthermore, as
Old Mutual Wealth in the UK moves toward
being a modern vertically integrated retail
investment business, the internal model
approach is less relevant.
Local currency
Business unit regulatory solvency
Old Mutual Life Assurance Company South Africa (OMLAC (SA))1 (Rbn)
Mutual & Federal2 (Rbn)
Nedbank3 (Rbn)
UK4 (£bn)
Bermuda5 ($bn)
Capital
Resources
Capital
Requirements
47.8
2.9
64.4
0.6
0.4
15.3
2.1
44.1
0.2
0.3
Surplus
32.5
0.8
20.3
0.4
0.1
2014
3.1x
1.8x
14.6%
2.6x
1.3x
1 South Africa Statutory Valuation Methods (SVM) in accordance with FSB requirement
2 Capital Adequacy Requirement (CAR) in accordance with FSB requirement
3 Basel III valuation method and including unappropriated profits and showing total Group Capital adequacy ratio
4 FGD basis (not required to report to the PRA separately)
5 Enhanced Capital Requirement as set by the Bermuda Monetary Authority
Group regulatory capital (FGD basis)
Capital resources
Capital requirements
Surplus
Coverage
2014
5.2
3.2
2.0
163%
2013
3.2x
1.9x
15.7%
2.6x
1.4x
£bn
2013
5.2
3.1
2.1
168%
Old Mutual plc
Annual Report and Accounts 2014
57
Financial review and risk Emerging Markets MCEV results and
economic impacts
MCEV increased from R51.5 billion at
31 December 2013 to R55.9 billion at
31 December 2014. This is mainly due to the
contribution from new business and investment
performance, partially offset by capital
transfers. Significantly positive mortality
variances were largely offset by adverse
persistency variances, development costs,
and the impact of increasing policyholder
cover levels on Mass Foundation Cluster
risk products (reflecting the strong beneficial
effect of better mortality experience with
policyholders). Return on embedded value
reduced to 9.9% in 2014 mainly due to lower
experience variances and other operating
variances, partially offset by a higher
contribution from expected returns and
positive operating assumption changes.
Economic variances were positive due to
favourable investment performance in
South Africa, although this was dampened
by poor market performance in Zimbabwe.
Economic Capital
Old Mutual’s Economic Capital (EC)
framework presents management’s view
of the Group’s capital with underpinning
assumptions that the full future value of
insurance profits emerges over time and that
full diversification can be recognised between
businesses. The Group monitors EC through
regular reporting, including risk assessments
and consideration of the impacts of extreme
stress scenarios for each business.
Although current FGD rules do not apply
restrictions on fungibility and transferability,
we expect that this may change under
solvency II. As we finalise assumptions and
methodologies underpinning the Group’s
Solvency II calculation, we will consider these
in relation to our EC framework and consider
whether any refinements are required as
a consequence.
At 31 December 2014, the Group Economic
Capital surplus was £5.2 billion, and Economic
Capital cover ratio was 226% (31 December
2013: £4.8 billion and 216%). As well as the
strong outcome for the Group, the results
demonstrate the capital strength of each
individual business unit. This is consistent
with the Group’s operating model and
capital philosophy and aligned with local
statutory capital.
The Group economic capital coverage ratio
has strengthened compared to the position at
31 December 2013, due to the impact on EC
surplus of an increase in available financial
resources from retained profits earned in the
period net of dividends paid and corporate
activity completed during 2014.
The Group’s Economic Capital positions
at 31 December 2014 are shown in the
table below.
Since the 2014 year end, the Group has
completed the acquisition of Quilter Cheviot
and announced a proposed acquisition of
UAP. The impact of these two transactions will
be to reduce Group EC surplus by £0.7 billion
to £4.5 billion and coverage to 209%.
Net Asset Value per ordinary share
The net asset value per ordinary share has
increased by 2.6p to 140.3p (2013: 137.7p).
This is mainly due to profit attributable to
ordinary shareholders of the parent of 11.4p
offset by dividends paid in the year of 8.0p.
On a constant currency basis, the net asset
value per share has increased by 3.9p. The
higher growth in constant currency is due to
the 2014 closing rand rate being 3% lower
than 2013.
Adjusted Group NAV per
ordinary share
The adjusted Group NAV per ordinary share
is calculated using an MCEV valuation basis
for Old Mutual Emerging Markets covered
business and the UK Heritage business in
Old Mutual Wealth as well as the market value
of listed subsidiaries. Other businesses and
residual assets are included at IFRS NAV.
The adjusted Group NAV was £10.9 billion,
up from £10.1 billion in 2013. The improvement
over 2014 mainly reflects growth in underlying
business contributions, the improvement in the
Nedbank share price and the valuation uplift
as a result of the IPO of the Old Mutual Asset
Management business. The adjusted Group
NAV per ordinary share was 221.9p at 31
December 2014 (31 December 2013: 206.1p).
Economic Capital
Available Financial Resources1
Economic Capital at Risk2
Economic Capital Surplus
Economic Capital cover ratio6
Old Mutual
Emerging
Markets
3.9
1.6
2.3
239%
Nedbank3
Old Mutual
Wealth
2.0
1.3
0.7
154%
2.1
0.9
1.2
234%
Other
business
units and
adjustments4
Sum of
Group
businesses
1.2
1.6
(0.4)
n/a
9.2
5.4
3.8
171%
Group
20145
9.2
4.0
5.2
226%
£bn
Group
2013
9.0
4.2
4.8
216%
1 The Available Financial Resources (‘AFR’) is the value of assets held in excess of economic liabilities
2
Economic capital at risk (‘ECaR’) requirement is the reduction in post-tax economic available financial resources over a one-year forward-looking time horizon that should only be
exceeded once in 200 years (99.5% confidence level that the event will not occur). The confidence level used for Nedbank is 99.93% reflecting Nedbank’s more prudent approach
to the Basel 99.9% requirements
Nedbank results are those calculated and disclosed as part of the Internal Capital Adequacy Assessment Process (ICAAP) but reflect the proportion of plc’s ownership and
exclude the 10% stressed-tested capital buffer
Other business units and adjustments reflect additions for Institutional Asset Management, OM Bermuda, group specific risks (including currency translation risk on non-GBP
surplus), and adjustments for intra-group transactions
The final Group position allows for assumed diversification between diverse business units. The business unit positions allow for diversification between entities within the
business unit
3
4
5
6 Economic Capital cover ratio calculated using unrounded ECAR and AFR figures
58 Old Mutual plc
Annual Report and Accounts 2014
FINANCIAL REVIEWcontinued Free surplus generation
Our businesses have generated a net free
surplus of £653 million in 2014 (2013: £811
million), reflecting a conversion rate of 66%
of AOP post-tax and non-controlling interests
(2013: 81%). This reduction is largely explained
by discretionary organic investment (excluding
new business strain) in the Old Mutual Wealth
and Old Mutual Emerging Market businesses
of £97 million and £23 million respectively
as these businesses execute their growth
strategies, the impact of the weaker rand on
the Old Mutual Emerging Markets surplus,
and the move to a remittance basis in
determining OMAM surplus generation
following the IPO. From this free surplus
generated, a total of £464 million was
remitted by the operating units to the
Group holding company during 2014.
Operational flows
Operational receipts from businesses
generating hard currency earnings decreased
to £154 million (2013: £210 million). This reflects
the investment made in the Wealth business
to support its transformation as well as lower
remittances from OMAM. Following its
listing in October 2014 the Group now
receives a dividend based on 25% of
Economic Net Income (ENI) and an annual
payment in respect of the Group’s deferred
tax asset whereas previously OMAM remitted
all available cash.
Servicing of capital
Dividend payments to shareholders of
£411 million were made, of which £227 million
was paid to shareholders in southern Africa.
£291m represented the final dividend for
2013 and £120 million was the interim
dividend for 2014.
Capital movements
Group capital movements in 2014 were
£46 million compared to £229 million during
the prior year. 2013 included the repayment
of debt of £176 million in the second half of
the year.
Corporate activity
Cash flows from net corporate activity includes
the cash received from the sale of OMAM
shares in the IPO and proceeds on the
disposal of our European businesses partially
offset by cash required to fund acquisitions.
Old Mutual Emerging Markets and
Nedbank corporate activity was funded
directly by the businesses.
Debt levels and maturities
The Group’s balance sheet remains strong.
The Group, excluding banking related debt,
had borrowed funds and other debt treated
as equity under IFRS, of £1,540 million at
31 December 2014 (31 December 2013:
£1,342 million).
Banking related gross debt was £2,030 million
as at 31 December 2014 (31 December 2013:
£1,828 million).
The Group has first calls on capital instruments
of R3,000 million (£167 million) Tier 2 debt,
issued by OMLAC(SA) exercisable in October
2015, and at the holding company level,
€374 million (£290 million) Tier 2 debt,
exercisable in November 2015 and £273
million Tier 1 debt exercisable in March 2020.
Additionally the Group has £112 million of
senior debt maturing in October 2016 and
£500 million of Tier 2 debt maturing in
June 2021.
OMLAC(SA) raised an additional R300 million
(£17 million) in fixed rate bonds and R700
million (£39 million) in floating rate Tier 2
bonds in November 2014 in the South African
bond market. Both instruments have first calls
in November 2019. OMLAC(SA) is continuing
with this programme and intends issuing
further debt in March 2015.
Nedbank has £415 million of maturities on
its capital and funding during 2015.
OM Asset Management plc drew down
$177 million (£114 million) in October 2014
under its $350 million (£225 million) syndicated
Revolving Credit Facility to fund the pre-IPO
dividend to the Group holding company.
Group cash flows
Opening cash and liquid assets at holding company at 1 January 2014
Operational flows
Operational receipts from Northern hemisphere businesses
Operational receipts from emerging market businesses
Corporate costs and other operational flows
Total operational flows
Capital servicing
Interest paid
Preference Dividends
Ordinary cash dividends
Total servicing of capital
Capital movements
Net debt (repayment)/issue in the period
Net Business unit funding
Issue of ordinary shares
Total capital movements
Corporate activity
Net corporate activity
Total Corporate Activity
2014
545
154
310
(30)
434
(32)
(32)
(411)
(475)
–
51
(5)
46
453
453
Closing cash and liquid assets at holding company at 31 December 2014
1,003
£m
2013
472
210
334
7
551
(32)
(46)
(335)
(413)
(176)
(50)
(3)
(229)
164
164
545
Old Mutual plc
Annual Report and Accounts 2014
59
Financial review and risk Liquidity
At 31 December 2014, the Group holding
company had available liquid assets of
£1 billion (31 December 2013: £0.5 billion)
invested in cash and near cash instruments,
including: money market funds, UK
government securities and a highly liquid
corporate bond portfolio. The Group holding
company also has access to an undrawn
committed facility of £0.8 billion (31 December
2013: £0.8 billion). Since the year end, liquid
assets of £566 million have been used in the
settlement of the completion process
associated with the Quilter Cheviot acquisition.
In addition to cash and available resources
held at the holding company level, which are
considered adequate to support the Group
under both normal and stressed conditions,
each individual business also maintains
liquidity and credit facilities sufficient to
support its normal trading operations and
to withstand stress events.
Financial strength rating
In June 2014 Fitch affirmed its long-term
foreign currency rating on SA Sovereign
debt as BBB, but revised the outlook from
stable to negative. In the subsequent review
of Old Mutual plc and its life subsidiaries,
Fitch affirmed the ratings of Old Mutual plc,
OMLAC(SA) and Old Mutual Wealth Life
Assurance Limited and kept all the ratings
on stable outlook.
In November 2014 Moody’s downgraded
its rating on SA Sovereign debt from Baa1
to Baa2 and changed the outlook from
negative to stable. In the subsequent review
of Old Mutual plc and its subsidiaries,
Moody’s downgraded the senior debt rating
for Old Mutual plc from Baa2 to Baa3 and
downgraded the Insurer Financial Strength
Rating of OMLAC(SA) from A3 to Baa1; both
ratings were moved from negative outlook to
stable. The rating for Old Mutual Wealth Life
Assurance Limited was affirmed at A2, while
the outlook was moved from stable to negative.
In July 2014, Fitch published a rating of
Mutual & Federal, assigning a National
IFSR of AAA(zaf) with stable outlook.
This rating reflected Fitch’s view that
Mutual & Federal is a core part of the Group
and benefits from the financial strength of
OMLAC(SA).
60 Old Mutual plc
Annual Report and Accounts 2014
Risk Management
Principal risks and uncertainties
A number of potential risks and uncertainties
could have a material impact on the Group’s
performance and cause actual results to differ
materially from expected and historical results.
Our principal risks have been determined
by assessing the possible effects on our
reputation, our stakeholders, our earnings,
capital and liquidity, and the future
sustainability of our business. These risks are
closely monitored by local management and
independent subsidiary boards and overseen
by Group management and reported to the
Board on a regular basis.
As a result of the pace and scale of the
changes the Group underwent in 2014,
strategic execution risk has become our key
principal risk. As in previous years, economic
conditions in South Africa, the changing
location of credit risk across the Group, market
risk and the level of currency translation risk
remain principal risks to Old Mutual. The risk
of changing customer needs and regulatory
change remains important for Old Mutual
and its peers.
Group risk profile
Across the Group, when measuring risks to
capital and to earnings, most risk exposures
have increased in line with business growth.
Within Emerging Markets, credit risk has
grown due to the increased stake in
Old Mutual Finance and the acquisition
of Faulu: we have reassessed risk appetite
accordingly. Credit risk has a greater
proportional impact on earnings at risk
than it does on capital at risk.
We recognise that there is a short-term increase
in operational risk in the next few years while
we execute and integrate the various strategic
change initiatives and material acquisitions in
new business sectors and locations. We have
accepted this increase to reduce our longer-
term strategic risk. We continue to monitor and
manage it closely through Group and business
unit oversight together with strong governance,
focus on the control environment and prompt
escalation of issues.
Business risk and market risk remain our two
most material risks. While they have remained
relatively stable over the year, they are
influenced by the economies in the key regions
where we operate and the impact on the
consumer in those countries, notably South
Africa, where we currently have our largest
retail earnings base. As well as monitoring
economic factors to understand our earnings
and capital resilience to severe macro-
economic events, we have maintained a strong
focus on customers, considering how we can
help them in tougher times and monitoring for
early indicators of financial distress.
Liability risk diversifies well against our other
risks and we continue to seek to increase the
proportion of this risk where appropriate.
Our liability risk exposure remains small outside
the South African businesses.
In line with our peers, there is significant
regulatory change impacting the financial
services sector in the territories we operate.
The regulatory capital uncertainties in relation
to Solvency II and Solvency Assessment and
Management are highlighted in the capital
section. There is also substantial change in the
conduct agenda in terms of the way business
is sold or the nature of the products designed
to achieve required customers’ outcomes.
Our focus on responsible business, core values
and culture gives us confidence to embrace
these changes, and we continue to monitor
the position carefully.
The Twin Peaks system of regulating the
financial sector in South Africa is expected to
come into force in due course. A second draft
of the Financial Sector Regulation Bill, which
seeks to lay the legislative basis for Twin Peaks
regulation, was released for comment in
December 2014. We are actively preparing to
meet the proposed regulatory requirements.
The Board believes that the Group has
adequate resources to continue in operational
existence for the foreseeable future.
Accordingly, the Board continues to adopt the
going concern basis for preparing accounts.
Tax risks and uncertainties
The Group is subject to income taxes in
numerous jurisdictions and the calculation of the
Group’s tax charge and worldwide provisions
for income tax necessarily involves a degree of
estimation and judgement. At any given time the
Group typically has a number of open tax
returns with various tax authorities and engages
in active dialogue to resolve this. Provisions
relating to these open items are recognised
based on the Group’s estimate of the most likely
outcome, after taking into account external
advice where appropriate. Where the final tax
outcome of these matters is different from the
amounts that were initially recorded such
differences will impact profit and loss, current
and deferred income tax assets and liabilities in
the period such determination is made.
FINANCIAL REVIEWcontinued Dividends
The full year dividend of 8.7 pence, or
its equivalent in local currency for those
shareholders on overseas registers, represents
an increase of 7% on the prior year.
For indicative purposes only, converting the
sterling final dividend at the exchange rate
on 31 December 2014, the dividend to South
African shareholders for the full year 2014
would be 13% higher than the 2013 full year
dividend in rand terms.
The interim dividend paid on 31 October 2014
was 2.45 pence.
Subject to being approved by shareholders
at the Annual General Meeting of Old Mutual
plc on 14 May 2015, the final dividend will
be paid on 29 May 2015. A separate
announcement on the key dividend dates
for the 2014 final dividend is made with
these preliminary results.
Dividend policy
The Board intends to pursue a progressive
dividend policy, consistent with our strategy,
having regard to overall capital requirements,
liquidity and profitability and targeting a
dividend cover in the range of 2.0 to 2.25 times
AOP earnings. And we will continue to set our
interim dividend at 30% of the prior year total.
IFRS results
The Group IFRS profit after tax attributable to
equity holders of the parent was £582 million
for 2014 and £705 million for 2013.
IFRS to AOP Reconciliation
year end December 2014
Profit/(loss) after tax attributable to equity
holders of the parent
Total adjusting items1
Tax on adjusting items
Non-controlling interest in adjusting items
Discontinued and non-core operations
AOP after tax and non-controlling interest
IFRS to AOP Reconciliation
year end December 2013
Profit/(loss) after tax attributable to equity
holders of the parent
Total adjusting items1
Tax on adjusting items
Non-controlling interest in adjusting items
Discontinued and non-core operations
AOP after tax and non-controlling interest
Emerging
Markets
Nedbank
Old Mutual
Wealth
Institutional
Asset
Management
Discontinued
and non-core
operations
Other
395
45
(20)
(10)
–
410
315
2
(1)
(15)
–
301
(37)
230
(14)
–
–
179
77
40
(18)
(3)
–
96
(119)2
(16)
17
–
–
(118)
(49)3
–
–
–
49
–
Emerging
Markets
Nedbank
Old Mutual
Wealth
Institutional
Asset
Management
Discontinued
and non-core
operations
Other
339
87
1
(4)
–
423
327
–
4
(16)
–
315
38
159
(20)
–
–
177
54
42
(12)
–
–
84
(88)2
(2)
(19)
–
–
(109)
353
–
–
–
(35)
–
£m
Total
582
301
(36)
(28)
49
868
£m
Total
705
286
(46)
(20)
(35)
890
1 Full details of the adjustment applied in determining AOP, is set out in note C1 to the Preliminary Financial Statements, which can be found in Part 4 of this document.
2 Other: Loss of £119 million in 2014, principally relates to centre costs and finance costs (2013: £88 million)
3
Discontinued and non-core operations comprises: Loss of £49 million in 2014 principally comprises the results of OM Bermuda and costs associated with the separation of the
Nordic and US Life businesses (2013: £35 million)
Supplementary financial information
Summarised financial information
IFRS results
Basic earnings per share (pence)
IFRS profit after tax attributable to equity holders of the parent (£m)
Net asset value (£bn)
Net asset value per share (pence)1
2014
2013
% change
12.4p
582
9,545
140.3p
15.0p
705
9,037
137.7p
(17%)
(17%)
6%
2%
1
Net asset value per share is calculated as ordinary shareholders’ equity (ie excluding the perpetual preferred callable securities) divided by the actual shares in issue at the end of
the period
Long-term investment return rates
Emerging Markets
Old Mutual Wealth
2014
7.4-8.0
1.0
%
2013
7.4-8.0
1.0
The LTIR rates are reviewed annually and reflect the returns expected on the chosen asset classes. There will be no change to the 2015 rates. The
asset allocation in Emerging Markets will continue to be split 75% cash and bonds, and 25% equity.
Old Mutual plc
Annual Report and Accounts 2014
61
Financial review and risk RISK AND CAPITAL
MANAGEMENT
“ Throughout our businesses,
the tone from the top is very
supportive of sound risk
management.”
Sue Kean
Chief Risk Officer
The Group’s philosophy and approach to risk
and capital management have been stable
for a number of years, and are aligned to the
Group Operating Model. However, the risk
landscape is changing and the Group is
entering a new phase in its development. Our
approach to risk management has evolved
accordingly. It reflects a blend of factors –
capital, earnings, liquidity and reputation –
whose relative weights vary according to the
business and the external environment.
The Group’s risk profile in terms of capital
and liquidity has improved substantially since
the financial crisis of 2008/09. Over that
period we embarked on a strategy to de-risk
and simplify, with a focus on the customer,
our culture and values, and our core
competencies. By 2014 the de-risking phase
was largely complete and the Group entered
a new growth phase – with investment in
acquisitions in the UK and Africa, as well
as substantial inorganic investment in IT.
Our risk management approach will continue
to be a blend of capital, earnings, liquidity and
reputation. There will be a sharper focus in
2015 on reputation, conduct, capital allocation
and understanding relative risk and returns,
as the Group starts to expand into new
territories and markets, in the environment
of changing capital regulation under
Solvency II/SAM and Basel III.
Against this Group backdrop of change, our
principal risks remain largely unchanged from
last year. However, execution risk is elevated
along with the uncertainties around the South
African economy. This impacts affordability
for our customers, as well as the translation
of rand earnings to sterling as our reporting
currency. The environment is also changing –
most notably in relation to our customers’
needs and the growth of conduct regulation
in all our key markets. Our response to this is
strongly supported by our efforts to run our
business so that we are recognised as a leader
in responsible business.
Ultimately, risk management is about people.
We build tools and processes to help identify,
monitor and manage risks, but the operation
of a sound risk management approach
depends on people and the culture in which
they operate, which is set by leadership across
the Group. This is why we developed a risk
and control culture measurement in 2014 –
primarily to facilitate open discussion and
understanding of risk and control issues.
Throughout our businesses, the tone from
the top is very supportive of sound risk
management; and we continue to cascade
this awareness throughout the organisation.
Sue Kean
Chief Risk Officer
The Group’s principal risks
The table in the ‘Principal risks and
uncertainties’ section summarises the Group’s
top five risks. Our principal risk assessment
considers the likelihood and severity of risks,
where the severity assessment considers the
financial, reputational, regulatory, people
and legal impacts of a particular risk.
These risks are largely strategic in nature.
They are closely monitored and overseen at
Group level, and the Board and Executive
Risk Committees receive regular updates.
Given our particular product offering, we
are also impacted by various inherent risks
– such as exposure to market levels. As such,
market risk is one of our most material risks.
However, we do not include it as a principal
risk within our assessment as it largely arises
as a result of the risk to asset-based fees
generated from client-selected investments.
62 Old Mutual plc
Annual Report and Accounts 2014
Risk appetite principles
Capital
The Group has limited appetite for regulatory
intervention (perceived or real). As such, we
hold a buffer above minimum regulatory
requirements in order to remain solvent.
Earnings
The Group accepts that as part of its
growth aspirations, especially in new
areas, earnings volatility and execution
risk are likely to increase.
In pursuing strategic opportunities, we
consider the availability, transferability, and
quality of capital within each business unit.
As regulatory capital varies by sector, we
also have an economic capital appetite which
reflects our own view of one-in-200 year risk
events (or slightly higher for Nedbank).
However, we have no appetite for big
surprises: earnings volatility that cannot
be anticipated by the market or significant
operational losses.
As such, a key focus is on understanding
the different drivers of earnings volatility,
focusing on identifying acceptable and
unacceptable causes of profit volatility, and
monitoring our exposure and experience
over time to ensure that outcomes are
within our risk tolerance framework.
Liquidity
The Group has a low appetite for failing to
deliver on its stated dividend policy.
We hold a buffer at Group level to support
this, sufficient to withstand a liquidity survival
horizon of at least twelve months.
The Group should be able to meet short-term
plausible but extreme losses.
Risk and control culture
A proactive risk and control culture is essential to support our reputation and operation as a responsible business. Individual behaviours and
judgements support a strong risk governance framework.
We measure our risk and control culture by considering our governance and tone from the top, understanding of risk, attitude to risk, control
functions, quality of management information, and remuneration structures.
Risk framework
The objective of the risk framework is to align
strategy, capital, process, people, technology
and knowledge in order to evaluate and
manage business opportunities, uncertainties
and threats in a structured, disciplined manner.
In this way we seek to ensure that risk and
capital implications are considered when
making strategic and operational decisions.
Risk management is designed to increase our
understanding of the risks inherent in the
business to improve decision making –
which includes accepting risk.
Our risk and governance framework is set
out in the Group Operating Model and is
supported by economic capital tools and
transparent processes for managing,
monitoring and controlling risks. We
continue to refine structures and processes
as necessary, but the overall governance
structures are stable. These structures and
processes, together with our strong balance
sheet, provide a solid base to support our
business as we pursue our growth strategy
over the next few years.
Risk frameworks, governance and the Group’s
internal capital model are overseen centrally
but implemented by our businesses locally, so
that local requirements can be addressed
appropriately. This approach is reinforced
through senior Group executive representation
on business unit boards, coupled with formal
dual reporting for all key control functions.
Further details can be found in the ‘Directors’
report on corporate governance’ on page 72.
Our risk strategy and
risk appetite
Our risk strategy guides the way we take on
risk in the course of running our business and
managing value for all stakeholders. It is a
core component of our business strategy,
and is influenced not only by the available
economic capital and earnings at risk, but also
by reference to factors such as the Group’s
customer focus and leveraging core skills
and competencies across the Group.
Our overall strategic aim is to build and grow
a long-term sustainable business. Central to
this is maintaining the Group’s brand and
reputation. We are committed to operating
responsibly, examining the impacts and risks
of our decisions on all our stakeholders as an
integral part of our decision-making process
(for more information on how we operate
responsibly, please see our Responsible
Business Report). Doing the right thing by all
our stakeholders is at the heart of what we do
and is also the foundation for our risk appetite.
Our risk strategy principles
Our risk strategy is supported by principles
that must be considered in deciding whether
or not to pursue an opportunity.
1. We only take on risks that we understand
and can price appropriately – so that
expected reward exceeds minimum
risk-adjusted return for shareholders –
and have the skills to monitor and manage.
2. We prefer risks that are capital-efficient to
underwrite. The impact on diversification or
concentration with the existing risk profile
should be understood and considered.
3. We consider risk by business unit, taking
into account the available capital in the
business unit, and in aggregate at
Group level.
4. We avoid risks where we expose ourselves
to very volatile or potentially extreme
adverse outcomes, such as catastrophe risk.
5. Operational risk should be minimised and
mitigated, taking into account the cost
versus the benefit of doing so.
Old Mutual plc
Annual Report and Accounts 2014
63
Financial review and risk Our risk appetite framework supports delivery
of our risk strategy. It includes risk appetite
principles to guide our business units and help
to clarify our risk strategy in line with the Group’s
risk appetite, as set out on the previous page.
These principles are supported by qualitative
risk appetite statements set out in the Group’s
risk policy suite, and by quantitative risk limits for
our risk appetite metrics, which are set as an
iterative part of our business planning process
to ensure that local risk limits are consistent with
local business plans. We set risk limits at both
Group and business unit level, and where
relevant by risk type. Twice a year there is a
formal review of risk exposures against the
limits and early warning thresholds. As well
as this, business units use operational limits
to monitor material risks at a more granular
level and on a more regular basis. For 2014,
all risk metrics across the Group were within
risk appetite limits.
In addition we monitor early warning
indicators across all our businesses that trigger
investigative action to identify and understand
sources of additional risk and management
actions needed to avoid breaching the risk
appetite limits.
The Group’s regulatory framework is
changing – primarily as a result of the
implementation of Solvency II in Europe and
SAM in South Africa, as well as Basel III in
our banking businesses. Given this changing
regulatory framework, we intend to review
our capital risk appetite in 2015.
Group’s risk profile
We assess the Group’s risk profile through
several different lenses, in line with our risk
appetite. We seek to optimise capital efficiency,
avoiding excessive risk concentrations and
diversifying risk where possible. In this context,
we view risk concentration and diversification
within each business unit. Each of the Group’s
business units (and regulated companies within
business units) is sufficiently capitalised in its
own right. The distribution and allocation of
capital to our businesses largely reflects the
different risk profiles within their regions and
the prevailing regulatory requirements. Even
when applying significant economic stresses
to our current capital, the Group remains
adequately capitalised. We have also identified
management actions that could be taken to
remedy the Group’s capital or liquidity position
in an extreme shock event (where capital or
liquidity levels could significantly breach our
risk appetite limits for a sustained period).
64 Old Mutual plc
Annual Report and Accounts 2014
Own Risk and Solvency Assessment (ORSA)
We do not view risk as something separate
from our business strategy and operations.
Risk strategy is often implicit within our
business strategy, and the aim of the
ORSA is to bring this out more explicitly.
The ORSA is an integral part of our existing
business management, risk management,
business planning and decision-making
processes. The ORSA includes all the
processes for risk identification, risk
assessment and measurement, risk
management, risk monitoring and reporting
that are in place through the Group
Operating Model and Group Enterprise
Risk Management framework.
The Board reviewed and approved
the results of the 2014 Group ORSA in
September 2014 and the 2014 Group
ORSA report was subsequently submitted
to the PRA in October 2014.
ORSA, ICAAP and other equivalent
assessments are also carried out annually
within business units.
As our capital is largely located where our
risks lie, any balance sheet impact would be
seen as an unrealised accounting translation
risk. This applies primarily to the translation
of rand earnings to sterling. Factors affecting
the level of the rand include changes in the
level of foreign investment in South Africa.
The risk of rand weakness remains high given
the current and capital account deficits South
Africa is running and the potential for external
investors to sell their holdings of South African
government bonds if global interest rates rise.
A substantial capital outflow could potentially
trigger a decline in the rand, and this would
also reduce our earnings as reported in
sterling. We have modelled scenarios involving
a severe rand drop and are comfortable that
the Group has sufficient capital and liquidity
resilience in such events, if they happened.
During 2014 we continued to execute our
growth strategy, acquiring stakes in a number
of businesses in Africa and the UK. These
businesses are small compared with our large
in-force insurance and banking businesses and
do not yet have a significant impact on our risk
profile with reference to capital (although they
do impact the returns earned on the capital
deployed). As a result, earnings volatility and
other business metrics such as operational risk
now play an increasing role in the determination
of our risk and business strategy.
Across the Group, most risks have increased
in line with business growth. Within Old Mutual
Emerging Markets, credit risk has grown
due to the increased stake in Old Mutual
Finance and the acquisition of Faulu: we have
reassessed risk appetite accordingly. Credit
risk has a greater proportional impact on
earnings at risk than it does on capital at risk.
We recognise that there could be a short-term
increase in operational risk in the next few
years while we execute and integrate
the various strategic change initiatives.
We have accepted this increase to reduce
our longer-term strategic risk, and continue
to monitor and manage it closely.
Business risk and market risk remain our
two most material risks. While they have
remained relatively stable over the year, they
are influenced by the economies in the key
regions where we operate – and by the impact
on consumers in those countries, notably South
Africa, where we currently have our largest
retail earnings base. As well as monitoring
economic factors to understand our earnings
and capital resilience to severe macro-
economic events, we have maintained a strong
focus on customers, considering how we can
help them in tougher times and monitoring for
early indicators of financial distress.
Liability risk diversifies well against our other
risks and we continue to seek to increase the
proportion of this risk where appropriate.
Our liability risk exposure remains small
outside the South African businesses. Our
business plans include a number of actions
to increase this exposure, but only where it
meets our risk and return requirements.
In line with our peers, there is significant
regulatory change impacting the financial
services sector in the territories we operate.
Clarity on outstanding regulatory capital
uncertainties in relation to Solvency II and
SAM is expected to emerge during 2015.
There is also substantial change in the conduct
agenda in terms of the way business is sold or
the nature of the products which meet our
customers’ needs. Our focus on responsible
business, core values and culture gives us
confidence to embrace these changes, and
we continue to monitor the position carefully.
Our risk universe is set out on the facing page.
RISK AND CAPITALMANAGEMENTcontinued Our risk universe
3 Risk exposure largely not
quantifiable, but risks actively
managed. The potential
financial impact from
compliance failures and
regulatory breaches captured
in the Operational Risk
measure and operational
risk economic capital
2 Risk exposure captured
via quantitative risk metrics
– Remittance at Risk and
Short-term Liquidity at Risk
(these metrics will be reviewed
in 2015)
1 Risk exposure captured
via quantitative risk metrics
– Economic Capital at Risk,
Earnings at Risk and
Operational Risk
3
Strategic
Risk
Market
Risk
Compliance
& Regulatory
Risk
Liquidity
Risk
2
Old Mutual
Risk
Categorisation
Model
Business
Risk
Liability
Risk
1
Operational
Risk
Credit &
Counterparty
Risk
Risk
Market risk
Business risk
Liability risk
Credit and
counterparty risk
Operational risk
Liquidity risk
Compliance and
regulatory risk
Strategic risk
Risk description
This is the risk of a financial impact arising from changes in the value of financial assets or financial
liabilities from changes in equity, bond and property prices, interest rates and foreign exchange rates.
We separately consider currency translation risk, which relates to the translation of earnings and capital
to our reporting currency.
The risk that business performance will be below projections as a result of negative variances in new
business volumes and margins, and lapse, rebate and expense experience.
We assume liability risk, sometimes referred to as insurance risk, by issuing insurance contracts under which
we agree to compensate the policyholder or beneficiary if a specified uncertain future event affecting the
policyholder occurs. This risk includes mortality and morbidity risk, as well as non-life risk from events such
as fire or accident.
This relates to the risk of credit defaults. It includes lending risk, where a borrower becomes unable to
repay outstanding balances (for instance banking credit risk), as well as counterparty risk where an asset
is not repaid in accordance with the terms of the contract. The risk of credit spreads changing is included
under market risk.
The risk arising from operational activities, for example a failure of a major system, or losses incurred as a
consequence of people and/or process failures, including external events.
The risk that liquid assets may not be available to pay obligations at a reasonable cost, when due.
The risk that laws and regulations will be breached. This includes risk of regulatory intervention resulting in
sanctions being imposed or a temporary restriction on the business’ ability to operate and/or an additional
regulatory capital charge. It also includes failure to adapt to regulatory change and business conduct risk.
The risk of failing to implement the business strategy and the management of associated changes to
the business.
Old Mutual plc
Annual Report and Accounts 2014
65
Financial review and risk
Economic capital risk
profile of the
Old Mutual Group
Our economic capital framework has been
in place for a number of years and presents
management’s view of the Group capital
with the underpinning assumption that the
full future value of insurance profits emerges
over time and that full diversification can be
recognised between businesses. The intention
of the framework is to look beyond the
regional capital constraints imposed by local
or group-level regulatory or rating agency
requirements and to represent a simple
economic view of capital. The economic
capital framework also helps us assess
exposure to risks across the Group relative
to risk appetite.
For risk management purposes, the Group’s
risk profile is based on standalone economic
capital at risk: the relative contribution of each
risk is determined before allowing for the
impact of diversification between risks.
Considering the risk exposure before
diversification enables us to assess changes in
quantifiable risks impacting the business units.
As discussed previously, economic capital is just
one of the lenses through which we assess the
Group’s risk profile, and in particular does not
quantify strategic, regulatory or liquidity risk.
The pie charts below set out our risk profile
by business unit, with an indication of the
relevant proportion of standalone risk
exposure in economic capital terms.
Old Mutual Bermuda is included in the
overall Group profile, but not shown
separately in the business unit view as this
business is in run-off and represents a
relatively small proportion of our Group
economic capital. The economic risk exposure
data shown is as at 31 December 2014.
The risk profile in Old Mutual Emerging
Markets is well diversified, reflecting the
diverse nature of our business in this region
across life assurance, property and casualty,
and banking. This profile has remained largely
stable over the year, with an increase in the
level of credit risk due to the increased holding
of Old Mutual Finance together with growth
in Old Mutual Finance’s book size and the
inclusion of Faulu, and a slight increase in
market risk due to growth in the book.
In Nedbank, we are mainly exposed to credit
and counterparty risk. This risk is inherent in
banking, from lending and other financing
activities, and is within risk appetite.
In Old Mutual Wealth, we are mainly exposed
to market and business risk. The market risk
arises primarily from asset-based fee risk, and
the business risk is driven largely by expenses,
mass lapse and rebate risk. Favourable
market movements improved funds under
management, resulting in higher exposure to
these risks. The risk profile did not change
materially as a result of the acquisition of
Intrinsic and disposal of the German, Austrian
and Liechtenstein operations, which took
place in the second half of 2014, although
the proportion contributed to total Group
standalone economic capital has decreased.
The corporate activity which completed in
early 2015 (the acquisition of Quilter Cheviot
and disposal of European operations in
France and Luxembourg) will change the
OM Asset Management
Nedbank
Old Mutual Wealth
26%
20%
2%
54%
7%
1%
14%
11%
20%
16%
47%
5%
11%
4%
28%
18%
2%
50%
Market risk
Credit and counterparty risk
Business risk
Liability risk
Operational risk
Currency translation risk
66 Old Mutual plc
Annual Report and Accounts 2014
* The chart above for OM Asset Management shows Old Mutual’s 79.6% proportionate share
(gross of shares to EBT) of OM Asset Management’s economic capital exposure
* The chart above shows Old Mutual’s 56.7% proportionate share of Nedbank’s economic capital exposure
*
Note that the results for Old Mutual Wealth include Intrinsic on a simplified basis. They include the French and
Luxembourg operations which were disposed of in early 2015. They do not include Quilter Cheviot which was
acquired in February 2015
RISK AND CAPITALMANAGEMENTcontinued underlying drivers of risk. However, the
high-level risk profile will remain unchanged:
market and business risk will remain the
largest exposures.
Risk exposures in OM Asset Management in
the US region are concentrated in asset-based
fee risk, which is part of market risk, business
risk and operational risk. This reflects the
nature of the asset management business.
A change in methodology has resulted in
splitting operational risk and business risk
compared to the June 2013 position.
The Group’s current overall risk profile is also
shown below. This allows for additional risks at
Group level not included in the business unit
pie charts – most notably currency translation
risk due to our significant surplus assets in
South Africa, which in this calculation are
assumed to be fully transferable.
Currency translation risk represents almost
a quarter of our Group risk profile. This risk
relates mainly to the translation of surplus
capital from rand to sterling and is a structural
feature of our Group. As our capital is held
where our risks are located, the risk would
only be realised if we were to require a
transfer of surplus capital between regions
during periods of stress, as outlined previously
in the ‘Principal risks and uncertainties’ section
of this Annual Report.
Risk and control culture
Culture and values alignment across the
Group is embedded through our Code of
Conduct and our ACT NOW! Leadership
Behaviours. The level of embedding and
alignment across the Group is measured
and monitored through our performance
management system and annual group-wide
culture survey.
A proactive risk and control culture, which is
a subset of the broader business culture, is
essential to support our reputation and
operation as a responsible business. Individual
behaviours and judgements support a strong
risk governance framework.
During 2013 we began an initial approach
to assess, measure and monitor risk culture.
This involved a top-down assessment by the
Group control functions, based on a series
of 50 indicators covering areas such as
effectiveness of risk management, quality
of management information, escalations,
controls, tone from the top, governance and
remuneration incentives. The framework has
provided a basis for discussions with business
unit executives on areas for future focus and
improvement. The top-down analysis is
supplemented with a bottom-up assessment
informed by our annual culture survey results
in 2014. We have also included a metric
and appetite for risk culture in our risk
management framework.
Risk culture and conduct is receiving
increased supervisory and regulatory
attention. Our focus on customer culture
and values places us in a good position to
respond to these developments.
Old Mutual Emerging Markets
Old Mutual Group
3%
6%
27%
42%
28%
24%
23%
6%
6%
100%
11%
30%
12%
24%
*
*
*
Note that the Old Mutual Emerging Markets business includes our exposure to Africa, Latin America and Asia
The risk profile of the Group is based on standalone economic capital at risk, ie the relative contribution of each
risk is determined before allowing for the impact of diversification between risks, as at 31 December 2014
No chart is shown for Old Mutual Bermuda, which provides 2% of standalone economic capital. Group risks provide
21% of standalone economic capital
Old Mutual plc
Annual Report and Accounts 2014
67
Financial review and risk GOVERNANCE
In this section we look at who is on our
Board and explain how we address
governance matters.
68
Contents
Board of Directors
Introduction to the Corporate Governance
report by the Chairman
Approach to governance
How the Board operates
Leadership and effectiveness
Board committees
Investor Relations
AGMs
Share capital and dividends
Audit arrangements
Financial control environment
Other Directors’ Report matters
Directors’ Remuneration Report
70
72
73
74
79
83
89
89
90
91
91
93
94
Old Mutual plc
Annual Report and Accounts 2014
69
Governance BOARD OF DIRECTORS
1. Patrick O’Sullivan (65) (Irish)
M.Sc. (Econ), B.B.S., F.C.A. (Ireland)
Chairman of the Board since January 2010.
Also chairs the Nomination Committee
Vice Chairman of Zurich Financial Services from
2007 to 2009, where he had specific responsibility
for its international businesses including those in
South Africa. Prior to that, he had been CFO of
the ZFS Group and CEO, General Insurance and
Banking, of its UKISA division. He has also held
positions at Bank of America, Goldman Sachs,
Financial Guaranty Insurance Company (a subsidiary
of GE Capital), Barclays/BZW and Eagle Star
Insurance Company.
Chairman of the UK Government Shareholder
Executive, Deputy Governor of the Bank of Ireland
and Chairman of Equity Syndicate Management
at Lloyd’s.
6. Zoe Cruz (60) (US)
B.A, M.B.A.
Independent non-executive director since January
2014. Also a member of the Board Risk and
Remuneration Committees
Co-President for Institutional Securities and Wealth
Management at Morgan Stanley from 2005 to 2007,
where she was responsible for running major
revenue-generating businesses, including overseeing
their securities risk management and information
technology. From 2009 to 2012, she was involved
in founding and running her own investment
management firm, Voras Capital Management. Prior
to becoming Co-President of Morgan Stanley, she had
been its Global Head of Fixed Income, Commodities
and Foreign Exchange from 2001 until 2005. She
joined the company in 1982 and was the third
founding member of the foreign exchange group.
Founder and CEO of EOZ Global.
2. Julian Roberts (57) (British)
B.A., F.C.A., M.C.T.
Group Chief Executive
Please see Group Executive Committee on pages
50-51 of this Report for further information.
3. Paul Hanratty (53) (Zimbabwean/Irish)
B.Bus.Sc., F.I.A.
Chief Operating Officer
Please see Group Executive Committee on pages
50-51 of this Report for further information.
4. Ingrid Johnson (48) (South African)
C.A. (SA), A.M.P. (Harvard)
Group Finance Director
Please see Group Executive Committee on pages
50-51 of this Report for further information.
5. Mike Arnold (67) (British)
B.Sc., F.I.A.
Independent non-executive director since
September 2009. Chairman of the Board
Risk Committee and a member of the Group
Audit Committee
Principal Consulting Actuary and Head of Life
practice at the consulting actuarial firm Milliman
from 2002 to 2009. Prior to that, he had been the
senior partner at the practice from 1995. He is
a past Member of Council and Vice Chairman
of the Institute of Actuaries, past Chairman of
the International Association of Consulting
Actuaries and past member of the Board of
Actuarial Standards.
Non-executive director of Financial Information
Technology Limited and of Scottish Equitable
Policyholders Trust Limited.
7. Alan Gillespie (64) (British)
CBE, B.A. Hons, M.A., Ph.D.
Senior Independent Director since May 2011,
having joined the Board as an independent
non-executive director in November 2010.
Also a member of the Nomination and
Remuneration Committees
Partner at Goldman Sachs from 1990, with
responsibility for corporate finance and mergers
and acquisitions in the UK and Ireland. He jointly
led the firm’s financial services practice in Europe
and in 1996 established Goldman Sachs’ presence
in South Africa. After retiring from Goldman
Sachs in 1999, he became Chief Executive of the
Commonwealth Development Corporation in the
UK. From 2001 to 2008, he was Chairman of Ulster
Bank, a subsidiary of Royal Bank of Scotland plc.
Senior Independent Director of United Business
Media plc and Chairman of the Economic & Social
Research Council.
8. Danuta Gray (56) (British)
B.Sc., M.B.A.
Independent non-executive director since
March 2013. Also Chairman of the
Remuneration Committee and a member
of the Nomination Committee
Chairman of Telefónica O2 in Ireland until December
2012, having previously been its Chief Executive from
2001 to 2010. Prior to that, she was a Senior Vice
President for BT Europe in Germany, where she
gained experience in sales, marketing, customer
service and technology and in leading and changing
large businesses. She previously served for seven
years on the board of Irish Life and Permanent plc
and was also a director of Business in the Community.
Non-executive director of Aldermore Group plc,
Aldermore Bank plc, Michael Page International Plc
and Paddy Power PLC.
70 Old Mutual plc
Annual Report and Accounts 2014
9. Adiba Ighodaro (51) (British)
LL.B., ACCA
Independent non-executive director since January
2014. Also a member of the Group Audit Committee
Joined the Commonwealth Development
Corporation (CDC) in 1991, first in London, and later
in Lagos, with a remit to establish CDC’s Nigerian
business. In 1995, her focus moved to the Caribbean
as a Senior Investment Executive and Investment
Manager, helping to obtain investment for and
dispose of some of CDC’s interests in Africa and
the Caribbean. Later she became CDC’s Country
Manager for Nigeria. She also became Head of
West Africa, with responsibility for building the
investment business of its Actis unit across the
region. Actis was spun out of CDC in 2004, resulting
in her role changing primarily to raising investment
funding including for Actis’s $3 billion Global
Emerging Markets Fund and $1.2 billion
Infrastructure Fund.
Partner, Investor Development, at Actis LLP.
10. Reuel Khoza (65) (South African)
Eng. D., M.A., LL.D. (h.c.)
Non-executive director of the Company since
January 2006 and Chairman of Nedbank Group
since May 2006. Also a member of the Board Risk
and Nomination Committees
His previous appointments include Chairmanship
of Eskom Holdings Limited and non-executive
directorships of Glaxo Wellcome SA, IBM SA,
Vodacom, the JSE, JCI, Standard Bank Group and
Liberty Life.
Chairman of AKA Capital (Pty) Limited. Non-
executive director of Corobrik (Pty) Limited, Nampak
Limited and Protea Hospitality Holdings Limited.
Fellow and President of the Institute of Directors of
South Africa.
11. Roger Marshall (66) (British)
B.Sc. (Econ.), F.C.A.
Independent non-executive director of the Company
and Chairman of the Group Audit Committee since
August 2010. Also a member of the Board Risk and
Remuneration Committees
Former audit partner in PricewaterhouseCoopers,
where he led the audit of a number of major
groups, including Zurich Financial Services and
Lloyds TSB.
Chairman of the Accounting Council, a Director of
the Financial Reporting Council and a non-executive
director of Genworth Financial’s European
insurance companies.
12. Nkosana Moyo (63) (Zimbabwean)
Ph.D., M.B.A.
Independent non-executive director since
September 2013. Also a member of the Group Audit
and Remuneration Committees
Founder of the Mandela Institute for Development
Studies (‘MINDS’). Vice President and Chief
Operating Officer of the African Development
Bank from 2009 to 2011. From 2004 to 2009,
Managing Partner, based in London, of Actis
Capital LLP with responsibility for its African
businesses. Associate Director of the International
Finance Corporation of the World Bank from 2001
to 2004. Managing Director of Standard Chartered
Bank (Zimbabwe) from 1990 to 1995, and later
African Regional Head for Corporate Banking
of Standard Chartered Bank.
13. Nonkululeko Nyembezi-Heita (54)
(South African)
B.Sc., M.Sc., M.B.A.
Independent non-executive director of the Company
since March 2012. Also a member of the Board Risk
and Nomination Committees
Non-executive director of Old Mutual Life
Assurance Company (South Africa) Limited from
2010 to 2012, a position she relinquished upon
taking up her role at Old Mutual plc. Former Chief
Officer of Mergers & Acquisitions for the Vodacom
Group and Chief Executive Officer of Alliance
Capital. Chief Executive Officer of ArcelorMittal
South Africa from 2008 until January 2014.
Chief Executive Officer of Ichor Coal N.V. and
non-executive Chairman of JSE Limited.
Executive Chairman of MINDS. Member of the
boards of the Investment Climate Facility (ICF)
and of the Africa Leadership Institute.
Vassi Naidoo (59) (South African)
C.A. (SA)
Appointment as a non-executive director of the
Company and as successor to Reuel Khoza as
Chairman of Nedbank Group announced in
January 2015, to take effect in May 2015
Vice Chairman of Deloitte UK from 2009 to 2014.
CEO of Deloitte Southern Africa from 1998 to 2006.
Member of the Institute of Chartered Accountants in
England and Wales and honorary life member of
the South African Institute of Chartered Accountants.
10
11
6
12
1
2
3
5
9
13
7
4
8
Old Mutual plc
Annual Report and Accounts 2014
71
Governance CORPORATE GOVERNANCE
management teams and Quilter Cheviot
(the last of which completed in February 2015);
the IPO of our US institutional asset
management business on the New York Stock
Exchange in October; Nedbank’s exercise
of its subscription rights to acquire 20% of
Ecobank Transnational Inc.; Old Mutual
Emerging Markets’ continuing search for
new opportunities in the Rest of Africa; and
disposals of a number of Skandia’s legacy
businesses in continental Europe, including
those in Poland, Germany and Austria.
During 2014, in line with one of the action
points emerging from last year’s Board
effectiveness review, each of the non-executive
directors was tasked to become more closely
acquainted with one of the Group’s main
businesses and encouraged to attend its
board and management meetings and
briefings in order to improve insight and
understanding at Board level. This has
already begun to demonstrate its value
and we plan to continue it into the future.
A fuller account of the Board’s activities is
included in the following pages.
Annual General Meeting (AGM)
Our AGM will be held in London on 14 May
2015. As usual, it will be webcast via our
website and there will be an opportunity
for shareholders to submit questions
beforehand to be dealt with at the meeting.
Our shareholder circular relating to the
AGM includes further details.
Old Mutual continues to view good corporate
governance as a vital ingredient in operating
a successful business, while also providing
assurance to shareholders, customers and
regulators that the Group’s businesses are
properly managed and controlled.
Patrick O’Sullivan
Chairman
“ Old Mutual continues
to view good corporate
governance as a vital
ingredient in operating
a successful business.”
Patrick O’Sullivan
Chairman
Board focus during 2014
■ Major acquisitions and disposals
■ Future strategic positioning
and development
■ Group Finance Director succession
■ Board training on aspects of Solvency II
■ Monitoring of Group culture and
investors’ views of the Company.
72 Old Mutual plc
Annual Report and Accounts 2014
I am pleased to introduce this Corporate
Governance report in which, among other
things, we describe the Company’s compliance
with the UK Corporate Governance Code,
explain how the Board and its main standing
committees have operated during the past
year, and describe how effective stewardship
is exercised over the Group’s activities in the
interests of shareholders and other stakeholders.
Board
Since last year’s report, we have recruited two
new executive directors to the Board: Ingrid
Johnson, who replaced Philip Broadley as
Group Finance Director, and Paul Hanratty,
who joined the Board as Chief Operating
Officer. Both of these appointments took effect
in July 2014 and were in line with our continuing
objective of having a Board with the diversity
of skills, experience, gender and geographical
background appropriate to the Group’s
current and developing business profile.
We have also announced the appointment of
Vassi Naidoo as a new non-executive director.
He will join the Board on 1 May 2015, ahead
of replacing Reuel Khoza as Chairman of
Nedbank Group Limited and Nedbank
Limited on 11 May 2015.
During 2014, the Board again devoted a
significant amount of time to discussing future
strategic opportunities for the Group in the
UK, Africa and elsewhere. Board meetings
were held in Nairobi in January and in Cape
Town in December. Areas of particular Board
focus this year included Old Mutual Wealth’s
progress in creating a leading UK retail
investment business through its acquisitions
of Intrinsic Financial Services, various asset
“ We aim to take a
holistic approach to
governance, with a
proactive and effective
Board providing the
framework for
addressing the Group’s
long-term sustainability.”
What is the
Company’s approach
to governance?
We aim to take a holistic approach to
governance, with a proactive and effective
Board providing the framework for addressing
the Group’s long-term sustainability.
As the Company’s primary listing (known in
the UK as a premium listing) is on the London
Stock Exchange, this report mainly addresses
the matters covered by the UK Corporate
Governance Code 2012, but the Company
also has appropriate regard to governance
expectations in other territories where its
shares are listed. The text of the UK Corporate
Governance Code 2012 is available on the
Financial Reporting Council’s website at
www.frc.org.uk.
The governance relationship with the Group’s
majority-owned subsidiary, Nedbank Group
Limited (Nedbank), recognises the latter’s own
governance framework as a separately-listed
entity on the JSE Limited and the fact that it has
minority shareholders. The Company has a
relationship agreement with Nedbank that
sets out the Company’s requirements and
expectations as its majority shareholder. The text
of that relationship agreement is available on the
Company’s website. Nedbank has also adopted
the Group Operating Model (described below),
subject to certain waivers in acknowledgement
of its separately-listed and regulated status,
which sits alongside that agreement.
The Group’s major South African public
subsidiary companies are subject to applicable
local governance expectations, including those
contained in King III and, for Nedbank, the JSE’s
listings requirements. In addition, given that the
Group has two ‘domestically systematically
important financial institutions’ – Old Mutual
Emerging Markets and Nedbank – we are
actively considering how we may need to adapt
the future governance of our South African
operations as South Africa migrates to a ‘Twin
Peaks’ regulation model similar to the UK’s.
OM Asset Management plc (OMAM), the
Group’s US institutional asset manager, is
now separately listed on the New York Stock
Exchange (NYSE). It is therefore subject to
the rules of the US Securities and Exchange
Commission, the NYSE listing rules and other
requirements applicable to US publicly-listed
entities, including those of the Sarbanes-Oxley
Act of 2002. OMAM has adopted policies and
governance principles that are closely aligned
with those set out in the Group Operating Model.
In addition, as part of the arrangements leading
up to its separate listing, OMAM entered into a
shareholders’ agreement with Old Mutual plc
and OM Group (UK) Limited giving the Group
various rights with respect to the management
and conduct of OMAM’s affairs. A copy of this
agreement is available on the Company’s website.
Objectives of our Group Operating Model (GOM)
Our GOM is based on a ‘strategic
controller’ model steered from our
Head Office. Its objectives are:
■ To establish clear principles of delegation
and escalation designed to provide
appropriate levels of assurance about
the control environment, while retaining
flexibility for our businesses to
operate efficiently
■ To set out a clear and comprehensive
governance framework – with appropriate
procedures, systems and controls –
facilitating the satisfactory discharge of the
duties and obligations of regulated firms,
directors and employees within the Group
■ To articulate clearly what Old Mutual plc
(as shareholder) expects from business unit
boards when exercising their powers as set
out in their respective constitutions
■ To take due account of the regulatory
requirement that boards of regulated
entities maintain proper controls over
the affairs of their respective businesses
■ To protect the interests of the Group’s
various stakeholders, including its
shareholders, creditors, policyholders
and customers.
How the GOM operates
Under the GOM (and the arrangements with
Nedbank and OMAM mentioned above), the
Company appoints up to three members of
senior Group executive management as
non-executive directors on the boards of its
major subsidiaries to ensure transparent
communication of information in both
directions. The boards of Old Mutual Wealth,
Nedbank Group Limited and Old Mutual
Emerging Markets are independently
regulated and have a majority of independent
directors. The major subsidiaries also have their
own Audit, Risk and Remuneration Committees.
The major businesses hold quarterly business
reviews with the Company, to monitor their
performance and prospects against a wide
spectrum of criteria. These arrangements sit
alongside the submission of detailed monthly
financial reports and communication of risk
and internal audit information through each
of the latter’s functional lines.
The GOM also incorporates the ‘three lines
of defence’ principles, assigning roles and
responsibilities under three categories:
acceptors of risk, overseers of the risks being
taken, and independent reviewers and
reporters of risk.
Old Mutual plc
Annual Report and Accounts 2014
73
Governance CORPORATE GOVERNANCE
continued
Has the Company complied with the
UK Corporate Governance Code?
Throughout the year ended 31 December
2014 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 UK
Corporate Governance Code 2012 applicable
to that period, as described in more detail in
the following sections of this report. Certain
changes to the Code applicable to years
beginning on or after 1 October 2014 will
be addressed in next year’s Corporate
Governance report.
The Company’s compliance with the provisions
of the UK Corporate Governance Code 2012,
and the statement relating to the going
concern basis adopted in preparing the
financial statements set out at the end of this
section of this Report, have been reviewed
by the Company’s auditors, KPMG LLP, in
accordance with guidance published by the
UK Auditing Practices Board.
Who serves on the
Board and how does
it operate?
Old Mutual’s Board currently has 13 members,
three of whom are executive and 10 of whom
(including the Chairman) are non-executive.
The following changes to the Board’s
membership took place during 2014:
■ Zoe Cruz and Adiba Ighodaro joined
the Board as non-executive directors
on 6 January 2014
■ Bongani Nqwababa ceased to be a
non-executive director on 6 January 2014
■ Paul Hanratty joined the Board as
Chief Operating Officer on 1 July 2014
■ Ingrid Johnson joined the Board as
Group Finance Director on 1 July 2014
■ Philip Broadley, the former Group Finance
Director, ceased to be a director on
31 August 2014.
The table below sets out the Board’s continuing
membership in more detail and in order of
original appointment.
The Board’s current membership
Role
Name and
nationality
Julian Roberts (British)
Reuel Khoza (SA)
Group Chief Executive
Non-executive director
Non-executive director Mike Arnold (British)
Chairman
Non-executive director
Senior Independent
Patrick O’Sullivan (Irish)
Roger Marshall (British)
Alan Gillespie (British)
Director
Non-executive director Nonkululeko
Nyembezi-Heita (SA)
Date of original
appointment
to the Board
August 2000
January 2006
Sept 2009
January 2010
August 2010
November
2010
March 2012
Non-executive director Danuta Gray (British)
Non-executive director Nkosana Moyo (Zim)
Non-executive director
Non-executive director
Chief Operating Officer Paul Hanratty (Zim/Irish)
Group Finance Director
March 2013
Sept 2013
Zoe Cruz (US)
January 2014
Adiba Ighodaro (British) January 2014
July 2014
July 2014
Ingrid Johnson (SA)
1 See also the Board succession plan details on page 88 below
2 Extended in February 2015, for a further three years, to March 2018
Date current
term ends,
where applicable
Current term
as director,
where
applicable
May 2015 3rd (final year)
2nd
2nd
2nd
2nd
September 20151
January 20161
August 20161
November 20161
March 20152
March 2016
September 2016
January 2017
January 2017
1st
1st
1st
1st
1st
Nationality of Board members
African
UK & Europe
US
38%
54%
8%
Tenure of the non-executive
directors (including
the Chairman)
at 31 December 2014
18%
<12 months
27%
1-2 years
9%
2-3 years
37%
3-6 years
9%
> 6 years
Note: In the first chart above, Paul Hanratty
is treated as Zimbabwean.
74 Old Mutual plc
Annual Report and Accounts 2014
“ The Board’s role is to
exercise stewardship of
the Company within a
framework of prudent
and effective controls
that enables risk to be
assessed and managed.”
For a description of how people are selected
to join the Board, see the Report from the
Nomination Committee later in this report.
What is the Board’s role and how
does it operate?
The Board’s role is to exercise stewardship of
the Company within a framework of prudent
and effective controls that enables risk to be
assessed and managed. The Board sets the
Company’s strategic aims, based on
recommendations made by the Group Chief
Executive, reviews whether the necessary
financial and human resources are in place for
it to meet its objectives, and monitors
management performance. It is kept informed
about major developments affecting the
Group through the Group Chief Executive’s
and Group Finance’s monthly reports and
holds regular sessions to discuss high-level
strategic matters. The Group Operating
Model identifies the matters that are specifically
reserved for Board decision and protocols
governing escalation of issues to it and
delegation of powers from it, to ensure clear
allocation of responsibility for decision-making.
In accordance with the Group Operating
Model, the Board has delegated its executive
powers to the Group Chief Executive, with
power to sub-delegate, and also to the
Approvals Committee. In his co-ordination and
stewardship of the Group, the Group Chief
Executive is supported by the Group Executive
Committee, a consultative management
committee whose current members are
described elsewhere in this Annual Report.
The Board has also delegated specific
responsibilities to Board committees, as
described in more detail under the heading
‘What are the standing Board Committees
and what did they do during 2014?’ later in
this report.
In addition to its interaction with the three
executive directors, the Board interacts with
the other senior executive management
(including the most senior executives of the
Group’s main business units) through their
periodic participation in Board meetings,
other briefing sessions, and Board visits to
the Group’s main business centres. The Board
also receives minutes of the proceedings of
the Group Executive Committee, to help keep
it informed about the discussions taking place
between the Group Chief Executive and the
heads of the Group’s main businesses and of
Group central functions such as Risk, Strategy,
Responsible Business and Human Resources.
The executive element of the Board is
balanced by an independent group of
non-executive directors. The Board as a whole
approves the strategic direction of the Group,
Board and Committees
Board Committees
Executive Committees
Group Audit Committee
Monitors the integrity of the Group’s
financial statements.
Group Executive Committee
Supports the Group Chief Executive as a senior
executive forum.
The Board
Sets the Company’s strategic aims,
reviews whether the necessary
financial and human resources
are in place for it to meet its
objectives, and monitors
management performance.
Board Risk Committee
Oversees the current and emerging
risk environment affecting the Group.
Nomination Committee
Manages Board and senior
executive appointments and
succession plans.
Remuneration Committee
Oversees executive director and
senior management remuneration.
Group Executive Risk Committee
Oversees risk from an executive perspective.
Group Capital Management Committee
Reviews and approves major capital expenditure.
Responsible Business Committee
Oversees the Group’s profile and initiatives in
the area of Responsible Business.
Approvals Committee
Provides approvals for matters delegated to it
by the Board.
Old Mutual plc
Annual Report and Accounts 2014
75
Governance CORPORATE GOVERNANCE
continued
Board and executive responsibility for running
the Company’s business. Further details of the
respective roles and responsibilities of our
Chairman and Group Chief Executive are set
out in the boxes on the left of this page.
Other than in exceptional circumstances,
non-executive directors (including the
Chairman) serve a maximum of nine years in
office. This maximum period consists of two
three-year terms, followed by up to three
further one-year terms. Renewal of non-
executive directors’ engagements for successive
terms is not automatic and the continued
suitability of each non-executive director is
assessed by the Nomination Committee before
their appointment is renewed.
Key roles and responsibilities
Chairman
■ Leading the Board
■ Ensuring the Board’s effectiveness and
setting its agenda
■ Ensuring that the directors receive
accurate, timely and clear information,
and adequate time is available for
discussion of all agenda items
■ Ensuring effective communication
with shareholders
■ Promoting a culture of openness
and debate
■ Ensuring constructive relationships
between the executive and
non-executive directors.
Group Chief Executive
■ Defining, creating and implementing
strategy and objectives
■ Developing manageable goals
and priorities
■ Leading and motivating the
management teams
■ Developing proposals to present to
the Board on all areas reserved for
its judgement
■ Developing Group policies for
approval by the Board and ensuring
their implementation
■ Promoting the Group’s culture.
scrutinises management’s performance
against agreed goals and objectives, and
monitors performance reporting. Procedures
are in place to help Board members satisfy
themselves about the integrity of the Group’s
financial information and to ensure that
financial controls and systems of risk
management are robust and sustainable.
Separately from the formal Board meeting
schedule, the Chairman meets with the
non-executive directors, with no executives
present, to provide a forum where any issues
can be raised. He also conducts an annual
one-to-one performance evaluation of each
of the non-executive directors, and any
resulting action points are reported to the
Nomination Committee.
The Company also facilitates informal
meetings among the non-executive directors,
without the Chairman or any executive present.
These meetings include the annual review of
the Chairman’s own performance – led by the
Senior Independent Director, who also obtains
whatever input he considers appropriate from
the executive directors and the facilitator of the
Board effectiveness review.
The assignment of responsibilities between the
Chairman Patrick O’Sullivan and the Group
Chief Executive Julian Roberts is documented
to ensure a clear division between running the
What was the directors’ attendance record during 2014?
The table below sets out the number of meetings held and individual directors’ attendance at
meetings of the Board and its principal committees (based on membership of those committees,
rather than attendance as an invitee) during 2014.
Attendance record
Number of meetings held
Mike Arnold
Zoe Cruz
Alan Gillespie
Danuta Gray
Paul Hanratty
Adiba Ighodaro
Ingrid Johnson
Reuel Khoza
Roger Marshall
Nkosana Moyo
Nonkululeko Nyembezi-Heita
Patrick O’Sullivan
Julian Roberts
Former director
Philip Broadley
Board
(scheduled
and ad hoc)
Group Audit
Committee
Board Risk
Committee
Remuneration
Committee
Nomination
Committee
12
11/12
12/12
11/12
11/12
7/7
11/12
7/7
11/12
12/12
10/12
10/12
12/12
12/12
7/7
7
7/7
–
–
3/4
–
7/7
–
–
7/7
6/7
–
–
–
–
9
9/9
8/9
–
–
–
–
–
5/9
9/9
–
8/9
–
–
–
8
–
8/8
8/8
8/8
–
–
–
–
7/8
7/8
–
–
–
–
10
–
–
10/10
10/10
–
–
–
9/10
–
–
9/10
10/10
8/8
–
76 Old Mutual plc
Annual Report and Accounts 2014
Board meetings in 2014
Date of meeting
January
Location
Nairobi
February
London
What did the Board do during 2014?
The Chairman’s introduction to this report
describes some of the main matters that the
Board addressed during the year. In addition
to those and to the regular updates that the
Board received on the Group’s results, the
Group Chief Executive’s report on recent
significant developments and major projects
around the Group, and reports from Board
committee chairmen, the following table sets
out the Board’s other activities at its principal
scheduled meetings during the year.
Principal topics covered
■ Presentation on the economic environment and
■ Presentation on possible strategic actions and
opportunities for the Group in East Africa
(see also the separate feature on this meeting at
the top of the next page)
■ Pre year-end review of results and the Annual
Report and Accounts for 2013
their effects on Group cash, including discussion
about the potential IPO of the Group’s US
institutional asset management business
■ Annual review and clearance of directors’
conflicts of interest.
■ Presentation by the Chief Executive of Old Mutual
Wealth on the Old Mutual Wealth business and
its plans to become a leading vertically-
integrated UK retail wealth manager
■ Update on strategic projects
■ Feedback from the annual independent survey of
investors’ views on the Group
■ Approval of the preliminary results for 2013
■ Approval of the Annual Report and Accounts and
the Responsible Business Report for 2013
■ Recommendation of the final dividend for 2013
■ Feedback by the Senior Independent Director
from his annual review of the Chairman.
May
London
■ Presentation by the Nedbank Group Chief
■ Update on preparations for the IPO of the Group’s
Executive on Nedbank, including discussion of its
subscription rights in Ecobank Transnational Inc.
■ Approval for Old Mutual Emerging Markets to
increase its stake in Old Mutual Finance
US institutional asset management business
■ Approval to renew the Company’s £800 million
revolving credit facility
■ Approval of the Q1 Interim Management
Statement.
July
Offsite, UK
■ Discussion of various topics relevant to the
■ Presentation and discussion on the possible
August
London
September
London
Group’s future strategy and vision
■ Presentation by the Chief Risk Officer on the
acquisition by Old Mutual Wealth of
Quilter Cheviot
Group’s draft Own Risk and Solvency Assessment
■ Discussion of Group governance arrangements.
■ Update on various strategic projects
■ Approval of the interim results for 2014
■ Declaration of an interim dividend
■ Briefings by Group HR on the latest executive
talent review and results of the Group culture
survey for 2014.
■ Update on plans for the IPO of the Group’s US
institutional asset management business and on
various other strategic initiatives
■ Presentation on Group capital.
November
December
London and by
telephone
■ Approval of the Q3 Interim Management
■ Update on strategic opportunities in the
Statement
Rest of Africa.
OMEM’s and Nedbank’s
premises in Cape Town
■ Presentations by Old Mutual Emerging Markets,
Old Mutual Investment Group, Nedbank and the
Property & Casualty business unit on their
respective business and strategy plans for
2015–2017
■ Briefings on the economic outlook for South
Africa and the Group’s cash and capital position
■ Review of the draft Group business plan for
2015–2017
■ Update on strategic projects, and presentations
by internal and external speakers on various
topics identified at the Board’s offsite strategy
session in July
■ Discussion of governance structures for the
Group’s South African businesses in the context
of the migration of South African regulatory
oversight to a ‘Twin Peaks’ model
■ Annual review of Board Committee memberships.
Old Mutual plc
Annual Report and Accounts 2014
77
Governance CORPORATE GOVERNANCE
continued
“ The Board continues to
review the progress
made by the Group in
expanding in the Rest
of Africa.”
78 Old Mutual plc
Annual Report and Accounts 2014
Board visit to Nairobi
During their visit to Nairobi in January 2014,
members of the Board received presentations
and participated in discussions on:
■ The macro-economic outlook for Kenya
and the neighbouring region, as described
by a local investment expert
■ Kenya Vision 2030, presented by a
local academic
■ Progress made by the Group in the Rest of
Africa and Kenya in particular, along with
further opportunities for the future, as
described by the Head of Africa and
local management from the Group’s
Kenyan operations.
On the evening of 30 January, the Board
joined management of Old Mutual’s
businesses in Kenya at a social event
attended by local politicians, regulators,
customers and media representatives, which
provided a very useful opportunity to meet
and interact with them.
We were grateful to SafariCom, Heineken,
Uchumi and the Nairobi Stock Exchange,
whose management kindly met with teams
from the Board to provide more detailed
insight into various aspects of doing business
in Kenya.
Are the non-executive directors
independent?
Of the nine current non-executive directors,
excluding the Chairman, the Board considers
eight to be independent within the criteria set
out in the UK Corporate Governance Code;
that is, they are independent in character and
judgement and have no relationships or
circumstances which are likely to affect their
judgement, or could appear to affect it. These
eight are: Mike Arnold, Zoe Cruz, Alan
Gillespie, Danuta Gray, Adiba Ighodaro,
Roger Marshall, Nkosana Moyo and
Nonkululeko Nyembezi-Heita.
The other non-executive director, Reuel Khoza,
is not considered independent for two reasons.
He chairs the Group’s majority-owned
subsidiary, Nedbank Group Limited, and there
are business relationships between Nedbank
and Aka Capital, in which he owns a stake.
In May 2015, he will be succeeded by Vassi
Naidoo, the incoming Chairman of Nedbank
Group Limited. The Board has determined that
it will also be appropriate to classify Vassi
Naidoo as non-independent for governance
purposes in view of his role at Nedbank.
Who is the Senior Independent
Director?
Alan Gillespie has been the Senior
Independent Director since May 2011. The
Senior Independent Director is available to
shareholders if they have concerns that are
unresolved after contact through the normal
channels of the Chairman, Group Chief
Executive or Group Finance Director or where
such contact would not be appropriate. The
Senior Independent Director’s contact details
can be obtained from the Group Company
Secretary: martin.murray@omg.co.uk.
Are directors required to hold shares
in the Company and what are their
current interests?
The Remuneration Committee has established
guidelines on shareholdings by executive
directors of the Company. Under these, the
Group Chief Executive is expected to build up
a holding of shares in the Company equal in
value to at least 200% of his annual base salary
within five years of appointment. For other
executive directors the requirement is 150% of
annual base salary within five years of
appointment. Julian Roberts and Paul Hanratty
both have shareholdings in excess of these
requirements, while Ingrid Johnson, having only
recently joined the Company from Nedbank,
has not yet begun to build up her shareholding.
The Board has considered adopting a
shareholding requirement for non-executive
directors, but does not believe a formal
requirement is appropriate. Instead, it decided
during 2014 to encourage non-executive
directors to build up holdings equal to 50% of
their annual base fees within 12 months after
appointment and to increase this over time to
100% of their annual base fees. The target for
the Chairman was set at 50% of his annual base
fee, to be achieved over time. The Company
has arranged through its UK share registrar,
Equiniti, to facilitate periodic purchases of
shares in the Company on behalf of eligible
non-executive directors out of their net fees:
two of them are currently using this facility.
Details of directors’ interests (including interests
of their connected persons) in the share capital
of the Company and its quoted subsidiaries,
Nedbank Group Limited and OM Asset
Management plc, at the beginning and end
of 2014 are set out in the table at the foot of
this page. The interests of the executive
directors in share options and forfeitable
shares awards are described in the section
of the Directors’ Remuneration Report entitled
‘Directors’ shareholdings and share interests’.
There were no changes to any of the interests
between 31 December 2014 and
27 February 2015.
How are directors’ conflicts of interest
managed?
Processes are in place for any potential
conflicts of interest to be disclosed and for
directors to avoid participation in any
decisions where they may have any such
conflict or potential conflict. The Nomination
Committee considers other significant
commitments or external interests of potential
appointees as part of the selection process
and discloses them to the Board when
recommending an appointment. Non-
executive directors are required to inform the
Board of any subsequent changes to such
commitments, which must be pre-cleared with
the Chairman if material.
The Company’s procedures for dealing with
directors’ conflicts of interest continued to
operate effectively during 2014 and no
director had a material interest in any
significant contract with the Company or any
of its subsidiaries during the year. Additional
details of various non-material transactions
between the directors and the Group are
reported on an aggregated basis, along with
other transactions by senior managers of the
Group, in Note H3 to the financial statements.
Directors’ interests
Mike Arnold
Zoe Cruz
Alan Gillespie
Danuta Gray
Paul Hanratty
Adiba Ighodaro
Ingrid Johnson
Reuel Khoza
Roger Marshall
Nkosana Moyo
Nonkululeko Nyembezi-Heita
Patrick O’Sullivan
Julian Roberts
Former director
Philip Broadley
(resigned 31 August 2014)
The executive directors are permitted to hold
and retain, for their own benefit, fees from one
external (non-Group) non-executive
directorship of another listed company (but not
a chairmanship), subject to prior clearance by
the Board and provided the directorship
concerned is not in conflict or potential conflict
with any of the Group’s businesses. None of
the executive directors currently holds any
external non-executive directorships of other
publicly quoted companies.
Leadership and
effectiveness
What is the Company’s approach to
ensuring diversity?
We recognise that success in delivering the
Group’s strategy depends on ensuring a
suitable talent pipeline throughout the Group
and maintaining effective HR practices to
attract, retain and develop appropriately skilled
employees, senior managers and executives.
Has the Company granted indemnities
to its directors?
In accordance with the Company’s Articles
of Association, each director is granted an
indemnity by the Company in respect of
liabilities incurred as a result of their office, to
the extent permitted by UK law. The Company
has entered into formal deeds of indemnity in
favour of each of the directors. A specimen
copy of the indemnities is available in the
Corporate Governance section of the
Company’s website.
The indemnities described above were in force
throughout 2014 and have remained so up to
the date of this report. In respect of those
liabilities for which directors may not be
indemnified, the Company maintains directors’
and officers’ liability insurance.
Each business is required to develop an
environment that promotes the benefits of
equal opportunities and diversity, reflecting
the diversity of the markets in which we
operate. Selection of both Board members
and employees is based on objective criteria
to ensure that we have the correct mix of skills,
experience and knowledge to reflect the
customers and communities we serve and aim
to serve. Recruitment, promotion, selection for
training and other aspects of employee
management are free from discrimination
– including on grounds of gender, race,
disability, age, marital status, sexual
orientation and religious belief. For our
business units in South Africa, these
imperatives have to be balanced against their
Black Economic Empowerment requirements.
At 31 December 2014
At 31 December 2013
Old Mutual plc
ordinary shares
Nedbank Group
Limited shares
OM Asset
Management plc
shares
Old Mutual plc
ordinary shares
Nedbank Group
Limited shares
26,475
–
13,000
14,175
824,5471
–
–
3,566
45,000
10,000
3,566
100,000
2,014,3031
–
–
–
–
–
–
22,9132
14,774
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
11,134
–
–
–
45,000
10,000
–
91,319
1,965,3971
513,4341
–
–
–
14,774
–
–
–
–
–
–
79
1 These figures do not include rights to forfeitable shares that have not yet vested, which are described in the Directors’ Remuneration Report
2 These shares are currently held under the terms of the Nedbank Compulsory Bonus Share Scheme and the Nedbank Voluntary Bonus Scheme
Old Mutual plc
Annual Report and Accounts 2014
Governance CORPORATE GOVERNANCE
continued
“ We recognise that
success in delivering
the Group’s strategy
depends on ensuring a
suitable talent pipeline
throughout the Group
and maintaining effective
HR practices to attract,
retain and develop
appropriately skilled
employees, senior
managers and executives.”
In addition, we aim to maintain an inclusive
culture that is sensitive to employees’ needs.
We make appropriate adjustments for
disabled employees as required, and
endeavour to provide training and career
development opportunities for all. Some
examples of these principles in action can
be found in the ‘Meet our People’ section
of our website.
The changes to the Board during 2014 mean
that we remain comfortably ahead of our
diversity target of three female members by
the end of 2015. With the appointments of Zoe
Cruz and Adiba Ighodaro in January 2014
and of Ingrid Johnson in July 2014, female
membership of our Board has risen to 38%
(five out of 13). We also now have 27% female
membership of the Group Executive
Committee, with the appointments of Ingrid
Johnson and Gail Klintworth during the year.
More generally, we remain committed to
improving our diversity and continue to strive
towards the targets for 2018 that we set in
2013 – see the diagrams below. Initiatives to
address these targets are described in our
Responsible Business Report.
How do we ensure that Board members
have the right knowledge to discharge
their duties?
The composition of and succession plans for
the Board are formally considered at least
annually. We have developed a skills and
industry experience matrix to help the Board
assess the composition profiles of the Group
and major subsidiary boards. Similarly the
Nomination Committee discusses talent and
succession plans for the Group and business
unit Executive Committees twice a year.
At Company level, each new Board member is
required to complete a structured induction
programme, which involves a commitment to
spend additional time on familiarising
themselves with the Group during their first
year. The induction programme has been
revised this year and includes the role and
expectations of a non-executive director,
Group strategy and business unit awareness,
business performance and financial
management, governance and compliance,
and audit. Each new member also completes a
behavioural and psychometric assessment to
provide awareness of their interpersonal
preferences and how these relate to the rest of
the Board. This feedback is available to the
Chairman, to help him ensure that all members
can participate fully in Board discussions.
Group Board gender split
Group Executive Committee gender split
Female
Male
2018 Target = >30% female
5
8
38%
62%
Female
Male
2018 Target = 30% female
3
8
27%
73%
Key roles1 gender split
Gender split of permanent staff across the Group
19
94
Female
Male
2018 Target = 30% female
1
Top 113 positions around the Group, at
31 December 2014
17%
83%
Female 33,569
23,866
Male
At 31 December 2014
58%
42%
80 Old Mutual plc
Annual Report and Accounts 2014
Induction of new non-executive
directors
The Company has a structured and
comprehensive induction programme for
new non-executive directors, which is
designed to enable new appointees to the
Board to familiarise themselves with the
Group’s operations, financial affairs and
strategic position so that they can make an
effective contribution as soon as possible
after they have joined the Board.
This programme includes sessions with
the heads of each of the Group’s major
businesses, functional heads and the
Company’s auditors and external
legal advisers.
Training sessions for the Board in 2014
focused principally on how the introduction of
Solvency II was likely to impact on the Group.
How is the performance of the Board
and its committees reviewed?
Performance reviews of the Board and its
standing committees are conducted annually.
They are carried out by an external expert at
least every three years in line with the UK
Corporate Governance Code.
Under its current Chairman, the Board has
invested a significant amount of effort in
understanding its effectiveness through both
internally and externally facilitated reviews.
The table below shows the history of such
reviews since 2009.
Actions taken during 2014 as a result of the
2013 Board effectiveness review included:
■ Establishment of a special purpose
Governance Review Committee to consider
governance interaction and the assignment
of responsibilities between Old Mutual plc’s
Board and the principal subsidiary boards,
with particular focus on the Group’s South
African operations. After reporting its
recommendations to the Board, the
Governance Review Committee’s
responsibilities were assumed by the
Nomination Committee later in the year
■ Alignment of non-executive directors to
a business unit to develop knowledge of
the business unit’s risks and issues and its
executive capability
■ Engagement of Board Intelligence to review
and provide recommendations on how
Board information flows and Board
agendas might best be structured.
The formal Board effectiveness review for
2014 was conducted through an external
facilitator, Helen Pitcher of Advanced Board
Excellence. Advanced Board Excellence is
independent of the Company and has no
other relationship with the Group. Given the
review findings and focus areas over the past
three years, the recent changes in Board
composition and the review work already
undertaken, this year’s evaluation focused on:
■ Achieving effective outcomes and Board
dynamics, with particular emphasis on the
quality of the Board’s discussions and
decision-making and how the Board
works together
■ Use of time and the Board’s focus
■ Effectiveness assessments of the individual
directors, including evaluation of their
maintenance and development of
knowledge of the financial services
industry and the Group’s businesses.
History of Board effectiveness reviews
2009
2010
2011
2012
2013
2014
Agreed effectiveness improvements and Board development facilitated both internally and externally
Led by KornFerry
Detailed questionnaire
supplemented by
1:1 interviews
Led by Helen Pitcher of
IDDAS, and including
a Governance and
Compliance Report
and Board Dynamics
Review
Board profile
reviewed and shared
Detailed questionnaire
supplemented by
1:1 interviews
Board profile updated
and discussions took
place with IDDAS on
the 2012 review findings
Board Governance
Review (internally led
with external input)
IDDAS compared the
findings from this to
2011 outputs and
commented on where
progress had been
achieved
Board Risk Committee
effectiveness review
Board culture survey
Board profile updated
(by Helen Pitcher of
Advanced Board
Excellence) and
reviewed with
the Chairman
External facilitation
Internal facilitation
Internal and external facilitation
Short questionnaire
focused on progress
against the action plan
and Board Values.
Supplemented by
1:1 interviews
Board Intelligence
reviewed and made
recommendations for
improvements to Board
information packs
Full Board effectiveness
review led by
Helen Pitcher of
Advanced Board
Excellence
Old Mutual plc
Annual Report and Accounts 2014
81
Governance CORPORATE GOVERNANCE
continued
“ The Board has invested
a significant amount of
effort in understanding
its effectiveness through
both internally and externally
facilitated reviews.”
The review for 2014 included thorough
one-to-one interviews with each Board
member and others who regularly interact
with the Board and its standing committees.
The results were collated and reported back
to the Board in February 2015.
The externally facilitated review concluded that:
■ The Board and its committees had
operated satisfactorily during the year,
with a generally appropriate mix of skills
represented on each of them and good
levels of information and discussion, well
led by their respective chairmen
■ Areas for future development included
a desire for more focus on succession
planning, resolving the future governance
structure for the Group’s South African
businesses, and continuing to refine
and sharpen the communication of
Board information.
In line with recommendations arising from
the 2014 review, the Nomination Committee
will in future be known as the Nomination
and Governance Committee, with a
correspondingly wider remit.
Focus areas in 2014 arising from the previous year’s Board effectiveness review
Governance and oversight
Vision and business unit insights
Board time allocation
■ Conduct a review of Group governance
■ Establish closer links to boards of
major subsidiaries.
■ Review Board and Board
committee agendas:
a) Ensure balance of time
is appropriate against
Group priorities
b) Ensure adequate time at Board
meetings for committee chairmen
to report to the full Board
c) Arrange, as opportunities allow,
meetings between non-executive
directors at Group and major
subsidiary levels.
■ Develop a shared understanding and
agreement about the vision for the
Group over the next five years
■ Increase knowledge of business units:
a) Chairmen of the Board’s standing
committees to get to know their
counterparts on subsidiary
committees better and involve
themselves more in the major issues
being dealt with at that level
b) Other non-executive directors to
spend some time outside Board
meetings concentrating on a
particular business to understand
it better
■ Improve induction processes for
new non-executive directors to
include business orientation and
stakeholder connections.
82 Old Mutual plc
Annual Report and Accounts 2014
“ The Board has a number
of important standing
committees which assist it
in discharging its duties.”
What are the Board’s
standing committees
and what did they do
during 2014?
The Board has a number of important standing
committees to which various matters are
delegated in line with their terms of reference.
After the significant changes to Board committee
memberships at the start of 2014, as described in
last year’s Corporate Governance report, no
further changes were made as a result of the
annual review of such memberships that took
place towards the end of 2014. Julian Roberts
had already stepped down as a member of the
Nomination Committee during the year in order
to ensure that its members comprised a majority
of independent non-executive directors, in line
with the UK Corporate Governance Code.
Current memberships of the Board’s
main standing committees are as follows:
Group Audit Committee
Roger Marshall (Chairman) (since 2010)
Mike Arnold (since 2009)
Adiba Ighodaro (since January 2014)
Nkosana Moyo (since January 2014)
Other members of the committee during the
year: Bongani Nqwababa (2007 to January
2014), Alan Gillespie (2010 to January 2014),
Danuta Gray (2013 to May 2014)
Secretary to the committee: Martin Murray
(since 1999)
Board Risk Committee
Mike Arnold (Chairman) (since 2010)
Zoe Cruz (since January 2014)
Reuel Khoza (since 2010)
Roger Marshall (since 2010)
Nonkululeko Nyembezi-Heita (since 2013)
Other members of the committee during the
year: Philip Broadley (2010 to January 2014),
Nkosana Moyo (2013 to January 2014)
Secretary to the committee: Colin Campbell
(since 2012)
Nomination Committee
Patrick O’Sullivan (Chairman) (since 2010)
Alan Gillespie (since 2010)
Danuta Gray (since 2013)
Reuel Khoza (since 2010)
Nonkululeko Nyembezi-Heita (since 2013)
Other members of the committee during the
year: Mike Arnold (2010 to January 2014),
Bongani Nqwababa (2010 to January 2014),
Roger Marshall (2010 to January 2014), Nkosana
Moyo (2013 to January 2014), Julian Roberts
(2008 to November 2014)
Secretary to the committee: Martin Murray
(since 1999)
Remuneration Committee
For details of the Remuneration Committee, see
the Directors’ Remuneration Report.
Vassi Naidoo, who will be joining the Company’s
Board as a non-executive director when he
replaces Reuel Khoza as Chairman of Nedbank
in May 2015, will also succeed to the former’s
memberships of the Board Risk and Nomination
Committees at that time.
Other committees
The Board establishes special purpose
committees as required, to deal with particular
strategic projects or other matters. In doing so, it
specifies a remit, quorum and appropriate mix of
executive and non-executive participation.
During 2014, these included a committee to
oversee the detailed implementation of the IPO
of the Group’s US institutional asset management
business on the New York Stock Exchange.
A number of standing executive committees help
the Group Chief Executive with the day-to-day
management of the Group. These include the
Group Executive Committee mentioned earlier in
this report; the Group Executive Risk Committee,
whose responsibilities are described in the Risk
and Capital Management report earlier in this
document; and the Group Capital Management
Committee, whose role is, among other things, to
agree capital allocations within certain limits (or
make recommendations to the Board regarding
any allocations beyond such limits) and to
approve the Group’s capital plan as part of the
annual business planning process.
The Company also operates a Responsible
Business Committee, which monitors progress
against the Group’s commitment to responsible
business principles and addresses matters that
could impact on the Group’s reputation or
licence to operate. For more details on this
committee’s remit, see the Responsible Business
Report for 2014 on the Company’s website.
Reports from the Board’s
standing committees
The following reports on the activities of the
Group Audit, Board Risk and Nomination
Committees during 2014 have been submitted by
their respective Chairmen. The activities of the
Remuneration Committee are described in the
Directors’ Remuneration Report later in
this document.
Old Mutual plc
Annual Report and Accounts 2014
83
Governance CORPORATE GOVERNANCE
continued
Report from the Group Audit Committee
Roger Marshall
Chairman of the Group Audit Committee
Audit Committee focus area
How the matter was reviewed
Assumptions related to policyholder
liabilities recognised by the Group’s
insurance businesses
The Group recognised insurance
policyholder liabilities of £10,519m at
31 December 2014 (2013: £12,126m).
Estimation of these routinely involves
assessment of risk exposures, expense
allocations and business persistency.
Tax provisions and uncertainties related
to open tax assessments
The complexity of the Old Mutual Group
means that it pays tax in a wide range of
geographies across a diverse product set.
In addition, the tax assessment process in
some countries means that tax
computations can remain open for a
number of years after filing.
The Group holds provisions of £200m
(2013: £202m) to cater for these uncertainties.
Loan loss provisions
Loan loss provisioning requires the
assessment of recoverable amounts,
which requires judgement in the
estimation of future payments.
At 31 December 2014, the Group’s total
advances were £35,588m, with related
provisions of £731m (2013: £34,240m and
£657m). Loans outstanding are principally
from Nedbank.
The Group Chief Actuary confirmed that
appropriate valuation models had been used to
determine the value of policyholder liabilities.
This included the presentation of results from
experience and assumption validation reviews. In
areas where significant assumption changes were
proposed, the rationale for these changes was
explained to the committee.
There was a focus on persistency and mortality
assumption changes proposed for the South
African long-term business, with specific
emphasis on the changes in mortality assumptions
relating to HIV in the Mass Foundation business.
The committee received reports from Group and
local tax departments to assist it with its
consideration of existing tax positions in the
context of identified exposures, focusing on areas
where there were material issues under discussion
between the Group and tax authorities. This
included reviewing the merits of the respective
positions taken on these and reflecting on external
professional advice obtained by management to
support the views taken by the Group.
There are a number of open tax computations in
South Africa. Progress was made during 2014 in
closing outstanding computations; however, a
The committee considered management
information related to specific areas such as
unsecured lending in Nedbank and Old Mutual
Finance and Nedbank’s large exposure
watchlists. It also received updates on
improvements to the provisioning methodology in
Old Mutual Finance.
Management presented an assessment of the
compliance of the provisioning methodologies
with accounting standards. Trends and peer
analysis of credit collection and loan loss ratios
were considered.
84 Old Mutual plc
Annual Report and Accounts 2014
The Group Audit Committee met seven times
during 2014. Two meetings were held partly as
joint sessions with members of the Board Risk
Committee to discuss matters of mutual
interest. Set out below is a summary of areas
of focus during the year, in addition to the
committee’s usual oversight responsibilities,
which are described in the table on page 86.
Explicit discretionary reserves recognised by
Old Mutual South Africa (OMSA) were discussed.
Particular focus was placed on the methodology
and assumptions used to create the Investment
Guarantee Reserve, which is a significant portion
of the explicit discretionary margins that relate
to amounts due to policyholders under
participating contracts. The committee reviewed
the composition of and rationale for holding
these reserves, which continue to be less than 2%
of OMSA’s total policyholder liabilities.
number of issues remain under discussion with the
tax authorities, and these items received specific
focus.
The committee concluded that management had
applied sufficient rigour in the analysis of the level
of provisions required and satisfied itself with the
adequacy of the disclosures that had been made
in respect of these items.
The relevant disclosures are set out under
‘Contingent liabilities’ in Note H4 to the financial
statements.
Local governance structures provide assurance
on the adequacy of loan loss provisioning and
key matters arising were routinely highlighted in
discussions with local Audit Committee chairmen.
Audit Committee focus area (continued)
How the matter was reviewed
Goodwill and other intangible assets
Developing models to support the
carrying value of goodwill and other
intangible assets requires judgement in
setting assumptions, such as discount and
growth rates and in determining the
Group’s ‘Cash Generating Units’.
At 31 December 2014, the Group
recognised £2,763m in relation to these
assets (2013: £2,835m).
A detailed paper was presented at the
committee’s meeting in November 2014 outlining
the forecasts used for determining cash flows, the
basis of the assumptions used (including any
changes from previous years), headroom
available and the sensitivity of the impairment-
testing results to changes in assumptions.
The committee validated the underlying
assumptions through its discussion of the analysis
presented. In view of business closures,
acquisitions and disposals, there was also specific
discussion of the appropriateness of the Cash
Generating Units applied by the Old Mutual
Wealth and Old Mutual Emerging
Markets businesses.
A more detailed review of the carrying value of
the goodwill and other intangibles relating to
Old Mutual Wealth was performed because of
the significance of balances recognised of
£1,197m at 31 December 2014 (2013: £1,461m)
and the recent changes in the composition of
the business.
The committee concluded that the projected
future cash flows from all the businesses
supported the current carrying value of goodwill
and intangible assets.
How our audit tender was conducted
Invitations to tender were issued to six
international audit firms, three of whom
(including the incumbent, KPMG) opted to
participate in the process. All of the
participating firms submitted
comprehensive local proposals of a very
high standard to local review committees.
Feedback from the local review process
was then submitted to the Group Audit
Committee before final presentations were
made to it. In evaluating the three tendering
firms, the primary focus was on audit
quality, giving specific consideration to:
■ Audit approach and delivery
■ Audit firm capability and understanding
of the Group’s business
■ Audit engagement team quality
■ Insight into future developments likely to
affect the Group’s business
■ Reputation, culture and firms’
and individuals’ quality of past
working experience
■ Independence.
The tender process was completed during
the third quarter of 2014. The Group Audit
Committee’s decision to recommend to the
Board the retention of KPMG was taken
after a roundtable discussion with
representatives from each of the Group’s
major businesses. The committee also
sought input from the Board Risk
Committee before making its final
recommendation to the Board.
Alternative profit measure
The Group makes a number of adjustments to
IFRS profit to derive an Adjusted Operating
Profit (AOP) measure. This is common practice
amongst peers. Some of these eliminate IFRS
valuations that introduce distorting results,
such as recognising gains or losses on own
debt or the removal of profits and losses on
disposal of businesses. Other adjustments seek
to adjust the IFRS result in order to arrive at
more normalised profit by, for example,
substituting a Long-Term Investment Return for
the actual investment returns for the year, and
adjusting the IFRS finance cost so that it reflects
the certain costs of financing otherwise
recognised in equity. The committee reviews
the appropriateness of the AOP measure on
an ongoing basis. It also reviews the Long-
Term Investment Return rate annually. The
committee seeks to validate that the
adjustments made in determining AOP are
appropriate to the objective of presenting a
measure of the long-term profitability of the
business to users of the financial statements.
Audit tender outcome
Last year, we indicated our intention to carry
out a tender for the Group’s external audit
during 2014. The decision to run the tender
process in 2014 was influenced by the
requirement under UK Competition Commission
rules to tender the engagement by 2016. In
addition, recent European Parliament guidance
will require the rotation of the Group’s external
auditors by no later than 2023. By running the
tender in 2014, we ensured that any new
appointee would have had time to take the
necessary preparatory steps to achieve
independence and allow for an orderly
transition from the incumbent, KPMG.
The Group Audit Committee recommended
that the Board retain KPMG as the Group’s
external auditors from 2016 onwards, subject
to the usual annual shareholder approval of
their re-appointment at forthcoming AGMs.
The Board duly accepted this recommendation.
We believe that the audit tender (further details
of which are set out in the box on the left of this
page) was a worthwhile exercise, and the
Group expects to achieve a number of
improvements to our audit service as a result.
External auditor effectiveness
During the year, the Group’s Internal Audit
function conducted the annual review of
KPMG’s effectiveness as our current auditors
and confirmed satisfaction with the quality of
the audit. The review analysed critical
competencies expected of our external
auditors and included feedback from key
finance personnel from Group and subsidiary
entities and Audit Committee members at
subsidiaries and Group level. This review was
performed during the first quarter of 2014 and
was independent of the audit tender described
above. The outcome underpins our
recommendation to re-appoint KPMG in
relation to the audit for the year ending
31 December 2015 at the AGM in May.
Old Mutual plc
Annual Report and Accounts 2014
85
Governance CORPORATE GOVERNANCE
continued
Report from the Group Audit Committee continued
Internal Audit effectiveness
I described in last year’s report the results of
an external review of the Group’s Internal
Audit function and certain initiatives that this
had prompted. The actions identified have
been implemented during 2014.
In May 2014, the Head of Group Internal
Audit left the Company to take up an
opportunity elsewhere. The Head of Internal
Audit for South Africa assumed this role on an
interim basis until Martin O’Malley joined the
Company as the Head of Group Internal Audit
in February 2015.
The Group’s Internal Audit Charter remains
unchanged from last year and is available on
the Company’s website.
Non-audit services
The Group operates within a clearly defined
policy with regard to the nature and amount of
non-audit services that can be provided by the
Group’s external auditors (see ‘Who are the
Group Auditors and how much are they paid?’
later in this report). The policy itself is formally
reviewed on an annual basis and, in 2014, we
opted for the first time to limit the quantum of
fees for non-audit services to a maximum of
25% of the total fee for external audit services.
The Chairman of the Group Audit Committee
is notified of expenditure on non-audit services
on a monthly basis and for certain services he
will be consulted for pre-approval. The Group
Audit Committee reviews compliance with the
non-audit services policy on a quarterly basis.
The committee is satisfied that KPMG have
been engaged in accordance with the
requirements of this policy during 2014.
Primary responsibilities of the Group Audit Committee
Financial and capital reporting
■ Monitor the integrity of the Group’s
financial statements and review the critical
accounting policies
■ Review and challenge, where necessary, the
critical accounting estimates and judgements of
management in relation to the interim and
annual financial statements
■ Review the content of the Annual Report and
Accounts and interim results and advise the
Board on whether, taken as a whole, the
Annual Report is fair, balanced and
understandable
■ Determine whether any training or education
sessions are required by the committee on
specific issues.
External audit
■ Make recommendations concerning the
■ Approve the annual audit plan, to ensure that it
is consistent with the scope of the audit
engagement and coordinated with the activities
of the Group’s Internal Audit function
■ Review the findings of audits with the external
auditors, considering management’s
responsiveness to the auditors’ findings
and recommendations
■ Monitor the effectiveness of the external audit
by a formal annual assessment and also the
results of any reviews published by the Financial
Reporting Council’s Audit Quality Review.
appointment, re-appointment and removal of
the external auditors
■ Be responsible for the Group’s audit
tender process
■ Oversee the relationship with the external
auditors, including the terms of engagement
(including remuneration) and their
effectiveness, independence and objectivity
■ Agree the policy for and provision of
non-audit services
■ Agree the policy on the employment of former
employees of the external auditors
■ Review the qualifications, expertise and
resources of the external auditors and the
effectiveness of the audit process
Internal Audit
■ Monitor the effectiveness of the Group’s
Internal Audit function and the Internal
Audit programme
■ Review the adequacy of Group Internal Audit’s
resources, its audit programme and its standing
within the Group
■ Consider the major findings of any significant
internal audit, and management’s response
■ Approve the appointment or removal of the
Head of Group Internal Audit.
Internal control and risk management
■ Review the effectiveness of systems for internal
control, financial reporting and risk management
■ Liaise with other business unit audit committees
■ Consider the major findings of any internal
investigations into control weaknesses, fraud or
misconduct and management’s response.
and ensure all relevant issues are
communicated to the committee
Whistleblowing
■ Review arrangements by which staff may
confidentially raise concerns about possible
improprieties in matters of financial reporting
or other matters.
86 Old Mutual plc
Annual Report and Accounts 2014
Report from the Board Risk Committee
In addition to its regular meetings, the
committee held a half-day workshop focusing
on the Solvency II Directive’s impact on the
Group’s capital and strategy, and several
‘deep-dive’ sessions to consider risk issues
affecting specific business units in more detail.
Between the scheduled meetings, I also
received updates through my regular meetings
with the Chief Risk Officer and the Group
Chief Actuary.
In connection with the finalisation of the
Group’s annual results, the committee
produced a report setting out conclusions
drawn from the risk and control indicators
used across the Group to help the
Remuneration Committee in its deliberations.
The committee also reviewed its performance
against its revised terms of reference, which
were adopted following the 2013 review of the
committee’s effectiveness. We found that the
committee complied with the vast majority of
the requirements of the terms of reference,
and put plans in place to comply with the
remaining items.
During 2014, either Roger Marshall or I
personally attended meetings of the risk and
audit committees of each of the major
subsidiaries of the Group, and we have
ongoing dialogue with the independent
directors who chair those subsidiaries’
committees. I shall continue to attend these
meetings in 2015 in order to remain close to
any major risk issues that may arise during the
coming year.
In 2015, in addition to the regular items on the
committee agenda, the committee will
continue to focus on the Group’s preparations
for the implementation of Solvency II and on
the development of the Group’s risk and
control culture, as well as continuing with its
programme of deep-dive sessions into
individual business units.
During 2014, the Board Risk Committee
continued to promote and oversee the
strengthening of the Group’s risk management
and risk culture.
The committee met nine times during the year.
Five meetings were additional to the four
originally scheduled. One of the additional
meetings, and part of one of the scheduled
meetings, were held jointly with the Group
Audit Committee. The Chief Risk Officer
attended each meeting. The Group Chief
Actuary and the Head of Group Internal Audit
were invited to attend all the meetings and
each attended the majority of the meetings.
The external auditors were invited to attend all
of the meetings.
The committee received a report from the
Chief Risk Officer on risk and regulatory
matters at each of its scheduled meetings
during 2014, in which any changes to the
Group’s risk profile were identified and
discussed. We also reviewed the risk appetite
metrics operated by the Group.
In addition, we focused on:
■ The Group’s Own Risk and Solvency
Assessment (ORSA), under which the Group
identifies and assesses its risks and
determines the resources necessary to
ensure that its solvency needs are met
sufficiently to achieve its business strategy.
The committee reviewed and considered the
ORSA before it was approved by the Board
■ Assessments of the Group’s capital and
solvency position
■ Proposed acquisitions and other strategic
projects being undertaken by the Group,
including the acquisitions of Intrinsic
Financial Services, Quilter Cheviot and the
stake in UAP in Kenya, and the IPO of OM
Asset Management plc
■ The content and continued suitability of the
Group’s suite of risk policies and standards
and of the Group Operating Model
■ The risk and control culture of the Group
and its business units
■ Regulatory risks arising as a result of business
activities, in particular the Group’s regulatory
environment and compliance status.
Old Mutual plc
Annual Report and Accounts 2014
87
Mike Arnold
Chairman of the Board Risk Committee
Key areas of focus during 2014
■ Reviewing the risk appetite metrics
operated by the Group
■ Overseeing the risk and control culture
of the Group
■ Monitoring current and emerging risks
affecting the Group
■ Supervising the Group’s suite of risk
policies and standards
■ Considering developments in the
regulatory environment and their
implications for the Group.
Governance CORPORATE GOVERNANCE
continued
Report from the Nomination Committee
Our role as the Nomination Committee is to
review and make recommendations to the
Board on the appointment of directors, the
structure of the Board and membership of the
Board’s main standing committees. We also
review development and succession plans for
the Group’s most senior executive
management and certain appointments to the
boards and standing committees of principal
subsidiaries in line with the Group Operating
Model. We receive twice-yearly updates on
the composition of principal subsidiary
boards, which include details of the skills
represented on such boards and the
subsidiary companies’ own succession plans.
This enables us to ensure that these bodies
remain equipped to meet the Group’s needs.
The Nomination Committee considers the
current Board composition suitable for the
Group’s business requirements. However,
such matters are kept under active review,
considering scheduled retirements of
non-executive directors and the Group’s
future strategy.
In planning for refreshing and renewing the
Board’s composition, we aim to ensure that
changes take place without undue disruption
and that there is an appropriate balance of
experience and length of service (see also the
box below left). We also ensure that our
process for identifying and recommending
candidates as Board directors is formal,
rigorous and transparent. Vacancies generally
arise in the context of either planned renewal
of the Board, replacing directors who are due
to retire, or adjusting the Board’s balance of
knowledge, skills, independence or diversity.
In identifying candidates and making
recommendations, we pay appropriate
regard to the independence of candidates,
their ability to meet the expected time
commitment involved and their suitability and
willingness to serve on Board committees.
In prior years, our focus, as far as the Board
was concerned, was on renewing and
addressing diversity among the non-executive
directors, as long-standing non-executive
directors came up to retirement or left the
Board because of other business commitments.
During 2014, we spent more of our time
dealing with changes to the executive
component of the Board.
We dealt first with succession planning for the
Group Finance Director, after Philip Broadley
advised that he planned to leave the
Company. Reflecting the strong cadre of
internal candidates already identified in our
succession-planning arrangements, we
considered six internal candidates alongside a
list of possible external candidates produced
by our retained advisers, Odgers Berndtson.
The committee was satisfied with the
independence of Odgers Berndtson as search
consultants, as they did not carry out any other
work for members of the Group during the
year. After a thorough interview, review and
evaluation process and consultation with the
Group’s regulators, Ingrid Johnson, former
Group Managing Executive: Retail and
Business Banking at Nedbank, was selected
as the new Group Finance Director.
The committee also decided to appoint Paul
Hanratty to the Board in July 2014. He had
been a regular attendee at Board meetings
over the preceding 18 months in his capacity
as Group Operating Officer, during which
time the Board and members of the committee
had had a good opportunity to appraise him.
He was redesignated as Chief Operating
Officer on his appointment.
In anticipation of Reuel Khoza’s planned
retirement as Chairman of Nedbank in May
2015, Nedbank established a Chairman’s
Selection Committee during 2014 to identify
potential suitable candidates. Julian Roberts,
our Group Chief Executive, was a member of
this special purpose committee. Five of our
directors interviewed Vassi Naidoo, the
candidate eventually recommended to be
appointed as Reuel Khoza’s successor, and the
Board accepted the Nomination Committee’s
recommendation that he should also be invited
to join the Old Mutual Board, in similar fashion
to previous Nedbank Chairmen. In making this
recommendation, the committee noted the
benefit to Nedbank of Vassi Naidoo’s
extensive experience of banking and financial
services and of operating businesses in Africa
and that his position on the Company’s own
Board would provide additional insight into
these important areas of the Group’s business.
Julian Roberts stepped down as a member
of the committee during the year, in response
to a view among some of the Company’s US
shareholders that it is preferable for a Chief
Executive not to be a member of a Nomination
Committee and also to ensure a suitable
balance of independence in the membership
of the committee.
In addition to our work described above, we
continued to monitor talent management and
diversity initiatives, and progress against
action items identified as part of the 2013
Board effectiveness review.
Patrick O’Sullivan
Chairman of the Nomination Committee
Board Chairman and Committee
Chairman succession planning
With a view to ensuring an orderly transition,
our current succession plans are for:
■ Myself as Board Chairman and Mike
Arnold as Chairman of the Board Risk
Committee to retire at the AGM in
May 2017
■ Roger Marshall as Chairman of the
Group Audit Committee and Alan
Gillespie as Senior Independent Director
to retire at the AGM in May 2018
■ Danuta Gray as Chairman of the
Remuneration Committee to retire at the
AGM in May 2019.
88 Old Mutual plc
Annual Report and Accounts 2014
How does the Company
conduct its investor
relations?
We continue to make significant efforts to
educate the public markets and to communicate
openly with retail shareholders, institutional
debt and equity investors and sell-side analysts
by means of a proactive Investor Relations (IR)
programme, run by a small dedicated IR team
based in London and South Africa. The team
works closely with the media relations,
Responsible Business and public affairs teams
around the Group. Old Mutual’s investor base
is very diverse in terms of both investor style
and geographic location and the Group has
almost 400,000 retail shareholders.
Our objective is to facilitate communication
with the global investment community and to
keep investors updated on the Group’s
performance. During 2014, we continued to
maintain a dialogue with investors and sell-side
analysts, through briefings and educational
support, to give them a better understanding
of the Group’s operations, with particular
focus on the Group’s corporate development.
We increased our communication and
engagement with the investment community
during the year, attending 14 investment
conferences in the US, Europe and South Africa.
In addition, we conducted investor
presentations in London, Cape Town and
Johannesburg. After 2013’s signature event
in Cape Town, we used webcast technology
to host follow-up events on Emerging Markets
and two presentations on Old Mutual Wealth.
We intend to continue using technology to
facilitate more effective communication and
will be exploring ways of using it to enhance
both interim and full-year results presentations
in due course.
We extended the geographical reach of our
investor targeting in 2014, visiting Singapore
and Hong Kong to meet with debt and equity
investors, including those who specialise in
Emerging Markets. We expect to build on this
in 2015. The table below shows the five-year
record of work to improve the Group’s
relationship with buy-side analysts and
investors around the world.
During 2014, we held IR meetings with
investors in the UK, South Africa, North
America, Canada and continental Europe,
involving 262 individual institutions. Most
meetings involved the Group Chief Executive,
the Group Finance Director or another
member of the senior management team. We
held regular sessions for senior management
to meet sell-side analysts in both Europe and
South Africa, and expect that the new Group
Finance Director will continue to build on her
existing relationships in 2015.
Copies of all investor presentations and, where
appropriate, transcripts are posted on the
Company’s website so that they are accessible
to shareholders generally.
Currently 17 sell-side analysts from Europe
and South Africa actively publish research on
the Company. We encourage sell-side analysts
to cover the Company – giving investors their
opinions on the Group’s valuation, its
performance and the business environment
in which it operates – and also to make
meaningful comparisons with our peers.
During 2014, one new UK-based research
analyst initiated coverage on our stock, and
we expect more global investment banks
and brokerages to begin sell-side coverage
in 2015.
The Chairman makes contact with major
investors and meets them as required. The
Senior Independent Director is also available
for interaction with shareholders. Matters
raised in these governance-focused meetings
during 2014 included Group strategy,
regulatory developments, remuneration,
succession planning and cyber security.
The IR team updates the Board on issues
arising from communications with the
investment community. It also regularly
commissions independent surveys to inform
the Board about how major investors see the
Company’s management and performance.
Our intranet provides employees with easy
access to key information about the Group,
including about its culture, vision, strategy and
financial performance. Regular senior
management roadshows provide employees
with further opportunities to understand more
about the aims of the Group.
What are the
arrangements for
Annual General
Meetings (AGMs)?
The Board uses the AGM, held at the
Company’s head office in London in May each
year, to comment on the Group’s first quarter’s
trading performance. Shareholders also have
the opportunity to ask the Board questions.
The AGM is webcast and a record of the
proceedings is also made available on the
Company’s website shortly after the end of the
meeting. All formal business items at the AGM
are conducted on a poll, rather than by a show
of hands. The Company’s share registrars
ensure that all properly submitted proxy votes
are counted, and a senior member of the UK
registrar’s staff acts as scrutineer to ensure that
votes cast are correctly received and recorded.
“ Our objective is to
facilitate communication
with the global investment
community and to keep
investors updated on the
Group’s performance.”
Total number of investor relations events and executive attendees
295
252
273
284
265
208
197
203
225
152
2014
2013
2012
2011
2010
Total number of events
Total with executives
Old Mutual plc
Annual Report and Accounts 2014
89
Governance CORPORATE GOVERNANCE
continued
Each substantially separate issue at the AGM
is dealt with by a separate resolution and the
business of the meeting always includes a
resolution on the receipt and adoption of the
Report and Accounts. The chairmen of the
Group Audit, Board Risk, Remuneration and
Nomination Committees are available at the
AGM to answer any questions on the matters
covered by their committees.
The notice of AGM is sent out to all
shareholders who have elected or are entitled
to receive physical documents in time to arrive
in the ordinary course of the post at least 20
working days before the date of the meeting.
Who will be standing for election or
re-election at this year’s AGM?
All the current directors (except for Reuel
Khoza, who will be retiring as Chairman of
Nedbank Group Limited and also as a
non-executive director of the Company in May
2015), as well as Vassi Naidoo, who will join
the Board from 1 May 2015, will stand for
election or re-election at this year’s AGM. The
Board recommends that every director who is
standing should be elected or re-elected. Brief
biographical details of all of the directors are
contained in the Board of Directors section
earlier in this Annual Report. Additional
information about them, as well further details
of the basis on which the Board has assessed
each director’s performance and recommends
their election or re-election, is set out in the
explanatory notes in the shareholder circular
relating to the AGM.
What is the Company’s
issued share capital and
who are the Company’s
largest shareholders?
The Company’s issued share capital at
31 December 2014 was £560,756,596.46
divided into 4,906,620,219 ordinary shares of
113⁄7p each (2013: £559,687,749.03 divided
into 4,897,267,804 ordinary shares of 113⁄7p
each). The total number of voting rights in the
Company’s issued ordinary share capital at
31 December 2014 was also 4,906,620,219.
Shown at the foot of this page is an illustration
of the current make-up of the Group’s share
register, which has remained broadly stable, in
terms of the categories illustrated, since 2012.
During 2014, the Company issued 9,352,415
ordinary shares of 113⁄7p each under
employee share schemes at an average price
of £0.465 per share.
At 31 December 2014, shareholder authorities
were in force enabling the Company to make
market purchases of, and/or to purchase
pursuant to contingent purchase contracts
relating to each of the overseas exchanges on
which its shares are listed, its own shares up to
an aggregate of 489,737,500 shares. It bought
back no shares during 2014 or during the
period up to 27 February 2015.
In the period 1 January to 27 February 2015,
the Company issued 45,014 further shares
under its employee share schemes at an
average price of £1.27 each and an additional
19,325,430 shares as part of the consideration
for the acquisition of Quilter Cheviot, based
upon a deemed value of £2.1864 per share.
As a result, the Company’s issued share capital
at 27 February 2015 was £562,970,361.49
divided into 4,925,990,663 ordinary shares of
113⁄7p each. The total number of voting rights
at that date was also 4,925,990,663.
Between 31 December 2014 and 27 February
2015, there have been no new notifications of
disclosable interests by shareholders and no
notifications of changes to the interests set out
in the table at the foot of this page.
How can I find out about the rights
and obligations attaching to the
Company’s shares?
The rights and obligations attaching to the
Company’s ordinary shares are those
conventional for a publicly listed UK company,
The Corporate Governance section of the
Company’s website provides a summary of
these (along with certain other information
relating to dividends, directors and
amendments to the Company’s Articles of
Association) and the Company’s current
Articles of Association.
What final dividend is
being recommended
and what is the
Company’s dividend
policy?
The Board is recommending a final dividend
for 2014 of 6.25p per share (or its equivalent in
other applicable currencies). This, together
with the interim dividend of 2.45p per share
paid in October 2014, equates to 2.06 times
AOP earnings cover for the full year. A scrip
dividend alternative is not being made
available for this dividend, which will be
settled entirely in cash.
Current make-up of the Company’s share register
Substantial interests in the Company’s shares
US
Canada
UK
South African Retail
South African
Institutional
BEE
Policyholders
Europe & Rest of
the World
Miscellaneous
12.79%
0.39%
19.19%
5.29%
37.80%
4.30%
1.30%
11.79%
7.15%
At 31 December 2014, the following substantial interests in voting rights
in relation to the Company’s shares had been declared to the Company
in accordance with the Disclosure and Transparency Rules:
Public Investment Corporation of
the Republic of South Africa
BlackRock Inc.
Sanlam Investment Management
(Pty) Limited
Number of
voting rights
268,811,081
249,751,037
216,168,105
% of
voting
rights
5.48
5.09
4.41
90 Old Mutual plc
Annual Report and Accounts 2014
Further information on the final dividend for
2014 is given in the Shareholder Information
section at the back of this Annual Report.
For future dividends, the Board intends to
continue pursuing a progressive dividend policy
consistent with our strategy, having regard to
overall capital requirements, liquidity and
profitability, and targeting a dividend cover in
the range of between 2.0 and 2.25 times AOP
earnings. Interim dividends will continue to be
set at about 30% of the prior year’s full
ordinary dividend.
During 2014, trustees of the Company’s and
the Company’s South African subsidiary
employee benefit trusts waived dividends on
certain shares in the Company held by them
relating to awards where the scheme
participants were not entitled to receive
dividends pending vesting. The total number
of shares concerned was 19,035,869 for the
final dividend for 2013 and 14,862,677 for the
interim dividend for 2014.
Audit arrangements
Who are the Company’s auditors and
how much are they paid?
KPMG LLP (or, prior to 2014, its related
associated entity KPMG Audit Plc) have been
Old Mutual’s auditors since the Company was
originally listed in 1999. We have made
arrangements with KPMG for appropriate
audit director rotation in line with the
requirements of the UK Auditing Practices
Board. The current audit engagement director
in the UK, Philip Smart, assumed this role in
April 2011.
The Group Audit Committee report above
describes how that committee satisfies itself
about KPMG’s performance, the basis on
which it carried out an audit tender during
2014, and its recommendation to re-appoint
KPMG (which has expressed its willingness to
continue in office) as auditors for 2015 at this
year’s AGM. The Company has not entered
into any contractual restriction preventing it
from considering a change of auditors.
During the year ended 31 December 2014,
fees paid by the Group to KPMG and its
associates totalled £13.7 million for audit
services (2013: £12.0 million) and £3.4 million
for tax, assurance and other non-audit services
(2013: £2.8 million). In addition to the above,
Nedbank Group paid a further £3.2 million
(2013: £3.7 million) to Deloitte in respect of
joint audit arrangements.
The Group Audit Committee has approved
detailed guidelines as part of the Group’s
policy on non-audit services: a summary of the
applicable provisions is available in the
Corporate Governance section of our website
and is also referred to under ‘Non-audit
services’ on page 86.
Financial control
environment
What is the Company’s internal control
environment and how is it monitored?
Since 2009, Old Mutual has implemented a
Group-wide framework of financial controls.
This has been designed in line with the criteria
described in ‘Internal Control – Integrated
Framework’ issued by the Committee of
Sponsoring Organizations of Treadway
Commission. Executive management reports
to the Group Audit Committee periodically
on the effectiveness of the financial controls
framework and also assessed its effectiveness
at 31 December 2014, concluding that it was
effective. This helped the Group Audit
Committee and the Board to conclude that
they could rely on the operation of these
controls as part of their review of internal
control effectiveness referred to below.
An ongoing process for identifying, evaluating
and managing the significant risks faced by
the Group has been in place for the year
ended 31 December 2014 and up to this
report’s date of approval, as described in
more detail below. Further details of the
Group’s Risk and Capital Management
disciplines are described in a dedicated
section earlier in this Annual Report.
The Board has overall responsibility for the
Group’s system of internal control and for
reviewing its effectiveness, while the
implementation of internal control systems is
the responsibility of management. Executive
management has implemented an internal
control system designed to help ensure:
■ The effective and efficient operation of the
Group and its business units by enabling
management to respond appropriately to
significant risks to achieving the Group’s
business objectives
■ The safeguarding of assets from
inappropriate use or from loss and fraud
and ensuring that liabilities are identified
and managed
■ The quality of internal and external reporting
■ Compliance with applicable laws and
regulations, and with internal policies on the
conduct of business.
“ We remain committed
to having a robust
control environment
across the Group.”
£13.7m
Total audit fees paid to
KPMG
£3.4m
Total non-audit fees paid to
KPMG
Old Mutual plc
Annual Report and Accounts 2014
91
Governance CORPORATE GOVERNANCE
continued
The system of internal control is designed to
manage, rather than eliminate, the risk of
failure to achieve the Group’s business
objectives. It can only provide reasonable, and
not absolute, assurance against material
misstatement or loss.
The Group’s actions to review the effectiveness
of the system of internal control include:
■ An annual review of the risk assessment
procedures, control environment
considerations, information and
communication and monitoring procedures
at Group level and within each business
unit. This review covers all material
controls including financial, operational
and compliance controls and risk
management systems
■ A certification process, under which all
business units are required to confirm that
they have undertaken risk management in
accordance with the Group risk framework,
that they have reviewed the effectiveness of
the system of internal controls, that internal
policies have been complied with, and that
no significant risks or issues are known
which have not been reported in
accordance with policy
■ Regular reviews of the effectiveness of the
system of internal control by the Group Audit
Committee, which receives reports from the
Group Internal Audit function. The committee
also receives reports from the external
auditors, which include details of significant
internal control matters that they have
identified during the course of their work.
These activities supplement the regular risk
management activities which are performed
on an ongoing basis, as described in more
detail in the Risk and Capital Management
section elsewhere in this document.
The certification process described above
does not apply to some joint ventures where
the Group does not exercise full management
control. In these cases, Old Mutual monitors
the internal control environment and the
potential impact on the Group through
representation on the board of the
entity concerned.
The Board reviewed the effectiveness of the
system of internal control during and at the
end of the year. Our annual internal control
assessment has not highlighted any material
failings. We remain committed to having a
robust internal control environment across
the Group.
92 Old Mutual plc
Annual Report and Accounts 2014
What is the role of Group Internal Audit?
The purpose of Group Internal Audit (GIA) is
to help the Board and executive management
to protect the assets, reputation and
sustainability of the Group. GIA does this
by assessing whether all significant risks are
identified and appropriately reported by
management and the Risk function to the
Board and executive management; assessing
whether they are adequately controlled; and
challenging executive management to
improve the effectiveness of governance,
risk management and internal controls.
GIA’s work is focused on the areas of greatest
risk, both current and emerging, to the Group
as determined by a comprehensive risk-based
planning process. The Group Audit Committee
approves the annual Internal Audit plan and
any subsequent material amendments to it and
also satisfies itself that GIA has adequate
resources to discharge its function. The Board
is able to confirm that this is the case for 2014
and 2015.
There are Internal Audit teams in each of our
major businesses. The heads of Internal Audit
in the Group’s wholly-owned subsidiaries report
directly to the Head of Group Audit (HGA).
Heads of audit in majority-owned subsidiaries
have a dual reporting line to the HGA, in line
with the Group Operating Model.
During 2014, the HGA reported functionally to
the Chairman of the Group Audit Committee
and administratively to the Group Chief
Executive. The HGA attends all meetings of the
Group Audit Committee, and has unrestricted
access to the Group Chief Executive and the
Chairman of the Board, as well as open
invitations to attend any meetings of the
business unit Audit Committees, the Board
Risk Committee and the Group Executive
Risk Committee.
Internal Audit teams across Old Mutual use a
single audit methodology which meets the
standards set by the Institute of Internal Auditors.
Issues raised by Internal Audit in the course of
its work are discussed with management, who
are responsible for implementing agreed
actions to address the issues identified within
an appropriate and agreed timeframe.
The HGA submits formal reports to each
meeting of the Group Audit Committee,
summarising the results of internal audit
activity, management’s progress in addressing
issues and other significant matters.
External advisers carry out periodic
assessments of GIA’s effectiveness. The most
recent assessment, in 2012, concluded that
GIA was fit for purpose in meeting the Group’s
current assurance needs. The Committee on
Internal Audit Guidance for Financial Services,
chaired by the Group Audit Committee
Chairman, published its 29 final
recommendations in July 2013. GIA has
analysed current performance against each of
these recommendations and has made good
progress in addressing them all: most are now
either implemented or in the process of being
piloted or embedded. It should be noted that
some of the actions are evolutionary in nature
and will bed down over time.
Can you confirm that the Company
is a going concern?
The Group’s financial position, its cash flows,
liquidity position and borrowing facilities are
described in the Financial review and risk
section of this Annual Report. In addition, Note
E1 to the financial statements includes the
Group’s objectives, policies and processes for
managing its capital (solvency risk) and
liquidity risks and sets out details of the
principal risks related to financial instrument
market risk, credit risk and insurance risks as
well as their sensitivities.
The preceding sections of the Annual Report
referred to above also explain the basis on
which the Group generates and preserves
value over the longer term and the strategy for
delivering its objectives. The FGD surplus capital
and cash flow are stress tested and are within
the limits described in the Risk and Capital
Management section in order to identify those
risks that would threaten the Group’s solvency
and liquidity. As a consequence, the directors
believe that the Group is in a strong financial
position and is well placed to manage its
business risks successfully.
After making enquiries, the Board has a
reasonable expectation that the Company
and the Group have adequate resources to
continue in operational existence for the
foreseeable future. Accordingly, it continues to
adopt the going concern basis in preparing
the financial statements.
Has all relevant information been
disclosed to the auditors?
The directors who held office at the date of
approval of this Annual Report confirm that, so
far as they are each aware, there is no
relevant audit information of which the
Company’s auditors are unaware, and each
director has taken all the steps that he or she
ought to have taken as a director to make
himself or herself aware of any relevant audit
information and to establish that the Company’s
auditors were aware of that information.
Other Directors’
Report matters
As an international business active in many
countries, the Group operates through
subsidiaries, branches, joint ventures and
associated companies established in, and
subject to the laws and regulations of, many
different jurisdictions.
Does the Company have any significant
agreements involving change of control?
The following significant agreement to which
the Company is a party contains provisions
entitling counterparties to exercise termination
or other rights in the event of a change of
control of the Company:
■ £800 million Revolving Credit Facility dated
22 August 2014 between the Company,
various syndicate banks (the Banks) and Bank
of America Merrill Lynch International Limited
as agent (the Agent). If a person or group of
persons acting in concert gains control of the
Company, the Company must notify the Agent.
The Agent and the Company will negotiate
with a view to agreeing terms and conditions
acceptable to the Company and all of the Banks
for continuing the facility. If such negotiations
fail within 30 days of the original notification
to the Agent by the Company, the Banks
become entitled to declare any outstanding
indebtedness repayable by giving notice to
the Agent within 15 days of the 30-day period
mentioned above. On receiving notice for
payment from the Agent, the Company shall
pay the outstanding sums within three
business days to the relevant Bank(s).
Where can I find the other matters
required to be included in the
Directors’ Report?
The Company has taken advantage of
paragraph 1A of Schedule 7 to The Large
and Medium-sized Companies and Groups
(Accounts and Reports) Regulations 2008 to
disclose certain information that must be
disclosed as part of its Directors’ Report
either elsewhere in this document or in its
Responsible Business Report as set out below:
■ Our financial risk management objectives
and policies are described in the Risk and
Capital Management section of this Annual
Report. Along with Notes E1 to E11 to the
financial statements, this also addresses the
Group’s exposure to price risk, credit risk,
liquidity risk and cash flow risk
■ A description of the Group’s environmental
management and impact during the year is
contained in our Responsible Business
Report for 2014, available on our website.
Information about the Group’s greenhouse
gas emissions is given in the Key
Performance Indicators section of this
Annual Report
■ Important events relating to the Group since
the end of the financial year are included in
the Strategic Report as well as in Note H9 to
the financial statements
■ A description of likely future developments
of the business of the Company or our
subsidiaries is contained in the Strategic
Report and the Financial review and
risk section
■ The Group’s involvement in research and
development, insofar as relevant to its
operations, is given in the Strategic Report
and the Financial review and risk section.
Did the Group make any political
donations during 2014?
The Group made no EU or other political
donations during the year.
How did the Board approve this
Annual Report?
The Board approved this Annual Report at
its meeting at the end of February 2015. It
confirmed that it considered the Annual Report
and Accounts, taken as a whole, to be fair,
balanced and understandable and to provide
the information necessary for shareholders to
assess the Company’s performance, business
model and strategy. In reaching this conclusion,
it took into account input from the Group Audit,
Remuneration and Board Risk Committees,
which had previously had the opportunity to
review and comment on drafts of the sections
falling within their respective remits.
Governing law
The Strategic Report, Financial review and risk
section, and this Corporate Governance report
collectively comprise the ‘directors’ report’ for
the purposes of section 463(1)(a) of the
Companies Act 2006. The Directors’
Remuneration Report contained in this Annual
Report is the directors’ remuneration report for
the purposes of section 463(1)(b) of that Act.
English law governs the disclosures contained
in and liability for the directors’ report and the
directors’ remuneration report.
Martin Murray
Group Company Secretary
27 February 2015
Old Mutual plc
Annual Report and Accounts 2014
93
Governance DIRECTORS’
REMUNERATION REPORT
In this section, we describe the Directors’ Remuneration
Policy and how our directors were paid during 2014.
Annual Statement
Our remuneration at a glance
Directors’ Remuneration Policy
Annual Report on Remuneration
■ Annual Statement from the Chairman of the Remuneration Committee
■ Alignment of executive remuneration to our strategy and shareholder value
■ Implementation of policy in 2015
■ Performance against targets in 2014
■ Single total figures of remuneration for 2014
■ Introduction
■ Market benchmarks
■ Balancing short- and long-term remuneration
■ Directors’ Remuneration Policy table (executive directors)
■ Notes to the Directors’ Remuneration Policy table (executive directors)
■ Consideration of employment conditions elsewhere in the Group
■ Approach to remuneration in connection with recruitment
■ Service agreements and payment for loss of office
■ Directors’ Remuneration Policy table (non-executive directors)
■ Market benchmarks
■ Single total figures of remuneration for executive directors
■ Additional requirements in respect of the single total figure table
■ Single total figures of remuneration for non-executive directors
■ Scheme interests awarded during 2014
■ Appointment of executive directors during 2014
■ Payments to past directors
■ Payments for loss of office
■ Shares in trust and shareholder dilution
■ Directors’ shareholdings and share interests
■ Performance graphs
■ Group Chief Executive’s remuneration over the last six years
■ Percentage change in the remuneration of the Group Chief Executive
■ Relative importance of spend on pay
■ Implementation of remuneration policy in 2015
■ Consideration by the directors of matters relating to directors’ remuneration
■ Advisers to the committee
■ Voting at General Meetings
■ Consideration of shareholder views
95
97
97
97
97
98
98
98
98
101
101
102
102
104
105
105
106
108
109
111
111
111
111
112
113
113
114
114
114
116
117
117
117
94 Old Mutual plc
Annual Report and Accounts 2014
Annual Statement
from the Chairman of the
Remuneration Committee
On behalf of the Remuneration Committee
(referred to in the rest of this report as the
committee), I am pleased to present the
Directors’ Remuneration Report for 2014,
my first since becoming Chairman of the
committee in May 2014. On behalf of the
Board, I would like to thank my predecessor,
Alan Gillespie, for his service as Chairman and
I am happy that he has remained a member of
the committee. I am also delighted to welcome
Zoe Cruz and Nkosana Moyo, who joined
the committee during 2014, ensuring that the
committee continues to benefit from a broad
range of experience and expertise.
Following the approval by shareholders of
our first Directors’ Remuneration Policy (DRP)
at the 2014 AGM, the committee focused on
a number of areas during the year, including
revisions to the UK Corporate Governance
Code by the Financial Reporting Council,
changes in the composition of our executive
directors, some significant corporate
transactions, particularly the partial IPO of the
Group’s US institutional asset management
business, OM Asset Management plc
(OMAM), and a change in adviser to the
committee. I will discuss these in more detail
in this statement. As ever, alignment of
remuneration plans and outcomes to company
performance, delivery of our objectives, and
shareholder and enterprise value creation are
key areas of focus for the committee.
Review of performance during the year
and plan outcomes
The Group has returned strong results in
2014, despite the continued challenging
economic environment in South Africa and
Europe, delivering 16% operational profit
growth, 13% growth in AOP EPS (both on
a constant currency basis) and RoE of 13.3%.
The Group continued to deliver solid total
shareholder returns (TSR) to investors in both
the UK and South Africa of approximately
11%, in line or slightly outperforming the
indices and ranked third in our UK peer
group over the 12-month period. This
continued a sustained period of excellent TSR
for our investors, 69% on the FTSE 100 and
132% on the JSE ALSI over the last three years.
As well as achieving these strong financial
results, there was continued progress to
restructure and simplify the Group, such as the
sale of some of the legacy businesses in
Continental Europe, the partial IPO of OMAM
and acquisitions in the UK and the Rest of Africa.
It is fundamental to our core remuneration
principles that executive pay is aligned to
Company performance, enterprise value and
shareholder experience through stretching
performance targets. The Group’s continued
strong performance over the last one and
three years resulted in a short-term incentive
(STI) outcome of 79.1% of the maximum for our
Group Chief Executive, while the 2012
long-term incentive (LTI) plan vested at 69.2%.
The latter was based on a stretching
cumulative profit target which vested
between target and maximum, coupled
with a TSR multiplier which was at maximum,
reflecting strong returns for shareholders
over the period.
These incentive outcomes were lower than
in previous years, reflecting the fact that
shareholder returns, although strong, were
lower in 2014. This demonstrates our robust
approach to linking pay to performance
based on stretching targets and alignment
with shareholders.
The committee reviews risk management
and controls across the Group annually, to
ensure that financial results over a one and
three year period have been achieved within
the risk framework and appetite limits
established. I am pleased to report that
this was the case for the period ended
31 December 2014 and no adjustments
were considered necessary to the incentive
plan outcomes.
As always, the committee was mindful to
ensure overall pay was appropriate for the
performance of the Company and in relation
to its operational peers. It was satisfied this was
the case for 2014 and will continue to monitor
pay closely against appropriate performance
and market benchmarks in the future.
Key areas of focus during the year
In late 2013, we announced that our then Group
Finance Director, Philip Broadley, would leave
the Group once a suitable successor had been
appointed. He left on 31 August 2014, after
working a notice period that exceeded our
initial expectations, in order to ensure a
smooth transition to his successor, Ingrid
Johnson. Ingrid Johnson and Paul Hanratty
were appointed to the Board on 1 July 2014 on
remuneration packages in line with our recently
approved DRP. Details were announced at the
time and are contained within this report.
Ingrid Johnson transferred from Nedbank in
Johannesburg, demonstrating the wealth of
Old Mutual plc
Annual Report and Accounts 2014
95
Danuta Gray
Chairman of the Remuneration Committee
“ The Group has returned
strong results in 2014,
despite the continued
challenging economic
environment in South Africa
and Europe, delivering 16%
operational profit growth,
13% growth in AOP EPS
(both on a constant currency
basis) and RoE of 13.3%.
This continued a sustained
period of excellent total
shareholder return for our
investors in both the UK
and South Africa.”
Governance DIRECTORS’
REMUNERATION REPORT
continued
“ Alignment of our executives
to the long-term strategic
priorities of the Company in
order to deliver sustainable
value to shareholders and
build enterprise value has
remained a key focus during
the year.”
96 Old Mutual plc
Annual Report and Accounts 2014
executive talent across the Group and, in
accordance with the DRP, the Company
covered the cost of certain items related
to her relocation as detailed in this report.
In line with the majority of UK-listed companies,
we intend to comply with the updated UK
Corporate Governance Code provisions on
malus and claw back for new awards in
respect of performance from 1 January 2015
onwards. The ability to claw back awards that
have already been paid or have vested is not
currently explicitly stated in our DRP, but because
we believe that this is an important feature of
our accountability to shareholders, we shall
be requiring our senior executives to agree
to a claw back provision for the cash element
of their STI and LTI awards they receive in
respect of performance from 2015 onwards.
As the implementation of claw back is not to
the benefit of the directors, we have not felt
it necessary to consult shareholders on its
introduction. Details of the new claw back
provisions are explained in the ‘Implementation
of remuneration policy in 2015’ section of
this report.
Alignment of our executives to the long-term
strategic priorities of the Company in order
to deliver sustainable value to shareholders
and build enterprise value has remained a key
focus during the year. The committee reviewed
the LTI structure, but given that a full review of
remuneration is to be undertaken during 2015,
concluded that the structure for awards in
2015 should remain largely unchanged. The
only modifications are a slight increase in the
weighting of financial metrics from 60% to 70%
and a review of strategic objectives to ensure
that they remain aligned to the business
priorities over the next three years.
During 2014, the committee also oversaw the
establishment of an LTI plan for senior
executives at OMEM and Nedbank in order to
drive collaboration between the businesses, in
line with one of the Group’s core strategic
priorities. Collectively, the executives involved
are incentivised to deliver R1 billion of synergies,
which should improve financial performance
of all of the businesses and increase value for
both Old Mutual and Nedbank shareholders.
The committee also oversaw the establishment
of a new remuneration philosophy and
structure for the executives of OMAM
following its partial IPO. A new LTI plan was
introduced linking reward to OMAM’s TSR,
ensuring that executives are incentivised over
the longer term to grow the business and
deliver value to their shareholders.
New adviser to the committee
Alan Judes has been providing valuable
advice and support to Old Mutual for
well over ten years, many of those as
the appointed adviser to the committee.
We are grateful to Alan for his advice and
support during this period. After a robust
selection process, the committee appointed
PricewaterhouseCoopers (PwC) to replace
Alan from October 2014.
Looking forward to 2015
2015 is going to be another busy year for the
committee. We have begun a project to ensure
our remuneration structures, governance and
oversight processes and risk management
linkage to outcomes are fit for the purpose of
Solvency II. The governance structure has
been a particular focus of the committee,
strengthening links with the Chairmen of the
Company’s Group Audit and Board Risk
Committees and business unit remuneration
committees on remuneration matters.
Although our DRP is only entering its second
year, the committee plans to undertake a
thorough review of it during 2015. The shape
and focus of the Group has been evolving
rapidly, and we are also required to ensure
that we are fully prepared for the
implementation of Solvency II from 1 January
2016, which includes some remuneration
provisions. With a number of new committee
members, and my own appointment as
Chairman, the committee believes that this is
the right time for such a review. We will
consider whether further enhancements could
be made to improve the alignment of strategy,
performance and shareholder experience
with incentive plan structures and our
approach to the vesting and holding of
shares. In addition, the current debate
on notice periods for executives raises
concerns central to the alignment of reward
to performance. It is therefore possible that
a new DRP will be brought for approval to
the 2016 AGM. If we decide to make
substantial changes, we will consult fully
with our major shareholders.
I hope that you find this report helpful and a
clear indication of the committee’s intention
to ensure that remuneration appropriately
aligns executive pay to long-term sustainable
performance and shareholder returns. I look
forward to your support for this Statement,
the Annual Report on Remuneration, and the
review of our DRP during 2015.
Danuta Gray
Chairman of the Remuneration Committee
Our remuneration at a glance
Alignment of executive remuneration to our strategy and shareholder value
Our approach to remuneration across the Group is designed to align our executives to the delivery of our strategy and long-term shareholder
value creation. We do this through:
■ Short- and long-term financial measures that support the business’s expansion and growth objectives
■ Executive scorecards that closely align their objectives and performance to the delivery of key priorities for the year
■ Long-term strategic objectives that are embedded in the metrics for our LTI plans
■ A significant portion of executive remuneration being delivered in shares which are restricted from sale for up to four years from the award
date. Our most senior executives must also build up and then maintain a minimum shareholding in the Company
■ Malus and claw back provisions that ensure that executives are accountable in the long term for delivering performance in a responsible and
sustainable way.
Implementation of policy in 2015
Element
Base pay
Summary description
Maximum as % of base pay
Change in 2015
Linked to agreed market benchmarks – normal
annual increases are kept in line with employees
of the executive’s home country
Not applicable
No change – increase between 2.2% and 2.5%
Benefits including
pension-related
benefits
Fixed allowance equal to 35% of base pay for
pension and other elective benefits. Core insurance
and other agreed benefits are also provided
Not applicable
No change
d
e
x
i
F
STI
l
e
b
a
i
r
a
V
LTI
Financial (Earnings per Share (EPS) in constant
currency and Return on Equity (RoE)) plus personal
scorecard measures. 50% deferred into a share
incentive award for a period of three years
Financial (EPS growth in pence, EPS growth in
cents and RoE), strategic measures plus a TSR
multiplier (50% FTSE 100 Index and 50% JSE ALSI).
50% vests after three years and 50% after four years
150%
250%
The malus provision for the deferred element
of the STI has been updated and malus and claw
back has been introduced to the cash element of
STI, as described in the ‘Implementation of
remuneration policy in 2015’ section of this report
The weighting of financial metrics versus strategic
objectives has been changed to 70% versus 30%,
the malus provision has been updated and claw
back has been introduced. These changes are
described in the ‘Implementation of remuneration
policy in 2015’ section of this report
In respect of incentive targets contained within this report, EPS and RoE are calculated on a post-tax AOP basis.
Performance against targets in 2014
Outcomes for STI – 2014 performance year1
Outcomes for LTI awards granted in 2012
EPS in constant currency – % of maximum achieved
70.3%
Aggregate post-tax AOP (£) in constant currency – % achieved
69.2%
RoE – % of maximum achieved
Vesting – % of maximum achieved
1 The STI is also subject to the achievement of personal scorecard objectives
Single total figures of remuneration for 2014
Aggregate post-tax AOP (£) in constant currency – % of
77.8%
maximum award
TSR multiplier – % achieved
74.1%
Vesting – % of maximum award
Base pay
£000
910
315
300
Taxable
benefits
£000
89
–
1,284
STI
£000
1,079
384
353
LTI
£000
1,804
833
190
Pension-
related
benefits
£000
Items in the
nature of
remuneration
£000
318
101
105
12
13
2
60.1%
115.0%
69.2%
Total
£000
4,212
1,646
2,234
Executive director
Julian Roberts
Paul Hanratty1
Ingrid Johnson1
Former executive director
Philip Broadley2
1 Paul Hanratty and Ingrid Johnson joined the Board on 1 July 2014. Figures represent the remuneration paid for the period from that date
2 Philip Broadley left the Group on 31 August 2014. Figures represent the remuneration paid for the period up to that date
Old Mutual plc
Annual Report and Accounts 2014
97
403
29
499
–
141
5
1,077
Governance Directors’ Remuneration Policy
Introduction
The Directors’ Remuneration Policy described in this section was approved by shareholders at the Company’s AGM in 2014. The policy is also
displayed on the Company’s website.
The committee will consider the Directors’ Remuneration Policy annually, to ensure that it remains aligned with business needs and is appropriately
positioned relative to the market. The Directors’ Remuneraton Policy must be put before shareholders for approval at least every three years.
Market benchmarks
We benchmark total potential remuneration against remuneration packages paid by peer group companies. Two peer groups are used for this
purpose, namely: (i) FTSE 100 companies of a similar size by market capitalisation; and (ii) large European insurers. The peer groups are kept under
review to take into account different companies that enter the market or those that change their size or the main characteristics of their business.
We also look at remuneration arrangements in other types of UK-based financial sector companies.
Balancing short- and long-term remuneration
Based on our view of current market practice and our remuneration principles, we have established the remuneration policy set out in this
report. Fixed annual elements, including base pay and benefits, recognise the status of our executives and ensure current and future market
competitiveness. STI and LTI arrangements are designed to motivate and reward them for making the Company successful on a sustainable basis.
Executive directors are also expected to retain sufficient of the vested shares from LTI and deferred STI share incentive awards, over a five-year
period from the time of their appointment, to meet their respective shareholding requirements. The shareholding linkage cements the relationship
between the executive directors’ personal returns and those of the Company’s investors.
The committee has discretion to amend the weighting of STI and LTI measures from year to year, in order to ensure that the executive directors
are incentivised to drive performance in line with the Company’s core strategic objectives.
Directors’ Remuneration Policy table (executive directors)
How the element
supports our
strategic
objectives
Base pay
Recognises the
role and the
responsibility
for delivery
of strategy
and results
Operation of the element
Maximum potential payout and payment at threshold
Performance measures used,
weighting and time period applicable
■ Paid in 12 monthly instalments
■ Reviewed annually with any changes
becoming effective from 1 January.
■ Base pay is set in the range of peer benchmark
■ None
groups. The maximum is the top of the range of large
European insurers
■ Maximum annual increases will not normally exceed
the average increase for the home country workforce.
Larger increases may be awarded in certain
circumstances, such as an increase in scope or
responsibility of the role, or salary progression for a
newly appointed director.
Benefits allowance for retirement provision and other elective benefits
Designed to
provide
appropriate,
market-aligned
benefits
consistent with
the role
■ The Company provides a benefit
allowance to fund contributions to
retirement funding arrangements and
other elective benefits
■ Otherwise paid monthly in cash.
Other benefits
■ Benefits common to employees of the home
employer, health assessments and the
opportunity to participate in Sharesave
■ Travel from home to work, and travel for
partners to certain Board meetings or
corporate events of the Company and its
major subsidiaries
■ For overseas appointments, flexibility to
provide benefits in line with those of the
executive’s home country and relocation
costs for internal or external appointments
of executive directors.
98 Old Mutual plc
Annual Report and Accounts 2014
■ A fixed allowance of 35% of base pay.
■ None
■ None
■ The cost of core insured benefits is determined by the
insurance provider based on experience factors in the
pool of employees covered and so may vary from
year to year
■ The Company offers the opportunity to participate in
a HMRC-approved Sharesave scheme
■ All other benefits are direct costs borne by the
Company based on policy agreed by the committee
■ A summary of key items normally paid for on
relocation is set out in the ‘Approach to remuneration
in connection with recruitment’ section of this report.
DIRECTORS’REMUNERATION REPORTcontinued How the element
supports our
strategic
objectives
Operation of the element
Maximum potential payout and payment at threshold
Short-term incentive (STI)
Incentivises
achievement of
annually
agreed
business
objectives and
strategic
priorities
■ Determined annually following the
finalisation of annual results
■ 50% of the award vests immediately
■ 50% is deferred for a period of three
years into a share incentive award.
Dividends are paid during the restricted
period and malus applies to the shares
held under award prior to vesting
■ The committee has the discretion to
amend deferred STI awards under the
rules of the plan, to adjust deferred STI
awards in the event of any variation of
the share capital of the Company, and to
adjust or vest deferred STI awards on a
demerger, special dividend or other
similar event, which affects the market
price of the shares to a material extent.
■ The maximum opportunity is 150% of base pay
■ Vesting against targets is 0% at threshold and 100% at
stretching targets, with interpolation between the points
■ The committee has discretion:
— to amend, and/or set different performance
measures for material changes (such as a change
in strategy, acquisition, divestment or market
conditions), if it considers such amendments
necessary to achieve the original purpose and
any new measures are not materially less difficult
to satisfy
— to adjust the outcome, if it is not aligned to the
overall performance of the Company
■ Any use of the discretions would, where relevant, be
explained in the Annual Report on Remuneration and
may, as appropriate, be the subject of consultation
with the Company’s major shareholders.
Long-term incentive (LTI)
Incentivises
attainment of
long-term
objectives and
strengthens the
alignment of
interests
between
executive
directors and
shareholders
■ Annual grants of share incentive awards
or options over Old Mutual plc shares
■ Vesting is subject to the achievement of
performance targets measured after a
three-year period
■ Vesting occurs 50% after three years and
50% after four years. Malus applies to
the shares held under option or award
prior to vesting
■ The committee has discretion:
■ Maximum annual grants will not normally exceed a
face value of 250% of base pay, inclusive of the
maximum TSR multiplier being applied
■ In exceptional circumstances, or on recruitment, the
committee may grant awards with a face value of up
to 400% of base pay, inclusive of the maximum TSR
adjuster being applied. This is in addition to the buying
out of unvested awards from a previous employer
■ Vesting is 0% at threshold and 100% at stretching
targets, with interpolation between the points
— before the grant of an award, to
decide that a participant shall be
entitled to receive dividend equivalents
— to amend awards under the rules of
the plan, to adjust awards in the event
of any variation of the share capital of
the Company, and to adjust or vest
awards on a demerger, special
dividend or other similar event which
affects the market price of the shares
to a material extent.
■ The committee has discretion:
— to amend, and/or set different performance
measures for material changes (such as a change
in strategy, acquisition, divestment or market
conditions), if it considers such amendments
necessary to achieve the original purpose and
any new measures are not materially less difficult
to satisfy
— to adjust the outcome, if it is not aligned to the
overall performance of the Company
■ Any use of the discretions would, where relevant,
be explained in the Annual Report on Remuneration
and may, as appropriate, be the subject of
consultation with the Company’s major shareholders.
Performance measures used,
weighting and time period applicable
■ Annual measures include:
Financial (minimum 50%):
— EPS in constant currency
— RoE
Strategic and operational:
— measures of individual
performance (set out in the
director’s personal scorecard)
■ The committee has discretion to
vary the weighting of the
performance measures over the
life of the Directors’
Remuneration Policy
■ The committee has discretion to
reduce STI outcomes based on
assessment of risk exposures.
■ Awards granted in 2013 and 2014:
— Financial (60%)
— Strategic (40%)
— TSR multiplier against the FTSE
100 Index (50%) and the JSE
ALSI (50%)
■ Awards granted in 2012:
— Cumulative growth over three
years in post-tax AOP on a
constant currency basis
— TSR multiplier against the FTSE
100 Index (50%) and the JSE
ALSI (50%)
■ The committee has discretion to
vary the weighting of performance
measures over the life of the
Directors’ Remuneration Policy.
Old Mutual plc
Annual Report and Accounts 2014
99
Governance How the element
supports our
strategic
objectives
Operation of the element
Maximum potential payout and payment at threshold
Performance measures used,
weighting and time period applicable
Shareholding requirement
To strengthen
alignment of
interests
between
executive
directors and
shareholders
■ The minimum shareholding requirement
as a percentage of base pay is to be
achieved within five years of
appointment to the role as follows:
— Group Chief Executive – 200%
— Other executive directors – 150%
■ Unvested and vested but unexercised
share awards or options are not taken
into account in the calculation.
■ None
■ None
Provisions of previous policy that will continue to apply
Any commitment made before: (i) 27 June 2012; or (ii) the individual becoming an executive director of the Company; and any vesting of outstanding share
incentive awards, will be honoured, even where it is not consistent with the policy prevailing at the time such commitment is fulfilled or such vesting occurs.
Malus provision
All LTI and deferred STI awards contain a malus provision, which gives the committee the power to reduce awards if the results on which they were based
were misleading or materially incorrect or were subsequently found to have relied on poor risk management or material misrepresentation of performance.
100 Old Mutual plc
Annual Report and Accounts 2014
DIRECTORS’REMUNERATION REPORTcontinued Notes to the Directors’ Remuneration Policy table (executive directors)
Performance measures and targets
The committee selects performance measures that are central to the Company’s overall strategy and are used by the executive directors and
Board in overseeing the operation of the business. The performance targets for STI are determined annually by the committee and are set in a
range around the business plan for the year, as agreed by the Board.
External directorships
Executive directors are, subject to prior clearance by the Board, permitted to hold one external non-executive directorship of a listed company
and are entitled to retain the fees payable to them for doing so.
Treatment of incentive awards on termination or change of control
For all deferred short- and long-term incentives, the share incentive plan rules provide for automatic ‘Good Leaver’ status on termination of
employment in the event of: (i) death; (ii) retirement; (iii) injury or disability; (iv) redundancy; (v) the employing company or business ceasing to be
a subsidiary or business of Old Mutual plc; and (vi) certain takeovers and other corporate events. In addition, the committee has discretion to
award Good Leaver status for any other reason (discretionary Good Leavers). In these circumstances, the committee has discretion to apply less
generous terms than would apply under the automatic Good Leaver reasons. The committee’s determination will take into account the particular
circumstances of the executive director’s departure and the recent performance of the Company.
Component
Automatic Good Leaver
Other leaver*
Change of control
STI
■ Pro-rata payment for the period worked in the
■ No award will be made.
■ At the discretion of the committee.
performance year, based on agreed
performance criteria
■ Paid in cash.
Deferred STI
■ Vesting of all awards on termination.
■ Outstanding awards
■ Vest automatically except in the case of internal
LTI
■ Vest on the normal vesting date (except in the event
of death or where other exceptional compassionate
reasons apply, when vesting may be immediate),
subject to achievement of performance targets,
calculated on a pro-rata basis, based on the period
of time after the date of grant and ending on the
date of termination relative to the restricted period
■ The committee has discretion to disapply time-based
pro-rating of awards when appropriate.
are forfeit.
■ Outstanding awards
are forfeit.
re-organisations or mergers, as defined in the rules,
where there may be an automatic surrender and
replacement of awards in the new/acquiring company.
■ Vest subject to the achievement of performance
measures and pro-rated from grant date to the
anniversary of grant date following change of
control, but the committee may disapply pro-rating
if it considers it appropriate to do so
■ For internal reorganisations or mergers, as defined
in the rules, there may be an automatic surrender
and replacement of awards in the new/
acquiring company.
Sharesave
■ In line with HMRC rules and the rules of Sharesave.
■ In line with HMRC rules and
■ In line with HMRC rules and the rules of Sharesave.
the rules of Sharesave.
* Anyone who is not a Good Leaver or a discretionary Good Leaver
Consideration of employment conditions elsewhere in the Group
The Company’s approach to executive director and wider employee remuneration is based on a common set of remuneration principles and a
governance structure, which have been implemented across all major subsidiaries. This includes subsidiary remuneration committees with agreed
terms of reference, who have oversight over local matters and ensure that the remuneration principles and policies are implemented consistently.
Although the committee does not consult directly with employees on executive director remuneration policy, it reviews proposals in the context
of a detailed understanding of remuneration for the broader employee population. The structure of total remuneration packages for executive
directors, and for the broader employee population, is similar, comprising base pay, pension and benefits and eligibility for a discretionary
STI based on performance in the financial year. The level of STI and the portion deferred are determined by role and responsibility. The Group
LTI plan applies to executive directors and senior executives based at the Group’s head office in London, and other LTI plans are in place for
senior executives in subsidiary companies.
Annual base pay increases for the executive directors are limited to the average pay increase for employees in their home country, unless there
has been a change in role or salary progression for a newly appointed director.
Old Mutual plc
Annual Report and Accounts 2014
101
Governance Approach to remuneration in connection with recruitment
The committee’s approach to remuneration in connection with recruitment is to pay no more than is necessary to attract appropriate candidates
to the role. It should be noted that the Company operates in a specialised sector and many of its competitors for talent are from outside the UK.
Remuneration terms for any new executive directors will be based on the approved remuneration policy and would include the same elements,
and be subject to the same constraints, as those of the existing executive directors as shown below:
Element of remuneration
Base pay
Maximum percentage of base pay
Benefit allowance (for retirement, elective benefits or in cash)
35%
Other benefits
STI
LTI
Dependent on circumstances and location
150%
250% (400% in exceptional circumstances)
When it is necessary to ‘buy out’ an individual’s unvested awards from a previous employer, the committee will seek to match the expected value
of the awards by granting awards that vest over a time frame similar to those given up, with a commensurate reduction in quantum where the new
awards will be subject to performance conditions that are not as stretching as those applicable to the awards given up. Existing annual incentive
given up may be bought out on an expected value basis or, at the discretion of the committee, through a guaranteed STI award for the first
performance year only.
Where appropriate, the committee will agree reasonable costs of relocation in line with the Group’s mobility policy which, based on individual
circumstances, provides for a settling-in allowance and costs incurred such as travel, shipping, immigration and tax advice, temporary housing,
transaction costs on home sale/purchase, home/school search and school fees and, if in relation to a temporary assignment, tax equalisation and
a housing allowance. All of these costs will be covered gross of tax incurred by the executive, where applicable.
Service agreements and payment for loss of office
Executive directors’ service agreements are designed to provide an appropriate level of protection for the executive and the Company by:
(i) setting out individual entitlements to elements of remuneration consistent with policy; (ii) summarising notice periods and compensation on
termination of employment by the Company; and (iii) describing the obligations in relation to confidentiality, data protection, intellectual
property and restraint on certain activities. Service agreements for the current executive directors are available on the Company’s website
www.oldmutual.com.
In the event that the employment of an executive director is terminated, any compensation payable will be determined in accordance with the
terms of the service agreement between the Company and the executive director, as well as the rules of any incentive plans. The Company’s policy
is to make payments in accordance with pre-established contractual arrangements, but with consideration of individual circumstances. These
circumstances may include the reason for termination and, for deferred STI and LTI share incentive awards, some discretion in the determination
of Good Leaver status for vesting of such awards. The policy in this respect is set out in the following table:
Standard provision
Policy
Details
Notice
■ Policy is to provide a maximum of
12 months’ notice.
■ In certain cases, executive directors will not be
required to work their notice period and,
depending on the circumstances, may be put on
‘garden leave’ or granted pay in lieu of all or part
of their notice period (PILON). PILON, including
base pay, benefits and pension-related benefits,
would normally be paid monthly and be subject
to mitigation when alternative employment is
secured but may also be paid as a lump sum
■ Executive directors are generally subject to
annual re-election at the Company’s Annual
General Meeting.
Treatment of
STI awards
■ STI awards will be made to Good Leavers based
■ Paid in cash.
on an overall assessment of corporate and personal
performance and pro-rated for the period worked
in the performance year of termination.
Other provisions in contract
■ Current contractual terms
for Julian Roberts were
agreed before 27 June 2012
and, in the absence of
certain conditions relating to
ill health or accident,
provide Julian Roberts with
notice by the Company of 12
months and notice to the
Company of 12 months.
■ In the event of termination
by the Company with
PILON, or on garden leave,
Julian Roberts’ contract
(agreed before 27 June
2012), provides for payment
of STI for the notice period.
The value to be paid will be
determined by the
committee based on the
terms set out in the contract.
102 Old Mutual plc
Annual Report and Accounts 2014
DIRECTORS’REMUNERATION REPORTcontinued Standard provision
Policy
Details
Other provisions in contract
Treatment of
unvested LTI
and deferred
STI share
incentive
awards
Compensation
for loss of
office
Non-executive
directors
■ All awards lapse except for Good Leavers.
■ LTI vesting for Good Leavers* is based on the
achievement of performance conditions. The
number of shares to vest would be calculated on
a pro-rata basis, based on the period of time
after the date of grant and ending on the date of
termination relative to the restricted period
■ Deferred STI awards for Good Leavers* vest fully
on termination.
■ Settlement agreements with executive directors
■ Terms are subject to the signing of a
■ There are no other
may provide for, as appropriate:
— Incidental costs related to the termination,
such as legal fees for advice on the
settlement agreement
— Provision of outplacement services
— Payment in lieu of accrued, but untaken,
holiday entitlements
— Exit payments in relation to any legal obligation
or damages arising from such obligation
— Settlement of any claim arising from
the termination
— Continuation or payment in lieu of other
incidental benefits
— In the case of redundancy, two weeks’ base pay
per year of service.
■ One month’s notice (12 months for the Chairman)
■ Appointed for an initial three-year term
■ Normally expected to serve two three-year terms,
subject to annual re-election at the Company’s
Annual General Meeting
■ A third term (of up to three years) may be offered
on a year by year basis after completion of the
first two terms.
settlement agreement.
contractual provisions for
compensation for loss
of office.
■ Non-executive directors are subject to annual
■ No compensation is
re-election at the Company’s Annual
General Meeting.
payable on termination of
appointment as a
non-executive director.
* Subject to further adjustments which may be applied to discretionary Good Leavers as set out in the ‘Treatment of incentive awards on termination or change of control’ section
of this report
Old Mutual plc
Annual Report and Accounts 2014
103
Governance Dates of directors’ service contracts and letters of appointment
Executive director
Julian Roberts
Paul Hanratty
Ingrid Johnson
Commencement date in current role Continuous service date
Notice period
9 September 2008
1 July 2014
1 July 2014
21 August 2000
16 January 1984
1 September 1993
12 months
12 months
12 months
Non-executive director
Date of original appointment
Date of current appointment
Current term as director
Date current appointment terminates
Patrick O’Sullivan
1 January 2010
1 January 2013
Mike Arnold
Zoe Cruz
Alan Gillespie
Danuta Gray
Adiba Ighodaro
Reuel Khoza
Roger Marshall
Nkosana Moyo
1 September 2009
1 September 2012
6 January 2014
3 November 2010
1 March 2013
6 January 2014
27 January 2006
5 August 2010
6 January 2014
3 November 2013
1 March 2013
6 January 2014
29 January 2015
5 August 2013
1 September 2013
1 September 2013
Nonkululeko Nyembezi-Heita 9 March 2012
9 March 2012
2nd
2nd
1st
2nd
1st
1st
–
2nd
1st
1st
1 January 2016
1 September 2015
6 January 2017
3 November 2016
1 March 2016
6 January 2017
14 May 20151
5 August 2016
1 September 2016
9 March 20152
1 Reuel Khoza’s appointment has been extended until the conclusion of the Company’s Annual General Meeting on 14 May 2015
2 Nonkululeko Nyembezi-Heita’s appointment has been extended for a second term until 9 March 2018
Directors’ service contracts and letters of engagement for the non-executive directors are available on the Company’s website at
www.oldmutual.com.
Directors’ Remuneration Policy table (non-executive directors)
How the element supports our
strategic objectives
To attract non-executive
directors who have the broad
range of experience and skills
required to oversee the
implementation of the strategy.
Operation of the elements (fees and benefits)
Maximum potential payout
Performance measures used, weighting and
time period applicable
■ Fees for non-executive directors
(other than the Chairman) are
set by the Board and paid in
12 monthly instalments
■ The Chairman’s fees are set
by the committee and paid in
12 monthly instalments
■ Travel for partners to a limited
number of Board meetings or
corporate events of the Company
and its major subsidiaries.
■ Fees are set within the range of
■ Non-executive directors are not
eligible to participate in
performance-related incentive plans.
comparative board and committee
fees, benchmarked against an
appropriate group of FTSE 100
companies. Average increases will
not normally exceed the average
increase for the UK workforce,
except where:
— committee roles or
responsibilities change
significantly; or
— market fees in relation to certain
roles change significantly
■ Non-executive directors may hold
positions on the boards of
subsidiary companies and are
entitled to retain the fees payable
to them for doing so.
104 Old Mutual plc
Annual Report and Accounts 2014
DIRECTORS’REMUNERATION REPORTcontinued Annual Report on Remuneration
The Annual Report on Remuneration sets out the payments made and awards granted to the directors in 2014 and how the Company intends to
implement the Directors’ Remuneration Policy in 2015 which, along with the Chairman’s Annual Statement, is subject to an advisory shareholder vote.
Market benchmarks
The primary peer group for benchmarking executive remuneration comprises large European insurers and, for 2014 and 2015, included
Prudential plc, Aviva plc, RSA Insurance Group Plc, Legal & General Group Plc, Standard Life plc, Allianz Group and Axa Group.
For non-executive directors, benchmarking is performed against non-executive directors’ remuneration in FTSE 100 companies using the whole of
the FTSE 100 population as well as an extract of companies by market capitalisation.
Single total figures of remuneration for executive directors (audited)
Base pay
Taxable benefits
STI
LTI
Pension-related
benefits
Items in the nature
of remuneration
Total
2014
£000
910
315
300
2013
£000
885
–
–
2014
£000
2013
£000
2014
£000
2013
£000
2014
£000
2013
£000
89
–
1,284
68
1,079
1,123
1,804
2,428
–
–
384
353
–
–
833
190
–
–
2014
£000
318
101
105
2013
£000
309
–
–
2014
£000
2013
£000
2014
£000
2013
£000
12
13
2
4
–
–
4,212
4,817
1,646
2,234
–
–
Executive director
Julian Roberts
Paul Hanratty1
Ingrid Johnson1
Former executive director
Philip Broadley2
403
590
29
45
499
766
–
1,492
141
206
5
3
1,077
3,102
1 Paul Hanratty and Ingrid Johnson joined the Board on 1 July 2014. Figures represent remuneration paid for the period from that date
2 Philip Broadley left the Group on 31 August 2014. Figures represent remuneration paid for the period up to that date
Element
Explanation
Taxable benefits
STI
LTI
Pension-related
benefits
Items in the nature of
remuneration
These amounts represent the gross value of benefits that are paid for by the Company and are chargeable to UK income tax.
They cover such items as spouse’s travel, use of a car and driver and, for Ingrid Johnson, relocation costs. In order for Ingrid
Johnson to take up the role of Group Finance Director, she was required to relocate from South Africa to the UK. In accordance
with the approved Directors’ Remuneration Policy, the Company paid for certain costs of relocating, such as relocation agents’
costs, moving costs, transport of household items, temporary housing and transaction costs, and indirect costs of purchasing a
house in London. The total value of the costs covered was £709,338. The Company accounted for the tax due on these costs directly,
resulting in a gross cost of £1,272,793. It is this value that is included in the single total figure.
STI awarded in relation to performance in the year, including 50% that is deferred for three years in the form of a share incentive
award. In accordance with the payment structure agreed when Ingrid Johnson was appointed Group Finance Director, an amount
equal to 50% of her total STI, inclusive of the amount paid for service with Nedbank up to 30 June 2014, will be deferred for three
years in the form of a share incentive award. Vesting of the share incentive award is not subject to the achievement of performance
targets, but requires the director to remain in employment with the Group during the vesting period. Malus applies to the shares
held under award prior to vesting.
The 2013 Directors’ Remuneration Report reflected the value of LTI vesting based on the average Old Mutual plc share price over
the final quarter of 2013 (194.3p) as the options granted in 2011 had not vested at the time of publication. The figures have been
updated to reflect the actual market value of 50% of the award that vested in April 2014, namely 198.93p per share, while the
balance of 50% (which vests in April 2015) remains valued as it was in 2013. In addition, Philip Broadley’s LTI for 2013 has been
updated to reflect the actual pro-rating of his award in relation to his service with the Group during the vesting period. The 2014
LTI values have been calculated using the average share price over the final quarter of 2014 (188.3p) and, for the 50% of the
options granted in 2012 that will vest in April 2015, will be restated in the 2015 Directors’ Remuneration Report. Malus applies to
the shares held under option prior to vesting. In respect of Ingrid Johnson, the LTI figure represents the value of her Nedbank
awards which are due to vest in 2015, calculated using the average Nedbank share price over the final quarter of 2014 (R232.85),
converted to sterling at a rate of R17.8712 to £1.
This represents the benefit allowance of 35% of base pay less any amounts sacrificed for the purchase of other benefits.
This includes non-taxable benefits, including those paid for through the sacrifice of pension-related benefits, which are not
considered to be significant in value. In respect of Julian Roberts, it also includes the value of the discount applied to his tax-
advantaged share option granted under the Old Mutual plc 2008 Sharesave Plan in 2014.
Old Mutual plc
Annual Report and Accounts 2014
105
Governance
Additional requirements in respect of the single total figure table (audited)
STI – 2014 performance year
The STI accruing to the executive directors in respect of performance during 2014 is shown below:
Executive director
Julian Roberts
Paul Hanratty1
Ingrid Johnson1
Former executive director
Philip Broadley2
RoE
EPS in constant currency
Personal Objectives
Weighted Outcome
Metric
Weight
37.5%
30.0%
30.0%
% Metric
Achieved
77.8%
77.8%
77.8%
Metric
Weight
37.5%
30.0%
30.0%
% Metric
Achieved
70.3%
70.3%
70.3%
Metric
Weight
25.0%
40.0%
40.0%
% Metric
Achieved
% of
Maximum
94.0%
92.0%
85.0%
79.1%
81.3%
78.5%
% of
Base pay
118.6%
121.9%
117.7%
£000
1,079
384
353
25.0%
77.8%
25.0%
70.3%
50.0%
91.0%
82.6%
123.8%
499
1 Paul Hanratty and Ingrid Johnson joined the Board on 1 July 2014. Figures represent the short-term incentive earned from that date
2 Philip Broadley left the Group on 31 August 2014. His figure represents the short-term incentive earned up to that date
The performance achieved against the financial metrics is shown below:
Performance measure
RoE
EPS in constant currency
Threshold
11.3%
15.5p
Target
12.6%
17.2p
Maximum
13.9%
18.9p
Actual
13.3%
17.9p
% of maximum
achieved
77.8%
70.3%
Outcomes for LTI awards over Old Mutual plc shares granted in 2012 (for the performance period 2012 – 2014)
The award made to Julian Roberts in 2012 had a face value of 250% of base pay at the time of award (inclusive of the TSR multiplier) and the
award made to Paul Hanratty, before he became an executive director of the Company, had a face value of 200% of base pay (inclusive of
the TSR multiplier) at the time of award. Vesting is due to occur 50% on the third anniversary of the date of grant (10 April 2015) and 50% on the
fourth anniversary of the date of grant (10 April 2016). As the awards had not vested at the date of this report, the average share price for the final
quarter of 2014 (188.3p) has been used to determine the value for the purposes of the single total figures.
Aggregate post-tax AOP (£) in constant currency
Threshold
Target
Maximum
Straight-line
basis between
0% and
100% vesting
100% vesting
Actual
% achieved
2.9bn
to 3.5bn
3.5bn
or greater
3.3bn
69.2%
0% vesting
<2.9bn
TSR multiplier
A TSR multiplier was used to adjust the outcome of the LTI scorecard in the table above. TSR was averaged at the start (Q4 2011) and end
(Q4 2014) of the three-year performance period.
Annualised relative TSR growth (£)
Annualised relative TSR growth (R)
Weighted total
* Straight-line interpolation between the points
Weighting
4% or more
below index* Equal to index*
4% or more
above index*
50%
50%
85%
100%
115%
Outcome
Multiplier
8.7%
17.4%
115.0%
115.0%
Overall outcome
Aggregate post-tax AOP (£) (in constant currency) – % achieved
Aggregate post-tax AOP (£) in constant currency – % of maximum award (A)
TSR multiplier – % achieved (B)
Vesting – % of maximum award (A x B)
106 Old Mutual plc
Annual Report and Accounts 2014
Weighted
outcome
57.5%
57.5%
115.0%
69.2%
60.1%
115.0%
69.2%
DIRECTORS’REMUNERATION REPORTcontinued
Committee considerations:
■ In respect of the STI and the LTI, the committee considered a report by the Chief Risk Officer, which confirmed that the targets had been fulfilled
within the Company’s risk appetite
■ In respect of the LTI, the committee considered whether any downward adjustments to the outcome of the targets would be appropriate due to
negative financial impacts or underperformance in the period, not adequately reflected in the AOP outcome. The committee concluded that no
such adjustments were necessary
■ In respect of the STI, the targets were adjusted positively/negatively for corporate transactions that were not envisaged when they were set.
This was in order to preserve the stretch in the original targets.
2012 LTI awards over Old Mutual plc shares due to vest to the executive directors
Executive director
Julian Roberts
Paul Hanratty
Old Mutual
shares
under option
at grant
1,384,470
639,084
Achievement
of performance
targets
Old Mutual
shares
under option
to vest in 2015
Old Mutual
shares
under option
to vest in 2016
Average
Old Mutual plc
share price
over Q4 2014
Value of share
options to
vest in 2015
£000
Value of share
options to
vest in 2016
£000
Total value
of LTI as
shown in
the single
figure table
£000
69.2%
69.2%
479,026
221,123
479,026
221,123
188.3p
188.3p
902
416
902
416
1,804
833
LTI values have been calculated using the average price of Old Mutual shares over the final quarter of 2014 (188.3p), and for 50% of the award
that will vest in April 2015, will be restated in the 2015 Directors’ Remuneration Report, once actual values on vesting are known.
In regard to Philip Broadley’s unvested deferred STI and LTI awards, the committee exercised its discretion to treat him under Good Leaver
provisions on the basis of his:
■ Agreement not to join a competitor of the Old Mutual Group;
■ Agreement to work with the Board to achieve an effective succession and transition process; and
■ Strong performance in his role for over five years, which greatly contributed to the Group’s recovery, rationalisation and improved
financial position.
It was agreed that:
■ Vesting of deferred STI awards and LTI awards would not be accelerated and awards would vest at the same time as would have applied if
he had remained in employment
■ All share incentive awards would be subject to forfeiture provisions for malus, on the same basis as if he had remained in employment
■ LTI awards would vest only to the extent that the performance conditions had been met, and pro-rata for service
■ He would not take up employment with or become a director of a competitor and, should he do so without the committee’s express permission,
he would be deemed to have waived his rights to any unvested share incentive awards at that time.
The committee has considered whether the above conditions have been met in respect of deferred STI and LTI awards due to vest in 2015 and
has concluded that the awards should vest. Details of the value of the LTI award will be disclosed in the 2015 Directors’ Remuneration Report.
Outcomes for LTI awards over Nedbank shares granted in 2012 (for the performance period 2012 – 2014)
Restricted share awards over 49,418 Nedbank shares were granted to Ingrid Johnson in March 2012. The shares held under award were subject
to forfeiture provisions during a three-year vesting period, which required her to remain in employment with Nedbank and, for 50% of the award,
the achievement of Nedbank corporate performance targets. The element of the award subject to the achievement of Nedbank corporate
performance targets is set out below:
Nedbank shares
under award at grant Nedbank measure
RoE (excluding goodwill) equal to or in excess of
cost of equity
24,7091
Nedbank share price against
Fini15 Index
Weighting
Range
Achieved
% of award
vesting
Number
of shares
vesting in 2015
Value of
LTI included
in the single
figure table
£0002
50%
0% to 8%
3.72%
74.3%
9,365
122
50% -20% to +30%
-19.7%
1.5%
1 The number of shares under award was subject to a potential 30% uplift in the event that Nedbank met or exceeded the top of the range of the targets
2 The value has been calculated using the average price of Nedbank shares over the final quarter of 2014 (R232.85), converted into sterling using an exchange rate of R17.8712 to £1.
The value shown in the single figure table will be restated in the 2015 Directors’ Remuneration Report, once the actual value on vesting is known
Old Mutual plc
Annual Report and Accounts 2014
107
Governance A deferred STI award over 10,477 Nedbank shares was granted to Ingrid Johnson under the Nedbank Compulsory Bonus Share Scheme in March
2012. The shares held under award were subject to forfeiture provisions which ended, in equal proportions, six months, 18 months and 30 months
after the date of award. A matching award was offered (on a one-for-one basis) on any of the shares which were held voluntarily in the scheme until
the third anniversary of the date of award. The matching award was subject to Ingrid Johnson remaining in employment with Nedbank during that
three-year vesting period and, for 50% of the award, the achievement of Nedbank corporate performance targets. It was agreed with Nedbank
that Ingrid Johnson would retain eligibility in relation to the employment condition provided she remained in employment with the Old Mutual
Group. The element of the matching award subject to the achievement of Nedbank corporate performance targets is set out below:
Nedbank measure
Target
Achieved
% of award
vesting
Maximum number
of matching shares
to be awarded in 2015
Actual number
of matching shares
to be awarded in 2015
Value of
LTI included
in the single
figure table
£0001
RoE (excluding goodwill)
excess over cost of equity
2%
3.72%
100%
5,239
5,239
68
1 The value has been calculated using the average price of Nedbank shares over the final quarter of 2014 (R232.85), converted into sterling using an exchange rate of R17.8712 to
£1. The value shown in the single figure table will be restated in the 2015 Directors’ Remuneration Report, once the actual value on vesting is known
Single total figures of remuneration for non-executive directors (audited)
Non-executive directors do not participate in any of the Company’s incentive arrangements, nor do they receive any benefits, other than those
described in footnote 1 to the table below. This table shows the single total figures for both 2013 and 2014 for the Chairman and the other
non-executive directors:
Fees
Taxable benefits1
Total
Non-executive director
Patrick O’Sullivan
Mike Arnold
Zoe Cruz
Alan Gillespie
Danuta Gray
Adiba Ighodaro2
Reuel Khoza3
Roger Marshall
Nkosana Moyo
Nonkululeko Nyembezi-Heita
Former non-executive director
2014
£000
370
97
77
94
88
67
315
107
77
72
2013
£000
360
95
–
99
65
–
340
103
23
66
Bongani Nqwababa (resigned January 2014)
1
78
2014
£000
17
2013
£000
29
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2014
£000
387
97
77
94
88
67
315
107
77
72
2013
£000
389
95
–
99
65
–
340
103
23
66
1
78
1
Neither the Chairman nor any of the other non-executive directors received any pension-related benefits, short- or long-term incentives or any other items in the nature
of remuneration in 2013 or 2014. The amounts included in the Taxable benefits column relate to the provision of travel to and from the office in London for the Chairman.
The 2013 figure has been restated
2 Fees payable to Adiba Ighodaro were paid to Actis LLP rather than to her personally
Includes fees of £243,000 (£272,000 in 2013) in respect of Nedbank Group Limited
3
108 Old Mutual plc
Annual Report and Accounts 2014
DIRECTORS’REMUNERATION REPORTcontinued
Scheme interests awarded during 2014 (audited)
The following tables show LTI awards in the form of nil-cost share options, deferred STI awards in the form of forfeitable shares awards and
tax-advantaged share options (in respect of an all-employee Sharesave plan), granted to the executive directors during 2014. STI and LTI awards
were granted in accordance with the grant policies set out above and the number of shares under award or option was calculated using the
middle market quotation (MMQ) of Old Mutual plc shares on the business day preceding the date of grant. The Sharesave exercise price was
determined at 20% below the average of the Company’s MMQ over a three-day period immediately preceding the invitation date.
Old Mutual
shares held
under option
or award
Share price
at date
of award
Face value
at date
of grant
£000
% receivable
if minimum
performance
is achieved
The end of the
period over
which the
performance
targets have
to be fulfilled
Vesting date
1,122,902
202.6p
2,275
0%
50% – 8 April 2017
50% – 8 April 2018
31 December
2016
277,082
202.6p
561
100%
8 April 2017
Sharesave
11,076
162.5p1
18
100%
1 June 2017
N/A
N/A
LTI
(200% of base pay)
Deferred STI
(50% of STI)
LTI
(35% of base pay)
LTI
(250% of base pay)
557,750
202.6p
1,130
0%
50% – 8 April 2017
50% – 8 April 2018
31 December
2016
237,566
202.6p
115,688
190.6p
481
221
100%
8 April 2017
N/A
50% – 8 August 2017
50% – 8 August 2018
31 December
2016
0%
786,989
190.6p
1,500
50% – 8 August 2017
50% – 8 August 2018
31 December
2016
0%
Date of grant
Award type
Basis of award
Julian Roberts
LTI
(250% of base pay)
Deferred STI
(50% of STI)
8 April 2014
Nil-cost share option
8 April 2014
Forfeitable shares award
Tax-advantaged share
option
30 April 2014
Paul Hanratty2
8 April 2014
Nil-cost share option
8 April 2014
Forfeitable shares award
8 August 2014 Nil-cost share option
Ingrid Johnson3
8 August 2014 Nil-cost share option
Former executive director
Philip Broadley
8 April 2014
Forfeitable shares award
Deferred STI
(50% of STI)
189,036
202.6
383
100%
8 April 2017
N/A
1 The Sharesave exercise price was set at a 20% discount to the average Old Mutual share price over a three-day period immediately preceding the invitation date
2 The Nil-cost share option and Forfeitable shares award granted to Paul Hanratty on 8 April 2014 were granted to him before he became a director of the Company
3
Ingrid Johnson also received awards over Nedbank shares in relation to her employment at Nedbank, as detailed on page 111
Performance measures for LTI awards over Old Mutual plc shares granted in 2014
l
a
i
c
n
a
n
F
i
j
s
e
v
i
t
c
e
b
o
c
i
g
e
t
a
r
t
S
Total
LTI scorecard
EPS (p) (IFRS AOP-based CAGR*) post-tax
EPS (c) (IFRS AOP-based CAGR*) post-tax
RoE (IFRS AOP-based averaged over three years)
1. Emerging Markets – Africa expansion (excluding banking)
Customer growth in Africa excluding SA (CAGR*)
Profit (AOP) growth in Africa excluding SA (CAGR*) pre-tax including LTIR
2. Old Mutual Wealth
Threshold
5.0%
5.0%
12.0%
10.0%
10.0%
Target
7.5%
7.5%
13.5%
15.0%
15.0%
Maximum
10.0%
10.0%
15.0%
20.0%
20.0%
Weight
15.0%
15.0%
30.0%
10.0%
5.0%
Profit (AOP) growth UK and International (CAGR*) pre-tax
10.0%
15.0%
20.0%
7.5%
3. Restructuring objectives
Group structural changes/key initiatives
4. Risk, governance, culture and reputation
Targets disclosed at the end of the
three-year performance period
Measures of risk, governance, culture and reputation
Assessed against measures and qualitatively
12.5%
5.0%
100.0%
* Compound annual growth over the three-year performance period
Old Mutual plc
Annual Report and Accounts 2014
109
Governance
Scorecard for Strategic Objectives
1. Emerging Markets
■ Core measures of focus are growth in African business outside South Africa, focusing on customers and profit
■ This is in the Life and Short-term insurance business. It excludes banking (currently Nedbank and Central Africa Building Society) and
minority interests
■ The committee will also make a qualitative assessment of the overall delivery of a range of measures against plan.
2. Old Mutual Wealth
■ Growth in AOP is the core measure – UK and International
■ The committee will also make a qualitative assessment of the overall delivery of a range of measures against plan.
3. Restructuring objectives
■ Agreed structural initiatives are commercially sensitive and will be disclosed in the Directors’ Remuneration Report following the end of the
three-year performance period.
4. Risk, governance, culture and reputation
The committee will use a number of measures to assess risk, culture and any impacts on governance and reputation, including the following:
■ Risk assessments against key risk measures and risk appetite – assessed annually and over the three-year period
■ Overall assessment of material breaches in risk, regulatory or governance issues and any reputational impact
■ Annual culture survey results compared to prior year’s results and to international standards measured at Group and business level for
improved scores where needed or maintenance where levels in 2013 were high.
The committee will apply its discretion in determining the final outcomes in relation to the 2014 LTI, and in this regard:
■ It will receive a report from the Chief Risk Officer to confirm that the performance of the Group has been achieved within the stated risk
appetite. Where the risk appetite has been breached, the committee will have discretion to reduce the level of vesting accordingly.
■ It will exercise its discretion to make adjustments where there is a significant negative impact on underlying financial performance which is not
adequately reflected in AOP results (for example, where LTIR adjustments create any inconsistency between AOP and IFRS basic earnings).
Where the Group undergoes a significant change, such as a large disposal, acquisition or restructuring, the committee will review the targets to
assess whether they need to be adjusted to reflect the change, or whether they should be replaced altogether.
TSR multiplier*
A TSR multiplier will be used to adjust the weighted average outcome of the LTI scorecard in the table on the preceding page, as shown below.
TSR will be averaged at the start (Q4 2013) and end (Q4 2016) of the three-year performance period.
Threshold
Target
Maximum
Relative TSR vs. index
4% or more below index
equal to index
4% or more above index
Multiplier
0.85
1.00
1.15
*
Relative TSR performance (calculated 50% against the FTSE 100 Index and 50% against the JSE ALSI) against the above ranges, with a multiplier being set on a linear basis
between the points
110 Old Mutual plc
Annual Report and Accounts 2014
DIRECTORS’REMUNERATION REPORTcontinued Nedbank Scheme interests awarded (audited)
The following table shows STI deferral awards, in the form of restricted share awards over Nedbank shares that were granted to Ingrid Johnson
by Nedbank in 2014, prior to her being appointed as Group Finance Director of the Company. In addition to the awards shown below, she also
elected to use some of her net cash STI to invest 1,345 Nedbank shares under the terms of the Nedbank Voluntary Bonus Share Scheme, in
respect of which a matching award will be granted if: (i) she remains in employment with the Old Mutual Group; (ii) the shares remain in the
scheme for a period of 36 months; and (iii) the relevant performance condition is met (the target being the same target as applies to the Nedbank
Compulsory Bonus Scheme below). Ingrid Johnson waived her rights to two restricted share awards granted in March 2014 before joining the
Company as Group Finance Director.
Date of grant
Award type
Basis of award
Nedbank
shares held
under award
Face value
at date
of grant
£0003
% receivable
if minimum
performance
is achieved
1 April 2014
Nedbank Compulsory
Bonus Share Scheme1
STI deferral
4,371
£55
100%
1 April 2014
Nedbank Compulsory
Bonus Share Scheme2
STI deferral
(time-based only)
4,372
£55
100%
The end of the
period over which
the performance
targets have to
be fulfilled in order
to receive the
matching award
31 December 2016
N/A
Vesting date4
Released from
forfeiture in three
equal tranches after
six, 18 and 30 months
from the date
of award
1 A matching award will be granted if Ingrid Johnson remains in employment with the Old Mutual Group on the third anniversary of the date of grant, retains all of the deferred
Nedbank shares for the full three-year period after award, and a Nedbank performance target, based on the simple average RoE (excluding goodwill) of Nedbank Group being
greater or equal to the simple average cost of equity +2% over the three-year period
2 A matching award will be granted if Ingrid Johnson remains in employment with the Old Mutual Group on the third anniversary of the date of grant and retains all of the
deferred Nedbank shares for the full three-year period after award
3 The face value at the date of grant has been calculated using the price of Nedbank shares at grant, namely R223 per share, converted to sterling using an exchange rate of
R17.8712 to £1
4 Release from forfeiture applies in three equal tranches after six, 18 and 30 months from the date of award. However, the shares must be retained in the scheme until 31 March
2017 in order for Ingrid Johnson to qualify for the matching award
Appointments of executive directors during 2014
The Company announced the appointment of Paul Hanratty as Chief Operating Officer and Ingrid Johnson as Group Finance Director on
14 May 2014, and both joined the Board on 1 July 2014. Details of their remuneration packages were announced at the time, and are set out below:
Element
Paul Hanratty
Annual Base pay
£630,000
Ingrid Johnson
£600,000
Benefits including
pension-related
benefits
STI
LTI for 2014
d
e
x
i
F
l
e
b
a
i
r
a
V
Fixed allowance equal to 35% of base pay for pension and other elective benefits. Core insurance and other agreed benefits
are also paid
Maximum of 150% (50% deferred for three years in the form of a forfeitable shares award) subject to Group financial
performance (60%) and personal scorecard performance (40%)
35% of base pay granted in August 2014 in the form of a nil-cost
share option, 50% vesting after three years and 50% vesting after
four years, subject to the achievement of performance targets
250% of base pay granted in August 2014 in the form of a
nil-cost share option, 50% vesting after three years and 50%
vesting after four years, subject to the achievement of
performance targets
LTI for 2015
onwards
Maximum of 250% of base pay granted in the form of a nil-cost share option, 50% vesting after three years and 50% vesting
after four years, subject to the achievement of performance targets.
Payments to past directors (audited)
There were no payments made to past directors during 2014.
Payments for loss of office (audited)
There were no payments to directors for loss of office during 2014.
Shares in trust and shareholder dilution
At 31 December 2014, there were 121,102,176 shares held in employee share ownership trusts (ESOTs) for the purposes of collaterising some
of the obligations under the Group’s employee share incentive schemes. The strategy is to ensure that, with the exception of Black Economic
Empowerment-related ESOTs, at least sufficient shares are held to satisfy restricted share/forfeitable shares awards. In calculating dilution limits,
any awards that are satisfied by transfer of pre-existing issued shares (such as shares acquired by market purchase through ESOTs) and any
shares comprised in any share option or share award that has lapsed or has been cash-settled are disregarded. At 31 December 2014, the
Company had 2.24% of share capital available under the 5%-in-10-years limit applicable to discretionary share incentive schemes and 6.46%
of share capital available under the 10%-in-10-years limit applicable to all share incentive schemes. The Company has complied with these limits
at all times.
Old Mutual plc
Annual Report and Accounts 2014
111
Governance Directors’ shareholdings and share interests (audited)
Within a period of five years of appointment to the role, the Group Chief Executive is required to build up a holding of shares in the Company
equal in value to 200% of base pay, and the equivalent figure for other executive directors is 150% of base pay. Unvested share awards or
share options and vested but unexercised share options are excluded for the purposes of the calculations. There is no requirement for executive
directors to hold shares or share interests in the Company once they have ceased employment with the Group.
The following table illustrates that both Julian Roberts and Paul Hanratty met their respective requirements at 31 December 2014. Shares have
been valued for these purposes at the year-end price, which was 190.5p per share. There have been no changes to the directors’ shareholdings
between 31 December 2014 and 27 February 2015; however, certain of the nil-cost share options granted in 2012 lapsed on 27 February 2015
due to the partial achievement of performance targets.
Executive director
Julian Roberts
Paul Hanratty
Ingrid Johnson
Share
ownership
requirement
(% of Base pay)
Number of
shares
required
to be held
Number
of shares
owned outright
(including by
connected
persons)
Share
ownership
requirement
met
Vested but
unexercised
share options
Forfeitable
shares awards
not subject to
performance
targets1
Nil-cost share
options
subject to
performance
targets2
Sharesave
share options
not subject to
performance
targets3
200%
150%
150%
955,381
2,014,303
496,063
472,441
824,547
–
Yes
Yes
No
–
–
–
898,731
4,263,018
703,862
2,166,062
–
786,989
11,076
7,031
–
1 Forfeitable shares awards are granted each year in relation to the deferred element of the STI. Julian Roberts and Paul Hanratty hold awards granted on 10 April 2012
(with a market value per share at grant of 157.1p), 8 April 2013 (194.4p) and 8 April 2014 (202.6p). Awards vest on the third anniversary of the date of award
2 Nil-cost share options are granted each year in relation to the LTI. Market value share options are no longer granted to executive directors. Julian Roberts and Paul Hanratty
hold nil-cost share options granted on 11 April 2011 (with a market value per share at grant of 144.7p), 10 April 2012 (157.1p), 8 April 2013 (194.4p) and 8 April 2014 (202.6p).
Paul Hanratty and Ingrid Johnson also hold nil-cost share options granted on 8 August 2014 with a market value per share at grant of 190.6p. The total shares held under option
include the unvested options granted in 2011 and 2012, for which the performance targets were partially achieved as well as, for the options granted in 2012, the shares that
lapsed on 27 February 2015 due to the partial achievement of the performance targets. Vesting of the nil-cost share options occurs 50% on the third anniversary and 50% on
the fourth anniversary of the date of grant
Julian Roberts and Paul Hanratty hold tax-advantaged share options under the Old Mutual plc 2008 Sharesave Plan, originally granted to Julian Roberts on 30 April 2014 with an
exercise price of 162.5p per share and to Paul Hanratty on 19 April 2012 with an exercise price of 128p per share. The exercise prices were determined at 20% below the average
of the Company’s MMQ over a three-day period immediately preceding the invitation dates. The options will become exercisable on 1 June 2017 and 1 June 2015 respectively
3
Share options exercised during 2014 (audited)
The following table shows all share options exercised by the executive directors during 2014:
Executive director
Type of option
Date of grant
Nil-cost
Nil-cost
11 April 2011
13 May 2010
1,402,805
15 May 2014
Shares
exercised
617,528
Exercise date
11 April 2014
Sharesave
9 April 2009
48,906
2 June 2014
Market value2
8 April 2009
400,000
11 March 2014
Nil-cost2
11 April 2011
Nil-cost2
13 May 2010
287,696
401,405
11 April 2014
15 May 2014
Exercise
price
Nil
Nil
32.0p
54.1p
Nil
Nil
Market value
8 April 2009
400,000
8 August 2014
54.1p
Nil-cost
Nil-cost
11 April 2011
13 May 2010
410,474
929,569
11 April 2014
15 May 2014
Nil
Nil
Share price
at date
of exercise
198.9p
200.8p
201.6p
191.7p
198.9p
200.8p
186.7p
198.9p
200.8p
Gain1
£000
1,228
2,816
83
550
572
806
530
817
1,866
Julian Roberts
Paul Hanratty
Former executive director
Philip Broadley
1
2
The full value of the shares on the date of exercise is shown. However, in respect of the nil-cost share options, Paul Hanratty sold 324,528 shares and retained 364,573 shares.
He sold all of the shares relating to the exercise of the market value share options. Julian Roberts sold the shares resulting from the nil-cost share options but retained his
Sharesave shares. Philip Broadley sold all of the exercised shares
These options were exercised by Paul Hanratty prior to him becoming a director of the Company
112 Old Mutual plc
Annual Report and Accounts 2014
DIRECTORS’REMUNERATION REPORTcontinued There are no share ownership requirements for the non-executive directors. Shares owned by the Chairman and the other non-executive directors
holding office at 31 December 2014 (including holdings by connected persons) are shown below:
Non-executive director
Patrick O’Sullivan
Mike Arnold
Zoe Cruz
Alan Gillespie
Danuta Gray
Adiba Ighodaro
Reuel Khoza
Roger Marshall
Nkosana Moyo
Nonkululeko Nyembezi-Heita
Old Mutual plc shares held at 31 December 2014
100,000
26,475
–
13,000
14,175
–
3,566
45,000
10,000
3,566
There have been no changes to the interests in shares owned by the Chairman and the other non-executive directors between 31 December 2014
and 27 February 2015.
Performance graphs
The charts below show the Company’s six-year annual TSR performance against the FTSE 100 Index and JSE ALSI. These indices were selected
because: (i) the Company is part of those indices; and (ii) due to the international structure and diversity of the Group’s businesses, the two broad
market indices shown are the only relevant market comparators available.
The charts show the value of TSR (assuming dividends reinvested) at each year-end from 31 December 2008 to 31 December 2014 on £100/R100
invested in Old Mutual plc shares compared with the TSR (calculated on the same basis) on £100/R100 invested in the FTSE 100 Index and the JSE
ALSI at the same dates.
Old Mutual plc TSR performance against FTSE 100:
Six-year performance to 31 December 2014
Old Mutual plc TSR performance against JSE ALSI:
Six-year performance to 31 December 2014
450%
400%
350%
300%
250%
200%
150%
100%
50%
0%
Old Mutual (LSE)
FTSE 100
550%
500%
450%
400%
350%
300%
250%
200%
150%
100%
50%
0%
31 Dec
2008
31 Dec
2009
31 Dec
2010
31 Dec
2011
31 Dec
2012
31 Dec
2013
31 Dec
2014
Old Mutual (JSE)
JSE ALSI
31 Dec
2008
31 Dec
2009
31 Dec
2010
31 Dec
2011
31 Dec
2012
31 Dec
2013
31 Dec
2014
Source: Datastream
Group Chief Executive’s remuneration over the last six years
Julian Roberts
Single figure
STI payout against maximum opportunity
LTI vesting against maximum opportunity
2009
£000
2,163
77%
0%
2010
£000
2,447
98%
0%
2011
£000
8,521
92%
100%
2012
£000
7,881
88%
80%
2013
£000
4,817
85%
84%
2014
£000
4,212
79%
69%
Old Mutual plc
Annual Report and Accounts 2014
113
Governance Percentage change in the remuneration of the Group Chief Executive
The table below shows the percentage change in the remuneration of the Group Chief Executive (from 2013 to 2014) compared to that for
UK-based employees of the Old Mutual Group. The committee has selected employees in the UK, as the executive directors are employed in
the UK and have a similar remuneration structure to those employees.
Element
Base pay
Taxable benefits
STI
Julian Roberts
% change
2.8%
30.6%
(3.9%)
Average UK-based employee1
% change
3.0%
3.0%
(4.4%)
1 UK-based employees excluding employees in Nedbank, Old Mutual Global Investors (UK) Limited and Institutional Asset Management
Relative importance of spend on pay
The table below illustrates the Group’s spend on pay compared with distributions to shareholders:
Dividends paid to ordinary equity holders
Dividends paid to Nedbank minority equity holders
Remuneration paid to all Group employees
2014
£m
394
119
2013
£m
336
114
1,860
1,904
Year-on-year change
£m
58
5
(44)
%
17.3%
4.4%
(2.3%)
Implementation of remuneration policy in 2015
The Directors’ Remuneration Policy will be implemented in 2015 as follows:
Base pay
The table below shows the changes to base pay for 2015, which are below the average increases of 3% for other employees in the UK:
Executive director
Julian Roberts
Paul Hanratty
Ingrid Johnson
2015
£000
930
645
615
2014
£000
910
630
600
% increase
2.20%
2.38%
2.50%
STI – 2015 performance year
For 2015, there has been no change to the maximum award of 150% of base pay or to the structure of the STI from those that applied in 2014.
The split in financial metrics and personal scorecard objectives is 75% and 25% respectively for Julian Roberts, and 60% and 40% respectively
for Paul Hanratty and Ingrid Johnson.
The agreed financial measures for 2015 are EPS in constant currency and RoE. These have been used as the core measures of financial
performance for a number of years, as they are the most meaningful central measures of the effective use of capital and annual profit as the
Group executes its strategy to grow the business through investment, integration and collaboration initiatives. The committee will disclose the
STI targets retrospectively in the 2015 Directors’ Remuneration Report as the committee believes that the STI targets are commercially sensitive
and that it would be detrimental to the Company’s interests to disclose them at the start of the performance period.
The committee considers corporate performance on environmental, social and governance issues, to the extent relevant, when setting executive
directors’ remuneration.
STI performance measures
EPS in constant currency
RoE
Group financial metrics – subtotal
Personal scorecard objectives1
Total weight
Julian Roberts
Paul Hanratty
Ingrid Johnson
Weighting per element (out of 100)
37.5
37.5
75
25
100
30
30
60
40
100
30
30
60
40
100
1 Personal scorecard objectives are set under the headings of: (i) leading the business; (ii) core responsibilities; and (iii) leadership behaviours
114 Old Mutual plc
Annual Report and Accounts 2014
DIRECTORS’REMUNERATION REPORTcontinued Performance measures for LTI awards over Old Mutual plc shares to be granted in 2015
For 2015, there has been no change to the maximum LTI award of 250% of base pay (inclusive of the TSR multiplier). The structure has
changed so that 70% is now based on Group financial metrics and 30% on key strategic objectives (60% Group financial metrics and 40%
key strategic objectives in 2014).
LTI scorecard
EPS (p) (IFRS AOP-based CAGR*) post-tax
Financial
EPS (c) (IFRS AOP-based CAGR*) post-tax
RoE (IFRS-AOP based averaged over three years)
1. In Africa, build a financial services champion
Threshold
5%
5%
12.0%
Target
7.5%
7.5%
13.5%
Maximum
10%
10%
15.0%
In assessing performance against this objective, the committee will consider: (i) the quantum and quality/sustainability of
synergy value achieved against the R1 billion target over the period; and (ii) growth in the Rest of Africa, considering the
quality of investment made, the effectiveness of delivering integration plans and building market presence
2. In the UK, build the leading retail investment business
In assessing performance against this objective, the committee will consider the effectiveness of transforming the business,
integrating acquisitions and delivering key strategic projects
3. Delivery of our culture and Responsible Business objectives
In assessing performance against this objective, the committee will have particular focus on the effectiveness of key culture
initiatives and KPI targets across the Group, along with success of Old Mutual’s financial wellbeing campaigns and responsible
investment objectives
Strategic
objectives
Total
Weight
17.5%
17.5%
35.0%
12.5%
10.0%
7.5%
100.0%
* Compound annual growth over the three-year performance period
The committee will apply its discretion in determining the final outcomes in relation to the 2015 LTI, and in this regard:
■ It will receive a report from the Chief Risk Officer to confirm that the performance of the Group has been achieved within the stated risk
appetite. Where the risk appetite has been breached, the committee will have discretion to reduce the level of vesting accordingly
■ It will exercise its discretion to make adjustments where there is a significant negative impact on underlying financial performance which is not
adequately reflected in AOP results (for example, where LTIR adjustments create any inconsistency between AOP and IFRS basic earnings).
Where the Group undergoes a significant change, such as a large disposal, acquisition or restructuring, the committee will review the targets to
assess whether they need to be adjusted to reflect the change, or whether they should be replaced altogether.
TSR multiplier*
A TSR multiplier will be used to adjust the weighted average outcome of the LTI scorecard in the table shown above, as follows. TSR will be
averaged at the start (Q4 2014) and end (Q4 2017) of the three-year performance period.
Threshold
Target
Maximum
Relative TSR vs index
4% or more below index
equal to index
4% or more above index
Multiplier
0.85
1.00
1.15
*
Relative TSR performance (calculated 50% against the FTSE 100 Index and 50% against the JSE ALSI) against the above ranges, with a multiplier being set on a linear basis
between the points
Old Mutual plc
Annual Report and Accounts 2014
115
Governance Introduction of claw back and amendments to automatic Good Leaver provisions
In response to the implementation of the revised UK Corporate Governance Code, the Company has updated its malus provisions and has also
introduced claw back on cash STI and vested LTI awards as follows:
Criteria
Malus
■ Misleading or misstated financial results
■ Loss due to failure to observe risk management policies
■ Gross misconduct
■ Actions leading to reputational damage
Claw back
■ Misleading or misstated financial results
■ Loss due to failure to observe risk management policies
■ Gross misconduct
Awards impacted and period applicable (net of statutory deductions basis
for claw back)
■ Cash STI – during the period between the end of the performance
period and the payment date
■ Unvested deferred STI awards – during the three-year performance
period
■ Unvested LTI awards – three or four years matching the vesting period
■ Cash STI – for a three-year period following the payment date
■ Vested LTI awards – for two years if three-year vesting and for one
year if four-year vesting
These provisions take effect immediately for any new awards granted in respect of performance periods beginning on or after 1 January 2015.
It has also been decided that, for future share awards, retirement will no longer be considered an automatic Good Leaver reason for employees
based in the UK at the date of award. Retirement may be considered for Good Leaver status under the discretionary Good Leaver provisions.
Non-executive directors’ fees
The annual fees payable to the Chairman and to the other non-executive directors in 2014 and 2015, by role, are set out below:
Role
Chairman
Senior Independent Director
Board fee
Chairman of the Board Risk Committee
Member of the Board Risk Committee
Chairman of the Group Audit Committee
Member of the Group Audit Committee
Member of the Nomination Committee
Chairman of the Remuneration Committee
Member of the Remuneration Committee
Average payment per non-executive director (excluding the Chairman) based on the Board and Board
committee structure in place at 31 December 2014
Consideration by the directors of matters relating to directors’ remuneration
2015
£000
380
2014
£000
370
15
59
30
10
30
10
5
30
10
85
15
57
30
10
30
10
5
30
10
84
Committee meetings and members
The following, all of whom are or were at the relevant time independent non-executive directors of the Company, served as members of the
committee during the year:
Non-executive director
Danuta Gray
Zoe Cruz
Alan Gillespie
Roger Marshall
Nkosana Moyo
Position
Chairman
Member
Member
Member
Member
Period on the committee
March 2013 to date (Chairman since May 2014)
January 2014 to date
November 2010 to date (Chairman May 2013 to May 2014)
May 2013 to date
January 2014 to date
Bongani Nqwababa
Former member
April 2010 to January 2014
Meetings
attended
Meetings
not attended
8
8
8
7
7
–
–
–
–
1
1
–
The committee Chairman has access to and regular contact with the Group Human Resources Department independently of the executive
directors. During 2014, the committee met eight times. The Board accepted the recommendations made by the committee during the year without
amendment. Paul Forsythe, Assistant Company Secretary, acted as Secretary to the committee.
116 Old Mutual plc
Annual Report and Accounts 2014
DIRECTORS’REMUNERATION REPORTcontinued Advisers to the committee
As foreshadowed in the 2013 Directors’ Remuneration Report, a review of the committee’s independent adviser was undertaken following Danuta
Gray’s appointment as Chairman. Following a competitive tender process, PwC was appointed as the independent adviser to the committee in
October 2014, replacing Alan Judes, who had provided independent advice to the committee for many years. PwC provides wide-ranging advice
and services across the Group on matters including transactions, tax, Internal Audit and IT security. In its capacity as adviser to the committee,
PwC will work with management to prepare recommendations for the committee’s consideration and will provide advice to the committee on
benchmarking of total remuneration packages for the executive directors and other senior employees, the design of short-term and long-term
incentive arrangements (including for employees of subsidiary companies), updating the committee on corporate governance best practice,
advice in relation to the measurement of performance for incentive purposes and any other matters within the committee’s terms of reference.
PwC also provides advice to management on remuneration matters.
The committee undertakes a review of the advice it receives to assess whether it is objective and independent; it also satisfies itself that there are no
conflicts of interest arising between it, the advisers and the Company. PwC is a signatory to the Remuneration Consultants’ Group Code of Conduct.
Work undertaken by PwC for the committee is charged on a time basis and for 2014 was £26,420 excluding VAT.
Work undertaken by Alan Judes for the committee during 2014 included advising the committee in connection with the formulation of the
Directors’ Remuneration Policy, the disclosure of that policy, the total remuneration packages for the executive directors, the design of STI and
LTI arrangements including arrangements for employees of subsidiary companies, updating the committee on corporate governance best
practice and requirements for disclosure under newly enacted and promulgated legislation for departing directors, advising in connection
with the measurement of performance for incentive purposes, and attending meetings of the committee. Fees paid to Alan Judes, through his
consultancy Strategic Remuneration, were charged on a time basis and for 2014 were £66,800 excluding VAT (2013: £120,000 excluding VAT).
Strategic Remuneration is a member of the Remuneration Consultants Group and adheres to that body’s Code of Conduct.
Don Schneider, Ian Luke and Kevin Stacey of Group Human Resources assisted the committee during the year. Group Human Resources provided
supporting materials for matters that came before the committee, including comparative data and justifications for proposed base pay, benefits,
annual incentive plans, share awards and criteria for performance targets and appraisals against those targets. Patrick O’Sullivan, Julian Roberts
and Sue Kean gave advice to the committee in assessing the performance of the Group Chief Executive, other members of the Group Executive
Committee and the assessment of risk, respectively.
Voting at General Meetings
The voting results at AGMs on resolutions relating to our Directors’ Remuneration Reports and the Directors’ Remuneration Policy over the last
two years were as follows:
Year of
report
2013
2013
2012
Type
Date of AGM
Votes for
Votes for %
Votes
against
Votes
against %
Total votes
cast (excluding
votes withheld)
Votes
withheld
Directors’
Remuneration Policy
Directors’
Remuneration Report
Directors’
Remuneration Report
15 May 2014
3,280,532,172
97.17
95,664,621
2.83
3,376,196,793
27,097,233
15 May 2014
3,253,282,521
97.04
99,343,587
2.96
3,352,626,108
50,669,930
9 May 2013
2,933,771,399
97.94
61,752,305
2.06
2,995,523,704
123,524,253
Consideration of shareholder views
The committee considers shareholder feedback in relation to the Directors’ Remuneration Report for the prior year at its first meeting following
the AGM. This feedback, as well as any additional feedback received during any other meetings with shareholders, is then considered as part of
the Company’s annual review of remuneration arrangements for the following year. Where any significant change is proposed, the Chairman of
the committee will inform major shareholders in advance, and will offer a meeting to discuss these.
Old Mutual plc
Annual Report and Accounts 2014
117
Governance Contents
Statement of directors’ responsibilities
in respect of the Annual Report and
Accounts and the financial statements
Independent Auditor’s Report to the
members of Old Mutual plc only
Consolidated income statement
Consolidated statement of
comprehensive income
Reconciliation of adjusted operating
profit to profit after tax
Consolidated statement of
financial position
Consolidated statement of cash flows
Consolidated statement of changes
in equity
120
121
124
125
126
128
129
130
Notes to the consolidated
financial statements
A: Significant accounting policies
B: Segment information
C: Other key performance information
D: Other income statement notes
E: Financial assets and liabilities
F: Other statement of financial
position notes
G: Interests in subsidiaries, associates
and joint arrangements
H: Other notes
I: Discontinued operations and
disposal groups held for sale
Financial statements of the Company
134
134
140
150
156
161
201
212
218
228
229
118 Old Mutual plc
Annual Report and Accounts 2014
FINANCIALS
In this section, we present the results of the
Group and the Parent Company in accordance
with International Financial Reporting
Standards (IFRS). The IFRS results are also
presented on an adjusted basis to reflect
management’s view of the underlying
long-term performance of the Group.
FINANCIALS
In this section, we present the results of the
Group and the Parent Company in accordance
with International Financial Reporting
Standards (IFRS). The IFRS results are also
presented on an adjusted basis to reflect
management’s view of the underlying
long-term performance of the Group.
Old Mutual plc
Annual Report and Accounts 2014
119
Financials GROUP FINANCIAL STATEMENTS
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
in respect of the Annual Report and Accounts and the financial statements
The directors are responsible for preparing the Annual Report and Accounts and the Group and Parent Company financial statements in
accordance with applicable law and regulations.
Company law requires the directors to prepare Group and Parent Company financial statements for each financial year. Under that law, they are
required to prepare the Group financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the
EU and applicable law and have elected to prepare the Parent Company financial statements on the same basis.
Under company law, the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state
of affairs of the Group and Parent Company and of their profit or loss for that period. In preparing each of the Group and Parent Company
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 they have been prepared in accordance with IFRS as adopted by the EU and
■ Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Parent Company will
continue in business.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Parent Company’s transactions
and disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that its financial
statements comply with the Companies Act 2006. 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.
Under applicable law and regulations, the directors are also responsible for preparing a Strategic Report, Directors’ Report, Directors’
Remuneration Report and Corporate Governance Statement that comply with that law and those regulations.
The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website.
Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Responsibility statement of the directors in respect of the annual financial report
We confirm that to the best of our knowledge:
■ The financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole, and
■ The Strategic Report includes a fair review of the development and performance of the business and the position of Old Mutual plc and the
undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
We consider the Annual Report and Accounts, taken as a whole, are fair, balanced and understandable and provide the information necessary
for shareholders to assess the Group’s position and performance, business model and strategy.
Julian Roberts
Group Chief Executive
Ingrid Johnson
Group Finance Director
27 February 2015
120 Old Mutual plc
Annual Report and Accounts 2014
GROUP FINANCIAL STATEMENTS
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS
OF OLD MUTUAL PLC ONLY
For the year ended 31 December 2014
Opinions and conclusions arising from our audit
1. Our opinion on the financial statements is unmodified
We have audited the financial statements of Old Mutual plc for the year ended 31 December 2014, which comprise the Consolidated Income
Statement, the Consolidated Statement of Comprehensive Income, the Consolidated and Parent Company Statements of Financial Position, the
Consolidated and Parent Company Cash Flow Statements, the Consolidated and Parent Company Statements of Changes in Equity and the
related notes which include the reconciliation of adjusted operating profit to profit after tax.
In our opinion:
■ The financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 December 2014 and
of the Group’s profit for the year then ended
■ The Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by
the European Union (IFRSs as adopted by the EU)
■ The Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in
accordance with the provisions of the Companies Act 2006, and
■ The financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group
financial statements, Article 4 of the IAS Regulation.
2. Our assessment of risks of material misstatement
In arriving at our audit opinion above on the financial statements the risks of material misstatement that had the greatest effect on our audit were
as follows:
■ Loans and advances (£34,857 million)
Refer to page 84 (Audit Committee Report), pages 136 to 137 and 163 (accounting policy) and the disclosures in notes A3, E1, E2 and E3 to the
financial statements.
The risk:
The Group’s loans and advances impairment assessment requires the exercise of judgement and the use of subjective assumptions. Due to the
significance of loans and advances and the related estimation uncertainty, this is considered to be a key audit risk, both in respect of the mature,
established clusters and the unsecured lending books within Nedbank, as well as the Emerging Markets exposure through the newly
consolidated Old Mutual Finance.
Our response:
For all banking clusters, our procedures included testing the design, implementation and operating effectiveness of key controls in operation
over the loan approval, administration and monitoring processes. We involved our own internal valuation specialists to assess each of the
portfolio loan loss provisioning models employed by the Group and to compare the Group’s assumptions to externally available data in
relation to key inputs such as historical default rates, recovery rates, collateral valuation, and economic growth rates. We also performed
detailed testing over the specific provisions held against loans and advances, by inspecting latest correspondence and Credit Committee
minutes to inform our work and challenge assumptions where necessary, assessing collateral values and re-performing key calculations.
■ Policyholder liabilities (£79,679 million)
Refer to page 84 (Audit Committee Report), pages 137 to 138 and 188 to 191 (accounting policy) and the disclosures in notes A3, E1, E2, and E8
to the financial statements.
The risk:
The main risk associated with policyholder liabilities is in respect of the insurance contracts within the life businesses; Emerging Markets and
Old Mutual Wealth. Judgement is required over the variety of uncertain future outcomes, including the policy for creating and releasing
discretionary margins. Economic assumptions, such as investment return, discount rates, and operating assumptions, such as mortality and
persistency, are the key inputs used to estimate the valuation of these long-term liabilities.
Our response:
Our procedures in this area included testing the design, implementation and operating effectiveness of key controls over the identification,
measurement and management of the Group’s calculation of insurance liabilities and evaluation of the consistency of methodologies and the
appropriateness of the assumptions used by the Group. We involved our own internal actuarial specialists to assist us in our challenge of the
assumptions used and the process followed for setting and updating these assumptions, particularly around persistency, expense and
mortality/morbidity assumptions. This included checking the appropriateness of the data used in management’s analysis prepared to set the
assumptions. Our challenge was provided in the context of our own industry knowledge, external data and our views of experience to date, an
understanding of which was enhanced through our attendance at the Group’s own Independent Review Committee meetings. In respect of the
discretionary reserves held within the South African business we checked and challenged the Group’s use and application of the established
policy, with reference to industry-wide practice and applicable accounting standards.
Old Mutual plc
Annual Report and Accounts 2014
121
Financials GROUP FINANCIAL STATEMENTS
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS
OF OLD MUTUAL PLC ONLY continued
For the year ended 31 December 2014
■ Goodwill and intangibles (£2,763 million)
Refer to page 85 (Audit Committee Report), page 201 (accounting policy) and the disclosures in notes F1 to the financial statements.
The risk:
Goodwill and intangible assets represent a significant audit caption on the balance sheet and the determination of the recoverable amount of
intangible assets (both acquired and internally generated) and goodwill is complex and typically requires a high level of judgement, taking into
account the different economic environments in which the Group operates. The most significant judgements arise over the forecast cash flows
and the discount rate applied in the value-in-use valuation models. We consider that the greatest risk is within Old Mutual Wealth but significant
goodwill also exists in Institutional Asset Management and the balance will increase as the Group pursues acquisitions.
Our response:
Our procedures included challenging the cash flow forecasts and the corresponding assumptions, such as discount rates, applied by the Group
in the consideration of potential impairment of intangible assets, based on our understanding of the relevant business and the industry and
economic environment in which it operates. We compared forecasts to business plans and also previous forecasts to actual results to assess the
performance of the business and the accuracy of forecasting and considered the appropriateness of the scenarios used, in the context of our
wider business understanding. We involved our own valuation specialists to assist us in evaluating the assumptions and methodologies used by
the Group, in particular those relating to the discount rates and in evaluating these assumptions with reference to inputs we derived ourselves.
■ Taxation (£200 million)
Refer to page 84 (Audit Committee Report), page 138 (accounting policy) and the disclosures in notes F7 & H4 to the financial statements.
The risk:
Accruals for uncertain tax positions require the Group to make judgements and estimates in relation to tax exposures and in response to
enquiries and challenges raised by the tax authorities. This is one of the key judgemental areas that our audit is concentrated on due to the
Group operating in a number of different tax jurisdictions and the complexities of and developments in international tax legislation, particularly
in relation to South Africa given the proportion of the Group’s income earned there.
Our response:
In understanding the accruals held, we inspected the correspondence with the relevant tax authorities and associated advice and held
discussions with relevant members of management. We involved our own local and international tax specialists to assist us in analysing the
Group’s tax positions and challenged positions taken by the Group in determining tax provisions based on our knowledge and experiences of
the application of the international and local legislation by relevant authorities and courts.
For all of the risk areas set out above, we have assessed whether the Group’s disclosures about the sensitivity of the relevant financial statement
items to changes in the respective key assumptions appropriately reflect the associated risks and comply with the requirements of relevant
accounting standards.
3. Our application of materiality and an overview of the scope of our audit
The materiality for the Group financial statements as a whole was set at £80 million, determined with reference to a benchmark of Group profit
before taxation. Materiality represents 5.2% of Group profit before tax. In normalising the benchmark, we considered certain of the Group’s
AOP adjustments.
We report to the Audit Committee any corrected and uncorrected identified misstatements exceeding £4 million in addition to other identified
misstatements that warranted reporting on qualitative grounds.
Of the Group’s six business units we subjected all to audits for Group reporting purposes, being the Emerging Markets, Old Mutual Wealth,
Nedbank, Institutional Asset Management, Bermuda and Group Head Office businesses. The component audit teams at each of the business
units undertook their own scoping exercises, with oversight from the Group team, to ensure sufficient audit coverage to support their own
reporting to the Group team. Our work covered 93% of total revenues, 99% of profit before tax and 92% of total Group assets.
The Group audit team instructed component auditors as to the significant areas to be covered, including the relevant risks detailed above and the
information to be reported back. The Group audit team approved the component materialities which ranged from £32 million to £65 million,
having regard for the mix of size and risk profile of the Group across the components.
To support the audit instructions sent to our component teams, the Group audit team visited five component locations in South Africa, the US,
Bermuda and elsewhere in the UK for planning and risk assessment meetings and maintained regular communication with the auditors at these
locations throughout the audit cycle to discuss work progress and identify matters of relevance to our audit of the Group financial statements. At
these visits and meetings, the status of any issues being reported to the Group audit team was discussed in detail, and any further work required
by the Group audit team was then performed by the component auditor. The Senior Statutory Auditor, in conjunction with other senior staff in the
Group audit team, also attended Audit Committee meetings held at the significant components to understand key risks and audit issues at a
component level which may affect the Group financial statements.
122 Old Mutual plc
Annual Report and Accounts 2014
4. Our opinion on other matters prescribed by the Companies Act 2006 is unmodified
In our opinion:
■ The part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006, and
■ The information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is
consistent with the financial statements.
5. We have nothing to report in respect of the matters on which we are required to report by exception
Under ISAs (UK and Ireland) we are required to report to you if, based on the knowledge we acquired during our audit, we have identified other
information in the Annual Report that contains a material inconsistency with either that knowledge or the financial statements, a material
misstatement of fact, or that is otherwise misleading.
In particular, we are required to report to you if:
■ We have identified material inconsistencies between the knowledge we acquired during our audit and the directors’ statement that they
consider that the Annual Report and financial statements taken as a whole is fair, balanced and understandable and provides the information
necessary for shareholders to assess the Group’s performance, business model and strategy, or
■ The Audit Committee Report does not appropriately address matters communicated by us to the Audit Committee.
Under the Companies Act 2006 we are required to report to you if, in our opinion:
■ Adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from
branches not visited by us, or
■ The Parent Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the
accounting records and returns, or
■ Certain disclosures of directors’ remuneration specified by law are not made, or
■ We have not received all the information and explanations we require for our audit.
Under the Listing Rules we are required to review:
■ The directors’ statement, set out on page 92, in relation to going concern, and
■ The part of the Corporate Governance Statement relating to the Parent Company’s compliance with the ten provisions of the 2012 UK
Corporate Governance Code specified for our review.
We have nothing to report in respect of the above responsibilities.
Scope of report and responsibilities
As explained more fully in the statement of directors’ responsibilities set out on page 120, the directors are responsible for the preparation of the
financial statements and for being satisfied that they give a true and fair view. A description of the scope of an audit of financial statements is
provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate. This report is made solely to the Company’s
members as a body and is subject to important explanations and disclaimers regarding our responsibilities, published on our website at
www.kpmg.com/uk/auditscopeukco2014a, which are incorporated into this report as if set out in full and should be read to provide an
understanding of the purpose of this report, the work we have undertaken and the basis of our opinions.
Philip Smart (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square
London, E14 5GL
27 February 2015
Old Mutual plc
Annual Report and Accounts 2014
123
Financials
GROUP FINANCIAL STATEMENTS
CONSOLIDATED INCOME STATEMENT
For the year ended 31 December 2014
Revenue
Gross earned premiums
Outward reinsurance
Net earned premiums
Investment return (non-banking)
Banking interest and similar income
Banking trading, investment and similar income
Fee and commission income, and income from service activities
Other income
Total revenue
Expenses
Claims and benefits (including change in insurance contract provisions)
Reinsurance recoveries
Net claims and benefits incurred
Change in investment contract liabilities
Losses on loans and advances
Finance costs
Banking interest payable and similar expenses
Fee and commission expenses, and other acquisition costs
Change in third-party interest in consolidated funds
Other operating and administrative expenses
Total expenses
Share of associated undertakings’ and joint ventures’ profit after tax
Loss on disposal of subsidiaries, associated undertakings and strategic investments
Profit before tax
Income tax expense
Profit from continuing operations after tax
Discontinued operations
(Loss)/profit from discontinued operations after tax
Profit after tax for the financial year
Attributable to
Equity holders of the parent
Non-controlling interests
Ordinary shares
Preferred securities
Profit after tax for the financial year
Earnings per share
Basic earnings per share based on profit from continuing operations (pence)
Basic earnings per share based on profit from discontinued operations (pence)
Basic earnings per ordinary share (pence)
Diluted basic earnings per share based on profit from continuing operations (pence)
Diluted basic earnings per share based on profit from discontinued operations (pence)
Diluted basic earnings per ordinary share (pence)
Weighted average number of ordinary shares (millions)
124 Old Mutual plc
Annual Report and Accounts 2014
£m
Year ended
31 December
2014
Year ended
31 December
2013
Notes
B2
D2
D3
D4
D5
D6
D7
D8
D9
G2
C1(c)
D1
I1
F10(a)(i)
F10(a)(ii)
C2(a)
C2(b)
C2(a)
3,209
(308)
2,901
6,304
3,057
197
2,894
125
15,478
(4,098)
215
(3,883)
(3,544)
(252)
(54)
(1,672)
(863)
(322)
(3,548)
3,701
(317)
3,384
9,986
3,050
195
3,095
100
19,810
(5,410)
246
(5,164)
(5,873)
(368)
(81)
(1,616)
(976)
(564)
(3,653)
(14,138)
(18,295)
26
(2)
1,364
(462)
902
(50)
852
582
252
18
852
13.5
(1.1)
12.4
12.5
(1.0)
11.5
21
(4)
1,532
(552)
980
3
983
705
259
19
983
14.9
0.1
15.0
13.8
0.1
13.9
4,485
4,442
GROUP FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF COMPREHENSIVE
INCOME
For the year ended 31 December 2014
Profit after tax for the financial year
Other comprehensive income for the financial year
Items that will not be reclassified subsequently to profit or loss
Fair value movements
Property revaluation
Measurement movements on defined benefit plans
Income tax on items that will not be reclassified subsequently to profit or loss
Items that may be reclassified subsequently to profit or loss
Fair value movements
Net investment hedge
Available-for-sale investments
Fair value gains/(losses)
Recycled to profit or loss
Exchange difference recycled to profit or loss on disposal of business
Shadow accounting
Currency translation differences on translating foreign operations
Other movements
Income tax on items that may be reclassified subsequently to profit or loss
Total other comprehensive income for the financial year
Total comprehensive income for the financial year
Attributable to
Equity holders of the parent
Non-controlling interests
Ordinary shares
Preferred securities
Total comprehensive income for the financial year
£m
Year ended
31 December
2014
Year ended
31 December
2013
Notes
852
983
D1(c)
D1(c)
22
2
6
30
(9)
21
(20)
(85)
(5)
(68)
(18)
(5)
(189)
(159)
693
441
234
18
693
23
70
(12)
81
43
(5)
(9)
–
–
(1,257)
9
2
(1,217)
(1,136)
(153)
(96)
(76)
19
(153)
Old Mutual plc
Annual Report and Accounts 2014
125
Financials GROUP FINANCIAL STATEMENTS
RECONCILIATION OF ADJUSTED OPERATING PROFIT
TO PROFIT AFTER TAX
For the year ended 31 December 2014
Core operations
Emerging Markets
Nedbank
Old Mutual Wealth
Institutional Asset Management
Finance costs
Long-term investment return on excess assets
Net interest payable to non-core operations
Corporate costs
Other net (costs)/income
Adjusted operating profit before tax
Adjusting items
Non-core operations
Profit before tax (net of policyholder tax)
Income tax attributable to policyholder returns
Profit before tax
Total tax expense
Profit from continuing operations after tax
(Loss)/profit from discontinued operations after tax
Profit after tax for the financial period
Adjusted operating profit after tax attributable to ordinary equity holders of the parent
Adjusted operating profit before tax
Tax on adjusted operating profit
Adjusted operating profit after tax
Non-controlling interests – ordinary shares
Non-controlling interests – preferred securities
Adjusted operating profit after tax attributable to ordinary equity holders of the parent
Adjusted weighted average number of shares (millions)
Adjusted operating earnings per share (pence)
£m
Year ended
31 December
2014
Year ended
31 December
2013
Notes
B3
B3
B3
B3
B3
B3
C1(a)
B3
D1(d)
D1(a)
I1
617
770
227
131
1,745
(78)
24
(5)
(55)
(26)
1,605
(301)
1
1,305
59
1,364
(462)
902
(50)
852
594
797
217
111
1,719
(92)
43
(11)
(54)
7
1,612
(286)
32
1,358
174
1,532
(552)
980
3
983
£m
Year ended
31 December
2014
Year ended
31 December
2013
1,605
(439)
1,166
(280)
(18)
868
4,845
17.9
1,612
(424)
1,188
(279)
(19)
890
4,836
18.4
Notes
B3
D1(d)
F10(a)(iii)
F10(a)(ii)
B3
C2(c)
C2(c)
126 Old Mutual plc
Annual Report and Accounts 2014
Basis of preparation of adjusted operating profit
Adjusted operating profit (AOP) reflects the directors’ view of the underlying long-term performance of the Group. AOP is a measure of
profitability which adjusts the IFRS profit measures for the specific items detailed in note C1 and, as such, it is a non-GAAP measure.
The reconciliation set out above explains the differences between AOP and profit after tax as reported under IFRS.
For core life assurance and property & casualty businesses, AOP is based on a long-term investment return, including returns on investments held
by life funds in Group equity and debt instruments, and is stated net of income tax attributable to policyholder returns. For all core businesses,
AOP excludes goodwill impairment, the impact of accounting for intangibles acquired in a business combination and costs related to completed
acquisitions, revaluations of put options related to long-term incentive schemes, profit/(loss) on acquisition/disposal of subsidiaries, associated
undertakings and strategic investments, fair value profits/(losses) on certain Group debt instruments and costs related to the fundamental
restructuring of continuing businesses. AOP includes dividends declared to holders of perpetual preferred callable securities. Old Mutual
Bermuda and Nordic are treated as non-core and discontinued operations in the AOP disclosure. As such they are not included in AOP. Refer to
note B1 for further information on the basis of segmentation.
Adjusted operating earnings per share is calculated on the same basis as AOP. It is stated after tax attributable to AOP and non-controlling
interests. It excludes income attributable to Black Economic Empowerment trusts of listed subsidiaries. The calculation of the adjusted weighted
average number of shares includes own shares held in policyholders’ funds and Black Economic Empowerment trusts.
Old Mutual plc
Annual Report and Accounts 2014
127
Financials GROUP FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
For the year ended 31 December 2014
Assets
Goodwill and other intangible assets
Mandatory reserve deposits with central banks
Property, plant and equipment
Investment property
Deferred tax assets
Investments in associated undertakings and joint ventures
Deferred acquisition costs
Reinsurers’ share of policyholder liabilities
Loans and advances
Investments and securities
Current tax receivable
Trade, other receivables and other assets
Derivative financial instruments
Cash and cash equivalents
Non-current assets held for sale
Total assets
Liabilities
Long-term business insurance policyholder liabilities
Investment contract liabilities
Property & casualty liabilities
Third-party interests in consolidated funds
Borrowed funds
Provisions and accruals
Deferred revenue
Deferred tax liabilities
Current tax payable
Trade, other payables and other liabilities
Amounts owed to bank depositors
Derivative financial instruments
Non-current liabilities held for sale
Total liabilities
Net assets
Shareholders’ equity
Equity attributable to equity holders of the parent
Non-controlling interests
Ordinary shares
Preferred securities
Total non-controlling interests
Total equity
Notes
F1
F2(a)
F2(b)
F7
G2
F3
E8
E3
E4
F4
E6
I2
E8
E8
E8
E9
F5
F6
F7
F8
E10
E6
I2
F9
F10(b)(i)
F10(b)(ii)
At
31 December
2014
£m
At
31 December
2013
2,763
829
765
1,678
283
518
862
2,314
34,857
87,547
92
2,362
1,227
4,944
1,475
2,835
759
722
1,811
303
168
1,211
1,875
33,583
88,220
128
2,583
1,259
4,869
5
142,516
140,331
10,519
68,841
319
5,986
3,044
284
330
454
189
4,276
36,243
1,201
1,285
132,971
9,545
7,406
1,867
272
2,139
9,545
12,126
69,015
332
5,478
2,644
195
628
491
237
4,300
34,370
1,478
–
131,294
9,037
7,270
1,502
265
1,767
9,037
The consolidated financial statements on pages 124 to 228 were approved by the Board of directors on 27 February 2015.
Julian Roberts
Group Chief Executive
Ingrid Johnson
Group Finance Director
128 Old Mutual plc
Annual Report and Accounts 2014
GROUP FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended 31 December 2014
Cash flows from operating activities
Profit before tax
Non-cash movements in profit before tax
Net changes in working capital
Taxation paid
Net cash inflow from operating activities
Cash flows from investing activities
Net acquisitions of financial investments
Acquisition of investment properties
Proceeds from disposal of investment properties
Acquisition of property, plant and equipment
Proceeds from disposal of property, plant and equipment
Acquisition of intangible assets
Acquisition of interests in subsidiaries, associated undertakings, joint ventures and strategic investments
Disposal of interests in subsidiaries, associated undertakings, joint ventures and strategic investments1
Net cash outflow from investing activities
Cash flows from financing activities
Dividends paid to
Ordinary equity holders of the Company
Non-controlling interests and preferred security interests
Dividends received from associated undertakings
Interest paid (excluding banking interest paid)
Proceeds from issue of ordinary shares (including by subsidiaries to non-controlling interests)
Net disposal of treasury shares
Disposal of non-controlling interests in OM Asset Management plc
Issue of subordinated and other debt
Subordinated and other debt repaid
Net cash outflow from financing activities
Net increase in cash and cash equivalents
Effects of exchange rate changes on cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
Consisting of
Cash and cash equivalents
Mandatory reserve deposits with central banks
Cash and cash equivalents included in assets held for sale
Total
Year ended
31 December
2014
£m
Year ended
31 December
2013
1,364
2,058
739
(402)
3,759
(2,873)
(48)
115
(154)
14
(76)
(429)
95
(3,356)
(394)
(177)
5
(48)
12
72
184
584
(290)
(52)
351
(193)
5,628
5,786
4,944
829
13
5,786
1,532
1,423
447
(458)
2,944
(1,658)
(47)
22
(113)
6
(86)
(119)
8
(1,987)
(336)
(183)
13
(51)
11
55
–
586
(578)
(483)
474
(828)
5,982
5,628
4,869
759
–
5,628
1
Included in disposal of interests in subsidiaries, associated undertakings, joint ventures and strategic investments is £76 million relating to disposal of subsidiaries.
Except for mandatory reserve deposits with central banks of £829 million (2013: £759 million) and cash and cash equivalents subject to
consolidation of funds of £1,639 million (2013: £1,667 million), management do not consider that there are any material amounts of cash and cash
equivalents which are not available for use in the Group’s day-to-day operations. Mandatory reserve deposits are, however, included in cash and
cash equivalents for the purposes of the statement of cash flows in line with market practice in South Africa.
Old Mutual plc
Annual Report and Accounts 2014
129
Financials GROUP FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
161
–
22
–
–
22
–
(5)
17
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
21
21
337
–
–
–
–
–
3
–
–
–
–
–
–
–
–
–
–
(9)
–
–
(85)
–
(45)
(136)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
178
37
(1,370)
4,891
(5)
2
(1)
(4)
–
–
–
–
–
–
–
(21)
532
(394)
(3)
72
11
375
52
–
(44)
69
–
–
7
7
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
32
(32)
(32)
526
17
2
6
25
(9)
21
(20)
(85)
(5)
(45)
(18)
(5)
441
(426)
18
84
11
–
52
–
(44)
(305)
7,406
5
–
–
5
–
–
–
–
–
–
–
4
1
–
–
(23)
252
(145)
163
53
44
120
2,139
£m
Total
equity
9,037
852
22
2
6
30
(9)
21
(20)
(85)
(5)
(68)
(18)
(5)
693
(571)
22
85
11
–
215
53
–
(185)
9,545
Millions
Number of
shares
issued and
fully paid
4,897
–
Share
capital
560
–
Share
premium
845
–
Merger
reserve
1,717
–
Available-
for-sale
reserve
52
–
Property
revaluation
reserve
Share-based
payments
reserve
Other
reserves
37
–
316
–
Foreign
currency
translation
reserve
(1,234)
Retained
earnings
4,290
557
Perpetual
preferred
callable
securities
Attributable
to equity
holders of
the parent
526
25
7,270
582
Total
non-
controlling
interests
1,767
270
For the year ended 31 December 2014
Year ended 31 December 2014
Notes
Shareholders’ equity at beginning of the year
Profit after tax for the financial year
Other comprehensive income
Items that will not be reclassified
subsequently to profit or loss
Fair value gains
Property revaluation
Measurement gains on defined benefit plans
Income tax on items that will not be reclassified
subsequently to profit or loss
Items that may be reclassified subsequently to
profit or loss
Fair value gains/(losses)
Net investment hedge
Available-for-sale investments
Fair value gains
Recycled to profit or loss1
Exchange differences recycled to profit or loss on
disposal of business1,2
Shadow accounting
Currency translation differences on translating foreign
operations
Other movements
Income tax on items that may be reclassified subsequently
to profit or loss
Total comprehensive income for the financial
year
Dividends for the year
Equity share-based payment transactions
Other movements in share capital
Expiry of Skandia AB shareholder claims
Merger reserve released1
Disposal of non-controlling interests in
OM Asset Management plc
Non-controlling interests in subsidiaries acquired
Change in participation in subsidiaries
Transactions with shareholders
D1(c)
D1(c)
C3
A2
A2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
10
–
–
–
–
–
10
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1
–
–
–
–
–
1
561
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
11
–
–
–
–
–
11
856
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(375)
–
–
–
(375)
1,342
–
–
–
–
–
21
(20)
–
–
–
–
(5)
(4)
–
–
–
–
–
–
–
–
–
48
Shareholders’ equity at end of the year
4,907
1 Following the disposal of Old Mutual Wealth’s European businesses, as discussed in note A2, available-for-sale reserves of £20 million and foreign currency translation reserves
of £46 million have been recycled to profit or loss. In addition, merger reserves of £375 million relating to these businesses have been released directly to retained earnings.
In addition to the above, foreign currency translation reserves of £39 million have been recycled directly to retained earnings following the OM Asset Management plc
initial public offering
2
Retained earnings were reduced in respect of own shares held in policyholder’s funds, ESOP trusts, Black Economic Empowerment trusts
and other undertakings at 31 December 2014 by £338 million (2013: £428 million).
130 Old Mutual plc
Annual Report and Accounts 2014
Millions
Number of
shares
issued and
fully paid
4,897
–
Share
capital
560
–
Share
premium
845
–
Merger
reserve
1,717
–
Available-
for-sale
reserve
52
–
Year ended 31 December 2014
Notes
Shareholders’ equity at beginning of the year
Profit after tax for the financial year
Other comprehensive income
Items that will not be reclassified
subsequently to profit or loss
Fair value gains
Property revaluation
Measurement gains on defined benefit plans
Income tax on items that will not be reclassified
subsequently to profit or loss
Items that may be reclassified subsequently to
profit or loss
Fair value gains/(losses)
Net investment hedge
Available-for-sale investments
Fair value gains
Recycled to profit or loss1
disposal of business1,2
Shadow accounting
operations
Other movements
to profit or loss
Exchange differences recycled to profit or loss on
Currency translation differences on translating foreign
Income tax on items that may be reclassified subsequently
Total comprehensive income for the financial
year
Dividends for the year
Equity share-based payment transactions
Other movements in share capital
Expiry of Skandia AB shareholder claims
Merger reserve released1
Disposal of non-controlling interests in
OM Asset Management plc
Non-controlling interests in subsidiaries acquired
Change in participation in subsidiaries
Transactions with shareholders
Shareholders’ equity at end of the year
D1(c)
D1(c)
C3
A2
A2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
10
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
11
11
856
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(375)
–
–
–
(375)
1,342
21
(20)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(5)
(4)
48
10
4,907
1
561
1 Following the disposal of Old Mutual Wealth’s European businesses, as discussed in note A2, available-for-sale reserves of £20 million and foreign currency translation reserves
of £46 million have been recycled to profit or loss. In addition, merger reserves of £375 million relating to these businesses have been released directly to retained earnings.
2
In addition to the above, foreign currency translation reserves of £39 million have been recycled directly to retained earnings following the OM Asset Management plc
initial public offering
Retained earnings were reduced in respect of own shares held in policyholder’s funds, ESOP trusts, Black Economic Empowerment trusts
and other undertakings at 31 December 2014 by £338 million (2013: £428 million).
Property
revaluation
reserve
Share-based
payments
reserve
161
–
22
–
–
22
–
–
–
–
(5)
–
–
–
17
–
–
–
–
–
–
–
–
–
178
316
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
21
–
–
–
–
–
–
21
337
Other
reserves
37
–
Foreign
currency
translation
reserve
(1,234)
–
Retained
earnings
4,290
557
Perpetual
preferred
callable
securities
Attributable
to equity
holders of
the parent
526
25
7,270
582
Total
non-
controlling
interests
1,767
270
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(9)
–
–
(85)
–
(45)
3
–
(136)
–
–
–
–
–
–
–
–
–
(5)
2
(1)
(4)
–
–
–
–
–
–
(21)
–
532
(394)
(3)
72
11
375
52
–
(44)
69
37
(1,370)
4,891
–
–
7
7
–
–
–
–
–
–
–
–
32
(32)
–
–
–
–
–
–
–
(32)
526
17
2
6
25
(9)
21
(20)
(85)
(5)
(45)
(18)
(5)
441
(426)
18
84
11
–
52
–
(44)
(305)
7,406
5
–
–
5
–
–
–
–
–
(23)
–
–
252
(145)
4
1
–
–
163
53
44
120
2,139
£m
Total
equity
9,037
852
22
2
6
30
(9)
21
(20)
(85)
(5)
(68)
(18)
(5)
693
(571)
22
85
11
–
215
53
–
(185)
9,545
Old Mutual plc
Annual Report and Accounts 2014
131
Financials
GROUP FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
17
–
–
17
–
–
–
–
–
–
–
–
–
–
–
–
17
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
48
48
316
–
–
–
–
–
–
–
–
4
–
4
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
43
(899)
(856)
–
52
(14)
38
–
–
–
–
(1)
–
705
(336)
13
55
(21)
(17)
(306)
4,290
–
–
10
10
–
–
–
–
–
–
47
(47)
–
–
–
(156)
(203)
526
17
52
(4)
65
43
(6)
(9)
(899)
3
2
(96)
(383)
61
66
(177)
(17)
(450)
7,270
6
18
(8)
16
–
1
–
6
–
(57)
(136)
(17)
3
–
17
(133)
1,767
161
37
(1,234)
(358)
(1,257)
£m
Total
equity
9,773
983
23
70
(12)
81
43
(5)
(9)
9
2
(153)
(519)
44
69
(177)
–
(583)
9,037
Millions
Number
of shares
issued and
fully paid
4,892
–
Share
capital
559
–
Share
premium
835
–
Merger
reserve
1,717
–
Available-
for-sale
reserve
65
–
Property
revaluation
reserve
Share-based
payments
reserve
144
–
268
–
Other
reserves
33
–
Foreign
currency
translation
reserve
(378)
–
Retained
earnings
3,891
668
Perpetual
preferred
callable
securities
682
37
Attributable
to equity
holders of
the parent
7,816
705
Total
non-
controlling
interests
1,957
278
For the year ended 31 December 2014
Year ended 31 December 2013
Notes
Shareholders’ equity at beginning of the year
Profit after tax for the financial year
Other comprehensive income
Items that will not be reclassified subsequently to
profit or loss
Fair value movements
Property revaluation
Measurement movements on defined benefit plans
Income tax on items that will not be reclassified
subsequently to profit or loss
D1(c)
Items that may be reclassified subsequently
to profit or loss
Fair value movements
Net investment hedge
Available-for-sale investments
Fair value gains
Recycled to profit or loss
Currency translation differences on translating
foreign operations
Other movements
Income tax on items that may be reclassified
subsequently to profit or loss
Total comprehensive income for the financial
year
Dividends for the year
Equity share-based payment transactions
Other movements in share capital
Preferred securities purchased
Change in participation in subsidiaries
Transactions with shareholders
D1(c)
C3
–
–
–
–
–
–
–
–
–
–
–
–
–
5
–
–
5
–
–
–
–
–
–
–
–
–
–
–
–
–
1
–
–
1
–
–
–
–
–
–
–
–
–
–
–
–
–
10
–
–
10
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(6)
(9)
–
–
2
(13)
–
–
–
–
–
–
52
Shareholders’ equity at end of the year
4,897
560
845
1,717
132 Old Mutual plc
Annual Report and Accounts 2014
Millions
Number
of shares
issued and
fully paid
4,892
–
Share
capital
559
–
Share
premium
835
–
Merger
reserve
1,717
–
Available-
for-sale
reserve
65
–
Property
revaluation
reserve
Share-based
payments
reserve
144
–
268
–
Other
reserves
33
–
Foreign
currency
translation
reserve
(378)
–
Retained
earnings
3,891
668
Perpetual
preferred
callable
securities
682
37
Attributable
to equity
holders of
the parent
7,816
705
Total
non-
controlling
interests
1,957
278
Year ended 31 December 2013
Notes
Shareholders’ equity at beginning of the year
Profit after tax for the financial year
Other comprehensive income
Items that will not be reclassified subsequently to
profit or loss
Fair value movements
Property revaluation
Measurement movements on defined benefit plans
Income tax on items that will not be reclassified
subsequently to profit or loss
D1(c)
Items that may be reclassified subsequently
to profit or loss
Fair value movements
Net investment hedge
Available-for-sale investments
Fair value gains
Recycled to profit or loss
Currency translation differences on translating
foreign operations
Other movements
Income tax on items that may be reclassified
subsequently to profit or loss
Total comprehensive income for the financial
year
Dividends for the year
Equity share-based payment transactions
Other movements in share capital
Preferred securities purchased
Change in participation in subsidiaries
Transactions with shareholders
D1(c)
C3
–
–
–
–
–
–
–
–
–
–
–
–
–
5
–
–
5
–
–
–
–
–
–
–
–
–
–
–
–
–
1
–
–
1
–
–
–
–
–
–
–
–
–
–
–
–
–
10
–
–
10
845
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(6)
(9)
–
–
2
(13)
–
–
–
–
–
–
52
Shareholders’ equity at end of the year
4,897
560
1,717
17
–
–
17
–
–
–
–
–
–
17
–
–
–
–
–
–
161
–
–
–
–
–
–
–
–
–
–
–
–
48
–
–
–
48
316
–
–
–
–
–
–
–
–
4
–
4
–
–
–
–
–
–
–
–
–
–
43
–
–
(899)
–
–
(856)
–
–
–
–
–
–
–
52
(14)
38
–
–
–
–
(1)
–
705
(336)
13
55
(21)
(17)
(306)
37
(1,234)
4,290
–
–
10
10
–
–
–
–
–
–
47
(47)
–
–
(156)
–
(203)
526
17
52
(4)
65
43
(6)
(9)
(899)
3
2
(96)
(383)
61
66
(177)
(17)
(450)
6
18
(8)
16
–
1
–
(358)
6
–
(57)
(136)
(17)
3
–
17
(133)
£m
Total
equity
9,773
983
23
70
(12)
81
43
(5)
(9)
(1,257)
9
2
(153)
(519)
44
69
(177)
–
(583)
7,270
1,767
9,037
Old Mutual plc
Annual Report and Accounts 2014
133
Financials
GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2014
A: Significant accounting policies
A1: Basis of preparation
Statement of compliance
Old Mutual plc (the Company) is a company incorporated in England and Wales.
The Group financial statements consolidate those of the Company and its subsidiaries (together referred to as the ‘Group’) and equity account the
Group’s interest in associates and joint ventures (other than those held by life assurance funds which are accounted for as investments). The Parent
Company financial statements present information about the Company as a separate entity and not about the Group.
Both the Parent Company financial statements and the Group financial statements have been prepared and approved by the directors in
accordance with IFRS as adopted by the EU. On publishing the Parent Company financial statements here together with the Group financial
statements, the Company is taking advantage of the exemption in section 408 of the Companies Act 2006 not to present its individual income
statement and related notes that form a part of these approved financial statements.
The accounting policies adopted by the Company and Group, unless otherwise stated, have been applied consistently to all periods presented
in these consolidated financial statements.
The financial statements are prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value:
derivative financial instruments, financial assets and liabilities designated as fair value through profit or loss or as available-for-sale, owner-
occupied property and investment property. Non-current assets and disposal groups held for sale are stated at the lower of the previous carrying
amount and the fair value less costs to sell.
The Parent Company financial statements are prepared in accordance with these accounting policies, other than for investments in subsidiary
undertakings and associates, which are stated at cost less impairments (see note E1(m)), in accordance with IAS 27.
The Company and Group financial statements have been prepared on the going concern basis which the directors believe to be appropriate
having taken into consideration the points as set out in the Directors’ Report in the section headed Going concern.
Judgements made by the directors in the applications of these accounting policies that have a significant effect on the financial statements, and
estimates with a significant risk of material adjustment in the next year, are discussed in note A3.
Translation of foreign operations
The assets and liabilities of foreign operations are translated from their respective functional currencies into the Group’s presentation currency
using the year-end exchange rates, and their income and expenses using the average exchange rates. Other than in respect of cumulative
translation gains and losses up to 1 January 2004, cumulative unrealised gains or losses resulting from translation of functional currencies to the
presentation currency are included as a separate component of shareholders’ equity. To the extent that these gains and losses are effectively
hedged, the cumulative effect of such gains and losses arising on the hedging instruments are also included in that component of shareholders’
equity. Upon the disposal of subsidiaries the cumulative amount of exchange differences deferred in shareholders’ equity, net of attributable
amounts in relation to net investments, is recognised in profit or loss. Cumulative translation gains and losses up to 1 January 2004, being the
effective date of the Group’s conversion to IFRS, were reset to zero.
The exchange rates used to translate the operating results, assets and liabilities of key foreign business segments to pounds sterling are:
Rand
US dollars
Euro
Year ended 31 December 2014
Year ended 31 December 2013
Income
statement
(average rate)
17.8712
1.6474
1.2399
Statement
of financial
position
(closing rate)
17.9976
1.5581
1.2877
Income
statement
(average rate)
15.0959
1.5650
1.1782
Statement
of financial
position
(closing rate)
17.4284
1.6566
1.2014
Developments during 2014
Other than changes arising from new accounting developments as mentioned in note A5, the Group has not made any changes to the accounting
policies during the year. Disclosures about the impact of future standards can be found in note A6.
These financial statements describe the material accounting policies and those which involve significant judgement, optionality in application and
are material to the Group’s overall financial statements. As such items which are immaterial or duplicated elsewhere in the Annual Report and
Accounts have been removed from these financial statements.
A detailed list of the Group’s accounting policies can be found at www.oldmutual.com. The contents of the website are not subject to audit.
134 Old Mutual plc
Annual Report and Accounts 2014
A2: Significant corporate activity and business changes during the period
Acquisitions completed during the year
Acquisition of Faulu Kenya DTM LTD
On 1 April 2014, the Group completed the acquisition of a controlling stake in the micro-lender Faulu Kenya DTM LTD for £20 million. Goodwill of
£3 million has been recognised on this transaction. No other intangible assets have been recognised. In addition, non-controlling interests of £9
million have been recognised on this transaction.
Acquisition of a significant interest in Banco Único
On 12 June 2014, the Group announced that it had completed the acquisition of a 36.4% stake in Banco Único for $24 million. Banco Único is
equity accounted as a joint venture in these financial statements.
Acquisition of Intrinsic Financial Services Limited
On 1 July 2014, the Group announced that it had completed the acquisition of 100% of Intrinsic Financial Services Limited (Intrinsic), a financial
advisers group of companies for total consideration of £98 million.The financial results and position of Intrinsic have been consolidated with effect
from 1 July 2014.
The purchase price allocation has been finalised and allocated to goodwill (£59 million) and other intangible assets (£41 million).
Acquisition of Old Mutual Finance (Pty) Ltd
On 1 September 2014, the Group completed the acquisition of an additional 25% stake in Old Mutual Finance (Pty) Ltd (OMF) for R1,115 million
(£63 million). As the Group now has a controlling shareholding of 75%, the financial results and position of OMF have been consolidated with
effect from 1 September 2014.
The accounting related to the step up in ownership from 50% to 75% effectively involved a simultaneous sale of 50% of the business, followed by
an acquisition of the fair value of 75% of the business. Consequently a profit of approximately R1,112 million (£62 million) was realised on the
transaction. Consistent with usual Group practice, this profit was recognised in the IFRS profit or loss, but excluded from AOP. Goodwill of £93
million, intangible assets of £27 million and non-controlling interest of £44 million have been recognised on this transaction.
Acquisition of 20.7% shareholding in Ecobank Transnational Incorporated (ETI)
On 7 October 2014, Nedbank Group Limited, the majority-owned South African banking subsidiary of the Group, announced that it has
exercised its rights to subscribe for a 20.7% shareholding in ETI for a cash consideration of $494 million (£305 million). The acquisition of the 20.7%
stake has resulted in ETI being an associate for Group reporting purposes. ETI has been equity accounted from 1 October 2014.
Disposals completed during the year
Disposal of Skandia Poland
On 30 May 2014, the Group completed the disposal of Skandia Poland, part of Old Mutual Wealth. A loss on disposal of £21 million has been
recognised in profit or loss.
Disposal of Skandia Austria and Skandia Germany
On 1 October 2014, the Group announced that it had completed the sale of two of its Old Mutual Wealth businesses, Skandia Austria and
Skandia Germany. A loss on disposal of £43 million has been recognised in profit or loss.
OM Asset Management plc initial public offering
On 15 October 2015, the Group announced the closing of the initial public offering (IPO) of 20.4% of OM Asset Management at a price to the
public of $14.00 per share. As a result of the IPO, the Group has recognised a profit on disposal of £13 million directly in equity. At 31 December
2014, non-controlling interests of £163 million have been recognised in the statement of financial position. In addition to the above, £39 million of
the foreign currency translation reserve has been transferred to retained earnings.
Disposal of Skandia Liechtenstein
On 6 November 2014, the Group completed the sale of Skandia Liechtenstein, part of Old Mutual Wealth. A total loss on disposal of £6 million
has been recognised in profit or loss.
Financing activities during the year
Nedbank Group Limited
On 10 July 2014, Nedbank Group Limited announced its intention to issue new preference shares which will be utilised to raise funding for
Nedbank’s business activities in general. No new preference shares were issued during the year.
Emerging Markets
On 27 November 2014, Old Mutual Life Assurance Company (South Africa) Limited (OMLAC(SA)) issued R300 million Unsecured Subordinated
Callable Fixed Rate Notes under its R10 billion Unsecured Callable Notes Programme. Interest is payable in arrears at a fixed rate of 9.255 per
cent on 27 May and 27 November each year up to the first call date of 27 November 2019 or until the maturity date of 27 November 2024.
On 27 November 2014, OMLAC(SA) also issued R700 million Unsecured Subordinated Callable Floating Rate Notes under the same programme.
Interest is payable at a floating rate of 3 month ZAR-JIBAR + 2.2 per cent on 27 November, 27 February, 27 May and 27 August each year until
27 November 2019. From this date the floating rate increases to 3 month ZAR-JIBAR + 3.3 per cent until the maturity date of 27 November 2024.
The notes have an optional redemption date of 27 November 2019 and each subsequent floating interest payment date until maturity.
Old Mutual plc
Annual Report and Accounts 2014
135
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2014
A: Significant accounting policies continued
A2: Significant corporate activity and business changes during the period continued
Transactions announced during the year that will complete after 31 December 2014
Disposal of Skandia Luxembourg and Skandia France
On 3 September 2014, the Group announced that terms have been agreed to sell Skandia Luxembourg and Skandia France, part of Old Mutual
Wealth.
For the year ended 31 December 2014, the net asset value of goodwill and intangible assets of these businesses has been written down to the fair
value (less costs to sell) given expected losses on disposal. As a result, an impairment loss of £14 million has been recognised in profit or loss.
The disposal of these businesses were completed on 2 February 2015.
Acquisition of Quilter Cheviot
On 17 October 2014, the Group announced that Old Mutual Wealth had agreed the acquisition of Quilter Cheviot, a leading UK-based
discretionary investment manager, for a total consideration of up to £585 million. The transaction completed on 25 February 2015. The Group
awaits the transaction completion financial statements of Quilter Cheviot in order to finalise its purchase price accounting.
Acquisition of UAP Holdings Limited
On 9 January 2015, the Group announced that it acquired a 23.3% stake in UAP Holdings Limited (UAP), an investment, retirement and insurance
group that operates in East Africa, for a consideration of KES 9 billion (£64 million). UAP will be treated as an associated undertaking from
9 January 2015.
Subsequently, on 26 January 2015, the Group announced it acquired an additional 37.3% (second tranche) of UAP for a consideration of KES 14
billion (£103 million), subject to regulatory approval. The transaction will increase the Group’s total holding to 60.7% and will result in the Group
consolidating UAP. The acquisition of the second tranche is expected to be completed in the first half of 2015.
A3: Critical accounting estimates and judgements
In the preparation of these financial statements, the Group is required to make estimates and judgements that affect items reported in the
consolidated income statement, statement of financial position, other primary statements and related supporting notes.
Critical accounting estimates and judgements are those which involve the most complex or subjective judgements or assessments. Where
applicable the Group applies estimation and assumption setting techniques that are aligned with relevant actuarial and accounting guidance
based on knowledge of the current situation. This requires assumptions and predictions of future events and actions. There have been no
significant methodology changes to the critical accounting estimates and judgements that the Group applied at 31 December 2014. The
significant accounting policies are described in the relevant notes.
The key areas of the Group’s business that typically require such estimates and the relevant accounting policies and notes are as follows:
Area
Policy note
More detail
Financial assets and liabilities
Life assurance contract provisions
Deferred acquisition costs
Intangible assets and goodwill
Consolidation
Tax
E1
E8
E8
F1
A3(d)
A3(c)
E4
E8
F3
F1
G3
D1/F7
Specific areas that have required closer attention in respect of the estimates and judgements during the year ended 31 December 2014 are
explained in more detail below:
(a) Loans and advances
Provisions for impairment of loans and advances
The majority of loans and advances are in respect of Nedbank, which assesses its loan portfolios for impairment at each financial reporting
date. Nedbank actively manages its exposure to loans and advances through robust credit approval processes. The credit loss ratio at year
ended 31 December 2014 was 0.79% (2013: 1.06%). The impairment for performing loans is calculated on a portfolio basis, based on
historical loss experience, adjusted for national and sector specific economic conditions and other indicators present at the reporting date that
correlate with defaults on the portfolio. These include early arrears, such as changes in macro-economic conditions and legislation affecting
credit recovery. These annual loss ratios are applied to loan balances in the portfolio and scaled to the estimated loss emergence period.
For portfolios of loans and advances which comprise large numbers of small homogeneous assets with similar risk characteristics where credit
scoring techniques are generally used, statistical techniques are used to calculate impairment allowances on the portfolio, based on historical
recovery rates and assumed emergence periods. There are a number of models in use, each tailored to a product, line of business or client
category. Judgement and knowledge are needed in selecting the statistical methods to use when the models are developed or revised.
Additional impairment provisions may be raised for issues which the Group believes is not specifically covered by statistical models.
136 Old Mutual plc
Annual Report and Accounts 2014
For wholesale (larger) exposures impairment allowances are calculated on an individual basis and all relevant considerations that have a
bearing on the expected future cash flows are taken into account. The level of impairment allowance is the difference between the value of the
discounted expected future cash flows and its carrying amount. Subjective judgements are made in the calculations of future cash flows and
change with time as new information becomes available or as strategies evolve, resulting in frequent revisions to the impairment provision as
individual decisions are taken.
Emerging Markets has lending exposure in South Africa, Kenya and Zimbabwe through non-wholly owned subsidiaries of £909 million
(2013: £255 million). Credit loss ratios are monitored on each individual business unit and have generally improved in the current year.
Further detail is provided in note E3.
(b) Policyholder liabilities
Emerging Markets discretionary reserves
Technical provisions in South Africa are determined as the aggregate of:
■ Best estimate liabilities, with assumptions allowing for the best estimate of future experience and a market-consistent valuation of financial
options and guarantees
■ Compulsory margins, prescribed in terms of the Long Term Insurance Act, 1988 and South African professional actuarial guidance note
(SAP 104) as explicit changes to actuarial assumptions that increase the level of technical provisions held, and
■ Discretionary margins, permitted by the Long Term Insurance Act, 1988 and SAP 104, to allow for the uncertainty inherent in estimates of future
experience after considering available options of managing that experience over time, or to defer the release of profits consistent with policy
design or company practice.
Discretionary margins are held as either implicit or explicit margins. Explicit discretionary margins are derived as conscious changes to
assumptions used to project future experience to increase technical provisions. Implicit discretionary margins arise where the method used to
calculate overall technical provisions results in liabilities that are greater than the sum of best estimate liabilities and compulsory margins.
Explicit discretionary margins of £459 million (1.7% of total technical provisions) were held at 31 December 2014 (2013: £489 million, 1.9% of total
technical provisions). This consisted largely of:
■ Margins held for Mass Foundation Cluster protection business, which allow for the uncertainty related to mortality experience in South Africa,
as well as future lapse experience and future investment returns, and to ensure that profit is released appropriately over the term of the policies
■ Margins to allow for the uncertainty inherent in the assumptions used to value financial options and guarantees, implied volatility assumptions in
particular, which are difficult to hedge due to the short term nature of the equity option market in South Africa
■ Margins on non-profit annuities, due to the inability to fully match assets to liabilities as a result of the limited availability of long-dated bonds,
and to provide for longevity risk and
■ A margin set up in 2013 to allow for the uncertainty inherent in future economic assumptions used to calculate, mainly protection product
liabilities, in the Retail Affluent business. Although interest rate hedging is used to manage interest rate risk on these products, the volatility of
bond yields in South Africa means that it is difficult to maintain appropriate hedging positions without incurring significant trading costs. The
discretionary margin therefore caters for the residual uncertainty present after allowing for the hedge programme that is in place. A similar
margin was set up for the Mass Foundation Cluster savings book in 2014.
Emerging Markets Financial Soundness Valuation discount rate
The calculation of the Group’s South African life assurance contract liabilities is sensitive to the discount rate used to value the liabilities.
The methodology applied by the Group requires discount rates to be set according to the South African professional guidance note (SAP 104).
In line with these principles, the reference rate is selected as the Bond Exchange of South Africa (BESA) par bond 10-year yield.
The reference rate was relatively volatile over 2014, ranging from 7.6% to 9.0% during the year ended 31 December 2014 (2013: 6.2% to 8.5%). At
31 December 2014 the reference discount rate was 8.0% (2013: 8.1%). The volatile interest rate environment continued to have a negligible impact
on the operating profit for the South African life assurance businesses in 2014, given the continuance of the hedging program and discretionary
margins put in place to mitigate these impacts.
The Group estimates that a 1% reduction in the reference discount rate will result in an increase in policyholder liabilities of £2 million
(2013: £6 million), allowing for the impact of the hedging programme.
Further disclosure of the policyholder sensitivity to interest rates is provided in note E8(g).
Old Mutual plc
Annual Report and Accounts 2014
137
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2014
A: Significant accounting policies continued
A3: Critical accounting estimates and judgements continued
Old Mutual Bermuda guarantees
Since the closure of Old Mutual Bermuda to new business in March 2009, management’s key priorities have been to de-risk the business, manage
the risk and solvency position and preserve shareholder value. The run-off of the book and hedging of the guarantees has significantly reduced the
Group’s risk exposure. The active contracts for which reserves are recognised are deferred and fixed index annuity investments and variable
annuity products, which include guaranteed minimum accumulation benefits (GMAB) and guaranteed minimum death benefits (GMDB).
The key risk to the Group relates to the GMAB policies which were sold with Universal Guarantee Options (UGOs).
UGOs guarantee policyholders the return of 120% of invested premiums and, subject to policyholder election, they may include a Highest
Anniversary Value (HAV) guarantee. These guarantees are effective on the 10 year anniversary of policies, which will be reached in 2017 and 2018.
The risk attaching to the guarantee of 120% of invested premium, and relating to equity and foreign exchange downside risks, is managed by a
dynamic tail hedging strategy, which progressively increases hedge coverage if the value of underlying policyholder investments decreases.
The Old Mutual Bermuda business has also implemented a series of structured ‘look back’ options for the HAV risk of markets rising above the
120% guarantee and then subsequently falling below 120%, having reset the guarantees amount above 120%.
GMAB reserves have reduced from $84 million at 31 December 2013 to $82 million at 31 December 2014.
There are no significant risks to the Group associated with GMDB and management continues to operate strong oversight over the business.
(c) Tax
Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in profit or loss except to the extent that
it relates to items recognised directly in other comprehensive income, in which case it is recognised in other comprehensive income.
The Group is subject to income taxes in numerous jurisdictions and the calculation of the Group’s tax charge and worldwide provisions for income
tax necessarily involves a degree of estimation and judgement. At any given tiAhme the Group typically has a number of open tax returns with
various tax authorities and engages in active dialogue to resolve this. Provisions relating to these open items are recognised based on the Group’s
estimate of the most likely outcome, after taking into account external advice where appropriate. Where the final tax outcome of these matters is
different from the amounts that were initially recorded such differences will impact profit or loss, current and deferred income tax assets and
liabilities in the period such determination is made.
(d) Consolidation set of standards
The Group has applied the following key judgements in the application of the requirements of the consolidation set of standards (IFRS 10
‘Consolidated Financial Statements’ and IFRS 11 ‘Joint Arrangements’):
Consolidation of investment funds and securitisation vehicles
The Group acts as a fund manager to a number of investment funds. In determining whether the Group controls such a fund, it will focus on an
assessment of the aggregate economic interests of the Group (comprising any carried interests and expected management fees) and the
investor’s rights to remove the fund manager. The Group assesses, on an annual basis, such interests to determine if the fund will be consolidated.
See note G3(b) for disclosures in respect of the investment funds in which the Group has an interest.
The Group has sponsored certain asset backed financing (securitisation) vehicles under its securitisation programme which are run according to
pre-determined criteria that are part of the initial design of the vehicles. The Group is exposed to variability of returns from the vehicles through its
holding of junior debt securities in the vehicles. It has concluded that it controls these vehicles and therefore has consolidated these asset backed
financing vehicles.
Structured entities
The Group is required to make judgements on what constitutes a structured entity. Accounting standards define a structured entity as an entity
designed so that its activities are not governed by way of voting rights. In assessing whether the Group has power over such investees in which it has
an interest, the Group considers factors such as the purpose and design of the investee, its practical ability to direct the relevant activities of the
investee, the nature of its relationship with the investee and the size of its exposure to the variability of returns of the investee. The Group has evaluated
all exposures and has concluded that all investments in investment funds as well as certain securitisation vehicles and other funding vehicles represent
investments in structured entities.
A4: Liquidity analysis of the statement of financial position
The Group’s statement of financial position is in order of liquidity as is permitted by IAS 1 ‘Presentation of Financial Statements’. In order to satisfy
the requirements of IAS 1, the following analysis is given to describe how the statement of financial position lines are categorised between current
and non-current balances, applying the principles laid out in IAS 1.
The following statement of financial position captions are generally classified as current: cash and cash equivalents, non-current assets held for
sale, client indebtedness for acceptances, current tax receivable, third-party interests in the consolidation of funds, current tax payable, liabilities
under acceptances and non-current liabilities held for sale. The following balances are generally classified as non-current: goodwill and other
intangible assets, mandatory reserve deposits with central banks, property, plant and equipment, investment property, deferred tax assets,
investments in associated undertakings and jointly controlled operations, deferred acquisition costs, deposits held with reinsurers, provisions,
deferred revenue and deferred tax liabilities.
138 Old Mutual plc
Annual Report and Accounts 2014
The following balances include both current and non-current portions: reinsurers’ shares of life assurance policyholder liabilities and property
& casualty business liabilities, loans and advances, investments and securities, other assets, derivative financial assets and liabilities, life assurance
policyholder liabilities and property & casualty liabilities, borrowed funds, amounts owed to bank depositors and other liabilities. The split
between the current and non-current portions for these assets and liabilities is given either by way of a footnote to the relevant note to
the accounts or by way of a maturity analysis (in respect of major financial liability captions).
A5: Standards, amendments to standards and interpretations adopted in the 2014 annual financial statements
The following standards, amendments to standards and interpretations, which are relevant to the Group, have been adopted in these
financial statements:
■ Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32)
■ Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27)
■ Novation of Derivatives and Continuation of Hedge Accounting (Amendments to IAS 39)
■ Recoverable Amount Disclosures for Non-Financial Assets (Amendments to IAS 36)
■ IFRIC 21 ‘Levies’
The adoption of these standards did not have any impact on the Group financial statements.
A6: Future standards, amendments to standards and interpretations not early-adopted in the 2014 annual
financial statements
At the date of authorisation of these financial statements, the following standards, amendments to standards, and interpretations, which are
relevant to the Group, have been issued by the International Accounting Standards Board (IASB).
IFRS 9 ‘Financial Instruments’
In July 2014, the IASB issued IFRS 9 ‘Financial Instruments’, which replaces IAS 39 ‘Financial Instruments: Recognition and Measurement’.
IFRS 9 introduces new requirements for how an entity should classify and measure financial assets, requires changes to the reporting of ‘own
credit’ with respect to issued debt liabilities that are designated at fair value, replaces the current rules for impairment of financial assets and
amends the requirements for hedge accounting.
Classification and measurement of financial assets and liabilities
IFRS 9 requires that an entity’s business model and a financial instrument’s contractual cash flows will determine its classification and therefore its
measurement in the financial statements. Upon assessment each financial asset will be classified as either fair value through profit or loss (FVTPL),
amortised cost, or fair value through Other Comprehensive Income (FVOCI). As these requirements are different than the assessments under the
existing IAS 39 rules, some differences to classification and measurement of financial assets are to be expected.
The classification and measurement of financial liabilities remain largely unchanged under IFRS 9 from current requirements. However, where
issued debt liabilities are designated at fair value, the fair value movements attributable to an entity’s own credit risk will be recognised in Other
Comprehensive Income rather than in the Consolidated income statement under IFRS 9.
Impairment of financial assets
The impairment rules under IFRS 9 will apply to those financial assets that are measured at amortised cost and debt instruments measured at
FVOCI. Impairment will move from a model whereby credit losses are recognised when a ‘trigger’ event occurs under IAS 39 to an expected loss
model, where provisions are taken upon initial recognition of the financial asset based on expectations of potential credit losses at that time.
The allowance for credit losses provided for on initial recognition will be based on a 12-month expected credit loss basis. Subsequently, should the
probability of default of the issuer increase significantly, the expected credit loss of the financial asset over its lifetime (lifetime expected losses) will
be recognised as an additional provision. As a result of the changes to impairment rules, IFRS 9 will result in an increase in subjectivity as
provisions will be based on forward-looking, probability-weighted information that is continuously monitored and incorporated over the life of
the financial asset. This is in contrast to impairment recognition that is based on credit events that have already occurred under IAS 39. IFRS 9 is
expected to result in an increase in the overall level of impairment allowances, due to the likelihood that there will be a larger population of
financial assets to which lifetime expected losses applies as compared to the population of financial assets for which credit events have already
occurred under IAS 39.
Hedge accounting
IFRS 9 also incorporates new hedge accounting rules that intend to align hedge accounting with risk management practices. Generally, some
restrictions under current rules have been removed and a greater variety of hedging instruments and hedged items become available for
hedge accounting.
Effective date
IFRS 9 is effective for annual periods beginning on or after 1 January 2018. The Group is currently assessing the impact of IFRS 9 which is
expected to have the largest impact on the Groups’ banking operations. The standard has not yet been endorsed by the EU.
Old Mutual plc
Annual Report and Accounts 2014
139
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2014
A: Significant accounting policies continued
A6: Future standards, amendments to standards and interpretations not early-adopted in the 2013 annual
financial statements continued
IFRS 15 ‘Revenue from Contracts with Customers’
In May 2014, the IASB issued IFRS 15 ‘Revenue from Contracts with Customers’, which specifies how and when revenue is recognised, but does not
impact income recognition related to financial instruments in scope of IFRS 9 or IAS 39. IFRS 15 replaces several other IFRS standards and
interpretations that currently govern revenue recognition under IFRS and provides a single, principles-based five-step model to be applied to all
contracts with customers. The standard also requires entities to provide users of financial statements with more informative and relevant disclosures.
IFRS 15 will be effective for annual periods beginning on or after 1 January 2017. The Group is currently assessing the impact of IFRS 15.
The standard has not yet been endorsed by the EU.
B: Segment information
B1: Basis of segmentation
The Group’s segmental results are analysed and reported on a basis consistent with the way that management and the Board of directors of
Old Mutual plc assesses performance of the underlying businesses and allocates resources. Information is presented to the Board on a
consolidated basis in pounds sterling (the presentation currency) and in the functional currency of each business.
Adjusted operating profit (AOP) is one of the key measures reported to the Group’s management and Board of directors for their consideration in
the allocation of resources to and the review of performance of the segments. As appropriate to the business line, the Board reviews additional
measures to assess the performance of each of the segments. These typically include sales, net client cash flows, funds under management, gross
earned premiums, underwriting results, net interest income, non-interest revenue and credit losses.
A reconciliation between segment revenues and expenses and the Group’s revenues and expenses is shown in note B3. Consistent with internal
reporting, assets, liabilities, revenues and expenses that are not directly attributable to a particular segment are allocated between segments
where appropriate and where there is a reasonable basis for doing so. The Group accounts for inter-segment revenues and transfers as if the
transactions were with third parties at current market prices. Given the nature of the operations, there are no major trading activities between
the segments.
The revenues generated in each reported segment can be seen in the analysis of profits and losses in note B3. The segmental information in notes
B3 and B4, reflects the adjusted and IFRS measures of profit or loss and the assets and liabilities for each operating segment as provided to
management and the Board of directors. There are no differences between the measurement of the assets and liabilities reflected in the primary
statements and that reported for the segments.
There are four primary business activities from which the Group generates revenue. These are life assurance (premium income), asset
management business (fee and commission income), banking (banking interest receivable and investment banking income) and property &
casualty (premium income). Other revenue includes gains and losses on investment securities.
The principal lines of business from which each operating segment derives its revenues are as follows:
Core operations
Emerging Markets – life assurance, property & casualty, asset management and banking
Nedbank – banking, asset management and life assurance
Old Mutual Wealth – life assurance and asset management
Institutional Asset Management – asset management
Non-core operations
Old Mutual Bermuda – life assurance
140 Old Mutual plc
Annual Report and Accounts 2014
Segment presentation
The results of the property & casualty business were previously disclosed separately. However, following changes in management oversight, these
have been included in the Emerging Markets segment with effect from 1 January 2014. This change has been applied to all periods presented
and comparative information has been re-presented accordingly.
The USAM segment has been renamed to Institutional Asset Management and consists of OM Asset Management plc, a listed subsidiary of the
Group and Rogge Global Partners plc, a fixed income asset management affiliate of the Group.
There have been no other changes to the presentation of segment information.
The Group’s reported segments are now Emerging Markets, Nedbank, Old Mutual Wealth and Institutional Asset Management. The Other
segment includes Group Head Office. For all reporting periods, Old Mutual Bermuda is classified as a continuing operation in the IFRS income
statement, but as non-core in determining the Group’s AOP.
As set out in the 2013 Annual Report and Accounts, the Group continues to incur costs related to the sale of its Nordic business in 2012. These costs
largely relate to the transition of IT information and support services that were previously provided by the Nordic business to the wider Group,
back to the Group. These costs are included in the expenses related to the discontinued operations in the IFRS consolidated income statement for
the year ended 31 December 2014 and as non-core for determining the Group’s AOP for the year ended 31 December 2014. Further information
on the results of discontinued operations is provided in note I1.
All other businesses have been classified as continuing operations for all reporting periods.
B2: Gross earned premiums and deposits to investment contracts
Year ended 31 December 2014
Life assurance – insurance contracts
Life assurance – investment contracts with discretionary participation features
General insurance
Gross earned premiums
Life assurance – other investment contracts recognised
as deposits
Year ended 31 December 2013
Life assurance – insurance contracts
Life assurance – investment contracts with discretionary participation features
General insurance
Gross earned premiums
Life assurance – other investment contracts recognised
as deposits
Emerging
Markets
Old Mutual
Wealth
1,299
961
669
2,929
280
–
–
280
£m
Total
1,579
961
669
3,209
1,981
6,442
8,423
Emerging
Markets
Old Mutual
Wealth
1,616
1,025
724
3,365
336
–
–
336
£m
Total
1,952
1,025
724
3,701
2,015
5,889
7,904
Old Mutual plc
Annual Report and Accounts 2014
141
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2014
B: Segment information continued
B3: Adjusted operating profit statement – segment information for the year ended 31 December 2014
Notes
Emerging
Markets
Nedbank
Old Mutual
Institutional
Asset
Wealth
Management
Other
Consolidation
adjustments
Adjusted
operating
profit
Adjusting
items
(note C1)
Discontinued
and non-core
operations¹
Revenue
Gross earned premiums
Outward reinsurance
Net earned premiums
Investment return (non-banking)
Banking interest and similar income
Banking trading, investment and similar income
Fee and commission income, and income from service activities
Other income
Inter-segment revenues
Total revenue
Expenses
Claims and benefits (including change in insurance contract provisions)
Reinsurance recoveries
Net claims and benefits incurred
Change in investment contract liabilities
Losses on loans and advances
Finance costs (including interest and similar expenses)
Banking interest payable and similar expenses
Fee and commission expenses, and other acquisition costs
Change in third-party interest in consolidated funds
Other operating and administrative expenses
Income tax attributable to policyholder returns
Inter-segment expenses
Total expenses
Share of associated undertakings’ and joint ventures’ profit after tax
Loss on disposal of subsidiaries, associated undertakings and strategic investments
Adjusted operating profit/(loss) before tax and non-controlling interests
Income tax expense
Non-controlling interests
Adjusted operating profit/(loss) after tax and non-controlling interests
Adjusting items after tax and non-controlling interests
Profit/(loss) after tax from continuing operations
Loss from discontinued operations after tax
Profit/(loss) after tax attributable to equity holders of the parent
B2
D2
D3
D4
D5
D6
D7
D8
D9
G2
C1(c)
D1
C1(a)
I1
2,929
(223)
2,706
3,422
116
7
506
80
86
6,923
(3,707)
79
(3,628)
(1,208)
–
–
(42)
(318)
–
(1,074)
(36)
(11)
(6,317)
11
–
617
(189)
(18)
410
(15)
395
–
395
–
–
–
–
2,941
190
919
22
11
4,083
–
–
–
–
(252)
–
(1,628)
(8)
–
(1,387)
–
(47)
(3,322)
9
–
770
(195)
(274)
301
14
315
–
315
1 Non-core operations relate to Old Mutual Bermuda. Old Mutual Bermuda profit after tax for the year ended 31 December 2014 was £1 million. Non-core operations also
include £31 million relating to the disposal of Nordic in 2012 and £19 million relating to the disposal of US Life in 2011. Further information on discontinued operations is provided
in note I1
Of the total revenues, £2,997 million was generated in the UK (2013: £4,947 million), £1,029 million in the rest of Europe (2013: £864 million),
£10,977 million in South Africa (2013: £13,446 million), £377 million in the United States (2013: £439 million) and £98 million relates to other
operating segments (2013: £114 million).
142 Old Mutual plc
Annual Report and Accounts 2014
30
15,595
(138)
21
15,478
280
(85)
195
2,493
1,085
3,783
(385)
136
(249)
(2,336)
–
–
8
2
–
–
–
–
–
–
(479)
(429)
(23)
(40)
227
(48)
–
179
(216)
(37)
–
(37)
422
11
–
433
–
–
–
–
–
–
–
–
–
–
–
–
–
(303)
(4)
–
–
(1)
6
–
131
(29)
(6)
96
(19)
77
–
77
28
438
–
–
–
–
–
–
–
2
–
–
–
–
–
–
–
–
–
–
(78)
(86)
–
(6)
(170)
(140)
22
–
(118)
(1)
(119)
–
(119)
(105)
343
(108)
(322)
(18)
–
105
(343)
–
–
–
–
–
9
1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3,209
(308)
2,901
6,381
3,057
197
2,941
122
(4)
(4,092)
215
(3,877)
(3,544)
(252)
(78)
(1,670)
(917)
(322)
(3,297)
(59)
–
(14,016)
26
–
1,605
(439)
(298)
868
(237)
631
–
631
(91)
(47)
–
–
–
–
–
–
–
–
–
–
–
–
24
(2)
58
–
59
–
(241)
(102)
–
(2)
(242)
(23)
28
(237)
237
–
–
–
£m
IFRS
Income
statement
3,209
(308)
2,901
6,304
3,057
197
2,894
125
–
(4,098)
215
(3,883)
(3,544)
(252)
(54)
(1,672)
(863)
(322)
(3,548)
–
–
26
(2)
1,364
(462)
(270)
632
–
632
(50)
582
14
–
–
–
–
–
–
3
4
(6)
–
(6)
(4)
–
(10)
–
–
–
–
–
–
–
–
1
–
–
1
–
1
(50)
(49)
(3,556)
(308)
(20)
(14,138)
B: Segment information continued
B3: Adjusted operating profit statement – segment information for the year ended 31 December 2014
Banking trading, investment and similar income
Fee and commission income, and income from service activities
Revenue
Gross earned premiums
Outward reinsurance
Net earned premiums
Investment return (non-banking)
Banking interest and similar income
Other income
Inter-segment revenues
Total revenue
Expenses
Reinsurance recoveries
Claims and benefits (including change in insurance contract provisions)
Net claims and benefits incurred
Change in investment contract liabilities
Losses on loans and advances
Finance costs (including interest and similar expenses)
Banking interest payable and similar expenses
Fee and commission expenses, and other acquisition costs
Change in third-party interest in consolidated funds
Other operating and administrative expenses
Income tax attributable to policyholder returns
Inter-segment expenses
Total expenses
Share of associated undertakings’ and joint ventures’ profit after tax
Loss on disposal of subsidiaries, associated undertakings and strategic investments
Adjusted operating profit/(loss) before tax and non-controlling interests
Income tax expense
Non-controlling interests
Adjusted operating profit/(loss) after tax and non-controlling interests
Adjusting items after tax and non-controlling interests
Profit/(loss) after tax from continuing operations
Loss from discontinued operations after tax
Profit/(loss) after tax attributable to equity holders of the parent
B2
D2
D3
D4
D5
D6
D7
D8
D9
G2
C1(c)
D1
C1(a)
I1
6,923
4,083
2,929
(223)
2,706
3,422
116
7
506
80
86
(3,707)
79
(3,628)
(1,208)
–
–
(42)
(318)
–
(36)
(11)
11
–
617
(189)
(18)
410
(15)
395
–
395
2,941
190
919
22
11
–
–
–
–
–
–
–
–
–
(252)
(1,628)
(8)
–
–
(47)
9
–
770
(195)
(274)
301
14
315
–
315
(1,074)
(1,387)
(6,317)
(3,322)
1 Non-core operations relate to Old Mutual Bermuda. Old Mutual Bermuda profit after tax for the year ended 31 December 2014 was £1 million. Non-core operations also
include £31 million relating to the disposal of Nordic in 2012 and £19 million relating to the disposal of US Life in 2011. Further information on discontinued operations is provided
in note I1
Of the total revenues, £2,997 million was generated in the UK (2013: £4,947 million), £1,029 million in the rest of Europe (2013: £864 million),
£10,977 million in South Africa (2013: £13,446 million), £377 million in the United States (2013: £439 million) and £98 million relates to other
operating segments (2013: £114 million).
Notes
Emerging
Markets
Nedbank
Old Mutual
Wealth
Institutional
Asset
Management
Other
Consolidation
adjustments
Adjusted
operating
profit
Adjusting
items
(note C1)
Discontinued
and non-core
operations¹
280
(85)
195
2,493
–
–
1,085
8
2
3,783
(385)
136
(249)
(2,336)
–
–
–
(479)
–
(429)
(23)
(40)
(3,556)
–
–
227
(48)
–
179
(216)
(37)
–
(37)
–
–
–
–
–
–
422
11
–
433
–
–
–
–
–
–
–
(4)
–
(303)
–
(1)
(308)
6
–
131
(29)
(6)
96
(19)
77
–
77
–
–
–
28
–
–
–
–
2
30
–
–
–
–
–
(78)
–
–
–
(86)
–
(6)
(170)
–
–
(140)
22
–
(118)
(1)
(119)
–
(119)
–
–
–
438
–
–
9
1
(105)
343
–
–
–
–
–
–
–
(108)
(322)
(18)
–
105
(343)
–
–
–
–
–
–
–
–
–
–
3,209
(308)
2,901
6,381
3,057
197
2,941
122
(4)
–
–
–
(91)
–
–
(47)
–
–
15,595
(138)
(4,092)
215
(3,877)
(3,544)
(252)
(78)
(1,670)
(917)
(322)
(3,297)
(59)
–
(14,016)
26
–
1,605
(439)
(298)
868
(237)
631
–
631
–
–
–
–
–
24
(2)
58
–
(241)
59
–
(102)
–
(2)
(242)
(23)
28
(237)
237
–
–
–
–
–
–
14
–
–
–
3
4
21
(6)
–
(6)
–
–
–
–
(4)
–
(10)
–
–
(20)
–
–
1
–
–
1
–
1
(50)
(49)
£m
IFRS
Income
statement
3,209
(308)
2,901
6,304
3,057
197
2,894
125
–
15,478
(4,098)
215
(3,883)
(3,544)
(252)
(54)
(1,672)
(863)
(322)
(3,548)
–
–
(14,138)
26
(2)
1,364
(462)
(270)
632
–
632
(50)
582
Old Mutual plc
Annual Report and Accounts 2014
143
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2014
B: Segment information continued
B3: Adjusted operating profit statement – segment information for the year ended 31 December 2013
Notes
Emerging
Markets
Nedbank
Old Mutual
Institutional
Asset
Wealth
Management
Other
Consolidation
adjustments
Adjusted
operating
profit
Adjusting
items
(note C1)
Discontinued
and non-core
operations¹
Revenue
Gross earned premiums
Outward reinsurance
Net earned premiums
Investment return (non-banking)
Banking interest and similar income
Banking trading, investment and similar income
Fee and commission income and income from service activities
Other income
Inter-segment revenues
Total revenue
Expenses
Claims and benefits (including change in insurance contract provisions)
Reinsurance recoveries
Net claims and benefits incurred
Change in investment contract liabilities
Losses on loans and advances
Finance costs (including interest and similar expenses)
Banking interest payable and similar expenses
Fee and commission expenses and other acquisition costs
Change in third-party interest in consolidated funds
Other operating and administrative expenses
Income tax attributable to policyholder returns
Inter-segment expenses
Total expenses
Share of associated undertakings’ and joint ventures’ profit after tax
Loss on disposal of subsidiaries, associated undertakings and strategic investments
Adjusted operating profit/(loss) before tax and non-controlling interests
Income tax expense
Non-controlling interests
Adjusted operating profit/(loss) after tax and non-controlling interests
Adjusting items after tax and non-controlling interests
Profit/(loss) after tax from continuing operations
Profit from discontinued operations after tax
Profit/(loss) after tax attributable to equity holders of the parent
B2
D2
D3
D4
D5
D6
D7
D8
D9
G2
C1(c)
D1
C1(a)
I1
3,365
(230)
3,135
5,184
–
–
552
39
61
8,971
(5,061)
201
(4,860)
(1,952)
–
–
–
(341)
–
(1,165)
(62)
(11)
(8,391)
14
–
594
(155)
(16)
423
(84)
339
–
339
–
–
–
–
3,050
195
1,048
31
11
4,335
–
–
–
–
(368)
–
(1,616)
(12)
–
(1,495)
–
(49)
(3,540)
2
–
797
(200)
(282)
315
12
327
–
327
1 Non-core operations relate to Old Mutual Bermuda. Old Mutual Bermuda profit after tax for the year ended 31 December 2013 was £32 million. Non-core operations also
include a net gain of £3 million divestment cost and additional proceeds received in relation to the Nordic business sold in 2012. Further information on discontinued operations is
provided in note I1
144 Old Mutual plc
Annual Report and Accounts 2014
336
(87)
249
4,159
–
–
1,173
21
1
5,603
(347)
45
(302)
(3,921)
–
–
–
–
(622)
(408)
(112)
(21)
–
–
217
(40)
–
177
(139)
38
–
38
–
–
–
–
–
–
3
–
381
384
–
–
–
–
–
–
–
(4)
–
–
–
(274)
5
–
111
(27)
–
84
(30)
54
–
54
–
–
–
68
–
–
–
(2)
8
74
–
–
–
–
–
–
–
–
(92)
(78)
–
(11)
(181)
–
–
(107)
(2)
–
(109)
21
(88)
–
(88)
19,919
(161)
634
(92)
552
(70)
(564)
(10)
–
92
–
–
–
–
–
8
2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3,701
(317)
3,384
10,045
3,050
195
3,162
94
(11)
(5,408)
246
(5,162)
(5,873)
(368)
(92)
(1,616)
(1,049)
(564)
(3,430)
(174)
–
21
–
1,612
(424)
(298)
890
(220)
670
–
670
–
–
–
–
–
–
–
(94)
(67)
–
–
–
–
–
11
–
78
–
(210)
174
–
53
–
(4)
(112)
(128)
20
(220)
220
–
–
–
(5,386)
(278)
(552)
(18,328)
£m
IFRS
Income
statement
3,701
(317)
3,384
9,986
3,050
195
3,095
100
–
19,810
(5,410)
246
(5,164)
(5,873)
(368)
(81)
(1,616)
(976)
(564)
(3,653)
(18,295)
–
–
21
(4)
1,532
(552)
(278)
702
–
702
3
705
35
–
–
–
–
–
–
6
11
52
(2)
–
(2)
–
–
–
–
(5)
–
(13)
–
–
(20)
–
–
32
–
–
32
–
32
3
35
B: Segment information continued
B3: Adjusted operating profit statement – segment information for the year ended 31 December 2013
Banking trading, investment and similar income
Fee and commission income and income from service activities
Revenue
Gross earned premiums
Outward reinsurance
Net earned premiums
Investment return (non-banking)
Banking interest and similar income
Other income
Inter-segment revenues
Total revenue
Expenses
Reinsurance recoveries
Claims and benefits (including change in insurance contract provisions)
Net claims and benefits incurred
Change in investment contract liabilities
Losses on loans and advances
Finance costs (including interest and similar expenses)
Banking interest payable and similar expenses
Fee and commission expenses and other acquisition costs
Change in third-party interest in consolidated funds
Other operating and administrative expenses
Income tax attributable to policyholder returns
Inter-segment expenses
Total expenses
Share of associated undertakings’ and joint ventures’ profit after tax
Loss on disposal of subsidiaries, associated undertakings and strategic investments
Adjusted operating profit/(loss) before tax and non-controlling interests
Income tax expense
Non-controlling interests
Adjusted operating profit/(loss) after tax and non-controlling interests
Adjusting items after tax and non-controlling interests
Profit/(loss) after tax from continuing operations
Profit from discontinued operations after tax
Profit/(loss) after tax attributable to equity holders of the parent
B2
D2
D3
D4
D5
D6
D7
D8
D9
G2
C1(c)
D1
C1(a)
I1
8,971
4,335
(1,165)
(1,495)
(8,391)
(3,540)
3,365
(230)
3,135
5,184
–
–
552
39
61
(5,061)
201
(4,860)
(1,952)
–
–
–
–
(341)
(62)
(11)
14
–
594
(155)
(16)
423
(84)
339
–
339
–
–
–
–
3,050
195
1,048
31
11
–
–
–
–
–
(368)
(1,616)
(12)
–
–
(49)
2
–
797
(200)
(282)
315
12
327
–
327
1 Non-core operations relate to Old Mutual Bermuda. Old Mutual Bermuda profit after tax for the year ended 31 December 2013 was £32 million. Non-core operations also
include a net gain of £3 million divestment cost and additional proceeds received in relation to the Nordic business sold in 2012. Further information on discontinued operations is
provided in note I1
Notes
Emerging
Markets
Nedbank
Old Mutual
Wealth
Institutional
Asset
Management
Other
Consolidation
adjustments
Adjusted
operating
profit
Adjusting
items
(note C1)
Discontinued
and non-core
operations¹
£m
IFRS
Income
statement
3,701
(317)
3,384
9,986
3,050
195
3,095
100
–
19,810
(5,410)
246
(5,164)
(5,873)
(368)
(81)
(1,616)
(976)
(564)
(3,653)
–
–
–
–
–
35
–
–
–
6
11
52
(2)
–
(2)
–
–
–
–
(5)
–
(13)
–
–
336
(87)
249
4,159
–
–
1,173
21
1
5,603
(347)
45
(302)
(3,921)
–
–
–
(622)
–
(408)
(112)
(21)
(5,386)
–
–
217
(40)
–
177
(139)
38
–
38
–
–
–
–
–
–
381
3
–
384
–
–
–
–
–
–
–
(4)
–
(274)
–
–
(278)
5
–
111
(27)
–
84
(30)
54
–
54
–
–
–
68
–
–
–
(2)
8
74
–
–
–
–
–
(92)
–
–
–
(78)
–
(11)
(181)
–
–
(107)
(2)
–
(109)
21
(88)
–
(88)
–
–
–
634
–
–
8
2
(92)
552
–
–
–
–
–
–
–
(70)
(564)
(10)
–
92
(552)
–
–
–
–
–
–
–
–
–
–
3,701
(317)
3,384
10,045
3,050
195
3,162
94
(11)
19,919
(5,408)
246
(5,162)
(5,873)
(368)
(92)
(1,616)
(1,049)
(564)
(3,430)
(174)
–
(18,328)
21
–
1,612
(424)
(298)
890
(220)
670
–
670
–
–
–
(94)
–
–
(67)
–
–
(161)
–
–
–
–
–
11
–
78
–
(210)
174
–
53
–
(4)
(112)
(128)
20
(220)
220
–
–
–
(20)
(18,295)
–
–
32
–
–
32
–
32
3
35
21
(4)
1,532
(552)
(278)
702
–
702
3
705
Old Mutual plc
Annual Report and Accounts 2014
145
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2014
B: Segment information continued
B4: Statement of financial position – segment information at 31 December 2014
Assets
Goodwill and other intangible assets
Mandatory reserve deposits with central banks
Property, plant and equipment
Investment property
Deferred tax assets
Investments in associated undertakings and joint ventures
Deferred acquisition costs
Reinsurers’ share of policyholder liabilities
Loans and advances
Investments and securities
Current tax receivable
Trade, other receivables and other assets
Derivative financial instruments
Cash and cash equivalents
Non-current assets held for sale
Inter-segment assets
Total assets
Liabilities
Long-term business insurance policyholder liabilities
Investment contract liabilities
Property & casualty liabilities
Third-party interests in consolidated funds
Borrowed funds
Provisions and accruals
Deferred revenue
Deferred tax liabilities
Current tax payable
Trade, other payables and other liabilities
Amounts owed to bank depositors
Derivative financial instruments
Non-current liabilities held for sale
Inter-segment liabilities
Total liabilities
Net assets
Equity
Equity attributable to equity holders of the parent
Non-controlling interests
Ordinary shares
Preferred securities
Total equity
Notes
F1
F2(a)
F2(b)
F7
G2
F3
E8
E3
E4
F4
E6
I2
E8
E8
E8
E9
F5
F6
F7
F8
E10
E6
I2
F10(b)(i)
F10(b)(ii)
Emerging
Markets
Nedbank
Old Mutual
Wealth
Institutional
Asset
Management
Other
Consolidation
adjustments
Non-core
operations
275
–
304
1,290
87
61
100
132
909
29,584
11
622
239
1,024
155
644
35,437
9,276
19,956
319
–
420
198
22
203
107
1,845
385
286
–
384
33,401
2,036
1,929
107
107
–
2,036
452
829
432
7
17
426
–
7
33,773
6,359
16
585
849
741
1
305
44,799
232
653
–
–
1,833
1
-
42
7
790
35,858
843
–
615
40,874
3,925
2,067
1,858
1,586
272
3,925
53,554
1,369
1,688
1,197
–
13
–
6
–
746
2,175
175
46,631
64
385
–
689
1,319
154
291
48,188
–
–
–
40
308
190
35
913
–
–
1,285
179
51,429
2,125
2,125
–
–
–
2,125
839
–
16
–
172
21
16
–
–
40
1
134
130
–
–
–
114
–
–
–
–
3
–
–
3
–
–
–
278
144
542
827
653
174
174
–
827
–
–
–
–
–
–
–
–
10
554
–
36
71
696
–
321
–
–
–
–
677
42
–
19
37
76
–
1
–
293
1,145
543
543
–
–
–
543
381
4,038
302
60
1,639
–
(1,615)
4,805
5,986
364
–
70
–
(1,615)
4,805
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
-
£m
Total
2,763
829
765
1,678
283
518
862
2,314
34,857
87,547
92
2,362
1,227
4,944
1,475
–
142,516
10,519
68,841
319
5,986
3,044
284
330
454
189
4,276
36,243
1,201
1,285
–
132,971
9,545
7,406
2,139
1,867
272
9,545
–
–
–
–
1
–
–
–
–
341
–
298
8
25
-
191
864
720
44
–
–
–
–
–
–
–
10
–
1
–
–
775
89
89
–
–
–
89
The net assets of Emerging Markets are stated after eliminating investments in Group equity and debt instruments of £227 million (2013: £302 million)
held in policyholder funds. These include investments in the Company’s ordinary shares, subordinated liabilities and preferred securities issued by
the Group’s banking subsidiary Nedbank Limited.
146 Old Mutual plc
Annual Report and Accounts 2014
B: Segment information continued
B4: Statement of financial position – segment information at 31 December 2014
Emerging
Markets
Nedbank
Old Mutual
Wealth
Institutional
Asset
Management
Other
Consolidation
adjustments
Non-core
operations
1,197
–
13
–
6
–
746
2,175
175
46,631
64
385
–
689
1,319
154
53,554
291
48,188
–
–
–
40
308
190
35
913
–
–
1,285
179
51,429
2,125
2,125
–
–
–
2,125
839
–
16
–
172
21
16
–
–
40
1
134
–
130
–
–
1,369
–
–
–
–
114
3
–
–
3
278
–
–
–
144
542
827
653
174
174
–
827
–
–
–
–
–
10
–
–
–
554
–
36
71
696
–
321
1,688
–
–
–
–
677
42
–
19
37
76
–
1
–
293
1,145
543
543
–
–
–
543
–
–
–
381
–
–
–
–
–
4,038
–
302
60
1,639
–
(1,615)
4,805
–
–
–
5,986
–
–
–
–
–
364
–
70
–
(1,615)
4,805
–
–
–
–
–
-
–
–
–
–
1
–
–
–
–
341
–
298
8
25
-
191
864
720
44
–
–
–
–
–
–
–
10
–
1
–
–
775
89
89
–
–
–
89
Assets
Goodwill and other intangible assets
Mandatory reserve deposits with central banks
Property, plant and equipment
Investment property
Deferred tax assets
Investments in associated undertakings and joint ventures
Deferred acquisition costs
Reinsurers’ share of policyholder liabilities
Loans and advances
Investments and securities
Current tax receivable
Trade, other receivables and other assets
Derivative financial instruments
Cash and cash equivalents
Non-current assets held for sale
Inter-segment assets
Total assets
Liabilities
Long-term business insurance policyholder liabilities
Investment contract liabilities
Property & casualty liabilities
Third-party interests in consolidated funds
Borrowed funds
Provisions and accruals
Deferred revenue
Deferred tax liabilities
Current tax payable
Trade, other payables and other liabilities
Amounts owed to bank depositors
Derivative financial instruments
Non-current liabilities held for sale
Inter-segment liabilities
Equity attributable to equity holders of the parent
Total liabilities
Net assets
Equity
Non-controlling interests
Ordinary shares
Preferred securities
Total equity
Notes
F1
F2(a)
F2(b)
F7
G2
F3
E8
E3
E4
F4
E6
I2
E8
E8
E8
E9
F5
F6
F7
F8
E10
E6
I2
F10(b)(i)
F10(b)(ii)
275
–
304
1,290
87
61
100
132
909
11
622
239
29,584
1,024
155
644
35,437
9,276
19,956
319
–
420
198
22
203
107
385
286
–
384
1,845
33,401
2,036
1,929
107
107
–
2,036
452
829
432
7
17
426
–
7
16
585
849
741
1
305
33,773
6,359
44,799
232
653
–
–
1,833
1
-
42
7
790
35,858
843
–
615
40,874
3,925
2,067
1,858
1,586
272
3,925
The net assets of Emerging Markets are stated after eliminating investments in Group equity and debt instruments of £227 million (2013: £302 million)
held in policyholder funds. These include investments in the Company’s ordinary shares, subordinated liabilities and preferred securities issued by
the Group’s banking subsidiary Nedbank Limited.
£m
Total
2,763
829
765
1,678
283
518
862
2,314
34,857
87,547
92
2,362
1,227
4,944
1,475
–
142,516
10,519
68,841
319
5,986
3,044
284
330
454
189
4,276
36,243
1,201
1,285
–
132,971
9,545
7,406
2,139
1,867
272
9,545
Old Mutual plc
Annual Report and Accounts 2014
147
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2014
B: Segment information continued
B4: Statement of financial position – segment information at 31 December 2013
Notes
F1
F2(a)
F2(b)
F7
G2
F3
E8
E3
E4
F4
E6
I2
E8
E8
E8
E9
F5
F6
F7
F8
E10
E6
I2
F10(b)(i)
F10(b)(ii)
Emerging
Markets
134
–
303
1,443
104
76
107
174
255
28,592
12
713
349
702
–
635
33,599
9,467
18,576
332
–
187
133
18
182
125
1,932
280
466
–
197
31,895
1,704
1,654
50
50
–
Nedbank
446
759
391
11
11
63
–
11
33,145
5,387
32
585
791
1,196
–
77
42,905
191
661
–
–
1,813
(1)
–
34
17
873
34,083
974
–
567
39,212
3,693
1,976
1,717
1,452
265
1,704
3,693
215
9,037
55,623
1,289
1,927
1,145
140,331
Old Mutual
Wealth
Institutional
Asset
Management
Other
Consolidation
adjustments
Non-core
operations
1,461
–
12
–
20
–
1,094
1,690
183
49,868
84
426
–
687
5
93
1,613
49,714
32
610
254
52
786
–
–
–
7
–
–
312
53,380
2,243
2,243
–
–
–
2,243
794
–
15
–
167
19
10
–
–
33
–
113
–
117
–
21
–
–
–
–
2
2
–
–
3
–
–
–
248
487
742
547
547
–
–
–
547
–
–
1
–
–
–
–
–
10
378
–
43
62
457
–
976
–
–
–
–
642
29
–
21
40
40
–
–
–
520
1,292
635
635
–
–
–
635
357
3,502
351
49
1,667
–
(2,083)
3,843
5,478
412
–
36
–
(2,083)
3,843
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
£m
Total
2,835
759
722
1,811
303
168
1,211
1,875
33,583
88,220
128
2,583
1,259
4,869
5
–
12,126
69,015
332
5,478
2,644
195
628
491
237
4,300
34,370
1,478
–
–
131,294
9,037
7,270
1,767
1,502
265
1
–
–
–
–
–
–
–
–
–
460
352
8
43
–
281
855
64
–
–
–
–
–
–
–
9
–
2
–
–
930
215
215
–
–
–
Assets
Goodwill and other intangible assets
Mandatory reserve deposits with central banks
Property, plant and equipment
Investment property
Deferred tax assets
Investments in associated undertakings and joint ventures
Deferred acquisition costs
Reinsurers’ share of policyholder liabilities
Loans and advances
Investments and securities
Current tax receivable
Trade, other receivables and other assets
Derivative financial instruments
Cash and cash equivalents
Non-current assets held for sale
Inter-segment assets
Total assets
Liabilities
Long-term business insurance policyholder liabilities
Investment contract liabilities
Property & casualty liabilities
Third-party interests in consolidated funds
Borrowed funds
Provisions and accruals
Deferred revenue
Deferred tax liabilities
Current tax payable
Trade, other payables and other liabilities
Amounts owed to bank depositors
Derivative financial instruments
Non-current liabilities held for sale
Inter-segment liabilities
Total liabilities
Net assets
Equity
Equity attributable to equity holders of the parent
Non-controlling interests
Ordinary shares
Preferred securities
Total equity
148 Old Mutual plc
Annual Report and Accounts 2014
B: Segment information continued
B4: Statement of financial position – segment information at 31 December 2013
Old Mutual
Wealth
Institutional
Asset
Management
Consolidation
adjustments
Non-core
operations
Assets
Goodwill and other intangible assets
Mandatory reserve deposits with central banks
Property, plant and equipment
Investment property
Deferred tax assets
Investments in associated undertakings and joint ventures
Deferred acquisition costs
Reinsurers’ share of policyholder liabilities
Loans and advances
Investments and securities
Current tax receivable
Trade, other receivables and other assets
Derivative financial instruments
Cash and cash equivalents
Non-current assets held for sale
Inter-segment assets
Total assets
Liabilities
Long-term business insurance policyholder liabilities
Investment contract liabilities
Property & casualty liabilities
Third-party interests in consolidated funds
Borrowed funds
Provisions and accruals
Deferred revenue
Deferred tax liabilities
Current tax payable
Trade, other payables and other liabilities
Amounts owed to bank depositors
Derivative financial instruments
Non-current liabilities held for sale
Inter-segment liabilities
Equity attributable to equity holders of the parent
Total liabilities
Net assets
Equity
Non-controlling interests
Ordinary shares
Preferred securities
Total equity
Notes
F1
F2(a)
F2(b)
F7
G2
F3
E8
E3
E4
F4
E6
I2
E8
E8
E8
E9
F5
F6
F7
F8
E10
E6
I2
F10(b)(i)
F10(b)(ii)
33,599
42,905
Emerging
Markets
134
–
303
1,443
28,592
104
76
107
174
255
12
713
349
702
–
635
9,467
18,576
332
–
187
133
18
182
125
280
466
–
197
1,932
31,895
1,704
1,654
50
50
–
Nedbank
446
759
391
11
11
63
–
11
33,145
5,387
32
585
791
1,196
–
77
191
661
–
–
1,813
(1)
–
34
17
873
34,083
974
–
567
39,212
3,693
1,976
1,717
1,452
265
1,704
3,693
1,461
–
12
–
20
–
1,094
1,690
183
49,868
84
426
–
687
5
93
55,623
1,613
49,714
–
–
–
32
610
254
52
786
7
–
–
312
53,380
2,243
2,243
–
–
–
2,243
Other
–
–
1
–
–
10
–
–
–
378
–
43
62
457
–
976
794
–
15
–
167
19
10
–
–
33
–
113
–
117
–
21
1,289
1,927
–
–
–
–
2
2
–
–
3
248
–
–
–
487
742
547
547
–
–
–
547
–
–
–
–
642
29
–
21
40
40
–
–
–
520
1,292
635
635
–
–
–
635
–
–
–
357
–
–
–
–
–
3,502
–
351
49
1,667
–
(2,083)
3,843
–
–
–
5,478
–
–
–
–
–
412
–
36
–
(2,083)
3,843
–
–
–
–
–
–
£m
Total
2,835
759
722
1,811
303
168
1,211
1,875
33,583
88,220
128
2,583
1,259
4,869
5
–
–
–
–
–
1
–
–
–
–
460
–
352
8
43
–
281
1,145
140,331
855
64
–
–
–
–
–
–
–
9
–
2
–
–
930
215
215
–
–
–
215
12,126
69,015
332
5,478
2,644
195
628
491
237
4,300
34,370
1,478
–
–
131,294
9,037
7,270
1,767
1,502
265
9,037
Old Mutual plc
Annual Report and Accounts 2014
149
Financials
GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2014
C: Other key performance information
C1: Operating profit adjusting items
(a) Summary of adjusting items for determination of adjusted operating profit (AOP)
In determining the AOP of the Group for core operations, certain adjustments are made to profit before tax to reflect the directors’ view of the
underlying long-term performance of the Group. The following table shows an analysis of those adjustments from AOP to profit before and
after tax.
(Expense)/income
Goodwill impairment and impact of acquisition accounting
Loss on disposal of subsidiaries, associated undertakings and strategic investments
Short-term fluctuations in investment return
Investment return adjustment for Group equity and debt instruments held in life funds
Dividends declared to holders of perpetual preferred callable securities
Institutional Asset Management equity plans
Credit-related fair value losses on Group debt instruments
Restructuring costs
Total adjusting items
Tax on adjusting items
Non-controlling interest in adjusting items
Total adjusting items after tax and non-controlling interests
Notes
C1(b)
C1(c)
C1(d)
C1(e)
C1(f)
C1(g)
C1(h)
C1(i)
D1(d)
£m
Year ended
31 December
2014
Year ended
31 December
2013
(128)
(2)
(49)
(42)
32
(42)
(10)
(60)
(301)
36
28
(237)
(141)
(4)
6
(100)
42
(38)
(31)
(20)
(286)
46
20
(220)
(b) Goodwill impairment and impact of acquisition accounting
When applying acquisition accounting, deferred acquisition costs and deferred revenues existing at the point of acquisition are not recognised
under IFRS. These are reversed on acquisition in the statement of financial position and replaced by goodwill, other intangible assets and the
value of the acquired present value of in-force business (acquired PVIF). In determining AOP, the Group recognises deferred revenue and
acquisition costs and deferred revenue in relation to policies sold by acquired businesses pre-acquisition. The Group excludes the impairment
of goodwill and the amortisation and impairment of acquired other intangibles and acquired PVIF as well as movements in certain acquisition
date provisions. Costs incurred on completed acquisitions are also excluded from AOP. If the intangible assets recognised as a result of a business
combination are subsequently impaired, this is excluded from AOP. The effect of these adjustments to determine AOP are summarised below:
Year ended 31 December 2014
Amortisation of acquired PVIF
Amortisation of acquired deferred costs and revenue
Amortisation of other acquired intangible assets
Change in acquisition date provisions
Impairment of goodwill and other intangible assets
Goodwill impairment and impact of acquisition accounting
Year ended 31 December 2013
Amortisation of acquired PVIF
Amortisation of acquired deferred costs and revenue
Amortisation of other acquired intangible assets
Impairment of goodwill and other intangible assets
Goodwill impairment and impact of acquisition accounting
Emerging
Markets
Old Mutual
Wealth
(3)
–
(7)
–
–
(67)
11
(47)
(1)
(14)
(10)
(118)
Emerging
Markets
Old Mutual
Wealth
–
–
(2)
(8)
(10)
(76)
11
(46)
(20)
(131)
£m
Total
(70)
11
(54)
(1)
(14)
(128)
£m
Total
(76)
11
(48)
(28)
(141)
150 Old Mutual plc
Annual Report and Accounts 2014
(c) Loss on disposal of subsidiaries, associated undertakings and strategic investments
Loss on disposal of subsidiaries, associated undertakings and strategic investments is analysed below:
Emerging Markets
Old Mutual Wealth
Institutional Asset Management
Loss on disposal of subsidiaries, associated undertakings and strategic investments
£m
Year ended
31 December
2014
Year ended
31 December
2013
66
(70)
2
(2)
–
–
(4)
(4)
Emerging Markets
On 30 April 2014, following the termination of the management agreement with SA Corporate Real Estate Fund, a JSE listed real estate trust, the
Group agreed to sell and transfer the business to the new manager once the transaction became unconditional. A profit of £4 million has been
recognised in profit or loss.
On 1 September 2014, the Group completed the acquisition of an additional 25% stake in Old Mutual Finance (Pty) Ltd. The accounting related to
the step up in ownership from 50% to 75% effectively involved a simultaneous sale of 50% of the business, followed by an acquisition of the fair
value of 75% of the business. Consequently a profit of £62 million has been realised on the transaction, calculated as the difference between the
fair value of the initial 50% and the carrying amount of the investment in Old Mutual Finance (Pty) Ltd at 1 September 2014.
Old Mutual Wealth
On 30 May 2014, the Group completed the disposal of Skandia Poland, part of Old Mutual Wealth. A loss on disposal of £21 million has been
recognised profit or loss.
On 1 October 2014, the Group announced that it had completed the sale of Skandia Austria and Skandia Germany. A loss on disposal of
£43 million has been recognised in profit or loss.
On 6 November 2014, the Group completed the sale of Skandia Liechtenstein. A loss on disposal of £6 million has been recognised in profit or loss.
Institutional Asset Management
During the year ended 31 December 2014, the Group received additional earn-out income of £2 million from affiliates disposed of in the
prior year.
On 2 January 2013, the Group completed the sale of five of its affiliates and recognised a loss of £1 million.
On 11 October 2013, Institutional Asset Management committed to a plan to cease the operations of Echo Point. The incremental cost of
£3 million associated with discontinuing the entity was recognised in full during October 2013.
(d) Short-term fluctuations in investment return
Profit before tax, as disclosed in the consolidated IFRS income statement, includes actual investment returns earned on the shareholder assets of
the Group’s life assurance and property & casualty businesses. AOP is stated after recalculating shareholder asset investment returns based on a
long-term investment return rate. The difference between the actual and the long-term investment returns is referred to as the short-term
fluctuation in investment return.
Long-term rates of return are based on achieved rates of return appropriate to the underlying asset base, adjusted for current inflation
expectations, default assumptions, costs of investment management and consensus economic investment forecasts. The underlying rates are
principally derived with reference to 10-year government bond rates, cash and money market rates and an explicit equity risk premium for South
African businesses. The rates set out below reflect the apportionment of underlying investments in cash deposits, money market instruments and
equity assets. Long-term rates of return are reviewed frequently by the Board, usually annually, for appropriateness. The review of the long-term
rates of return seeks to ensure that the returns credited to AOP are consistent with the actual returns expected to be earned over the long term.
For Emerging Markets, the return is applied to an average value of investible shareholders’ assets, adjusted for net fund flows. For Old Mutual
Wealth, the return is applied to average investible assets.
Long-term investment rates
Emerging Markets
Old Mutual Wealth
%
Year ended
31 December
2014
Year ended
31 December
2013
7.4 – 8.0
1.0
7.4 – 8.0
1.0
Old Mutual plc
Annual Report and Accounts 2014
151
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2014
C: Other key performance information continued
C1: Operating profit adjusting items continued
Analysis of short-term fluctuations in investment return
Year ended 31 December 2014
Actual shareholder investment return
Less: Long-term investment return
Short-term fluctuations in investment return
Year ended 31 December 2013
Actual shareholder investment return
Less: Long-term investment return
Short-term fluctuations in investment return
Emerging
Markets
Old Mutual
Wealth
64
123
(59)
23
5
18
Emerging
Markets
Old Mutual
Wealth
160
137
23
22
30
(8)
Other
16
24
(8)
Other
34
43
(9)
£m
Total
103
152
(49)
£m
Total
216
210
6
(e) Investment return adjustment for Group equity and debt instruments held in policyholder funds
AOP includes investment returns on policyholder investments in Group equity and debt instruments held by the Group’s life funds. These include
investments in the Company’s ordinary shares and the subordinated liabilities and ordinary shares issued by the Group. These investment returns
are eliminated within the consolidated income statement in arriving at profit before tax in the IFRS income statement, but are included in AOP. This
ensures consistency of treatment with the measures in the related policyholder liability. During the year ended 31 December 2014, the investment
return adjustment increased AOP by £42 million (year ended 31 December 2013: increase of £100 million).
(f) Dividends declared to holders of perpetual preferred callable securities
Dividends declared to the holders of the Group’s perpetual preferred callable securities on an AOP basis were £32 million for the year ended
31 December 2014 (year ended 31 December 2013: £42 million). For the purpose of determining AOP, these are recognised in finance costs on
an accrual basis. In accordance with IFRS, the total cash distribution is recognised directly in equity.
(g) Institutional Asset Management equity plans
Institutional Asset Management has a number of long-term incentive arrangements with senior employees in its asset management affiliates.
The Group has issued put options over the equity of certain affiliates to senior affiliate employees, as part of its Institutional Asset Management
incentive schemes. The impact of revaluing these instruments is recognised in accordance with IFRS, but excluded from AOP. At 31 December
2014, these instruments were revalued, the impact of which was a loss of £42 million (year ended 31 December 2013: loss of £38 million).
(h) Credit-related fair value losses on Group debt instruments
The widening of the credit spread on the Group’s debt instruments causes the market value of these instruments to decrease, resulting in gains
being recognised in profit or loss. Conversely, if the credit spread narrows the market value of debt instruments increases causing losses to be
recognised in the consolidated income statement. In the directors’ view, such movements are not reflective of the underlying performance of the
Group and will reverse over time. Therefore they have been excluded from AOP. For the year ended 31 December 2014, due to narrowing of
credit spreads, a net loss of £10 million was recognised (year ended 31 December 2013: net loss of £31 million).
(i) Old Mutual Wealth restructuring expenditure
The Old Mutual Wealth business embarked on a significant programme of operational change in 2013. This will fundamentally restructure the
way in which its UK platform business operates. Over the next two years, it will migrate certain elements of service provision to International
Financial Data Services (IFDS). Costs related to decommissioning of existing technology and service provision and the migration of service to IFDS
are excluded from AOP. These costs comprise payments to IFDS and directly attributable internal project costs and totalled £60 million for the
year ended 31 December 2014 (year ended 31 December 2013: £20 million).
152 Old Mutual plc
Annual Report and Accounts 2014
C2: Earnings and earnings per share
The Group calculates earnings per share (EPS) on a number of different bases as appropriate to prevailing international, UK and South African
practices and guidance. IFRS requires the calculation of basic and diluted EPS. Adjusted operating EPS reflects earnings per share that is
consistent with the Group’s alternative profit measure. JSE Limited (JSE) listing requirements also require the Group to calculate headline EPS.
The Group’s EPS on these different bases are summarised below:
Basic earnings per share
Diluted basic earnings per share
Adjusted operating earnings per share
Headline earnings per share (Gross of tax)
Headline earnings per share (Net of tax)
Diluted headline earnings per share (Gross of tax)
Diluted headline earnings per share (Net of tax)
Source of guidance
IFRS
IFRS
Group policy
JSE Listing Requirements
JSE Listing Requirements
JSE Listing Requirements
JSE Listing Requirements
Pence
Year ended
31 December
2014
Year ended
31 December
2013
12.4
11.5
17.9
12.3
12.6
11.4
11.6
15.0
13.9
18.4
15.6
15.2
14.4
14.1
Notes
C2(a)
C2(b)
C2(c)
C2(d)
C2(d)
C2(d)
C2(d)
(a) Basic earnings per share
Basic earnings per share is calculated by dividing the profit for the financial year attributable to ordinary equity shareholders by the weighted
average number of ordinary shares in issue during the year excluding own shares held in policyholder funds, Employee Share Ownership Plan
Trusts (ESOP), Black Economic Empowerment trusts and other related undertakings.
The table below reconciles the profit attributable to equity holders of the parent to profit attributable to ordinary equity holders:
Profit for the financial year attributable to equity holders of the parent from continuing operations
(Loss)/profit for the financial year attributable to equity holders of the parent from discontinued operations
Profit for the financial year attributable to equity holders of the parent
Dividends paid to holders of perpetual preferred callable securities, net of tax credits
Profit attributable to ordinary equity holders
£m
Year ended
31 December
2014
Year ended
31 December
2013
632
(50)
582
(25)
557
702
3
705
(37)
668
Total dividends paid to holders of perpetual preferred callable securities of £25 million for the year ended 31 December 2014 (year ended
31 December 2013: £37 million) are stated net of tax credits of £7 million (year ended 31 December 2013: £10 million).
The table below summarises the calculation of the weighted average number of ordinary shares for the purposes of calculating basic earnings
per share:
Weighted average number of ordinary shares in issue
Shares held in charitable foundations
Shares held in ESOP trusts
Adjusted weighted average number of ordinary shares
Shares held in life funds
Shares held in Black Economic Empowerment trusts
Weighted average number of ordinary shares used to calculate basic earnings per share
Basic earnings per ordinary share (pence)
Millions
Year ended
31 December
2014
Year ended
31 December
2013
Notes
C2(c)
4,901
(6)
(50)
4,845
(127)
(233)
4,485
12.4
4,897
(6)
(55)
4,836
(155)
(239)
4,442
15.0
Old Mutual plc
Annual Report and Accounts 2014
153
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2014
C: Other key performance information continued
C2: Earnings and earnings per share continued
(b) Diluted basic earnings per share
Diluted basic EPS recognises the dilutive impact of shares and options held in ESOP trusts and Black Economic Empowerment trusts, to the extent
they have value, in the calculation of the weighted average number of shares, as if the relevant shares were in issue for the full year.
The table below reconciles the profit attributable to ordinary equity holders to diluted profit attributable to ordinary equity holders and
summarises the calculation of weighted average number of shares for the purpose of calculating diluted basic earnings per share:
Profit attributable to ordinary equity holders (£m)
Dilution effect on profit relating to share options issued by subsidiaries (£m)
Diluted profit attributable to ordinary equity holders (£m)
Weighted average number of ordinary shares (millions)
Adjustments for share options held by ESOP trusts (millions)
Adjustments for shares held in Black Economic Empowerment trusts (millions)
Weighted average number of ordinary shares used to calculate diluted basic earnings
per share (millions)
Diluted basic earnings per ordinary share (pence)
Year ended
31 December
2014
Year ended
31 December
2013
Notes
C2(a)
557
(10)
547
4,485
48
233
4,766
11.5
668
(10)
658
4,442
45
239
4,726
13.9
(c) Adjusted operating earnings per share
The following table presents a reconciliation of profit for the financial year to adjusted operating profit after tax attributable to ordinary equity
holders and summarises the calculation of adjusted operating earnings per share:
Profit for the financial year attributable to equity holders of the parent
Adjusting items
Tax on adjusting items
Non-core operations
Loss/(profit) from discontinued operations
Non-controlling interest on adjusting items
Adjusted operating profit after tax attributable to ordinary equity holders (£m)
Adjusted weighted average number of ordinary shares used to calculate adjusted operating
earnings per share (millions)
Adjusted operating earnings per share (pence)
Notes
C1(a)
B3
I1
Year ended
31 December
2014
Year ended
31 December
2013
582
301
(36)
(1)
50
(28)
868
705
286
(46)
(32)
(3)
(20)
890
C2(a)
4,845
17.9
4,836
18.4
154 Old Mutual plc
Annual Report and Accounts 2014
(d) Headline earnings per share
The Group is required to calculate headline earnings per share (HEPS) in accordance with the JSE Limited (JSE) Listing Requirements, determined
by reference to the South African Institute of Chartered Accountants’ circular 02/2013 (Revised) ‘Headline Earnings’. The table below sets out a
reconciliation of basic EPS and HEPS in accordance with that circular. Disclosure of HEPS is not a requirement of IFRS, but it is a commonly used
measure of earnings in South Africa. The table below reconciles the profit for the financial year attributable to equity holders of the parent to
headline earnings and summarises the calculation of basic HEPS:
Year ended
31 December 2014
Year ended
31 December 2013
Notes
Gross
582
(25)
557
14
2
(20)
553
(10)
543
4,485
4,766
12.3
11.4
Profit for the financial year attributable to equity holders of the parent
Dividends paid to holders of perpetual preferred callable securities
Profit attributable to ordinary equity holders
Adjustments:
Impairments of goodwill and intangible assets
Loss/(profit) on disposal of subsidiaries, associated undertakings and strategic
investments
Realised gains (net of impairments) on available-for-sale financial assets
Headline earnings
Dilution effect on earnings relating to share options issued by
subsidiaries (£m)
Diluted headline earnings
Weighted average number of ordinary shares (millions)
Diluted weighted average number of ordinary shares (millions)
C2(a)
C2(b)
Headline earnings per share (pence)
Diluted headline earnings per share (pence)
C3: Dividends
2012 Final dividend paid – 5.25p per 113⁄7p share
2013 Interim dividend paid – 2.10p per 113⁄7p share
2013 Final dividend paid – 6.00p per 113⁄7p share
2014 Interim dividend paid – 2.45p per 113⁄7p share
Dividends to ordinary equity holders
Dividends paid to holders of perpetual preferred callable securities
Dividend payments for the year
Net
582
(25)
557
14
14
(20)
565
(10)
555
4,485
4,766
12.6
11.6
Gross
705
(37)
668
28
4
(8)
692
(10)
682
4,442
4,726
15.6
14.4
Net
705
(37)
668
28
(12)
(8)
676
(10)
666
4,442
4,726
15.2
14.1
£m
Year ended
31 December
2014
Year ended
31 December
2013
–
–
279
115
394
32
426
238
98
–
–
336
47
383
Final and interim dividends paid to ordinary equity holders are calculated using the number of shares in issue at the record date less own shares
held in ESOP trusts, life funds of Group entities, Black Economic Empowerment trusts and related undertakings.
As a consequence of the exchange control arrangements in place in certain African territories, dividends to ordinary equity holders on the branch
registers of 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.
A final dividend of 6.25 pence (or its equivalent in other applicable currencies) per ordinary share in the Company has been recommended by
the directors. The final dividend will be paid on 29 May 2015 to shareholders on the register at the close of business on 17 April 2015 for the
South Africa, Zimbabwe, Namibia and Malawi registers and 22 April 2015 for the UK register. The dividend will absorb an estimated £293 million
of shareholders’ funds. The Company is not planning to offer a scrip dividend alternative.
In March and November 2014, £17 million and £15 million respectively, were declared and paid to holders of perpetual preferred callable
securities (March 2013: £22 million, November 2013: £25 million).
Old Mutual plc
Annual Report and Accounts 2014
155
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2014
For the year ended 31 December 2014
D: Other income statement notes
D1: Income tax expense
(a) Analysis of total income tax expense
Current tax
United Kingdom
Overseas tax
– Africa
– Europe
– Rest of the world
Withholding taxes
Adjustments to current tax in respect of prior years
Total current tax
Deferred tax
Origination and reversal of temporary differences
Effect on deferred tax of changes in tax rates
Recognition of previously unrecognised deferred tax assets
Adjustments to deferred tax in respect of prior years
Total deferred tax
Total income tax expense
(b) Reconciliation of total income tax expense
Profit before tax
Tax at UK standard rate of 21.5% (2013: 23.25%)
Different tax rate or basis on overseas operations
Untaxed and low taxed income
Disallowable expenses
Net movement on deferred tax assets not recognised
Effect on deferred tax of changes in tax rates
Withholding taxes
Income tax attributable to policyholder returns
Tax on Group equity held in life funds
Other
Total income tax expense
(c) Income tax relating to components of other comprehensive income
Preferred perpetual callable securities
Measurement gains on defined benefit plans
Income tax on items that will not be reclassified subsequently to profit or loss
Income tax on items that may be reclassified subsequently to profit or loss
Income tax (credit)/expense relating to components of other comprehensive income
156 Old Mutual plc
Annual Report and Accounts 2014
£m
Year ended
31 December
2014
Year ended
31 December
2013
19
336
32
5
16
31
439
43
–
–
(20)
23
462
(3)
407
19
7
16
(25)
421
142
(15)
1
3
131
552
£m
Year ended
31 December
2014
Year ended
31 December
2013
1,364
293
95
(56)
67
7
–
8
46
–
2
462
1,532
356
57
(76)
35
31
(15)
10
133
21
–
552
£m
Year ended
31 December
2014
Year ended
31 December
2013
(7)
1
(6)
5
(1)
(10)
22
12
(2)
10
For the year ended 31 December 2014
(d) Reconciliation of income tax expense in the IFRS income statement to income tax on adjusted operating profit
Income tax expense
Tax on adjusting items
Goodwill impairment and impact of acquisition accounting
(Loss)/profit on disposal of subsidiaries, associates and strategic investments
Short-term fluctuations in investment return
Tax on dividends declared to holders of perpetual preferred callable securities recognised in equity
Institutional Asset Management equity plans
Restructuring costs
Total tax on adjusting items
Income tax attributable to policyholders returns
Income tax on adjusted operating profit
D2: Investment return (non-banking)
Interest and similar income
Loans and advances
Investments and securities
Cash and cash equivalents
Total interest and similar income
Dividend income – investments and securities
Fair value gains and losses recognised in income
Rental income from investment properties
Investment property gains on revaluation
Foreign currency losses
Total amounts recognised in profit or loss
Total interest income for assets not at fair value through profit or loss
The fair value gains and losses shown above are analysed according to their IAS 39 categorisations as follows:
Held-for-trading (including derivatives)
Designated at fair value through profit or loss
Available-for-sale financial assets
£m
Year ended
31 December
2014
Year ended
31 December
2013
462
15
(11)
6
(7)
20
13
36
(59)
439
552
26
16
(2)
(10)
11
5
46
(174)
424
£m
Year ended
31 December
2014
Year ended
31 December
2013
5
974
127
1,106
334
4,653
150
62
(1)
6,304
48
1,012
121
1,181
390
8,161
152
103
(1)
9,986
9
12
–
4,653
–
4,653
(25)
8,172
14
8,161
There were no fair value gains and losses on available-for-sale financial assets for the year ended 31 December 2014 in the normal course of
business that were recycled to investment return (non-banking). For the year ended 31 December 2013, £14 million relates to gains realised on the
sale of debt securities held by the Group’s Old Mutual Bermuda business.
Old Mutual plc
Annual Report and Accounts 2014
157
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2014
D: Other income statement notes continued
D3: Banking interest and similar income
Loans and advances
Mortgage loans
Finance lease and instalment debtors
Credit cards
Overdrafts
Term loans and other
Investments and securities
Government and government-guaranteed securities
Other debt securities, preference shares and debentures
Total interest and similar income
Total interest income for assets not at fair value through profit or loss
Total interest income on impaired financial assets
D4: Banking trading, investment and similar income
Dividend income – investments and securities
Rental income from investment property
Net exchange and other non-interest income
Net trading income
Total banking trading, investment and similar income
The fair value gains and losses included above are analysed according to their IAS 39 categorisations as follows:
Held-for-trading (including derivatives)
Designated at fair value through profit or loss
Realised fair value gains included above
D5: Fee and commission income and income from service activities
Year ended 31 December 2014
Fee and commission income
Transaction and performance fees
Change in deferred revenue
Year ended 31 December 2013
Fee and commission income
Transaction and performance fees
Change in deferred revenue
158 Old Mutual plc
Annual Report and Accounts 2014
Life and
savings
Asset
management
Banking
General
insurance
832
–
18
850
1,111
30
24
1,165
Life and
savings
Asset
management
902
–
49
951
1,126
20
38
1,184
838
13
–
851
Banking
934
–
1
935
29
–
(1)
28
General
insurance
28
–
(3)
25
£m
Year ended
31 December
2014
Year ended
31 December
2013
2,710
1,190
500
96
83
841
347
200
147
2,703
1,187
514
98
84
820
347
236
111
3,057
3,050
2,453
50
2,536
65
£m
Year ended
31 December
2014
Year ended
31 December
2013
5
7
33
152
197
8
(2)
6
6
3
5
17
170
195
(145)
147
2
2
£m
Total
2,810
43
41
2,894
£m
Total
2,990
20
85
3,095
D6: Finance costs
Interest payable on borrowed funds
Senior debt and term loans
Subordinated debt
Interest rate swaps
Fair value gains and losses on borrowed funds
Borrowed funds
Derivative instruments used as economic hedges
Total finance costs excluding banking activities
Finance costs from banking activities
Total Group finance costs on debt instruments
£m
Year ended
31 December
2014
Year ended
31 December
2013
Notes
48
8
55
(15)
6
34
(28)
54
159
213
50
8
57
(15)
31
(17)
48
81
156
237
D7
The fair value gains and losses shown above are analysed according to their IAS 39 categorisations as follows:
Designated at fair value through profit or loss
6
31
D7: Banking interest payable and similar expense
Amounts owed to bank depositors
Deposits and loan accounts
Current and savings accounts
Negotiable certificates of deposit
Long-term debt instruments
Other liabilities
Total interest payable and similar expenses
£m
Year ended
31 December
2014
Year ended
31 December
2013
Notes
1,529
1,074
8
288
159
143
1,672
1,484
977
11
340
156
132
1,616
D6
Total interest expense included above for liabilities not at fair value through profit or loss
1,483
1,372
D8: Fee and commission expenses and other acquisition costs
Year ended 31 December 2014
Fee and commission expenses
Change in deferred acquisition costs
Other acquisition costs
Year ended 31 December 2013
Fee and commission expenses
Change in deferred acquisition costs
Other acquisition costs
Life and
savings
Asset
management
General
insurance
492
24
67
583
161
13
–
174
107
(1)
–
106
Life and
savings
Asset
management
General
insurance
538
29
65
632
200
31
–
231
115
(2)
–
113
£m
Total
760
36
67
863
£m
Total
853
58
65
976
Old Mutual plc
Annual Report and Accounts 2014
159
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2014
D: Other income statement notes continued
D9: Other operating and administrative expenses
(a) Other operating and administrative expenses include:
Staff costs
Depreciation
Software costs
Operating lease rentals – banking
Operating lease rentals – non-banking
Amortisation of PVIF and other acquired intangibles
Impairment of goodwill and other intangible assets
Notes
D9(b)
F2(a)
F1(f)
C1(b)/F1(f)
Operating lease payments principally represent rentals payable by the Group for the rental of buildings and equipment.
£m
Year ended
31 December
2014
Year ended
31 December
2013
1,860
83
9
61
27
170
14
1,904
88
10
63
32
173
28
£m
Year ended
31 December
2014
Year ended
31 December
2013
Notes
1,094
39
1,184
31
H1(b)
H1(b)
82
(3)
8
403
61
54
122
88
1
10
373
40
59
118
1,860
1,904
Number
Year ended
31 December
2014
Year ended
31 December
2013
25,684
3,223
31,083
1,343
228
22
61,583
22,646
2,886
29,799
1,249
206
26
56,812
(b) Staff costs
Wages and salaries
Social security costs
Retirement obligations
Defined contribution plans
Defined benefit plans
Other retirement benefits
Bonus and incentive remuneration
Share-based payments
Cash settled
Equity settled
Other
The average number of persons employed by the Group was:
Emerging Markets
Old Mutual Wealth
Nedbank
Institutional Asset Management
Other
Non-core operations (Old Mutual Bermuda)
160 Old Mutual plc
Annual Report and Accounts 2014
(c) Fees to Group’s auditors
Included in other operating expenses and loss from discontinued operations are fees paid to the Group’s auditors. These can be categorised as follows:
Fees for audit services
Group
Subsidiaries
Pension schemes
Total audit fees
Fees for non-audit services
Audit-related assurance
Taxation compliance
Corporate finance transactions
Other non-audit services
Total non-audit services
Total Group auditors’ remuneration
£m
Year ended
31 December
2014
Year ended
31 December
2013
1.3
12.1
0.3
13.7
0.9
1.6
0.4
0.5
3.4
17.1
1.3
10.5
0.2
12.0
0.7
1.6
0.2
0.3
2.8
14.8
In addition to the above, fees of £3.2 million (2013: £3.7 million) were payable to other auditors in respect of joint audit arrangements of
Nedbank, the Group’s banking subsidiary in South Africa.
E: Financial assets and liabilities
E1: Group statement of financial position
The Group is exposed to financial risk through its financial assets (investments and loans), financial liabilities (investment contracts, customer
deposits and borrowings), reinsurance assets and insurance liabilities. The key focus of financial risk management for the Group is ensuring that
the proceeds from its financial assets are sufficient to fund the obligations arising from its insurance and banking operations. The most important
components of financial risk are credit risk, market risk (arising from changes in equity, bond prices, interest and foreign exchange rates) and
liquidity risk.
(a) Recognition and derecognition
A financial asset or liability is recognised when, and only when, the Group becomes a party to the contractual provisions of the financial instrument.
The Group derecognises a financial asset when, and only when:
■ The contractual rights to the cash flows arising from the financial assets have expired or been forfeited by the Group; or
■ It transfers the financial asset including substantially all the risks and rewards of ownership of the asset; or
■ It transfers the financial asset and neither transfers nor retains substantially all the risks and rewards of ownership and does not retain control.
A financial liability is derecognised when, and only when, the liability is extinguished. That is, when the obligation specified in the contract is
discharged, assigned, cancelled or has expired.
The difference between the carrying amount of a financial liability (or part thereof) extinguished or transferred to another party and
consideration received, including any non-cash assets transferred or liabilities assumed, is recognised in profit or loss.
All purchases and sales of financial assets that require delivery within the timeframe established by regulation or market convention (‘regular way’
purchases and sales) are recognised at trade date, which is the date that the Group commits to purchase or sell the asset. Loans and receivables
are recognised (at fair value plus attributable transaction costs) when cash is advanced to borrowers.
(b) Initial measurement
Financial instruments are initially recognised at fair value plus, in the case of a financial asset or financial liability not at fair value through profit
or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability.
(c) Derivative financial instruments
Derivative financial instruments are recognised in the statement of financial position at fair value. Fair values are obtained from quoted market
prices, discounted cash flow models and option pricing models as appropriate. All derivatives are carried as assets when their fair value is
positive and as liabilities when their fair value is negative.
Changes in the fair value of derivatives not designated as hedges for hedge accounting purposes are included in investment income or finance
costs as appropriate.
Old Mutual plc
Annual Report and Accounts 2014
161
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2014
E: Financial assets and liabilities continued
E1: Group statement of financial position continued
(d) Hedge accounting
Qualifying hedging instruments must either be derivative financial instruments or non-derivative financial instruments used to hedge the risk of
changes in foreign currency exchange rates, changes in fair value or changes in cash flows. Changes in the value of the financial instrument
should be expected to offset changes in the fair value or cash flows of the underlying hedged item.
The Group designates certain qualifying hedging instruments as either (1) a hedge of the exposure to changes in fair value of a recognised asset
or liability or an unrecognised firm commitment (fair value hedge) or (2) a hedge of a future cash flow attributable to a recognised asset or
liability, or a forecasted transaction, and could affect profit or loss (cash flow hedge) or (3) a hedge of a net investment in a foreign operation.
Hedge accounting is used for qualifying hedging instruments designated in this way provided certain criteria are met.
The Group’s criteria in accordance with reporting standards for a qualifying hedging instrument to be accounted for as a hedge include:
■ Upfront formal documentation of the hedging instrument, hedged item or transaction, risk management objective and strategy, the nature of
the risk being hedged and the effectiveness measurement methodology that will be applied is prepared before hedge accounting is adopted
■ The hedge is documented showing that it is expected to be highly effective in offsetting the changes in the fair value or cash flows attributable
to the hedged risk, consistent with the risk management and strategy detailed in the upfront hedge documentation
■ The effectiveness of the hedge can be reliably measured
■ The hedge is assessed and determined to have been highly effective on an ongoing basis
■ For cash flow hedges of a forecast transaction, an assessment that it is highly probable that the hedged transaction will occur and will carry
profit or loss risk.
Changes in the fair value of derivatives that are designated and qualify as fair value hedges and that prove to be highly effective in relation to
hedged risk, are recorded in profit or loss, along with the corresponding change in fair value of the hedged asset or liability that is attributable
to that specific hedged risk.
Changes in the fair value of derivatives that are designated and qualify as cash flow hedges or hedges of a net investment in a foreign operation,
and that prove to be highly effective in relation to the hedged risk, are recognised in other comprehensive income. Any ineffective portion of
changes in the fair value of the derivative is recognised in profit or loss.
If the hedge no longer meets the criteria for hedge accounting, hedge accounting is discontinued prospectively. For fair value hedge accounting,
any previous adjustment to the carrying amount of a hedged interest-bearing financial instrument carried at amortised cost (as a result of
previous hedge accounting), is amortised in profit or loss from the date hedge accounting ceases, to the maturity date of the financial instrument,
based on the effective interest method.
For hedges of a net investment in a foreign operation, any cumulative gains or losses in equity are recognised in profit or loss on disposal of the
foreign operation.
(e) Embedded derivatives
Certain derivatives embedded in financial and non-financial instruments, such as the conversion option in a convertible bond, are treated as
separate derivatives and recognised as such on a standalone basis, when their risks and characteristics are not closely related to those of the
host contract and the host contract is not carried at fair value with unrealised gains and losses reported in profit or loss. If it is not possible to
determine the fair value of the embedded derivative, the entire hybrid instrument is categorised as fair value through profit or loss and measured
at fair value.
(f) Offsetting financial instruments and related income
Financial assets and liabilities are offset and the net amount reported in the statement of financial position only when there is a legally
enforceable right to set off and there is intention to settle on a net basis, or to realise the asset and settle the liability simultaneously.
Income and expense items are offset only to the extent that their related instruments have been offset in the statement of financial position, with the
exception of those relating to hedges, which are disclosed in accordance with profit or loss effect of the hedged item.
(g) Interest income and expense
Interest income and expense in relation to financial instruments carried at amortised cost or held as available-for-sale are recognised in profit or
loss using the effective interest method, taking into account the expected timing and amount of cash flows. Interest income and expense include
the amortisation of any discount or premium or other differences between the initial carrying amount of an interest-bearing instrument and its
amount at maturity calculated on an effective interest basis.
Interest income and expense on financial instruments carried at fair value through profit or loss are presented as part of interest income or
expense.
(h) Non-interest revenue
Non-interest revenue in respect of financial instruments principally comprises fees and commission and other operating income. These are
accounted for as set out below.
162 Old Mutual plc
Annual Report and Accounts 2014
Fees and commission income
Loan origination fees, for loans that are probable of being drawn down, are deferred (together with related direct costs) and recognised as an
adjustment to the effective yield on the loan. Fees and commission arising from negotiating, or participating in the negotiation of a transaction for
a third-party, such as the acquisition of loans, shares or other securities or the purchase or sale of businesses, are recognised on completion of the
underlying transaction.
Other income
Revenue other than interest, fees and commission (including fees and insurance premiums), which includes exchange and securities trading income,
dividends from investments and net gains on the sale of banking assets, is recognised in profit or loss when the amount of revenue from the
transaction or service can be measured reliably and it is probable that the economic benefits of the transaction or service will flow to the Group.
(i) Financial assets
Non-derivative financial assets are recorded as held-for-trading, designated as fair value through profit or loss, loans and receivables, held-to-
maturity or available-for-sale. An analysis of the Group’s statement of financial position, showing the categorisation of financial assets, together
with financial liabilities is set out in note E1(o).
(j) Classification of financial instruments
Held-for-trading financial assets
Held-for-trading financial assets are those that were either acquired for generating a profit from short-term fluctuations in price or dealer’s
margin, or are securities included in a portfolio in which a pattern of short-term profit taking exists, or are derivatives that are not designated as
effective hedging instruments.
Financial assets designated as fair value through profit or loss
Financial assets that the Group has elected to designate as fair value through profit or loss are those where the treatment either eliminates or
significantly reduces a measurement or recognition inconsistency that would otherwise arise when using a different measurement basis (for
instance with respect to financial assets supporting insurance contract provisions) or are managed, evaluated and reported using a fair value
basis (for instance financial assets supporting shareholders’ funds).
All financial assets carried at fair value through profit or loss, whether held-for-trading or designated, are initially recognised at fair value and
subsequently remeasured at fair value based on bid prices quoted in active markets. If such price information is not available for these
instruments, the Group uses other valuation techniques, including internal models, to measure these instruments. These techniques use market
observable inputs where available, derived from similar assets and liabilities in similar and active markets, from recent transaction prices for
comparable items or from other observable market data. For positions where observable reference data are not available for some or all
parameters, the Group estimates the non-market observable inputs used in its valuation models. Where discounted cash flow techniques are used,
estimated future cash flows are based on management’s best estimates and the discount rate used is a market-related rate at the reporting date
for an instrument with similar terms and conditions.
Fair values of certain financial instruments, such as over-the-counter (OTC) derivative instruments, are determined using pricing models that
consider, among other factors, contractual and market prices, correlations, yield curves, credit spreads, and volatility factors.
Realised and unrealised fair value gains and losses on all financial assets carried at fair value through profit or loss are included in investment
return (non-banking) or in banking trading, investment and similar income as appropriate.
Interest earned whilst holding financial assets at fair value through profit or loss is reported within investment return (non-banking) or banking
interest and similar income, as appropriate. Dividends receivable are included separately in dividend income, within investment return (non-
banking) or banking trading, investment and similar income, when a dividend is declared.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than
those classified by the Group as fair value through profit or loss or available-for-sale. Loans and receivables are carried at amortised cost less
any impairment write-downs. Third-party expenses such as legal fees incurred in securing a loan are treated as part of the cost of the transaction.
Held-to-maturity financial assets
Financial assets with fixed maturity dates which are quoted in an active market and where management has both the intent and the ability to hold
the asset to maturity are classified as held-to-maturity. These assets are carried at amortised cost less any impairment write-downs. Interest
earned on held-to-maturity financial assets is reported within investment return (non-banking) or banking interest and similar income, as
appropriate.
Available-for-sale financial assets
Financial assets intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest
rates, exchange rates or equity prices other than those designated fair value through profit or loss or as loans and receivables, are classified as
available-for-sale. Management determines the appropriate classification of its investments at the time of the purchase.
Available-for-sale financial assets are measured at fair value based on bid prices quoted in active markets. If such prices are unavailable or
determined to be unreliable, the fair value of the financial asset is estimated using pricing models or discounted cash flow techniques. Where
discounted cash flow techniques are used, estimated future cash flows are based on management’s best estimates and the discount rate used is
a market-related rate at the reporting date for an instrument with similar terms and conditions. Where pricing models are used, inputs are based
on observable market data where available at the reporting date.
Old Mutual plc
Annual Report and Accounts 2014
163
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2014
E: Financial assets and liabilities continued
E1: Group statement of financial position continued
(j) Classification of financial instruments continued
Unrealised gains and losses arising from changes in the fair value of available-for-sale financial assets are recognised in other comprehensive
income. When available-for-sale financial assets are disposed, the related accumulated fair value adjustments are included in profit or loss as
gains and losses from available-for-sale financial assets. When available-for-sale assets are impaired the resulting loss is shown separately in
profit or loss as an impairment charge.
Interest earned on available-for-sale financial assets is reported within investment return (non-banking) or banking interest and similar income,
as appropriate. Dividends receivable are included separately in dividend income, within investment return (non-banking) or banking trading,
investment and similar income, as appropriate when a dividend is declared.
Financial liabilities (other than investment contracts and derivatives)
Non-derivative financial liabilities, including borrowed funds, amounts owed to depositors and liabilities under acceptances, are recorded
as held-for-trading, designated as fair value through profit or loss or as financial liabilities at amortised cost.
Liabilities that the Group has elected to designate as fair value through profit or loss are those where the treatment either eliminates or significantly
reduces a measurement or recognition inconsistency that would otherwise arise when using a different measurement basis or are managed,
evaluated and reported using a fair value basis.
For financial liabilities recorded at fair value and which contain a demand feature, the fair value of the liability is not less than the amount payable
on demand, discounted from the first date that the amount could be required to be paid.
Financial liabilities categorised at amortised cost are recognised initially at fair value, which is normally represented by the transaction price less
directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are stated at amortised cost with any difference
between cost and redemption value being recognised in profit or loss over the period of the borrowings on an effective interest basis.
Equity classified conversion options included within financial liabilities are recorded separately in shareholders’ equity. The Group does not
recognise any change in the value of this option in subsequent periods. The remaining obligation to make future payments of principal and
interest to bondholders is calculated using a market interest rate for an equivalent non-convertible bond and is presented on the amortised cost
basis in other borrowed funds until extinguished on conversion or maturity of the bonds.
If the Group purchases its own debt, it is removed from the statement of financial position and the difference between the carrying amount of
a liability and the consideration paid is included in other income.
(k) Reclassifications of financial assets
A non-derivative financial asset that would have met the definition of loans and receivables at initial recognition that was required to be
categorised as held-for-trading (on the basis that it was held for the purpose of selling or repurchasing in the near term) may under exceptional
circumstances be reclassified out of the fair value through profit or loss category if the Group intends and is able to hold the financial asset for the
foreseeable future or until maturity. If a financial asset is so reclassified, it is reclassified at its fair value on the date of reclassification. Any gain or
loss already recognised in profit or loss is not reversed. The fair value at the date of reclassification becomes its new cost or amortised cost, as
applicable.
Other non-derivative financial assets that were required to be categorised as held-for-trading at initial recognition may be reclassified out of the
fair value through profit or loss category in rare circumstances. If a financial asset is so reclassified, it is reclassified at its fair value on the date of
reclassification. Any gain or loss already recognised in profit or loss is not reversed. Measurement of the asset after reclassification depends on
the subsequent categorisation.
A non-derivative financial asset that would have met the definition of loans and receivables at initial recognition that was designated as available-
for-sale may under exceptional circumstances be reclassified out of the available-for-sale category to the loans and receivables category if it
meets the loans and receivables definition at the date of reclassification and if the Group intends and is able to hold the financial asset for the
foreseeable future or until maturity. If a financial asset is so reclassified, it is reclassified at its fair value on the date of reclassification. The fair
value at the date of reclassification becomes its new cost or amortised cost, as applicable. In the case of a financial asset with a fixed maturity, the
gain or loss already recognised in the available-for-sale reserve in equity is amortised to profit or loss over the remaining life using the effective
interest method together with any difference between the new amortised cost and the maturity amount. In the case of a financial asset that does
not have a fixed maturity, the gain or loss already recognised in the available-for-sale reserve in equity is recognised in profit or loss when the
financial asset is sold or otherwise disposed.
(l) Sale and repurchase agreements and lending of securities
Securities sold subject to linked repurchase agreements are retained in the financial statements as appropriate when considering the de-
recognition criteria contained within IAS 39. The securities that are retained in the financial statements are reflected as trading or investment
securities and the counterparty liability is included in amounts owed to other depositors, deposits from other banks, or other money market
deposits, as appropriate. Securities purchased under agreements to resell at a pre-determined price are recorded as loans and advances to
other banks or customers as appropriate. The difference between the sale and repurchase price is treated as interest and accrued over the lives
of agreements using the effective interest method.
164 Old Mutual plc
Annual Report and Accounts 2014
Securities lent to counterparties are retained in the financial statements and any interest earned recognised in profit or loss using the effective
interest method.
Securities borrowed are not recognised in the financial statements, unless these are sold to third parties, in which case the purchase and sale are
recorded with the gain or loss included in trading income. The obligation to return them is recorded at fair value as a trading liability.
(m) Parent Company investments in subsidiary undertakings and associates
Parent Company investments in subsidiary undertakings and associates are recorded at cost. Impairments of Parent Company investments in
subsidiary undertakings and associates are accounted for in the same way as impairments of other non-financial assets.
(n) Impairments of financial assets
Indicators of impairment
A provision for impairment is established if there is objective evidence that the Group will not be able to recover all amounts relating to the
financial asset. Observable data that could come to the attention of the Group that could lead to a provision for impairment to be made include:
■ Significant financial difficulty of the counterparty
■ A breach of contract, such as a default or delinquency in interest or principal payments
■ The Group, for economic or legal reasons relating to the counterparty’s financial difficulty, grants to the counterparty a concession that the
Group would not otherwise consider
■ It becoming probable that the counterparty will enter bankruptcy or other financial reorganisation
■ Observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of assets since the initial
recognition of those assets, although the decrease cannot yet be identified with the individual financial assets, including:
– adverse changes in the payment status of counterparties in the group of financial assets; or
– national or local economic conditions that correlate with defaults on the assets in the group of financial assets.
In addition, for an available-for-sale financial asset, a significant or prolonged decline in the fair value below its cost is also objective evidence
of impairment.
Financial assets at amortised cost
The amount of the impairment of a financial asset held at amortised cost is the difference between the carrying amount and the recoverable
amount, being the value of expected cash flows, including amounts recoverable from guarantees and collateral, discounted based on the
effective interest rate at initial recognition. In estimating future expected cash flows, the Group looks at the contractual cash flows of the assets
and adjusts these contractual cash flows for historical loss experience of assets with similar credit risks, with this adjusted to reflect any additional
conditions that are expected to arise or to account for those which no longer exist. This is done to predict inherent losses which exist in the asset
as at the reporting date but have not been reported.
The impairment provision also covers losses where there is objective evidence that losses are present in components of the loan portfolio at the
reporting date, but these components have not yet been specifically identified. When a loan is uncollectable, it is written-off against the related
impairment provision.
If the amount of impairment subsequently decreases due to an event occurring after the write-down, the release of the impairment provision is
credited to profit or loss. Impairment reversals are limited to what the carrying amount would have been had no impairment losses been recognised.
Interest income on impaired loans and receivables is recognised on the impaired amount using the original effective interest rate before the impairment.
Available-for-sale financial assets
The amount of the impairment loss of an available-for-sale financial asset is the cumulative loss that has been recognised in other comprehensive
income, being the difference between the acquisition cost and the asset’s current fair value, less any impairment loss on that asset previously
recognised in profit or loss. For available-for-sale debt securities, fair value is determined as the present value of expected future cash flows
discounted at the current market rate of interest.
All such impairments are recognised in profit or loss. The release of an impairment allowance in respect of a debt instrument categorised as
available-for-sale is credited to profit or loss, the release in respect of an equity instrument categorised as available-for-sale is credited to the
available-for-sale reserve within equity.
Old Mutual plc
Annual Report and Accounts 2014
165
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2014
E: Financial assets and liabilities continued
E1: Group statement of financial position continued
(o) Categories of financial instruments
The analysis of assets and liabilities into their categories as defined in IAS 39 ‘Financial Instruments: Recognition and Measurement’ is set out in
the following table. Assets and liabilities of a non-financial nature, or financial assets and liabilities that are specifically excluded from the scope of
IAS 39, are reflected in the non-financial assets and liabilities category.
At 31 December 2014
Measurement basis
Fair value
(note E1(q))
Amortised cost
(note E1(r))
Total
Held-for-
trading
Designated
Available-
for-sale
financial
assets
Held-to-
maturity
investments
Loans and
receivables
Financial
liabilities
amortised
cost
Non-
financial
assets and
liabilities
£m
Assets
Mandatory reserve deposits with
central banks
Investments in associated undertakings
and joint ventures
Reinsurers’ share of policyholder liabilities
Loans and advances
Investments and securities
Trade, other receivables and other assets
Derivative financial instruments
Cash and cash equivalents
Total assets that include financial
instruments
Total non-financial assets
Total assets
Liabilities
Life assurance policyholder liabilities
Third-party interest in consolidation
of funds
Borrowed funds
Trade, other payables and other liabilities
Amounts owed to bank depositors
Derivative financial instruments
Total liabilities that include financial
instruments
Total non-financial liabilities
Total liabilities
829
–
–
518
2,314
34,857
87,547
2,362
1,227
4,944
134,598
7,918
142,516
–
–
1,497
839
117
1,227
–
3,680
–
3,680
50
2,027
3,523
83,568
310
–
–
89,478
–
89,478
79,360
–
60,904
5,986
3,044
4,276
36,243
1,201
130,110
2,861
132,971
–
–
251
4,290
1,201
5,742
–
5,742
5,986
734
341
2,199
–
70,164
–
70,164
–
–
–
2
754
–
–
–
756
–
756
–
–
–
–
–
–
–
–
–
–
829
–
–
–
2,325
–
–
–
2,325
–
2,325
–
12
29,835
61
1,260
–
4,944
36,941
–
36,941
–
–
–
–
–
–
–
–
–
–
–
–
468
275
–
–
675
–
–
1,418
7,918
9,336
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
18,456
–
2,310
2,217
29,754
–
–
–
1,467
–
–
34,281
–
19,923
2,861
34,281
22,784
166 Old Mutual plc
Annual Report and Accounts 2014
At 31 December 2013
Measurement basis
Fair value
(note E1(q))
Amortised cost
(note E1(r))
Total
Held-for-
trading
Designated
Available-
for-sale
financial
assets
Held-to-
maturity
investments
Loans and
receivables
Financial
liabilities
amortised
cost
Non-
financial
assets and
liabilities
£m
Assets
Mandatory reserve deposits with central
banks
Investments in associated undertakings
and joint ventures
Reinsurers’ share of policyholder liabilities
Loans and advances
Investments and securities
Trade, other receivables and other assets
Derivative financial instruments
Cash and cash equivalents
Total assets that include financial
instruments
Total non-financial assets
Total assets
Liabilities
Life assurance policyholder liabilities
Third-party interest in consolidation of
funds
Borrowed funds
Trade, other payables and other liabilities
Amounts owed to bank depositors
Derivative financial instruments
Total liabilities that include financial
instruments
Total non-financial liabilities
Total liabilities
759
–
–
168
1,875
33,583
88,220
2,583
1,259
4,869
133,316
7,015
140,331
81,141
5,478
2,644
4,300
34,370
1,478
129,411
1,883
131,294
–
–
2,147
971
193
1,259
–
4,570
–
4,570
49
1,624
3,668
84,873
347
–
–
90,561
–
90,561
–
61,555
–
–
263
3,303
1,478
5,044
–
5,044
5,478
747
294
5,179
–
73,253
–
73,253
–
–
–
4
807
–
–
–
811
–
811
–
–
–
–
–
–
–
–
–
–
–
–
1,461
–
–
–
1,461
–
1,461
–
–
–
–
–
–
–
–
–
–
759
–
16
27,764
108
1,447
–
4,869
34,963
–
34,963
–
–
–
–
–
–
–
–
–
–
–
–
119
235
–
–
596
–
–
950
7,015
7,965
–
–
–
–
–
–
–
–
–
–
19,586
–
1,897
2,398
25,888
–
30,183
–
30,183
–
–
1,345
–
–
20,931
1,883
22,814
Old Mutual plc
Annual Report and Accounts 2014
167
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2014
E: Financial assets and liabilities continued
E1: Group statement of financial position continued
(p) Fair values of financial assets and liabilities
(i) Determination of fair value
All financial instruments, regardless of their IAS 39 categorisation, are initially recorded at fair value. The fair value of a financial instrument on
initial recognition is normally the transaction price. That is, the fair value of the consideration given or received. In certain circumstances, however,
the initial fair value may be based on other observable current market transactions in the same instrument, without modification or repackaging,
or on a valuation technique whose variables include only observable data.
Subsequent to initial recognition, the fair values of financial instruments measured at fair value that are quoted in active markets are based on bid
prices for assets, which in certain circumstances includes using quotations from independent third parties such as brokers and pricing services,
and offer prices for liabilities. When quoted prices are not available, fair values are determined by using valuation techniques that refer as far as
possible to observable market data. These include comparison with similar instruments where market observable prices exist, discounted cash
flow analysis, option pricing models and other valuation techniques commonly used by market participants. A number of factors such as bid-offer
spread, credit profile, servicing costs and model uncertainty are taken into account, as appropriate, when values are calculated using a valuation
technique. Changes in the assumptions used in such valuations could impact the reported value of such instruments. All derivative instruments are
measured at fair value.
In general, none of the carrying amounts of financial assets and liabilities carried at amortised cost have a fair value significantly different to their
carrying amounts. Such assets and liabilities primarily comprise variable-rate financial assets and liabilities that re-price as interest rates change,
short-term deposits or current assets.
All financial assets and liabilities that are measured at amortised cost are initially recognised at fair value plus transaction costs.
The following is taken into account when evaluating the fair value of financial instruments:
■ Assessing whether instruments are trading with sufficient frequency and volume, that they can be considered liquid
■ The inclusion of a measure of the counterparties’ non-performance risk in the fair-value measurement of loans and advances, which involves
the modelling of dynamic credit spreads
■ The inclusion of credit valuation adjustment (CVA) and debit valuation adjustment (DVA) in the fair-value measurement of derivative instruments,
with particular emphasis on DVA and
■ The inclusion of own credit risk in the calculation of the fair value of financial liabilities.
Loans and advances
Loans and advances include mortgage loans, other asset-based loans, including collateralised debt obligations, and other secured and
unsecured loans.
In the absence of an observable market for these instruments, the fair value is determined by using internally developed models that are specific
to the instrument and that incorporate all available observable inputs. These models involve discounting the contractual cash flows by using a
credit-adjusted zero-coupon rate.
Investments and securities
Investments and securities include government and government-guaranteed securities, listed and unlisted debt securities, preference shares and
debentures, listed and unlisted equity securities, listed and unlisted pooled investments (see below), short-term funds and securities treated as
investments and certain other securities.
Pooled investments represent the Group’s holdings of shares/units in open-ended investment companies, unit trusts, mutual funds and similar
investment vehicles. Pooled investments are stated at fair value. The fair values of pooled investments are based on widely published prices that
are regularly updated or models based on the market prices of investments held in the underlying pooled investment funds.
Amounts owed to bank depositors
The fair values of amounts owed to bank depositors correspond with the carrying amount shown in the statement of financial position, which
generally reflects the amount payable on demand.
Borrowed funds
The fair values of amounts included in borrowed funds are based on quoted market prices at the reporting date where applicable, or by
reference to quoted prices of similar instruments.
Other financial assets and liabilities
The fair values of other financial assets and liabilities (which comprise cash and cash equivalents, cash with central banks, other assets and
liabilities) are reasonably approximated by the carrying amounts reflected in the statement of financial position as they are short-term in nature
or re-price to current market rates frequently.
168 Old Mutual plc
Annual Report and Accounts 2014
(ii) Fair value hierarchy
Fair values are determined according to the following hierarchy.
■ Level 1 – quoted market prices: financial assets and liabilities with quoted prices for identical instruments in active markets. Instruments
classified as Level 1 generally comprise listed equity securities, government securities and other listed debt securities and similar instruments,
actively traded pooled investments, certain quoted derivative assets and liabilities, listed borrowed funds and investment contract liabilities
linked to Level 1 pooled investments and other assets.
■ Level 2 – valuation techniques using observable inputs: financial assets and liabilities with quoted prices for similar instruments in active markets
or quoted prices for identical or similar instruments in inactive markets and financial assets and liabilities valued using models where all
significant inputs are observable. Instruments classified as Level 2 generally comprise unlisted equity and debt securities where the valuation is
based on models involving no significant unobservable data. Certain inputs, such as discount rates and credit spreads may be unobservable
but these inputs do not have a significant impact on the fair value of the instrument. This includes certain loans and advances, certain privately
placed debt instruments, third-party interests in consolidated funds and amounts owed to bank depositors.
■ Level 3 – valuation techniques using significant unobservable inputs: financial assets and liabilities valued using valuation techniques where one
or more significant inputs are unobservable. Instruments classified as Level 3 generally comprise unlisted equity and securities with significant
unobservable inputs, securities where the market is not considered sufficiently active, including certain inactive pooled investments, and
derivatives embedded in certain portfolios of insurance contracts where the derivative is not closely related to the host contract and the
valuation contains significant unobservable inputs.
■ The Group deems a transfer to have occurred between Level 1 and Level 2 when an active, traded primary market ceases to exist for that
financial instrument.
The best evidence of fair value is a quoted price in an active market. In the event that the market for a financial asset or liability is not active,
or quoted prices cannot be obtained without undue effort, another valuation technique is used.
The judgement as to whether a market is active may include, for example, consideration of factors such as the magnitude and frequency of
trading activity, the availability of prices and the size of bid/offer spreads. In inactive markets, obtaining assurance that the transaction price
provides evidence of fair value or determining the adjustments to transaction prices that are necessary to measure the fair value of the asset or
liability requires additional work during the valuation process.
The majority of valuation techniques employ only observable data and so the reliability of the fair value measurement is high. However, certain
financial assets and liabilities are valued on the basis of valuation techniques that feature one or more significant inputs that are unobservable
and, for them, the derivation of fair value is more judgemental. A financial asset or liability in its entirety is classified as valued using significant
unobservable inputs if a significant proportion of that asset or liability’s carrying amount is driven by unobservable inputs.
In this context, ‘unobservable’ means that there is little or no current market data available for which to determine the price at which an arm’s
length transaction would be likely to occur. It generally does not mean that there is no market data available at all upon which to base a
determination of fair value. Furthermore, in some cases the majority of the fair value derived from a valuation technique with significant
unobservable data may be attributable to observable inputs. Consequently, the effect of uncertainty in determining unobservable inputs will
generally be restricted to uncertainty about the overall fair value of the asset or liability being measured. Details of the Group’s valuation
techniques can be found in note E1(q) (iii). There have been no significant changes to the valuation techniques applied.
Old Mutual plc
Annual Report and Accounts 2014
169
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2014
E: Financial assets and liabilities continued
E1: Group statement of financial position continued
(q) Disclosure of financial assets and liabilities measured at fair value
(i) Financial assets and liabilities measured at fair value, classified according to fair value hierarchy
The table below presents the Group’s financial assets and liabilities that are measured at fair value in the consolidated statement of financial
position according to their IAS 39 classification, as set out in note E1(o), and in terms of the fair value hierarchy as required by IFRS 7 ‘Financial
Instruments: Disclosures’.
£m
At 31 December 2014
Financial assets measured at fair value
Held-for-trading (fair value through profit or loss)
Loans and advances
Investments and securities
Other financial assets
Derivative financial instruments – assets
Designated (fair value through profit or loss)
Investments in associated undertakings and joint ventures
Reinsurers’ share of policyholder liabilities
Loans and advances
Investments and securities
Other financial assets
Available-for-sale financial assets (fair value through equity)
Loans and advances
Investments and securities
Total assets measured at fair value
Financial liabilities measured at fair value
Held-for-trading (fair value through profit or loss)
Other liabilities
Amounts owed to bank depositors
Derivative financial instruments – liabilities
Designated (fair value through profit or loss)
Life assurance policyholder liabilities
Third-party interests in consolidated funds
Borrowed funds
Other liabilities
Amounts owed to bank depositors
Total
Level 1
Level 2
Level 3
At 31 December 2013
Total
Level 1
Level 2
3,680
1,497
839
117
1,227
373
–
254
117
2
3,299
1,497
585
–
1,217
89,478
73,554
14,320
50
2,027
3,523
83,568
310
756
2
754
–
2,027
177
71,040
310
137
2
135
–
–
3,344
10,976
–
618
–
618
8
–
–
–
8
1,604
50
–
2
1,552
–
1
–
1
93,914
74,064
18,237
1,613
Total assets measured at fair value
95,942
77,663
16,507
1,772
5,742
251
4,290
1,201
245
243
–
2
5,497
8
4,290
1,199
70,164
44,274
25,136
60,904
5,986
734
341
2,199
43,571
–
653
50
–
16,579
5,986
81
291
2,199
–
–
–
–
754
754
–
–
–
–
Total liabilities measured at fair value
75,906
44,519
30,633
754
Total liabilities measured at fair value
78,297
47,048
30,317
932
Financial assets measured at fair value
Held-for-trading (fair value through profit or loss)
Loans and advances
Investments and securities
Other financial assets
Derivative financial instruments – assets
Designated (fair value through profit or loss)
Investments in associated undertakings and joint ventures
Reinsurers’ share of policyholder liabilities
Loans and advances
Investments and securities
Other financial assets
Loans and advances
Investments and securities
Available-for-sale financial assets (fair value through equity)
Financial liabilities measured at fair value
Held-for-trading (fair value through profit or loss)
Other liabilities
Amounts owed to bank depositors
Derivative financial instruments – liabilities
Designated (fair value through profit or loss)
Life assurance policyholder liabilities
Third-party interests in consolidated funds
Borrowed funds
Other liabilities
Amounts owed to bank depositors
76,822
11,980
1,759
4,570
2,147
971
193
1,259
90,561
49
1,624
3,668
84,873
347
811
4
807
5,044
263
3,303
1,478
73,253
61,555
5,478
747
294
5,179
493
–
295
193
5
1,624
–
1
74,850
347
348
4
344
265
256
–
9
46,783
46,084
–
663
36
–
4,066
2,147
673
–
1,246
–
–
3,665
8,315
–
461
–
461
4,779
7
3,303
1,469
25,538
14,539
5,478
84
258
5,179
£m
Level 3
11
–
3
–
8
49
–
2
1,708
–
2
–
2
–
–
–
–
–
–
–
–
932
932
170 Old Mutual plc
Annual Report and Accounts 2014
E: Financial assets and liabilities continued
E1: Group statement of financial position continued
(q) Disclosure of financial assets and liabilities measured at fair value
(i) Financial assets and liabilities measured at fair value, classified according to fair value hierarchy
The table below presents the Group’s financial assets and liabilities that are measured at fair value in the consolidated statement of financial
position according to their IAS 39 classification, as set out in note E1(o), and in terms of the fair value hierarchy as required by IFRS 7 ‘Financial
Instruments: Disclosures’.
At 31 December 2014
Financial assets measured at fair value
Held-for-trading (fair value through profit or loss)
Loans and advances
Investments and securities
Other financial assets
Derivative financial instruments – assets
Designated (fair value through profit or loss)
Investments in associated undertakings and joint ventures
Reinsurers’ share of policyholder liabilities
Loans and advances
Investments and securities
Other financial assets
Loans and advances
Investments and securities
Available-for-sale financial assets (fair value through equity)
Total assets measured at fair value
Financial liabilities measured at fair value
Held-for-trading (fair value through profit or loss)
Other liabilities
Amounts owed to bank depositors
Derivative financial instruments – liabilities
Designated (fair value through profit or loss)
Life assurance policyholder liabilities
Third-party interests in consolidated funds
Borrowed funds
Other liabilities
Amounts owed to bank depositors
3,680
1,497
839
117
1,227
373
–
254
117
2
50
2,027
3,523
83,568
310
–
2,027
177
71,040
310
756
2
754
5,742
251
4,290
1,201
137
2
135
245
243
–
2
3,299
1,497
585
–
1,217
–
–
–
3,344
10,976
618
–
618
5,497
8
4,290
1,199
70,164
44,274
25,136
60,904
5,986
734
341
2,199
43,571
–
653
50
–
16,579
5,986
81
291
2,199
754
754
50
–
2
1,552
£m
8
–
–
–
8
–
1
–
1
–
–
–
–
–
–
–
–
Total
Level 1
Level 2
Level 3
At 31 December 2013
Total
Level 1
Level 2
89,478
73,554
14,320
1,604
Designated (fair value through profit or loss)
Financial assets measured at fair value
Held-for-trading (fair value through profit or loss)
Loans and advances
Investments and securities
Other financial assets
Derivative financial instruments – assets
Investments in associated undertakings and joint ventures
Reinsurers’ share of policyholder liabilities
Loans and advances
Investments and securities
Other financial assets
Available-for-sale financial assets (fair value through equity)
Loans and advances
Investments and securities
4,570
2,147
971
193
1,259
90,561
49
1,624
3,668
84,873
347
811
4
807
493
–
295
193
5
76,822
–
1,624
1
74,850
347
348
4
344
4,066
2,147
673
–
1,246
11,980
–
–
3,665
8,315
–
461
–
461
£m
Level 3
11
–
3
–
8
1,759
49
–
2
1,708
–
2
–
2
93,914
74,064
18,237
1,613
Total assets measured at fair value
95,942
77,663
16,507
1,772
Total liabilities measured at fair value
75,906
44,519
30,633
754
Total liabilities measured at fair value
Financial liabilities measured at fair value
Held-for-trading (fair value through profit or loss)
Other liabilities
Amounts owed to bank depositors
Derivative financial instruments – liabilities
Designated (fair value through profit or loss)
Life assurance policyholder liabilities
Third-party interests in consolidated funds
Borrowed funds
Other liabilities
Amounts owed to bank depositors
5,044
263
3,303
1,478
73,253
61,555
5,478
747
294
5,179
265
256
–
9
46,783
46,084
–
663
36
–
4,779
7
3,303
1,469
25,538
14,539
5,478
84
258
5,179
78,297
47,048
30,317
–
–
–
–
932
932
–
–
–
–
932
Old Mutual plc
Annual Report and Accounts 2014
171
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2014
E: Financial assets and liabilities continued
E1: Group statement of financial position continued
(q) Disclosure of financial assets and liabilities measured at fair value continued
(ii) Level 3 fair value hierarchy disclosure
The tables below reconcile the opening balances of Level 3 financial assets and liabilities to closing balances at the end of the year:
Year ended 31 December 2014
Level 3 financial assets
At beginning of the year
Total net (losses)/gains recognised
in the profit or loss for the period
Purchases and issues
Sales and settlements
Transfers in
Transfers out
Foreign exchange and other
Total level 3 financial assets
Gains relating to assets held at 31 December 2014
recognised in profit or loss
Held-for-trading
Designated fair value through profit or loss
Available-
for-sale
£m
Total
Investments
and
securities
Derivatives
Investments
in associated
undertakings
and joint
ventures
Loans and
advances
Investments
and
securities
Investments
and
securities
3
–
–
(3)
–
–
–
–
–
8
(1)
–
–
–
–
1
8
(1)
49
–
(1)
–
–
–
2
50
–
2
–
–
–
–
–
–
2
–
1,708
53
136
(319)
54
(36)
(44)
1,552
22
2
–
–
(1)
–
–
–
1
–
1,772
52
135
(323)
54
(36)
(41)
1,613
21
Year ended 31 December 2013
Level 3 financial assets
At beginning of the year
Total net gains/(losses) recognised
in the profit or loss for the period
Purchases and issues
Sales and settlements
Transfers in
Transfers out
Foreign exchange and other
Total level 3 financial assets
Gains relating to assets held at 31 December 2013
recognised in profit or loss
Held-for-trading
Designated fair value through profit or loss
Investments
and
securities
Derivatives
Loans and
advances
Investments
Investments
and
securities
and
securities
Investments
in associated
undertakings
and joint
ventures
Available-for-
sale
£m
Total
4
1
–
(1)
–
–
(1)
3
–
–
–
9
–
–
–
(1)
8
–
73
(1)
4
(12)
–
–
(15)
49
–
9
–
–
(6)
–
–
(1)
2
–
1,122
65
290
(77)
464
(21)
(135)
1,708
55
2
–
–
–
–
–
–
2
–
1,210
65
303
(96)
464
(21)
(153)
1,772
55
During 2013, £464 million of investments and securities was transferred from Level 2 to Level 3 in terms of the fair value hierarchy. This relates to
Old Mutual Wealth investments in illiquid property investment funds. Observable inputs which can be utilised to value these funds are not readily
available. These investment funds back policyholder liabilities (investment contracts) for which there is a corresponding £464 million Level 3 of the
fair value hierarchy. The backing of liabilities by assets means that the Group is not exposed to any profit or loss arising on the realisation of these
investment funds.
£m
Designated
fair value
through
profit
or loss –
Life assurance
policyholder
liabilities
(investment
contracts)
932
(47)
8
(137)
(2)
754
(47)
Total net gains recognised in profit or loss for the period
Year ended 31 December 2013
Level 3 financial liabilities
At beginning of the year
Purchases and issues
Sales and settlements
Transfers in
Foreign exchange and other
Total level 3 financial liabilities
Losses relating to liabilities held at 31 December 2014 recognised in profit or loss
£m
Designated fair
value through
profit or loss –
Life assurance
policyholder
liabilities
(investment
contracts)
480
(8)
106
(114)
464
4
932
(12)
Year ended 31 December 2014
Level 3 financial liabilities
At beginning of the year
Total net gains recognised in profit or loss for the period
Purchases and issues
Sales and settlements
Foreign exchange and other
Total level 3 financial liabilities
Gains relating to liabilities held at 31 December 2014 recognised in profit or loss
172 Old Mutual plc
Annual Report and Accounts 2014
E: Financial assets and liabilities continued
E1: Group statement of financial position continued
(q) Disclosure of financial assets and liabilities measured at fair value continued
(ii) Level 3 fair value hierarchy disclosure
The tables below reconcile the opening balances of Level 3 financial assets and liabilities to closing balances at the end of the year:
Year ended 31 December 2014
Level 3 financial assets
At beginning of the year
Total net (losses)/gains recognised
in the profit or loss for the period
Purchases and issues
Sales and settlements
Transfers in
Transfers out
Foreign exchange and other
Total level 3 financial assets
Gains relating to assets held at 31 December 2014
recognised in profit or loss
Held-for-trading
Designated fair value through profit or loss
Investments
and
securities
Derivatives
and joint
ventures
Loans and
advances
Investments
Investments
and
and
securities
securities
Investments
in associated
undertakings
Available-
for-sale
£m
Total
3
–
–
(3)
–
–
–
–
–
8
(1)
–
–
–
–
1
8
(1)
49
–
(1)
–
–
–
2
50
–
2
–
–
–
–
–
–
2
–
1,708
53
136
(319)
54
(36)
(44)
1,552
22
2
(1)
–
–
–
–
–
1
–
1,772
52
135
(323)
54
(36)
(41)
1,613
21
Year ended 31 December 2013
Level 3 financial assets
At beginning of the year
Total net gains/(losses) recognised
in the profit or loss for the period
Purchases and issues
Sales and settlements
Transfers in
Transfers out
Foreign exchange and other
Total level 3 financial assets
Gains relating to assets held at 31 December 2013
recognised in profit or loss
Held-for-trading
Designated fair value through profit or loss
Available-for-
sale
£m
Total
Investments
and
securities
Derivatives
Investments
in associated
undertakings
and joint
ventures
Loans and
advances
Investments
and
securities
Investments
and
securities
4
1
–
(1)
–
–
(1)
3
–
–
–
9
–
–
–
(1)
8
–
73
(1)
4
(12)
–
–
(15)
49
–
9
–
–
(6)
–
–
(1)
2
–
1,122
65
290
(77)
464
(21)
(135)
1,708
55
2
–
–
–
–
–
–
2
–
1,210
65
303
(96)
464
(21)
(153)
1,772
55
During 2013, £464 million of investments and securities was transferred from Level 2 to Level 3 in terms of the fair value hierarchy. This relates to
Old Mutual Wealth investments in illiquid property investment funds. Observable inputs which can be utilised to value these funds are not readily
available. These investment funds back policyholder liabilities (investment contracts) for which there is a corresponding £464 million Level 3 of the
fair value hierarchy. The backing of liabilities by assets means that the Group is not exposed to any profit or loss arising on the realisation of these
investment funds.
Total net gains recognised in profit or loss for the period
Year ended 31 December 2014
Level 3 financial liabilities
At beginning of the year
Purchases and issues
Sales and settlements
Foreign exchange and other
Total level 3 financial liabilities
Gains relating to liabilities held at 31 December 2014 recognised in profit or loss
Year ended 31 December 2013
Level 3 financial liabilities
At beginning of the year
Total net gains recognised in profit or loss for the period
Purchases and issues
Sales and settlements
Transfers in
Foreign exchange and other
Total level 3 financial liabilities
Losses relating to liabilities held at 31 December 2014 recognised in profit or loss
£m
Designated
fair value
through
profit
or loss –
Life assurance
policyholder
liabilities
(investment
contracts)
932
(47)
8
(137)
(2)
754
(47)
£m
Designated fair
value through
profit or loss –
Life assurance
policyholder
liabilities
(investment
contracts)
480
(8)
106
(114)
464
4
932
(12)
Old Mutual plc
Annual Report and Accounts 2014
173
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2014
E: Financial assets and liabilities continued
E1: Group statement of financial position continued
(q) Disclosure of financial assets and liabilities measured at fair value continued
(iii) Effect of changes in significant unobservable assumptions to reasonable possible alternatives
Favourable and unfavourable changes are determined on the basis of changes in the value of the financial asset or liability as a result of varying
the levels of the unobservable parameters using statistical techniques. When parameters are not amenable to statistical analysis, quantification of
uncertainty is judgemental.
When the fair value of a financial asset or liability is affected by more than one unobservable assumption, the figures shown reflect the most
favourable or most unfavourable change from varying the assumptions individually.
In respect of private equity investments, which are included as investment securities, the valuations are assessed on an asset-by-asset basis using
a valuation methodology appropriate to the specific investment, in line with industry guidelines. In many of the methodologies, the principal
assumption is the valuation multiple to be applied to the main financial indicators including, for example, multiples for comparable listed
companies and discounts for marketability.
For asset-backed securities whose prices are unobservable, models are used to generate the expected value of the asset, incorporating
benchmark information on factors such as prepayment patterns, default rates, loss severities and the historical performance of the underlying
assets. The models used are calibrated by using securities for which external market information is available.
For structured notes and other derivatives, principal assumptions concern the future volatility of asset values and the future correlation between
asset values. These principle assumptions include credit volatilities and correlations used in the valuation of the structured credit derivatives. For
such unobservable assumptions, estimates are based on available market data, which may include the use of a proxy method to derive a volatility
or correlation from comparable assets for which market data is more readily available, and examination of historical levels.
The table below summarises the significant inputs to value instruments categorised as Level 3 and their sensitivity to changes in the inputs used.
Types of financial
instruments
Fair values
at 31 December
2014
£m
Valuation
techniques
Significant
unobservable
input
Range of estimates
for unobservable
inputs
Fair value measurement
sensitivity to unobservable
inputs at 31 December 2014
£m
50
(2013: 49)
■ Discounted cash flows (DCF)
■ Price earnings ratios
■ Valuation multiples
■ -16% to +16%
Assets
Investments
in associated
undertakings
and joint
ventures
Investments
and securities
1,553
(2013: 1,713)
■ Discounted cash flows
(DCF)
■ EBITDA multiple
■ Price earnings ratios
■ Adjusted net asset values
supplied by fund managers
■ Valuation multiples
■ Correlations
■ Volatilities
■ Credit spreads
■ Dividend growth rates
■ Internal rates of return,
cost of capital
■ Inflation rates
■ Market adjusted price
(infrequently traded shares)
■ Correlations
■ Volatilities
■ Credit spreads
■ Interest rates
■ Volatilities
■ Favourable: 7
(2013: 7)
■ Unfavourable: 7
(2013: 8)
■ Favourable: 202
(2013: 212)
■ Nedbank:
-13% to +13%
■ Emerging Markets:
■ Unfavourable: 190
-10% to +10%
■ Institutional asset
management:
-10% to +10%
(2013: 198)
■ -13% to +13%
■ Unfavourable: £nil
■ -10% to +10%
■ -10% to +10%
(2013: £nil)
■ Favourable: £nil
(2013: £nil)
■ Unfavourable: 6
(2013: 6)
■ Favourable: £nil
(2013: £nil)
■ Favourable: 70
(2013: 85)
■ Unfavourable: 80
(2013: 74)
Loans and
advances
2
(2013: 2)
■ Discounted cash flows (DCF)
Derivatives
8
(2013: 8)
■ Option pricing model
Liabilities
Long-term
business
polyholder
liabilities
754
(2013: 932)
■ Adjusted net asset values
supplied by fund managers
■ Interest rates
■ Volatilities
■ Option pricing model
174 Old Mutual plc
Annual Report and Accounts 2014
Financial instruments that are classified as Level 2 in terms of the fair value hierarchy tend to use market observable inputs (such as risk free
interest rates) to determine the value of the instruments. Such instruments would include the value of bonds and debt instruments.
Financial instruments that are classified as Level 3 use more market unobservable inputs such as an entity’s earnings and adjusted price earning
volatilities. The valuation of the majority of Level 3 instruments uses extensive inputs, which are unobservable in order to determine their value.
Alternative assumptions
Accounting standards require consideration of the effect of reasonable possible alternative assumptions on the fair value of Level 3 financial
assets and liabilities.
Alternative assumptions are assessed in terms of possible favourable and unfavourable changes in the key market inputs for the major types
of Level 3 financial assets and liabilities, ranging from, for example, up to a 13% change in the price earnings multiple for equity securities, and up
to a 13% change in the discount rates applied to debt securities and volatility assumptions in derivative contracts. Changes in business risk inputs
such as lapses and non-performance risk were also considered.
The impact of reasonable possible alternative assumptions on other comprehensive income was £nil in both years.
(iv) Financial instruments designated as fair value through profit or loss
Certain items in the Group’s statement of financial position that would otherwise be categorised as loans and receivables under IAS 39 have been
designated as fair value through profit or loss. Information relating to the change in fair value of these items as it relates to credit risk is shown in
the table below:
At 31 December 2014
At 31 December 2013
£m
Change in fair value due to change in credit risk
Loans and advances
Investments and securities
Other financial assets
Maximum
exposure to
credit risk
Current
financial
year
Cumulative
3,347
6,406
21
9,774
–
(1)
–
(1)
–
(3)
–
(3)
Maximum
exposure to
credit risk
3,434
6,547
19
10,000
Current
financial
year
1
7
8
16
Certain items in the Group’s statement of financial position that would otherwise be categorised as financial liabilities at amortised cost under
IAS 39 have been designated as fair value through profit or loss. Information relating to the change in fair value of these items as it relates to
credit risk is shown in the table below:
Cumulative
–
(2)
–
(2)
£m
Change in fair value due to
change in credit risk
Borrowed funds
Amounts owed to bank depositors
Current
financial
year
10
(2)
8
At 31 December 2014
Cumulative
Contractual
maturity
amount
97
(5)
92
606
2,198
2,804
Fair value
734
2,199
2,933
Fair value
747
5,179
5,926
Current
financial
year
32
(1)
31
At 31 December 2013
Cumulative
87
(4)
83
Contractual
maturity
amount
709
5,177
5,886
The fair values of other categories of financial liabilities designated as fair value through profit or loss do not change significantly in respect of
credit risk.
The change in fair value due to a change in credit risk shown above is determined as the amount of the change in fair value of the instrument that is
not attributable to changes in market conditions that give rise to market risk. For loans and receivables that have been designated as at fair value
through profit or loss, individual credit spreads are determined at inception as the difference between the benchmark interest rate and the interest
rate charged to the client. Subsequent changes in the benchmark interest rate and the credit spread give rise to changes in fair value of the financial
instrument. Loans and advances are reviewed for observable changes in credit risk and the credit spread is adjusted at subsequent dates if there has
been an observable change in credit risk relating to a particular loan or advance. No credit derivatives are used to hedge the credit risk on any of the
financial assets designated at fair value through profit or loss. The change in fair value due to credit risk of financial liabilities designated at fair value
through profit or loss has been determined as the difference between fair values determined using a liability curve (adjusted for credit) and a risk-free
liability curve. This difference is cross-checked to market-related data on credit spreads, where available.
Old Mutual plc
Annual Report and Accounts 2014
175
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2014
E: Financial assets and liabilities continued
E1: Group statement of financial position continued
(r) Fair value hierarchy for assets and liabilities not measured at fair value
(i) Financial instruments
Certain financial instruments of the Group are not carried at fair value, principally investments and securities categorised as held to maturity,
loans and receivables, and other financial assets and financial liabilities at amortised cost. The calculation of the fair value of these financial
instruments incorporates the Group’s best estimate of the value at which these financial assets could be exchanged, or financial liabilities
transferred, between market participants at the measurement date. The Group’s estimate of what fair value is does not necessarily represent what
it would be able to sell the asset for or transfer the respective financial liability for in an involuntary liquidation or distressed sale.
Held-to-maturity investments and securities
The fair value of investments and other securities is determined based on available market prices and directors’ valuations where appropriate.
They would be classified into Level 1 (available market prices) and Level 2 (directors’ valuations) of the fair value hierarchy.
Loans and advances
Loans and advances, detailed in note E3, that are not recognised at fair value, principally comprise variable-rate financial assets. The interest
rates on these variable rate-financial assets are adjusted when the applicable benchmark interest rate changes.
Loans and advances are not actively traded in most markets and it is therefore not possible to determine the fair value of these loans and
advances using observable market prices and market inputs. Due to the unique characteristics of the loans and advances portfolio and the fact
that there have been no recent transactions involving the disposals of such loans and advances, there is no basis to determine a price that could
be negotiated between market participants in an orderly transaction.
The Group is not currently in the position of a forced sale of such underlying loans and advances and it would therefore be inappropriate to value
the loans and advances on a forced-sale basis.
The Group has developed a methodology and model to determine the fair value of the gross exposures for the performing loans and advances
measured at amortised cost. This model incorporates the use of average interest rates and projected monthly cash flows per product type. Future
cash flows are discounted using interest rates at which similar loans would be granted to borrowers with similar credit ratings and maturities.
Inputs into the model include various assumptions utilised in the pricing of loans and advances. The determination of such inputs is highly
subjective and therefore any change to one or more of the assumptions may result in a significant change in the determination of the fair value of
loans and advances.
The Group is of the opinion that the carrying value of loans and advances approximates fair value. Loans and advances would be classified into
Level 3 of the fair value hierarchy.
Other financial assets
The carrying values of cash and cash equivalents, mandatory deposits with central banks, provisions and accrurals and trade and other
receivables and other assets are considered a reasonable approximation of their respective fair values, as they are either short term in nature or
are repriced to current market rates at frequent intervals. Cash and cash equivalents and mandatory reserves would be classified into Level 1 of
the fair value hierarchy. Trade, other receivables and other assets would be classified into Level 3 of the fair value hierarchy.
Amounts owed to depositors
The Group is of the opinion that the carrying value of variable-rate amounts owed to depositors approximates fair value. Amounts owed to
depositors would be classified into Level 2 of the fair value hierarchy.
Borrowed funds
The Group is of the opinion that the carrying value of variable-rate long-term debt instruments approximates fair value. Long-term debt
instruments would generally be classified into Level 1 or Level 2 of the fair value hierarchy.
Other financial liabilities
The carrying values of trade, other payables and other liabilities are considered a reasonable approximation of their respective fair values, as
they are either short-term in nature or are repriced to current market rates at frequent intervals. Trade, other payables and other liabilities would
be classified into Level 3 of the fair value hierarchy.
(ii) Non-financial instruments
The fair value of plant and equipment, investment in associated undertakings and joint ventures (that are not categorised as Designated at fair
value through profit or loss) and Life assurance policyholder liabilities (that are not categorised as Designated at fair value through profit or loss)
approximates the respective carrying values. All of these assets and liabilities would be classified as Level 3.
176 Old Mutual plc
Annual Report and Accounts 2014
For the year ended 31 December 2014 (s) Non-recurring assets and liabilities at fair value
(i) Business combinations
Non-recurring assets and liabilities recognised at fair value arise from assets and liabilities that have been acquired as a result of business
combinations (refer to note H8). The assets and liabilities acquired are valued based on expected future cash flows which will be received from
the assets or paid to settle the liability and which have been discounted at an appropriate rate. The majority of assets and liabilities acquired in a
business combination are classified as Level 3. The following table shows the fair value of the non-recurring assets and liabilities as a result of
business acquisitions:
Intangible assets
Property, plant and equipment
Loans and advances
Trade, other receivables and other assets
Total assets
Borrowed funds
Amounts owed to bank depositors
Trade, other payables and other liabilities
Total liabilities
£m
As at
31 December
2014
100
20
498
15
633
335
69
129
533
The comparative amounts for 2013 were £55 million for assets and £26 million for liabilities.
(ii) Held for sale buildings and investment properties
Investment properties of £156 million (2013: £nil) and buildings of £nil (2013: £5 million) were transferred to held for sale during the year and are
regarded as non-recurring assets and classified as Level 3. More detail on held to sale assets can be found in note I2.
(t) Risks
Market risk
(i) Overview
Market risk is the risk of a financial impact arising from the changes in values of financial assets or financial liabilities from changes in equity,
bond and property prices, interest rates and foreign exchange rates. Market risk arises differently across the Group’s businesses depending
on the types of financial assets and liabilities held.
The Group has developed risk policies which set out the practices which are used to monitor and manage market risk. These policies are
cascaded to business units across the Group. Each of the Group’s business units has their own established set of policies, principles and
governance processes to monitor and manage market risk within their individual businesses and in accordance with their local regulatory
requirements. Group-level governance and monitoring processes provide oversight of these individual approaches to the management of
market risk.
The sensitivity of the Group’s earnings, capital position and embedded value to market risk is monitored through the Group’s embedded value
and risk appetite reporting processes.
(ii) Insurance operations
For the Group’s insurance operations, equity, property, volatility and interest rate risk exposure to capital and to earnings are quantified in
accordance with the Group’s risk appetite framework. Additional detail is provided in the Principal Risks and Uncertainties section.
In South Africa the stock selection and investment analysis process is supported by a well developed research function. For fixed annuities, market
risks are managed where possible by investing in fixed interest securities with a duration closely corresponding to those liabilities. Market risk on
policies that include guarantees where shareholders carry the investment risk, 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 based upon comprehensive
investment guidelines. Market risk on with-profit policies with guarantees is managed through appropriate asset-liability matching, which includes
hedging, as per the Principles and Practices of Financial Management (PPFM).
In Old Mutual Wealth’s unit-linked assurance operations, policyholders carry the full market risk, with the only risk to the Group being
asset-based fee risk from charges on policyholder funds. In respect of Old Mutual Wealth’s shareholders’ funds, market risk is addressed
in Old Mutual Wealth’s investment policy, which provides for very limited opportunity for entities to invest their shareholder capital in equities
and other volatile assets.
For the variable annuity business in Old Mutual Bermuda, market risk to shareholders arises from offering policyholder guaranteed returns. In
addition, these guarantees are US dollar denominated and a significant portion of the underlying assets invested in by Old Mutual Bermuda’s
clients are exposed to currencies other than US dollar. The market and currency risk is managed through a dynamic tail hedging strategy, with the
overall exposures to changes in markets monitored closely so that timely actions can be taken to re-establish hedging as required.
Old Mutual plc
Annual Report and Accounts 2014
177
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
E: Financial assets and liabilities continued
E1: Group statement of financial position continued
(iii) Banking operations
The principal market risks arising in the Group’s banking operations arise from:
■ Trading risk in Nedbank Capital and
■ Banking book interest rate risk from repricing and/or maturity mismatches between on- and off-balance sheet components in all banking
businesses.
A comprehensive market risk framework is used to ensure that market risks are understood and managed. Governance structures are in place
to achieve effective independent monitoring and management of market risk.
Trading risk
Market risk exposures from trading activities at Nedbank Capital are measured using Value-at-Risk (VaR), supplemented by sensitivity analysis,
and stress and scenario analysis. Limit structures are set accordingly.
The VaR risk measure for Nedbank 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 into account market volatilities as well as risk diversification
by recognising offsetting positions and correlations between products and markets. Risks can be measured consistently across all markets and
products, and risk measures can be aggregated to arrive at a single risk number. The one-day 99% VaR number used by Nedbank represents the
overnight loss that has less than 1% chance of occurring under normal market conditions. By its nature, VaR is only a single measure and cannot
be relied upon on its own as a means of measuring and managing risk.
(t) Risks continued
At 31 December
Historical VaR (one-day, 99%) by
risk type
Foreign exchange
Interest rate
Equity product
Other
Diversification
Total VaR exposure
Average
Minimum
Maximum
£m
Year-end
2014
2013
2014
2013
2014
2013
2014
2013
0.2
0.4
0.1
0.2
(0.4)
0.6
0.1
0.3
0.1
0.2
(0.3)
0.4
–
0.3
–
0.2
–
0.4
–
0.1
–
0.1
–
0.2
0.6
0.7
0.3
0.3
–
0.9
0.5
0.6
0.3
0.4
–
0.7
0.1
0.3
0.1
0.3
(0.3)
0.5
0.1
0.6
0.1
0.2
(0.3)
0.6
Banking book interest rate risk
Banking book interest rate risk at Nedbank arises because:
■ The bank writes a large amount of prime-linked assets and raises fewer prime-linked deposits
■ Funding is prudently raised across the curve at fixed-term deposit rates that re-price only on maturity
■ Short-term demand-funding products re-price to different short-end base rates
■ Certain ambiguous maturity accounts are non-rate-sensitive
■ The bank has a mismatch in net non-rate-sensitive balances, including shareholders’ funds that do not re-price for interest rate changes.
Nedbank uses standard analytical techniques to measure interest rate sensitivity within its banking book. This includes static re-price gap analysis
and a point-in-time interest income stress testing for parallel interest rate moves over a forward-looking 12 month period. At 31 December 2014
the sensitivity of the banking book to a 1% instantaneous reduction in interest rates would have led to a reduction in net interest income and equity
of £57 million (2013: £54 million).
178 Old Mutual plc
Annual Report and Accounts 2014
For the year ended 31 December 2014 The table below shows the re-pricing profile of Nedbank’s banking book, which highlights the fact that assets re-price quicker than liabilities
following derivative hedging activities:
At 31 December 2014
Interest rate re-pricing gap
Total assets
Total liabilities and shareholders’ funds
Interest rate hedging activities
Repricing profile
Cumulative repricing profile
Expressed as a % of total assets
At 31 December 2013
Interest rate re-pricing gap
Total assets
Total liabilities and shareholders’ funds
Interest rate hedging activities
Repricing profile
Cumulative repricing profile
Expressed as a % of total assets
Up to
3 months 3 to 6 months
6 months to
1 year
1 to 5
years Over 5 years
Trading and
non-rate
29,517
(27,068)
1,355
3,804
3,804
8.5%
1,492
(1,459)
418
451
4,255
9.5%
1,295
(1,514)
71
(148)
4,107
9.1%
2,559
(918)
(1,394)
247
4,354
9.7%
902
(265)
(450)
187
4,541
10.1%
9,204
(13,745)
–
(4,541)
–
–
Up to 3
months
3 to 6
months
6 months
to 1 year
1 to 5
years
Over
5 years
Trading and
non-rate
£m
Total
44,969
(44,969)
–
–
–
–
£m
Total
29,940
(26,479)
(497)
2,964
2,964
6.9%
1,099
(2,025)
1,572
646
3,610
8.4%
450
(1,602)
1,035
(117)
3,493
8.1%
2,632
(989)
(1,418)
225
3,718
8.6%
1,065
(224)
(692)
149
3,867
9.0%
7,825
(11,692)
–
(3,867)
–
–
43,011
(43,011)
–
–
–
–
The analysis indicates that the maturity profile of financial assets is broadly matched to the financial liabilities due to derivative hedging activities.
This means that in the event of increasing interest rates, net interest income will remain stable in the short-term.
Old Mutual plc
Annual Report and Accounts 2014
179
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
E: Financial assets and liabilities continued
E1: Group statement of financial position continued
(u) Currency translation risk
The Group is exposed to movements in exchange rates from changes in the sterling value of surplus assets and earnings denominated in foreign
currencies. From a capital perspective, our capital is held where our risks are located and currency translation risk would only be realised if we
were to require a transfer of surplus capital between regions during a period of stress. The functional currencies of the Group’s principal overseas
operations are South African rand, US dollar and Euro. The Group reduces this risk through the use of currency swaps, currency borrowings and
forward foreign exchange contracts. Such risk mitigation techniques are reflected in the currency analysis that follows.
The tables below show the Group’s statement of financial position by major currency:
ZAR
GBP
USD
EUR
SEK
Other
At 31 December 2014
Assets
Mandatory reserve deposits with central banks
Reinsurers’ share of policyholder liabilities
Loans and advances
Investments and securities
Trade, other receivables and other assets
Derivative financial instruments – assets
Cash and cash equivalents
Total financial assets
Total non-financial assets
Total assets
Liabilities
Life assurance policyholder liabilities
Third-party interests in consolidation of funds
Borrowed funds
Trade, other payables and other liabilities
Amounts owed to bank depositors
Derivative financial instruments – liabilities
Total financial liabilities
Total non-financial liabilities
Total liabilities
At 31 December 2013
Assets
Mandatory reserve deposits with central banks
Reinsurers’ share of policyholder liabilities
Loans and advances
Investments and securities
Trade, other receivables and other assets
Derivative financial instruments – assets
Cash and cash equivalents
Total financial assets
Total non-financial assets
Total assets
Liabilities
Life assurance policyholder liabilities
Third-party interests in consolidation of funds
Borrowed funds
Trade, other payables and other liabilities
Amounts owed to bank depositors
Derivative financial instruments – liabilities
Total financial liabilities
Total non-financial liabilities
Total liabilities
806
116
31,464
31,420
1,260
1,065
2,409
68,540
3,061
–
2,169
412
37,116
404
139
1,434
41,674
2,258
–
1
1,879
10,835
482
11
318
13,526
1,421
71,601
43,932
14,947
28,322
3,112
2,211
2,655
32,266
1,100
69,666
779
36,472
2,818
677
992
599
93
41,651
573
70,445
42,224
6,314
48
146
253
1,683
3
8,447
75
8,522
–
–
182
5,251
101
8
511
6,053
1,407
7,460
4,883
8
–
84
270
1
5,246
1,329
6,575
–
–
22
1,078
–
2
6
1,108
–
1,108
1,086
–
–
–
6
2
1,094
–
1,094
£m
Total
829
2,314
34,857
87,547
2,362
1,227
4,944
134,080
8,436
23
28
898
1,847
115
2
266
3,179
289
3,468
142,516
2,283
–
10
292
1,419
2
4,006
105
79,360
5,986
3,044
4,276
36,243
1,201
130,110
2,861
4,111
132,971
ZAR
GBP
USD
EUR
SEK
Other
747
160
30,509
29,351
1,425
1,126
2,511
65,829
2,570
68,399
27,211
3,154
2,000
2,746
31,218
1,301
67,630
736
68,366
–
1,680
369
34,462
424
75
1,271
38,281
2,140
40,421
34,253
2,274
642
803
611
22
38,605
592
39,197
1
1
1,716
10,708
507
45
408
13,386
1,361
14,747
6,022
25
2
342
1,535
149
8,075
55
8,130
–
5
284
9,908
146
4
412
10,759
753
11,512
9,639
25
–
131
249
–
10,044
354
10,398
–
–
16
1,460
13
3
5
1,497
–
1,497
1,459
–
–
12
3
3
1,477
–
1,477
11
29
689
2,331
68
6
262
3,396
359
3,755
2,557
–
–
266
754
3
3,580
146
3,726
£m
Total
759
1,875
33,583
88,220
2,583
1,259
4,869
133,148
7,183
140,331
81,141
5,478
2,644
4,300
34,370
1,478
129,411
1,883
131,294
The exposure to currency risk on policyholder funds is included under market risk as discussed above.
The derivative instruments are stated at their fair value, and not their notional amounts. Therefore, this table does not reflect the results of risk
management activities undertaken by the Group.
180 Old Mutual plc
Annual Report and Accounts 2014
For the year ended 31 December 2014 (v) Master netting or similar agreements
The Group offsets financial assets and liabilities in the statement of financial position when it has a legal enforceable right to do so and intends to
settle on a net basis simultaneously. Certain master netting agreements do not provide the Group with the current legally enforceable right to
offset the instruments. The majority of these transactions are governed by the principles of ISDA or similar types of agreements. These agreements
aim to protect the parties in the event of default.
The following tables present information on the potential effect of netting offset arrangements after taking into consideration these types
of agreements.
At 31 December 2014
Financial assets
Loans and advances
Derivative financial instruments – assets
Financial liabilities
Amounts owed to bank depositors
Derivative financial instruments – liabilities
At 31 December 2013
Financial assets
Loans and advances
Derivative financial instruments – assets
Financial liabilities
Amounts owed to bank depositors
Derivative financial instruments – liabilities
Gross
amount of
financial
instrument
Amounts
offset in the
statement
of financial
position
Financial
instruments
presented in
the statement
of financial
position
Amounts available
for future set off
Master
netting
agreement
Collateral
received/
pledged¹
Position
not subject
to offset
£m
35,017
1,335
36,352
37,883
1,464
39,347
Gross
amount of
financial
instrument
33,631
1,259
34,890
35,299
1,478
36,777
(160)
(108)
(268)
(1,640)
(263)
(1,903)
34,857
1,227
36,084
36,243
1,201
37,444
(140)
(1,102)
(1,242)
(3,288)
(1,096)
(4,384)
–
–
–
–
(63)
(63)
34,717
125
34,842
32,955
42
32,997
£m
Amounts
offset in the
statement
of financial
position
Financial
instruments
presented in
the statement
of financial
position
Amounts available
for future set off
Master
netting
agreement
Collateral
received/
pledged1
Position
not subject
to offset
(48)
–
(48)
(929)
–
(929)
33,583
1,259
34,842
34,370
1,478
35,848
(118)
(1,087)
(1,205)
(3,164)
(1,117)
(4,281)
–
–
–
–
(107)
(107)
33,465
172
33,637
31,206
254
31,460
1 This represents the amounts that could be offset in the event of default. These arrangements are typically governed by master netting and collateral arrangements
Old Mutual plc
Annual Report and Accounts 2014
181
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2014
E: Financial assets and liabilities continued
E1: Group statement of financial position continued
(w) Capital management
The Group actively manages its capital with a focus on capital efficiency and effective risk management. The capital objectives are to maintain
the Group’s ability to continue as a going concern while supporting the optimisation of return relative to the risks. The Group ensures that it
can meet its expected capital and financing needs at all times having regard to the Group’s business plans, forecasts and strategic initiatives.
The Group’s overall capital risk appetite is set with reference to the requirements of the relevant stakeholders and seeks to:
■ Maintain sufficient, but not excessive, financial strength to support stakeholder requirements
■ Optimise debt to equity structure to enhance shareholder returns
■ Retain financial flexibility by maintaining liquidity including unutilised committed credit lines.
The primary sources of capital used by the Group are equity shareholders’ funds, preference shares, subordinated debt and borrowings.
Alternative resources are utilised where appropriate. Targets are established in relation to regulatory solvency, credit ratings, liquidity and
dividend capacity and are a key tool in managing capital in accordance with our risk appetite and the requirements of our various stakeholders.
The individual companies in the Group are subject to regulatory capital requirements at an individual level. In addition the Group as a whole
is subject to the solvency requirements of the Financial Groups Directive (FGD) as implemented by the Prudential Regulation Authority (PRA).
Further detail of the Group’s regulatory capital surplus and that of subsidiaries is provided in the Annual Report and Accounts. As at 31 December
2014, the unaudited pro-forma surplus was estimated to be £2.0 billion (2013: £2.1 billion). The FGD position will be submitted to the PRA by
30 April 2015.
A key component of our approach to capital management is to ensure that the Group’s policies are aligned with the Group’s overall strategy,
business plans and risk appetite. The Group’s Capital Management Committee (GCMC) reviews the capital structure regularly.
E2: Credit risk
Overall exposure to credit risk
The Group is exposed to banking credit risk from lending and other financing activities, through its exposure to Nedbank and its exposure to
banking operations within Emerging Markets. Nedbank’s lending portfolio forms a substantial part of the Group’s loans and advances, as
analysed in note E3. Credit risk represents the most significant risk type facing Nedbank, accounting for 58% of its economic capital requirements.
Nedbank’s credit risk profile is managed in terms of its credit risk management framework, which encompasses comprehensive credit risk policy,
mandate (limits) and governance structures, and is approved by the Nedbank Board.
The Group has adopted a policy of dealing with creditworthy counterparties and obtaining sufficient collateral where appropriate, as a means of
mitigating the financial loss from defaults. Credit risk is managed through research and analysis at the time of investment. The Group’s exposure
and the credit rating of its counterparties are continuously monitored.
The overlap of exposures to a single counterparty is limited across regions. The credit risk on liquid funds and derivative financial instruments is
limited due to counterparty credit rating and collateral requirements set by the Credit Risk Policy.
The Group is also exposed to the risk of credit defaults and movements in credit spreads from its insurance businesses. This includes counterparty
default risk, which arises mainly from reinsurance and hedging arrangements.
Other than the above, the Group has other limited credit risk exposures in respect of amounts due from policyholders, intermediaries and
reinsurers. Credit risk exposure from our property & casualty business is small and none of the life assurance operations cedes significant risk
through reinsurance. Loans to policyholders are secured on the surrender value of the relevant policies.
182 Old Mutual plc
Annual Report and Accounts 2014
For the year ended 31 December 2014 For the year ended 31 December 2014
E2: Credit risk continued
The table below represents the Group’s maximum exposure to credit risk, without taking into account the value of any collateral obtained. The
total credit exposure also includes potential exposure arising from financial guarantees given by the Group and undrawn loan commitments,
which are not yet reflected in the Group’s statement of financial position.
Mandatory reserve deposits with central banks
Reinsurers’ share of policyholder liabilities
Loans and advances
Investments and securities
Government and government-guaranteed securities
Other debt securities, preference shares and debentures
Short-term funds and securities treated as investments
Other
Other assets
Derivative financial instruments – assets
Cash and cash equivalents
Financial guarantees and other credit-related contingent liabilities
Loan commitments and other credit-related commitments
Non-current assets held for sale
£m
At
31 December
2014
At
31 December
2013
829
2,314
34,857
19,314
6,039
10,180
2,480
615
2,284
1,227
4,944
1,973
5,347
1,475
759
1,875
33,583
18,539
6,235
9,217
2,565
522
2,248
1,259
4,869
2,576
5,128
5
74,564
70,841
(i) Financial collateral
The Group takes financial collateral to support exposures in its banking and securities and lending activities. Collateral held includes cash and
debt securities. Cash collateral is included as part of cash equivalents.
These transactions are entered into under terms and conditions that are standard industry practice to securities borrowing and lending activities.
(ii) Non-financial collateral
The Group takes other non-monetary collateral to recover outstanding lending exposures in the event of the borrower being unable or unwilling
to fulfil its obligations. This includes mortgage over property (both residential and commercial), and liens over business assets (including, but
not limited to plant, vehicles, aircraft, inventories and trade debtors) and guarantees from parties other than the borrower. Where the Group
is exposed to syndicated lending, the collateral offered by the borrower is secured by security special purpose vehicles.
Should a counterparty be unable to settle its obligations, the Group takes possession of collateral as full or part settlement of such amounts.
In general, the Group seeks to dispose of such property and other assets that are not readily convertible into cash as soon as the market for the
relevant asset permits.
A further analysis of credit risk is provided in notes E3, E4, E5 and F4.
Old Mutual plc
Annual Report and Accounts 2014
183
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2014
E: Financial assets and liabilities continued
E3: Loans and advances
(a) Summary
Home loans
Commercial mortgages
Properties in possession
Credit cards
Overdrafts
Policyholder loans
Other loans to clients
Preference shares and debentures
Net finance leases and instalment debtors
Gross investment
Unearned finance charges
Factoring accounts
Trade, other bills and bankers’ acceptances
Term loans
Remittances in transit
Deposits placed under reverse purchase agreements
Gross loans and advances
Provisions for impairment
Specific provisions
Portfolio provision
Total net loans and advances
£m
At
31 December
2014
At
31 December
2013
Notes
E3(b)
7,909
6,870
33
745
929
248
4,856
1,006
5,236
6,551
(1,315)
277
16
6,436
11
1,016
7,989
6,102
44
656
884
241
4,989
1,089
4,879
6,095
(1,216)
275
2
5,596
14
1,480
35,588
34,240
(731)
(494)
(237)
(657)
(428)
(229)
34,857
33,583
Non-performing loans included above had a book value less impairment provisions of £501 million (2013: £573 million).
Of the gross loans and advances shown above, £11,096 million (2013: £10,845 million) is receivable within one year of the reporting date and is
regarded as current. £23,761 million (2013: £22,541 million) is regarded as non-current based on the maturity profile of the assets.
Of the gross loans and advances shown above, £35,357 million (2013: £33,802 million) relates to balances held by the Group’s banking
operations. No impairments have been raised against policyholder loans as they are fully backed by amounts owing to policyholder liabilities.
The table below gives an age analysis of loans and advances representing primarily the exposures of the Group’s banking operations:
£m
At
31 December
2014
At
31 December
2013
33,270
1,226
32,015
1,106
691
511
10
1
13
1,092
35,588
(731)
34,857
595
502
7
–
2
1,119
34,240
(657)
33,583
Neither past due nor impaired
Past due but not impaired
Past due but less than 1 month
Past due, greater than 1 month but less than 3 months
Past due, greater than 3 months but less than 6 months
Past due, greater than 6 months but less than 1 year
Past due more than 1 year
Impaired loans and advances individually impaired
Gross loans and advances
Provisions for impairment
Total net loans and advances
184 Old Mutual plc
Annual Report and Accounts 2014
For the year ended 31 December 2014 The neither past due nor impaired loans and advances can be further analysed by credit rating as follows:
At 31 December 2014
£m
At 31 December 2013
Home loans
Commercial mortgages
Credit cards
Overdrafts
Policyholder loans
Other loans to clients
Preference shares and debentures
Net finance leases and instalment debtors
Factoring accounts
Trade, other bills and bankers’
acceptances
Term loans
Remittances in transit
Deposits placed under reverse purchase
agreements
Investment
grade
Sub-
investment
grade
Not rated
1,144
2,454
61
201
–
3,055
633
244
8
–
4,154
–
4,161
5,559
572
519
–
1,540
220
4,432
246
16
1,407
–
317
78
1
86
226
247
152
120
–
–
390
11
Total
5,622
8,091
634
806
226
4,842
1,005
4,796
254
16
5,951
11
964
52
–
1,016
Gross loans and advances
12,918
18,724
1,628
33,270
Investment
grade
Sub-
investment
grade
Not rated
1,034
2,095
76
219
195
3,347
908
285
16
2
3,451
–
5,570
3,609
483
474
–
1,542
169
4,070
242
–
1,757
–
1,231
12,859
249
18,165
404
179
1
61
27
150
12
100
–
1
43
13
–
991
Total
7,008
5,883
560
754
222
5,039
1,089
4,455
258
3
5,251
13
1,480
32,015
The rating scale of the loans and advances is based on local equivalent rating scales and not international scales.
Collateral is held as security against certain loans and advances detailed above, with this principally consisting of cash, properties and letters of credit.
Movements in provisions for impairment of loans and advances are analysed as follows:
Balance at beginning of the year
Acquisitions through business combinations
Profit or loss charge
Recoveries of amounts previously written off
Amounts written off against the provision
Foreign exchange and other movements
Balance at end of the year
£m
At 31 December 2014
At 31 December 2013
Specific
impairment
Portfolio
impairment
Total
impairment
Specific
impairment
Portfolio
impairment
Total
impairment
428
97
285
(53)
(328)
65
494
229
–
20
–
(1)
(11)
237
657
97
305
(53)
(329)
54
731
541
–
391
(59)
(373)
(72)
428
249
–
36
–
(33)
(23)
229
790
–
427
(59)
(406)
(95)
657
The majority of loans and advances are in respect of Nedbank. Loans and advances increased by 5.1%, in local currency terms, due to
solid growth in wholesale banking. This was offset by muted growth in retail home loans and reductions in personal loans. Nedbank’s credit
loss ratio at 0.79% compared with 2013 (1.06%) improved, due to impairments decreasing by 19.0%. Further detail on Nedbank is available at
www.nedbankgoup.co.za.
During the year under review, the Group recognised collateral of £33 million (2013: £44 million) in the statement of financial position. These
amounts are being included in the loans and advances above as properties in possession.
(b) Finance lease and instalment debtors
Amounts receivable under finance leases – At 31 December
Within one year
In the second to fifth years inclusive
After five years
Less: unearned finance income
Present value of minimum lease payments receivable
£m
Minimum lease payments
receivable
Present value of minimum
lease payments receivable
2014
1,696
4,559
296
6,551
(1,315)
5,236
2013
1,616
4,213
266
6,095
(1,216)
4,879
2014
1,361
3,603
272
5,236
–
5,236
2013
1,293
3,374
212
4,879
–
4,879
Old Mutual plc
Annual Report and Accounts 2014
185
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
E: Financial assets and liabilities continued
E4: Investments and securities
Government and government-guaranteed securities
Other debt securities, preference shares and debentures
Listed
Unlisted
Equity securities
Listed
Unlisted
Pooled investments
Listed
Unlisted
Short-term funds and securities treated as investments
Other
Total investments and securities
£m
At
31 December
2014
At
31 December
2013
6,039
10,180
7,225
2,955
16,779
15,856
923
51,454
8,776
42,678
2,480
615
87,547
6,235
9,020
6,101
2,919
16,894
15,990
904
52,984
6,973
46,011
2,565
522
88,220
Investments and securities are regarded as current and non-current assets based on the intention with which the financial assets are held, as
well as their contractual maturity profile. Of the amounts shown above, £58,675 million (2013: £55,154 million) is regarded as current and
£28,872 million (2013: £33,066 million) is regarded as non-current.
(a) Debt instruments and similar securities
All debt instruments and similar securities are neither past due nor impaired.
The following table shows an analysis of the carrying values of the Group’s neither past due nor impaired debt instruments and similar securities
according to their credit rating (Standard & Poor’s or an equivalent), by investment grade:
At 31 December 2014
Government and government-guaranteed securities
Other debt securities, preference shares and debentures
Short-term funds and securities
Other
Debt instruments and similar securities
At 31 December 2013
Government and government-guaranteed securities
Other debt securities, preference shares and debentures
Short-term funds and securities
Other
Debt instruments and similar securities
Investment
grade
(AAA to BBB)
5,061
6,478
2,192
44
Sub-
Investment
grade
(BB and lower)
33
248
9
–
Included
through
consolidation
of funds
938
1,521
141
305
Not rated
7
1,933
138
87
13,775
290
2,165
2,905
Investment
grade
(AAA to BBB)
4,808
5,560
1,943
20
Sub-
investment
grade
(BB and lower)
25
131
–
–
Included
through
consolidation
of funds
1,343
1,382
191
362
Not rated
59
1,947
431
137
£m
Total
6,039
10,180
2,480
436
19,135
Total
6,235
9,020
2,565
519
12,331
156
2,574
3,278
18,339
In general, no collateral is taken in respect of the Group’s holdings of debt instruments and similar securities.
186 Old Mutual plc
Annual Report and Accounts 2014
For the year ended 31 December 2014 E5: Securities lending
The Group participates in securities lending programmes where securities holdings are lent to third parties. These securities are not derecognised
from the Group’s consolidated statement of financial position and are retained within the relevant investment classification. Collateral is held in
respect of the loaned securities.
The table below represents the amounts lent and the related collateral received:
Assets lent under securities lending
Equity
Debt securities
Amounts received as collateral for securities lending
Cash
Debt securities
£m
At
31 December
2014
At
31 December
2013
491
79
570
570
56
626
452
155
607
630
17
647
Cash collateral has been recognised in the statement of financial position with a corresponding liability to return the collateral included in other
liabilities. Of the collateral included in the table above, £56 million (2013: £17 million) can be sold or repledged and £nil (2013: £nil) has been sold
or repledged.
At 31 December 2014, the Group has provided £283 million (2013: £203 million) in debt securities collateral under repurchase arrangements.
At 31 December 2014 and 31 December 2013, the Group has not provided any cash collateral for security lending arrangements.
E6: Derivative financial instruments – assets and liabilities
The Group utilises derivative instruments for both economic hedging and non-hedging purposes. The derivative instruments become in-the-
money or out-of-the-money as a result of fluctuations in market interest rates, foreign exchange rates or asset prices relative to their terms. The
aggregate contractual or notional amount of derivative financial instruments on hand, the extent to which instruments are in-the-money or
out-of-the-money and, therefore, the aggregate fair values of derivative financial assets and liabilities can fluctuate significantly from time to time.
The Group undertakes transactions involving derivative financial instruments with other financial institutions. Management has established limits
commensurate with the credit quality of the institutions with which it deals and manages the resulting exposures such that a default by any
individual counterparty is unlikely to have a materially adverse impact on the Group.
The following table provides a detailed breakdown of the Group’s derivative financial instruments outstanding at year-end. These instruments
allow the Group and its customers to transfer, modify or reduce their credit, equity market, foreign exchange and interest rate risks.
£m
Derivative financial instruments
Assets
Liabilities
At 31 December
Equity derivatives
Exchange rate contracts
Interest rate contracts
Credit derivatives
Other derivatives
Total
2014
42
420
645
57
63
2013
46
286
810
68
49
2014
21
290
773
46
71
1,227
1,259
1,201
The undiscounted contractual maturities of the cash flows of the derivative liabilities held are as follows:
Derivative financial liabilities
At 31 December 2014
At 31 December 2013
Carrying
amount
Less than
3 months
More than
3 months less
than 1 year
Between
1 and
5 years
1,201
1,478
56
5
171
165
344
404
More
than
5 years
1,026
1,757
No
contractual
maturity
date
–
–
2013
41
287
1,050
63
37
1,478
£m
Total
1,597
2,331
Old Mutual plc
Annual Report and Accounts 2014
187
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
E: Financial assets and liabilities continued
E7: Hedge accounting
Net investment hedges
The Group uses a combination of currency swaps, forward foreign exchange contracts and debt raised in the currency of the exposure to
mitigate the translation effect of holding overseas companies. The following table summarises the Group’s open positions with respect to financial
instruments utilised for net investment hedging purposes. There was no ineffectiveness in respect of the net investment hedges during the financial
year ended 31 December 2014 and the financial year ended 31 December 2013.
The table below sets out the notional amounts of derivative contracts used as hedging instruments:
Open positions
Forward contracts
Currency swaps
At 31 December 2014
At 31 December 2013
USD
ZAR
EUR
USD
ZAR
EUR
£m
24
117
141
148
–
148
–
–
–
–
110
110
119
–
119
106
–
106
£m
Fair value of financial instruments designated as net investment hedges
ZAR forward foreign exchange contracts
EUR forward foreign exchange contracts
USD forward foreign exchange contracts
USD cross currency swap
At
31 December
2014
At
31 December
2013
(1)
1
(1)
3
2
11
2
–
19
32
The ZAR, USD and EUR forward exchange contracts are designated as hedges against foreign currency risk in respect of the Group’s investments
in its South African, US and European operations.
E8: Insurance and investment contracts
Life assurance
Classification of contracts
Contracts sold as life assurance (with the exception of unit-linked assurance contracts) are categorised into insurance contracts, contracts with a
discretionary participation feature or investment contracts, being in accordance with the classification criteria set out in the following paragraphs.
For the Group’s unit-linked assurance business, contracts are separated into an insurance component and an investment component (known as
unbundling) and each unbundled component is accounted for separately in accordance with the accounting policy for that component.
Unit-linked assurance contracts are savings contracts with a small or insignificant component of insurance risk.
Contracts under which the transfer of insurance risk to the Group from the policyholder is not significant are classified as investment contracts.
Such contracts include savings and/or investment contracts sold without life assurance protection.
Contracts under which the Group accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the
policyholder or other beneficiary if a specified uncertain future event (the insured event) adversely affects the policyholder are classified as
insurance contracts. Insurance risk is the risk other than financial risk. Contracts accounted for as insurance contracts include life assurance
contracts and savings contracts providing more than an insignificant amount of life assurance protection.
Financial risk is the risk of a possible future change in one or more of a specified interest rate, security price, security index, commodity price,
foreign exchange rate, index of prices or rates, a credit rating or credit index, or other variable, provided, in the case of a non-financial variable,
that the variable is not specific to a party to the contract.
Contracts with discretionary participating features are those under which the policyholder holds a contractual right to receive additional
payments as a supplement to guaranteed minimum payments. These additional payments, the amount or timing of which is at the Group’s
discretion, represent a significant portion of the total contractual payments and are contractually based on (1) the performance of a specified
pool of contracts or a specified type of contract, (2) realised and/or unrealised investment returns on a specified pool of assets held by the Group
or (3) the profit or loss of the Group. Investment contracts with discretionary participating features, which have no life assurance protection in the
policy terms, are accounted for in the same manner as insurance contracts.
188 Old Mutual plc
Annual Report and Accounts 2014
For the year ended 31 December 2014
Premiums on life assurance
Premiums and annuity considerations receivable under insurance contracts and investment contracts with a discretionary participating feature are
stated gross of commission and exclude taxes and levies. Premiums in respect of unit-linked insurance contracts are recognised when the liability is
established. Premiums in respect of other insurance contracts and investment contracts with a discretionary participating feature are recognised
when due for payment.
Outward reinsurance premiums are recognised when due for payment.
Amounts received under investment contracts other than those with a discretionary participating feature and unit-linked assurance contracts are
recorded as deposits and credited directly to investment contract liabilities.
Revenue on investment management service contracts
Fees charged for investment management services provided in conjunction with an investment contract are recognised as revenue as the services
are provided. Initial fees, which exceed the level of recurring fees and relate to the future provision of services are deferred and amortised over
the anticipated period in which services will be provided. Fees charged for investment management service contracts by asset management
businesses are also recognised on this basis.
Claims paid on life assurance
Claims paid under insurance contracts and investment contracts with a discretionary participating feature include maturities, annuities, surrenders,
death and disability payments.
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.
Amounts paid under investment contracts other than those with a discretionary participating feature and unit-linked assurance contracts are
recorded as deductions from investment contract liabilities.
Amounts received under investment contracts other than those with a discretionary participating feature and unit-linked assurance contracts are
not recorded through profit or loss, except for fee income and investment income attributable to those contracts, but are accounted for directly
through the statement of financial position as an adjustment to investment contract liabilities.
Insurance contract provisions
Insurance contract provisions for African businesses have been computed using a gross premium valuation method. Provisions in respect of
African businesses have been made in accordance with the Financial Soundness Valuation basis as set out in the guidelines issued by the Actuarial
Society of South Africa in Standard of Actuarial Practice (SAP) 104 (2012). Under this guideline, provisions are valued using realistic expectations
of future experience, with margins for prudence and deferral of profit emergence.
Provisions for investment contracts with a discretionary participating feature are also computed using the gross premium valuation method in
accordance with the Financial Soundness Valuation basis. Surplus allocated to policyholders but not yet distributed related to these contracts
is included as part of life assurance policyholder liabilities.
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 local actuarial practices and methodologies.
Derivatives embedded in an insurance contract are not separated and measured at fair value if the embedded derivative itself qualifies for
recognition as an insurance contract. In this case the entire contract is measured as described above.
The Group performs liability adequacy testing at a business unit level on its insurance liabilities to ensure that the carrying amount of its liabilities
(less related deferred acquisition costs and intangible assets) is sufficient in view of estimated future cash flows. When performing the liability
adequacy test, the Group discounts all contractual cash flows and compares this amount to the carrying value of the liability at discount rates
appropriate to the business in question. Where a shortfall is identified, an additional provision is made.
The provision estimation techniques and assumptions are periodically reviewed, with any changes in estimates reflected in profit or loss as they occur.
Whilst the directors consider that the gross insurance contract provisions 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 amount provided.
In respect of South African life assurance, shadow accounting is applied to insurance contract provisions where the underlying measurement of
the policyholder liability depends directly on the value of owner-occupied property and the unrealised gains and losses on such property, which
are recognised in other comprehensive income. The shadow accounting adjustment to insurance contract provisions is recognised in other
comprehensive income to the extent that the unrealised gains or losses on owner-occupied property backing insurance contract provisions are
also recognised directly in other comprehensive income.
Financial guarantee contracts are recognised as insurance contracts. Liability adequacy testing is performed to ensure that the carrying amount
of the liability for financial guarantee contracts is sufficient.
Old Mutual plc
Annual Report and Accounts 2014
189
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
E: Financial assets and liabilities continued
E8: Insurance and investment contracts continued
Investment contract liabilities
Investment contract liabilities in respect of the Group’s other than unit-linked business are recorded at amortised cost unless they are designated
at fair value through profit or loss in order to eliminate or significantly reduce a measurement or recognition inconsistency, for example where the
corresponding assets are recorded at fair value through profit or loss.
Investment contract liabilities in respect of the Group’s unit-linked business are recorded at fair value. For such liabilities, including the deposit
component of unbundled unit-linked assurance contracts, fair value is calculated as the account balance, which is the value of the units allocated
to the policyholder, based on the bid price of the assets in the underlying fund (adjusted for tax).
Investment contract liabilities measured at fair value are subject to a ‘deposit floor’ such that the liability established cannot be less than the
amount repayable on demand.
Acquisition costs
Acquisition costs for insurance contracts comprise all direct and indirect costs arising from the sale of insurance contracts.
As the gross premium valuation method used in African territories to determine insurance contract provisions makes implicit allowance for the
deferral of acquisition costs, no explicit deferred acquisition cost asset is recognised in the statement of financial position for the contracts issued
in these areas.
Deferral of costs on insurance business in other territories is limited to the extent that they are deemed recoverable from available future margins.
Costs incurred in acquiring investment management service contracts
Incremental costs that are directly attributable to securing an investment management service contract are recognised as an asset if they can be
identified separately and measured reliably and it is probable that they will be recovered. Deferred acquisition costs represent the contractual
right to benefit from providing investment management services and are amortised as the related revenue is recognised. Costs attributable to
investment management service contracts in the asset management businesses are also recognised on this basis.
Property & casualty
Contracts under which the Group accepts significant insurance risk from another party and are not classified as life insurance are classified as
general insurance. All classes of property & casualty business are accounted for on an annual basis.
Premiums in property & casualty
Premiums 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 reporting 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.
Claims on property & casualty
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.
Outstanding claims do not include any provision for possible future claims where the claims arise under contracts not in existence at the reporting date.
The Group performs liability adequacy testing at a business unit level on its claim liabilities to ensure that the carrying amount of its liabilities (less
related deferred acquisition costs and the unearned premium reserve) is sufficient in view of estimated future cash flows.
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 amount 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.
Acquisition costs on property & casualty
Acquisition costs, which represent commission and other related expenses, are deferred and amortised over the period in which the related
premiums are earned.
Reinsurance
The Group cedes reinsurance in the normal course of business for the purpose of limiting its net loss potential through the diversification of its risks.
Assets, liabilities and income and expense arising from ceded reinsurance contracts are presented separately from the related assets, liabilities,
income and expense from the related insurance contracts because the reinsurance arrangements do not relieve the Group from its direct
obligations to its policyholders.
Only rights under contracts that give rise to a significant transfer of insurance risk are accounted for as reinsurance assets. Rights under contracts
that do not transfer significant insurance risk are accounted for as financial instruments.
190 Old Mutual plc
Annual Report and Accounts 2014
For the year ended 31 December 2014 Reinsurance premiums for ceded reinsurance are recognised as an expense on a basis that is consistent with the recognition basis for the
premiums on the related insurance contracts. For property & casualty business, reinsurance premiums are expensed over the period that the
reinsurance cover is provided based on the expected pattern of the reinsured risks. The unexpensed portion of ceded reinsurance premiums is
included in reinsurance assets.
The amounts recognised as reinsurance assets are measured on a basis that is consistent with the measurement of the provisions held in respect
of the related insurance contracts. Reinsurance assets include recoveries due from reinsurance companies in respect of claims paid.
Reinsurance assets are assessed for impairment at each reporting date. An asset is deemed impaired if there is objective evidence, as a result of
an event that occurred after its initial recognition, that the Group may not recover all amounts due, and that the event has a reliably measurable
impact on the amounts that the Group will receive from the reinsurer.
The reinsurers’ share of policyholder liabilities in Old Mutual Wealth relates to investment contracts where the direct management of assets are
ceded to a third party through a reinsurance arrangement. Due to the nature of the arrangement, there is no transfer of insurance risk.
(a) Policyholder liabilities
The Group’s insurance and investment contracts are analysed as follows:
Life assurance policyholder liabilities
Insurance contracts
Life assurance policyholder liabilities
Outstanding claims
Investment contracts
Unit-linked investment contracts and similar contracts
Other investment contracts
Discretionary participating investment contracts
At 31 December 2014
At 31 December 2013
Gross Reinsurance
Net
Gross
Reinsurance
Net
£m
10,519
10,369
150
68,841
60,158
746
7,937
(172)
(154)
(18)
(2,026)
(2,026)
–
–
10,347
10,215
132
66,815
58,132
746
7,937
12,126
11,953
173
69,015
60,769
786
7,460
(141)
(119)
(22)
(1,620)
(1,620)
–
–
11,985
11,834
151
67,395
59,149
786
7,460
Total life assurance policyholder liabilities
79,360
(2,198)
77,162
81,141
(1,761)
79,380
Property & casualty liabilities
Claims incurred but not reported
Unearned premiums
Outstanding claims
Total property & casualty liabilities
47
96
176
319
(10)
(45)
(61)
(116)
37
51
115
203
49
92
191
332
(7)
(49)
(58)
(114)
42
43
133
218
Total policyholder liabilities
79,679
(2,314)
77,365
81,473
(1,875)
79,598
Of the £2,314 million (2013: £1,875 million) included in reinsurer’s share of life assurance policyholder and property & casualty liabilities is an
amount of £2,266 million (2013: £1,774 million) which is classified as current, the remainder being non-current.
(b) Insurance contracts
Movements in the amounts outstanding in respect of life assurance policyholder liabilities, other than outstanding claims, are set out below:
Balance at beginning of the year
Income
Premium income
Investment income
Other income
Expenses
Claims and policy benefits
Operating expenses
Disposal of interests in subsidiaries1
Currency translation (gain)/loss
Other charges and transfers
Taxation
Transfer to operating profit
Transfer to non-current liabilities held for sale
Balance at end of the year
At 31 December 2014
At 31 December 2013
Gross Reinsurance
Net
Gross
Reinsurance
Net
11,953
(119)
11,834
14,457
(129)
14,328
£m
1,750
1,173
1
(1,973)
(455)
(156)
(303)
105
(9)
(412)
(1,305)
(73)
–
–
60
–
–
2
(41)
–
17
–
1,677
1,173
1
(1,913)
(455)
(156)
(301)
64
(9)
(395)
(1,305)
2,126
1,402
5
(2,674)
(509)
–
(2,415)
(57)
(16)
(366)
–
(70)
–
–
60
–
–
17
12
–
(9)
–
2,056
1,402
5
(2,614)
(509)
–
(2,398)
(45)
(16)
(375)
–
10,369
(154)
10,215
11,953
(119)
11,834
1 The disposal of interests in subsidiaries relates to the disposal of Old Mutual Wealth’s European businesses, as discussed in note A2.
Old Mutual plc
Annual Report and Accounts 2014
191
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
£m
At
31 December
2014
At
31 December
2013
61,555
8,847
(432)
(6,696)
(4,524)
3,520
(1,360)
(6)
60,904
57,823
8,452
(518)
(7,044)
–
5,670
(2,828)
–
61,555
£m
At
31 December
2014
At
31 December
2013
7,460
7,710
961
874
(945)
(76)
(73)
(8)
(195)
(61)
7,937
1,025
1,599
(901)
(80)
(61)
(11)
(1,733)
(88)
7,460
E: Financial assets and liabilities continued
E8: Insurance and investment contracts continued
(c) Unit-linked investment contracts and similar contracts, and other investment contracts
Balance at beginning of the year
Contributions received
Maturities
Withdrawals and surrenders
Disposal of interests in subsidiaries1
Fair value movements
Foreign exchange and other movements
Transfer to non-current liabilities held for sale
Balance at end of the year
1 The disposal of interests in subsidiaries relates to the disposal of Old Mutual Wealth’s European businesses, as discussed in note A2.
(d) Discretionary participating investment contracts
Balance at beginning of the year
Income
Premium income
Investment income
Expenses
Claims and policy benefits
Operating expenses
Other charges and transfers
Taxation
Currency translation gain
Transfer to operating profit
Balance at end of the year
192 Old Mutual plc
Annual Report and Accounts 2014
For the year ended 31 December 2014 (e) Contractual maturity analysis
The following table is a maturity analysis of liability cash flows based on contractual maturity dates for investment contract liabilities and
discretionary participating financial instruments, and expected claim dates for insurance contracts.
The undiscounted cash flows of discretionary participating investment contracts only include amount vested or to be vested, while their carrying
amount include reserves that are payable at the discretion of the Group.
The Group acknowledges that for property & casualty the unearned premium provision, which will be recognised as earned premium in the
future, will most likely not lead to claim cash outflows equal to this provision. The Group has estimated the potential claim outflows that may be
associated with this unearned premium.
At 31 December 2014
Life assurance policyholder liabilities
Insurance contracts
Life assurance policyholder liabilities
Outstanding claims
Investment contracts
Unit-linked investment contracts and similar contracts
Other investment contracts
Discretionary participating investment contracts
£m
Undiscounted cash flows
Carrying
amount
Less than
3 months
10,519
10,369
150
68,841
60,158
746
7,937
394
244
150
67,008
58,864
710
7,434
More than
3 months
less than
1 year
Between
1 and
5 years
More than
5 years
960
960
–
742
728
14
–
5,340
5,340
–
144
113
31
–
17,625
17,625
–
668
622
46
–
Total
24,319
24,169
150
68,562
60,327
801
7,434
Total life assurance policyholder liabilities
79,360
67,402
1,702
5,484
18,293
92,881
Property & casualty liabilities
Claims incurred but not reported
Unearned premiums
Outstanding claims
Total property & casualty liabilities
47
96
176
319
29
11
76
116
13
52
64
129
5
33
36
74
–
–
–
–
47
96
176
319
Total policyholder liabilities
79,679
67,518
1,831
5,558
18,293
93,200
At 31 December 2013
Life assurance policyholder liabilities
Insurance contracts
Life assurance policyholder liabilities
Outstanding claims
Investment contracts
Unit-linked investment contracts and similar contracts
Other investment contracts
Discretionary participating investment contracts
£m
Undiscounted cash flows
More than
3 months
less than
1 year
Between
1 and
5 years
More than
5 years
941
941
–
609
590
19
–
5,248
5,248
–
1,230
1,184
46
–
18,135
18,135
–
3,067
2,998
69
–
Total
26,010
25,837
173
68,510
60,904
802
6,804
Carrying
amount
Less than
3 months
12,126
11,953
173
69,015
60,769
786
7,460
1,686
1,513
173
63,604
56,132
668
6,804
Total life assurance policyholder liabilities
81,141
65,290
1,550
6,478
21,202
94,520
Property & casualty liabilities
Claims incurred but not reported
Unearned premiums
Outstanding claims
Total property & casualty liabilities
49
92
191
332
21
39
82
142
13
49
49
111
16
5
60
81
–
–
–
–
50
93
191
334
Total policyholder liabilities
81,473
65,432
1,661
6,559
21,202
94,854
Old Mutual plc
Annual Report and Accounts 2014
193
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
E: Financial assets and liabilities continued
E8: Insurance and investment contracts continued
(f) Insurance risk (risk arising within insurance contracts)
For accounting purposes insurance risk is defined as risk other than financial risk. Contracts issued by the Group may include both insurance and
financial risk. Contracts with significant insurance risk are classified as insurance contracts, while contracts with no or insignificant insurance risk
are classified as investment contracts.
The Group assumes insurance risk by issuing insurance contracts, under which the Group agrees to compensate the policyholder or other
beneficiary if a specified uncertain future event (the insured event) affecting the policyholder occurs. Insurance risk includes mortality and
morbidity risk in the case of life assurance or risk of loss (from fire, accident, or other source) in the case of property & casualty.
Insurance risk arises through exposure to variable claims experience on life assurance, critical illness and other protection business and exposure
to variable operating experience in respect of factors such as persistency levels and management expenses. Unfavourable persistency, expenses
and mortality and morbidity claim rates, relative to the actuarial assumptions made in the pricing process, may prevent the Group from achieving
its profit objectives.
The Group has developed a risk policy which sets out the practices which are used to monitor and manage insurance risk as well as management
information and stress testing requirements. The policy is cascaded to all entities across the Group who each have their own risk policy suite
aligned to the Group. As well as management of persistency, expense and claims experience, the risk policy sets requirements and standards on
matters such as underwriting and claims management practices, and the use of reinsurance to mitigate insurance risk.
The sensitivity of the Group’s earnings, capital position and embedded value to insurance risk is monitored through the Group’s embedded value
and risk appetite reporting processes.
The insurance risk profile and experience is closely monitored to ensure that the exposure remains acceptable.
The financial impact of insurance risk events is examined through stress tests carried out within the MCEV and IFRS sensitivities, ICA and Economic
Capital assessment.
Mortality and morbidity
Mortality and morbidity risk is the risk that death, critical illness and disability claims are different from expected levels. Possible causes are new
and unexpected epidemics and widespread changes in lifestyle such as eating, smoking and exercise habits. Higher than expected claims levels
will reduce expected emerging profits. For contracts where the insured risk is survival, the most significant factor that is likely to adversely impact
the claims experience is continued improvement in medical science and social conditions that increase longevity.
For unit-linked contracts, a risk charge is applied to meet the expected cost of the insured benefit (in excess of the unit value). This risk charge
can be altered in the event of significant changes in the expectation for future claims experience, subject to ‘Treating Customers Fairly’ principles.
The operations manage mortality and morbidity risks through its underwriting policy and external reinsurance arrangements where its policy
is to retain certain types of insurance risks within specified maximum single event loss limits. Exposures above accepted limits are transferred to
reinsurance counterparties.
Persistency
Persistency risk is the risk that policyholder surrenders, transfers or premium cessation on contracts occur at levels that are different to expected.
In order to limit this risk to an acceptable level, products (including charging and commission structures) are designed to limit the risk of direct
financial loss on surrender, subject to ‘Treating Customers Fairly’ principles.
Persistency statistics are monitored monthly and a detailed persistency analysis at a product level is carried out on an annual basis. Management
actions may be triggered if statistics show significant adverse movement or emerging trends in experience.
Expenses
Expense risk is the risk that actual expenses and expense inflation differ from expected levels. Higher expenses and expense inflation may result in
emerging profit falling below the Group’s profit objectives.
Expense levels are monitored quarterly against budgets and forecasts. An activity-based costing process is used to allocate costs relating to
processes and activities to individual product lines.
Some products’ structures include maintenance charges. These charges are reviewed annually in light of changes in maintenance expense levels.
This review may result in changes in charge levels, subject to ‘Treating Customers Fairly’ principles.
Tax
Tax risk is the risk that the projected taxation basis for basic life assurance business is incorrect, resulting in contracts being incorrectly priced.
Tax risk also represents potential changes in the interpretation or application of prevailing tax legislation as paid by either policyholders or
shareholders, resulting in higher taxes reducing profitability or increasing shareholder tax burdens. The taxation position of the operations is
projected annually and tax changes will result in changes to new business pricing models as part of the annual control cycle. High risk issues and
emerging trends are reported internally on a quarterly basis.
194 Old Mutual plc
Annual Report and Accounts 2014
For the year ended 31 December 2014 (g) Sensitivity analysis – life assurance
Changes in key assumptions used to value insurance contracts would result in increases or decreases to the insurance contract provisions
recorded, with impact on profit/(loss) and/or shareholders’ equity. The effect of a change in assumption is mitigated by the offset (partial or full)
to the bonus stabilisation reserve in the case of smoothed bonus products in South Africa.
The tables below demonstrate the effect of a change in a key assumption while other assumptions remain unchanged:
At 31 December 2014
Assumption
Mortality and morbidity rates – assurance
Mortality rates – annuities
Discontinuance rates
Expenses (maintenance)
At 31 December 2013
Assumption
Mortality and morbidity rates – assurance
Mortality rates – annuities
Discontinuance rates
Expenses (maintenance)
%
£m
£m
£m
Change
Emerging
Markets
Old Mutual
Wealth
Bermuda
10
(10)
10
10
271
44
(7)
54
%
£m
2
–
(1)
3
£m
–
–
1
–
£m
Change
Emerging
Markets
Old Mutual
Wealth
Bermuda
10
(10)
10
10
256
42
(7)
52
2
–
(1)
3
–
–
3
–
Emerging Markets
The changes in insurance contract liabilities shown are calculated using the specified increase or decrease to the rates, with no change in charges
paid by policyholders.
The insurance contract liabilities recorded for the Emerging Market business are also impacted by the valuation discount rate assumed. Lowering this
rate by 1% (with a corresponding reduction in the valuation inflation rate assumption) would result in a net increase to the insurance contract liabilities,
and decrease to profit, of £3 million (2013: £6 million). This impact is calculated with no change in charges paid by policyholders. The 2014 impact is
lower than the 2013 impact due to further management actions taken to reduce the impact of changing interest rates on operating profit.
It should be noted that where the assets and liabilities of a product are closely matched (for instance non-profit annuity business) or where the
impact of a lower valuation discount rate is hedged or partially hedged, the net effect has been shown since the asset movement fully or partially
offsets the liability movement.
Old Mutual Wealth
The changes in insurance contract liabilities shown are calculated independently using the specified increase or decrease to the rates, with no
change in premiums paid by policyholders. The assumption changes have no impact on the linked UK business.
Whole of Life is the main product group affected by the lapse assumption change. This is because the policies have the longest duration and
represent close to 95% of the reserve. The main product groups impacted by the expense, mortality and morbidity sensitivities are Whole of Life
and Accelerated Critical Illness.
In the Old Mutual Wealth business, non-linked liabilities are well matched by gilts so that the net impact of a valuation interest rate change taking
asset and liability movement into account is negligible.
Old Mutual Bermuda
Lapses and partial withdrawals have the largest impact where increased activity reduces the guarantee portion of the business since less death
and living benefit exposure is expected in the future. Mortality plays a much smaller part in Bermuda since all the business is accumulation/savings
type business. Increased deaths do accelerate payment of guaranteed minimum death benefits but there is a comparable release of reserve on
the maturity guarantee providing an offset (about 74% of the variable annuity business has both death/living benefits).
Old Mutual plc
Annual Report and Accounts 2014
195
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
E: Financial assets and liabilities continued
E8: Insurance and investment contracts continued
(h) Sensitivity analysis – property & casualty
An increase of 10% in the average cost of claims would require the recognition of an additional loss of £37 million (2013: £49 million) net of
reinsurance. Similarly, an increase of 10% in the ultimate number of claims would result in an additional loss of £37 million (2013: £49 million) net
of reinsurance.
The majority of the Group’s property & casualty contracts are classified as ‘short-tailed’, meaning that any claim is settled within a year after the
loss date. This contrasts with the ‘long-tailed’ classes where the claims cost take longer to materialise and settle. The Group’s property & casualty
long-tailed business is generally limited to accident, third-party motor, liability and some engineering classes. In total the long-tail business
comprises less than five per cent of an average year’s claim costs.
(i) Reinsurance assets – credit risk
None of the Group’s reinsurance assets are either past due or impaired. Of the reinsurance assets shown in the statement of financial position all
are considered investment grade with the exception of £36 million of unrated exposures (2013: £73 million). Collateral is not taken against
reinsurance assets or deposits held with reinsurers other than in limited circumstances.
E9: Borrowed funds
Notes
Non-
banking
Banking
At
31 December
2014
Non-
banking
Senior debt securities and term loans
Floating rate notes
Fixed rate notes
Term loans
Revolving credit facilities
Mortgage-backed securities
Subordinated debt securities
Borrowed funds
Other instruments treated as equity for
accounting purposes
€374 million perpetual preferred callable securities
at 5.00%
£273 million perpetual preferred callable securities
at 6.40%
Total: Book value
Nominal value of the above
E9(a)(i)
E9(a)(ii)
E9(a)(iii)
E9(b)
E9(c)
E9(d)
F9(b)
F9(b)
112
–
112
–
114
–
788
1,264
1,376
563
576
125
72
52
642
563
688
125
186
52
1,430
3,044
1,014
2,030
253
273
1,540
1,512
113
–
113
–
–
–
703
816
253
273
1,342
1,370
£m
At
31 December
2013
1,279
673
591
15
–
65
1,300
2,644
Banking
1,166
673
478
15
–
65
597
1,828
The table below is a maturity analysis of the liability cash flows based on contractual maturity dates for borrowed funds. Maturity analysis is
undiscounted and based on year-end exchange rates.
Less than 1 year
Greater than 1 year and less than 5 years
Greater than 5 years
Total
Non-
banking
392
555
1,116
2,063
At
31 December
2014
1,025
2,293
1,418
4,736
Banking
633
1,738
302
2,673
Non-
banking
98
751
1,099
1,948
£m
At
31 December
2013
490
2,485
1,341
4,316
Banking
392
1,734
242
2,368
196 Old Mutual plc
Annual Report and Accounts 2014
For the year ended 31 December 2014 (a) Senior debt securities and term loans
(i) Floating rate notes (net of Group holdings)
Banking – Floating rate unsecured senior debt
R2,563 million at JIBAR + between 0.94% and 1.05%
R1,297 million at JIBAR + 1.00%
R1,027 million at JIBAR + 1.75%
R250 million at JIBAR + 1.00%
R1,044 million at JIBAR + 2.20%
R677 million at JIBAR + 1.25%
R3,056 million at JIBAR + 0.80%
R694 million at JIBAR + 0.75%
R405 million at JIBAR + 1.30%
R1,035 million at JIBAR + 0.85%
R786 million at JIBAR + 1.30%
R806 million at JIBAR + 0.90%
R241 million at JIBAR + 1.12%
R80 million at JIBAR + 2.15%
R650 million at JIBAR + 1.30%
Less: floating rate notes held by other Group companies
Total floating rate notes
All floating rate notes are non-qualifying for the purposes of regulatory tiers of capital.
(ii) Fixed rate notes (net of Group holdings)
Banking – Fixed rate unsecured senior debt
R450 million at 8.39%
R478 million at 9.68%
R3,244 million at 10.55%
R1,137 million at 9.36%
R151 million at 6.91%
R1,273 million at 11.39%
R1,888 million at 8.92%
R855 million at 9.38%
R500 million at 9.29%
R391 million at 9.73%
R660 million at zero coupon
Less: Fixed rate notes held by other Group companies
Banking fixed rate unsecured senior debt (net of Group holdings)
Non-banking
$2 million secured senior debt at 5.23%
£112 million Eurobond at 7.125%
Total fixed rate notes
All fixed rate notes are non-qualifying for the purpose of regulatory tiers of capital.
Maturity date
At
31 December
2014
At
31 December
2013
£m
Repaid
February 2015
April 2015
August 2015
September 2015
March 2016
July 2016
November 2016
February 2017
March 2017
August 2017
June 2017
November 2017
April 2020
June 2021
–
72
57
14
59
38
169
39
23
58
39
45
14
5
36
668
(105)
563
138
75
60
14
61
39
176
40
23
–
42
–
–
5
–
673
-
673
£m
Maturity date
At
31 December
2014
At
31 December
2013
Repaid
April 2015
September 2015
March 2016
July 2016
September 2019
November 2020
March 2021
June 2021
March 2024
October 2024
Repaid
October 2016
–
27
186
65
9
77
106
49
28
22
15
584
(8)
576
–
112
112
688
26
28
192
67
9
80
109
–
–
–
14
525
(47)
478
1
112
113
591
Old Mutual plc
Annual Report and Accounts 2014
197
Financials
GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2014
E: Financial assets and liabilities continued
E9: Borrowed funds continued
(iii) Term loans
Banking – Floating rate loans
R1,500 million at JIBAR + 2.95%
Banking – Fixed rate loans
$4 million at 9.50%
$6 million at 8.00%
$19 million at 8.00%
$10 million at 8.00%
$5 million at 11.00%
$10 million at 10.00%
KES720 million at 14.00% to 14.75%
KES175 million at 11.70%
KES225 million at 11.70%
KES200 million at 5.00%
Total term loans and other loans
Maturity date
August 2017
Repaid
August 2017
September 2017
May 2020
September 2022
December 2023
October 2015
October 2016
August 2017
July 2022
At 31
December
2014
£m
At 31
December
2013
84
–
4
12
7
3
6
5
1
2
1
–
6
–
–
–
3
6
–
–
–
–
125
15
These term loans are used to fund the lending operations of the Emerging Markets banking businesses.
(b) Revolving credit facilities
Banking
R1,000 million drawn of a R1,200 million facility at 3 month JIBAR + 2.95%
R500 million fully drawn at 3 month JIBAR + 3.10%
Non-banking
$177 million drawn of a $350 million facility at USD LIBOR + 1.50%
Total revolving credit facilities
Maturity date
August 2017
October 2019
October 2019
At 31
December
2014
£m
At 31
December
2013
44
28
72
114
186
–
–
–
–
–
The Group also has access to an £800 million (2013: £800 million) five-year multi-currency revolving credit facility which matures in August 2019,
with an optional further one-year extension at both the first and second year anniversary. At 31 December 2014 and 31 December 2013, none
of this facility was drawn and there were no irrevocable letters of credit in issue against this facility.
(c) Mortgage-backed securities (net of Group holdings)
Banking
R480 million (class A1) at JIBAR + 1.10%
R336 million (class A2) at JIBAR + 1.25%
R900 million (class A3) at JIBAR + 1.54%
R110 million (class B) at JIBAR + 1.90%
Less: Mortgage backed securities held by other Group companies
Total mortgage-backed securities
Tier
Maturity date
Tier 2 25 October 2039
Tier 2 25 October 2039
Tier 2 25 October 2039
Tier 2 25 October 2039
At 31
December
2014
£m
At 31
December
2013
2
19
51
6
78
(26)
52
13
20
52
6
91
(26)
65
198 Old Mutual plc
Annual Report and Accounts 2014
For the year ended 31 December 2014
For the year ended 31 December 2014
(d) Subordinated debt securities (net of Group holdings)
Banking
R1,700 million at 8.90%
R1,265 million at JIBAR + 4.75%
R487 million at 15.05%
R1,000 million at 10.54%
$100 million at 3 month USD LIBOR
R2,000 million at JIBAR + 0.47%
R1,800 million at JIBAR + 2.75%
R1,200 million at JIBAR + 2.55%
R450 million at JIBAR plus 10.49%
R1,737 million at 3 month JIBAR + 2.55%
R300 million at JIBAR + 2.75%
Less: Banking subordinated debt securities held by other Group companies
Banking subordinated securities1
Non-banking
R3,000 million at 8.92%
£500 million at 8.00%
R300 million at 9.255%2
R700 million at 3 month JIBAR + 2.20%3
Non-banking subordinated securities
Total subordinated debt securities
Tier
Maturity
date
At
31 December
2014
At
31 December
2013
£m
Tier 2
Repaid
Non-core Tier 1 November 2018
Non-core Tier 1 November 2018
Tier 2 September 2020
March 2022
Tier 2 Secondary
July 2022
Tier 2
Tier 2
July 2023
Tier 2 November 2023
April 2024
Tier 2
April 2024
Tier 2
April 2024
Tier 2
October 2020
Lower Tier 2
Lower Tier 2
June 2021
Lower Tier 2 November 2024
Lower Tier 2 November 2024
–
74
32
58
64
113
102
67
26
98
17
651
(9)
642
167
565
17
39
788
101
74
32
62
60
116
105
69
–
–
–
619
(22)
597
172
531
–
–
703
1,430
1,300
1 The first call date of the R1,265 million and R487 million subordinated debt securities is November 2018. All other subordinated debt securities have a first call date five years
before the maturity date.
2 On 27 November 2014, Old Mutual Life Assurance Company (South Africa) Limited (OMLAC(SA)) issued R300 million Unsecured Subordinated Callable Fixed Rate Notes under
its R10 billion Unsecured Callable Notes Programme. Interest is payable in arrears at a fixed rate of 9.255% on 27 May and 27 November each year up to the first call date
of 27 November 2019. If not called on the first call date, the rate increases to 3.30% plus the relevant Government of South Africa benchmark rate, until the maturity date of
27 November 2024.
3 On 27 November 2014, OMLAC(SA) also issued R700 million Unsecured Subordinated Callable Floating Rate Notes under its R10 billion Unsecured Callable Notes Programme.
Interest is payable at a floating rate of 3 month ZAR-JIBAR + 2.20% on 27 November, 27 February, 27 May and 27 August each year until 27 November 2019. If not called on the
first call date, the floating rate increases to 3 month ZAR-JIBAR + 3.30% resettable quarterly, until the maturity date of 27 November 2024.
E10: Amounts owed to bank depositors
At 31 December 2014
Current accounts
Savings deposits
Other deposits and loan accounts
Negotiable certificates of deposit
Deposits received under repurchase agreements
Amounts owed to bank depositors
At 31 December 2013
Current accounts
Savings deposits
Other deposits and loan accounts
Negotiable certificates of deposit
Deposits received under repurchase agreements
Amounts owed to bank depositors
Carrying
amount
3,621
1,556
26,213
4,150
703
Less than
3 months
3,621
1,509
20,021
1,023
703
36,243
26,877
Carrying
amount
3,376
1,579
23,694
5,018
703
34,370
Less than
3 months
3,374
1,578
17,402
1,276
704
24,334
More than
3 months
less than
1 year
–
45
3,650
2,062
–
5,757
More than
3 months
less than
1 year
–
–
3,388
2,829
–
6,217
Between
1 and
5 years
–
2
2,849
1,425
–
4,276
More than
5 years
–
–
593
18
–
611
Between
1 and
5 years
2
1
2,993
1,279
–
4,275
More than
5 years
–
–
304
5
–
309
£m
Total
3,621
1,556
27,113
4,528
703
37,521
£m
Total
3,376
1,579
24,087
5,389
704
35,135
Old Mutual plc
Annual Report and Accounts 2014
199
Financials
GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
E: Financial assets and liabilities continued
E11: Liquidity
Liquidity risk is the risk that cash may not be available to pay obligations when due at a reasonable cost. Ultimate responsibility for liquidity risk
management rests with the Board of Directors, which has built an appropriate liquidity risk management framework for the management of the
Group’s short-, medium- and long-term funding and liquidity requirements. The Group manages liquidity by maintaining adequate reserves and
banking facilities, continuously monitoring forecast and actual cash flows, and matching the maturity profiles of financial assets and liabilities.
Individual businesses separately maintain and manage their local liquidity requirements according to their business needs, within the overall
liquidity framework established by Old Mutual plc.
The Group continues to meet Group and individual entity capital requirements, and day-to-day liquidity needs through the Group’s available
cash resources and, if necessary, available credit facilities. The Group’s liquid resources are held in large portfolios of highly marketable
securities, for example listed bonds, actively traded pooled investments, equities and cash and cash equivalents. Whilst most of the Group’s
policyholder and banking liabilities are generally repayable on demand, the Group’s expectation is that policyholders and banking depositors
will only require funds on an ongoing basis. However, cash resources and other liquid assets are maintained in the event of a need for additional
liquidity. Information on the nature of the investments and securities held is given in note E4. The Group renewed the existing revolving credit
facility of £800 million (2013: £800 million) in August 2014, maturing in August 2019 (2013: April 2016). Details, together with information on the
Group’s borrowed funds, are given in note E9.
The key information reviewed by the Group’s Executive Directors and Executive Committee, together with the Group’s Capital Management
Committee, is a detailed management report on the Group’s and holding company’s current and planned capital and liquidity position, together
with summary information on the current and planned liquidity positions of the Group’s operating segments. Forecasts are updated regularly
based on new information received and also as part of the Group’s annual business planning cycle. The Group and holding company’s liquidity
and capital position and forecast are presented to the Old Mutual plc Board of Directors on a regular basis. Additionally the Group conducts
regular stress testing around liquidity requirements, as referenced in the Principal risks and uncertainties section (refer to page 32).
Group operating segments are required, both in terms of their local requirements and in accordance with direction from the holding company, to
establish their own processes for managing their liquidity and capital needs and these are subject to review by their local oversight functions, with
representation from the Group.
Further information on liquidity and the holding company cash flows is contained in the financial performance section of the Business Review section.
The Group does not have material liquidity exposure to special purpose entities or investment funds.
The contractual maturities of the Group’s financial liabilities are set out in notes E6, E8, E9 and E10.
200 Old Mutual plc
Annual Report and Accounts 2014
For the year ended 31 December 2014 F: Other statement of financial position notes
F1: Goodwill and other intangible assets
(a) Goodwill and goodwill impairment
Goodwill arising on the acquisition of a subsidiary undertaking is recognised as an asset at the date that control is achieved (the acquisition date).
Goodwill is measured as the excess of the fair value of the business over the net of the acquisition date amounts of the identifiable assets acquired
and the liabilities assumed. If the Group’s interest in the net fair value of the acquiree’s identifiable net assets exceeds the sum of the consideration
transferred, the amount of any non-controlling interest in the acquiree and the fair value of the acquirer’s previously-held equity interest (if any),
this excess is recognised immediately in profit or loss as a bargain purchase gain. Non-controlling interest is measured at fair value of the stake
held on initial recognition of the business combination.
Goodwill is not amortised, but is reviewed for impairment at least once annually. Any impairment loss is recognised immediately in profit or loss
and is not subsequently reversed.
On loss of control of a subsidiary undertaking, any attributable goodwill is included in the determination of any profit or loss on disposal.
On disposal of a business, where goodwill on acquisition is allocated to the entire cash-generating unit (CGU), goodwill is allocated to the
disposal on a relative basis.
Goodwill is allocated to one or more CGUs, being the smallest identifiable group of assets that generates cash inflows that are largely
independent of the cash inflows from other assets or group of assets. The directors annually test for impairment of each CGU or group of CGUs
containing goodwill and intangible assets with indefinite useful lives, at a level that is no larger than that of the Group’s identified operating
segments for the purposes of segment reporting. An impairment loss is recognised whenever the carrying amount of an asset or its CGU or group
of CGUs exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. Impairment losses relating to
goodwill are not reversed.
(b) Present value of acquired in-force for insurance and investment contract business
The present value of acquired in-force for insurance and investment contract business is capitalised in the consolidated statement of financial
position as an intangible asset.
The capitalised value is the present value of cash flows anticipated in the future from the relevant book of insurance and investment contract
policies acquired at the date of the acquisition. This is calculated by performing a cash flow projection of the associated life assurance fund and
book of in-force policies in order to estimate future after tax profits attributable to shareholders. The valuation is based on actuarial principles
taking into account future premium income, mortality, disease and surrender probabilities, together with future costs and investment returns on
the assets supporting the fund. These profits are discounted at a rate of return allowing for the risk of uncertainty of the future cash flows. The key
assumptions impacting the valuation are discount rate, future investment returns and the rate at which policies discontinue.
The asset is amortised over the expected profit recognition period on a systematic basis over the anticipated lives of the related contracts.
The amortisation charge is stated net of any unwind in the discount rate used to calculate the asset.
The recoverable amount of the asset is re-calculated at each reporting date and any impairment losses recognised accordingly.
(c) Other intangible assets acquired as part of a business combination
Contractual banking and asset management customer relationships, relationships with distribution channels and similar intangible assets,
acquired as a part of a business combination, are capitalised at their fair value, represented by the estimated net present value of the future cash
flows from the relevant relationships acquired at the date of acquisition.
Brands and similar items acquired as part of a business combination are capitalised at their fair value based on a ‘relief from royalty’
valuation methodology.
Subsequent to initial recognition such acquired intangible assets are amortised on a straight-line basis over their estimated useful lives as set out below:
■ Distribution channels
■ Customer relationships
■ Brand
10 years
10 years
15 – 20 years
The estimated useful life is re-evaluated on a regular basis.
(d) Internally developed software
Internally developed software (software) is amortised over its estimated useful life, where applicable. Such assets are stated at cost less
accumulated amortisation and impairment losses. Software is recognised in the statement of financial position if, and only if, it is probable that the
relevant future economic benefits attributable to the software will flow to the Group and its cost can be measured reliably.
Costs incurred in the research phase are expensed whereas costs incurred in the development phase are capitalised subject to meeting specific
criteria, set out in the relevant accounting guidance. The main criteria being that future economic benefits can be identified as a result of the
development expenditure. Amortisation is charged to profit or loss on a straight-line basis over the estimated useful lives of the relevant software,
which range between two and 10 years.
Old Mutual plc
Annual Report and Accounts 2014
201
Financials
GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
F: Other statement of financial position notes continued
F1: Goodwill and other intangible assets continued
(e) Subsequent expenditure
Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific
asset to which it relates. All other expenditure is expensed as incurred.
(f) Analysis of goodwill and other intangible assets
At 31 December
2014
2013
2014
2013
2014
2013
2014
2013
2014
Present value of
acquired in-force
business
development costs
Goodwill
Software
development costs
Other
intangible
assets
Cost
Balance at beginning of the year
Acquisitions through business combinations
Additions
Disposals of interests in subsidiaries
Disposals or retirements
Transfer to non-current assets held for sale
Foreign exchange and other movements
Balance at end of the year
Amortisation and impairment losses
Balance at beginning of the year
Amortisation charge for the year
Impairment losses
Disposals of interests in subsidiaries
Disposals or retirements
Transfer to non-current assets held for sale
Foreign exchange and other movements
Accumulated amortisation and
impairment losses at end of the year
Carrying amount
Balance at beginning of the year
Balance at end of the year
2,641
155
–
(86)
–
–
46
2,756
(598)
–
(14)
–
–
–
(12)
(624)
2,729
30
–
–
–
–
(118)
2,641
(611)
–
(8)
–
–
–
21
(598)
1,464
17
–
(323)
–
(14)
(25)
1,119
(946)
(70)
–
186
–
8
18
(804)
1,453
–
–
–
–
–
11
1,464
(866)
(76)
–
–
–
–
(4)
(946)
630
14
72
(22)
(18)
(3)
(4)
669
(437)
(46)
–
20
17
3
(6)
(449)
684
–
84
–
(5)
–
(133)
630
(480)
(49)
–
–
6
–
86
(437)
538
69
4
–
–
–
(17)
594
(457)
(54)
–
–
–
–
13
(498)
565
–
2
–
(35)
–
6
538
(418)
(48)
(20)
–
33
–
(4)
5,273
255
76
(431)
(18)
(17)
–
5,138
(2,438)
(170)
(14)
206
17
11
13
(457)
(2,375)
(2,438)
2,043
2,132
2,118
2,043
518
315
587
518
193
220
204
193
81
96
147
2,835
81
2,763
3,056
2,835
£m
Total
2013
5,431
30
86
–
(40)
–
(234)
5,273
(2,375)
(173)
(28)
–
39
–
99
Goodwill acquired through business combinations comprises £96 million in respect of acquisitions made by Emerging Markets and £59 million
made by Old Mutual Wealth. Refer to note H8 for further information.
Of the present value of acquired in-force business net carrying amount at the year-end, £301 million (2013: £518 million) relates to the Skandia
business acquired during 2006, which is due to be amortised over a further seven to twelve years. £14 million relates to Emerging Markets and
arose on acquisition of Old Mutual Finance (Pty) Ltd. Refer to note A2 and H8 for further information.
Of the other intangible assets at the year-end, £25 million (2013: £69 million) relates to distribution channels associated with the Skandia business.
The remaining period of amortisation of these intangible assets is one year. The Group recognised mutual fund and asset management
relationship intangible assets of £41 million on acquisition of Intrinsic Financial Services Limited. The remaining period of amortisation of these
intangible assets is three years.
202 Old Mutual plc
Annual Report and Accounts 2014
For the year ended 31 December 2014 (g) Allocation of goodwill to cash generating units
The carrying amount of goodwill accords with the operating segmentation shown in note B and primarily relates to the cash generating units
(CGUs) of Emerging Markets, Old Mutual Wealth, Nedbank and Institutional Asset Management.
Emerging Markets
Old Mutual Wealth
Nedbank
Institutional Asset Management
Goodwill, net of impairment losses
£m
At
31 December
2014
At
31 December
2013
194
823
277
838
101
864
285
793
2,132
2,043
(h) Annual impairment testing of goodwill
In accordance with the requirements of IAS 36 ‘Impairment of Assets’, goodwill is tested annually for impairment for each CGU, by comparing the
carrying amount of each CGU to its recoverable amount, being the higher of that CGU’s value-in-use or fair value less costs to sell. An impairment
charge is recognised when the recoverable amount is less than the carrying value.
Emerging Markets and Old Mutual Wealth
Emerging Markets and Old Mutual Wealth CGUs generate revenues through their life assurance and asset management businesses.
The value-in-use calculations for the life assurance operations are determined using the reported embedded value methodology plus a
discounted cash flow calculation for the value of new business. The value of new business represents the present value of future profits from
expected new business. Embedded value represents the shareholders’ interest in the life assurance business and is calculated in accordance with
MCEV principles.
The cash flows attributable to the value of new business are determined with reference to latest approved three-year business plans. Projections
beyond the plan period are extrapolated using an inflation based growth assumption.
The value-in-use calculations for the asset management operations are similarly determined based on discounted cash flow models derived from
the latest approved three-year business plans. An additional two years of projections beyond the plan period are extrapolated using inflation
based growth rates.
The cash flows are discounted at economic profit rates applicable to each individual CGU. The key assumptions used in the value-in-use
calculations for the Emerging Markets, and Old Mutual Wealth CGUs are as follows:
■ The growth rate – the rate used is an inflation based growth assumption, which varies by CGU and is based on external market factors
particular to that CGU. Emerging Markets applied the growth rate of between 9.0% to 12.0% (2013: 8.7% to 9.7%) to both its life assurance
business and asset management business, being the expected growth rate reflected in the business plans of each CGU. Old Mutual Wealth
applied a weighted average calculation to determine the growth rate of 14.0% (2013: 14.5%)
■ The discount rate – the applied rate used the relevant 10-year government bond rate as a starting point, which was adjusted for an equity
market risk premium and other relevant risk adjustments, which were determined using market valuation models and other observable
references. Rates applied were 13.5% (2013: 13.3%) for Emerging Markets and 9.0% (2013: 9.6%) for Old Mutual Wealth.
Old Mutual Wealth is regarded by the directors as a single cash generating unit due to the integrated nature of its operations. On disposals of
businesses, goodwill is allocated to them based on the relative size of the net assets of the business. The directors are satisfied that any reasonable
change in the assumptions would not cause the recoverable amounts of the Emerging Markets and Old Mutual Wealth CGUs to fall below their
carrying amounts.
Nedbank
The impairment test in respect of the Nedbank CGU has been performed by comparing the CGU’s net carrying amount to its estimated
value-in-use. The value-in-use has been determined using a discounted cash flow methodology. The key assumptions used in the value-in-use
calculation are the discount rate and growth rate, which are based on the three year business plan plus the terminal value. A growth rate between
0.0%, international business and 5.8%, South African business (2013: 0.0% and 5.0%) was applied to extrapolate cash flows for an additional two
years beyond the three-year business plan period. A terminal value, using the same growth rate, is added for the value of cash flows beyond five
years. The discount rate applied was approximately 12.8% (2013: 12.0%). The directors are satisfied that a reasonable change in assumptions
would not cause the recoverable amount of the goodwill to fall below the carrying amount.
Old Mutual plc
Annual Report and Accounts 2014
203
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
F: Other statement of financial position notes continued
F1: Goodwill and other intangible assets continued
Institutional Asset Management
The impairment test in respect of the Institutional Asset Management’s CGU has been performed by comparing the CGU’s net carrying
amount to its value-in-use determined using a discounted cash flow methodology. The key assumptions used in the value-in-use calculations for
Institutional Asset Management are as follows:
■ The three year business plan plus two further years have growth rate assumptions based on management’s expectation of performance
over this period. A terminal value, using a long-term growth rate of 4.0% (2013: 4.0%) is added for the value of cash flows beyond five years.
The assumed long-term growth rate was determined with reference to nominal historical gross domestic product (GDP) growth, and the
outlook for nominal GDP growth for the US
■ The risk-adjusted discount rate applied was 12.0% (2013: 12.0%).
The directors are satisfied that a reasonable change in assumptions would not cause the recoverable amount of the goodwill to fall below the
carrying amount.
(i) Segmental analysis of goodwill and other intangibles
The following table shows a segmental analysis of the carrying amounts of goodwill and other intangible assets, together with amortisation and
impairment charges, by operating segment:
At 31 December
Emerging Markets
Old Mutual Wealth
Nedbank
Institutional Asset Management
Goodwill and
intangible assets
(carrying amount)
2014
275
1,197
452
839
2,763
2013
134
1,461
446
794
2,835
£m
Amortisation
Impairment
2014
16
117
37
–
170
2013
9
125
39
–
173
2014
–
14
–
–
14
2013
8
20
–
–
28
The impairment of £14 million in Old Mutual Wealth relates to the pending sale of Skandia Luxembourg and Skandia France. Refer to note A2 for
further information.
F2: Fixed assets
F2(a): Property, plant and equipment
For properties reclassified during the year from property, plant and equipment to investment properties, any revaluation gain arising is initially
recognised in profit or loss to the extent that impairment losses were previously recognised. Any residual excess is taken to the revaluation reserve.
Revaluation deficits are recognised in the revaluation reserve to the extent of previously recognised gains and any residual deficit is accounted for
in profit or loss.
At 31 December
Gross carrying amount
Balance at beginning of the year
Additions
Additions from business combinations
Increase arising from revaluation
Disposals
Foreign exchange and other movements
Transfer to non-current assets held for sale
Accumulated depreciation and
impairment losses
Balance at beginning of the year
Depreciation charge for the year
Disposals
Foreign exchange and other movements
Transfer to non-current assets held for sale
Balance at end of the year
Carrying amount
Balance at beginning of the year
Balance at end of the year
204 Old Mutual plc
Annual Report and Accounts 2014
2014
98
22
6
12
(3)
(9)
–
126
–
–
–
–
–
–
Land
2013
106
7
–
2
–
(17)
–
98
–
–
–
–
–
–
98
126
106
98
Buildings
Plant and equipment
2014
2013
2014
2013
2014
466
12
5
16
(1)
(47)
–
451
(34)
(11)
1
2
–
(42)
432
409
562
10
–
33
–
(139)
–
466
(39)
(12)
–
17
–
(34)
523
432
598
120
9
–
(87)
(18)
(1)
621
(406)
(72)
76
10
1
(391)
192
230
734
96
1
–
(81)
(152)
–
598
(516)
(76)
75
111
–
(406)
218
192
1,162
154
20
28
(91)
(74)
(1)
1,198
(440)
(83)
77
12
1
(433)
722
765
£m
Total
2013
1,402
113
1
35
(81)
(308)
–
1,162
(555)
(88)
75
128
–
(440)
847
722
For the year ended 31 December 2014 The carrying value of property, plant and equipment leased to third parties under operating leases included in the above is £8 million (2013: £41 million)
and comprises land of £7 million (2013: £6 million) and buildings of £1 million (2013: £35 million).
The value of property, plant and equipment pledged as security is £6 million (2013: £2 million).
The revaluation of land and buildings relates to Emerging Markets and Nedbank. In 2014, Emerging Markets made revaluation gains of £6 million on
land (2013: £1 million) and £6 million (2013: £10 million) on buildings. Nedbank made revaluation gains of £6 million on land (2013: £nil) and £10
million on buildings (2013: £23 million).
For Emerging Markets, land and buildings are valued as at 31 December each year by internal professional valuers and external valuations are
obtained once every three years. For Nedbank, valuations are performed every three years by external professional valuers. For each business, the
valuation methodology adopted is dependent upon the nature of the property. Income generating assets are valued using discounted cash flows and
vacant land and property are valued according to sales of comparable properties. The carrying value that would have been recognised had the
land and buildings been carried under the historic cost model would be £28 million (2013: £25 million) and £171 million (2013: £179 million)
respectively for Emerging Markets, £15 million (2013: £16 million) and £113 million (2013: £112 million) for Nedbank respectively.
F2(b): Investment property
Balance at beginning of the year
Additions
Additions from business combinations
Disposals
Net gain from fair value adjustments
Foreign exchange and other movements
Transfer to non-current assets held for sale
Balance at end of the year
£m
Year ended
31 December
2014
Year ended
31 December
2013
Notes
1,811
48
–
(115)
61
29
(156)
1,678
1,947
47
10
(22)
107
(278)
–
1,811
I2
The additions of £48 million (2013: £47 million) and the net gain from fair value adjustments of £61 million (2013: £107 million) are both related to
Emerging Markets.
The fair value of investment property (freehold) leased to third parties under operating leases is as follows:
Freehold
Leasehold
Rental income from investment property
Direct operating expense arising from investment property that generated rental income
£m
Year ended
31 December
2014
Year ended
31 December
2013
1,662
16
1,678
157
(27)
130
1,779
32
1,811
157
(24)
133
The carrying amount of investment property is the fair value of the property as determined by a registered independent valuer at least every three
years, and annually by locally qualified staff, having an appropriate recognised professional qualification and recent experience in the location
and category of the property being valued. Fair values are determined having regard to recent market transactions for similar properties in the
same location as the Group’s investment property. The Group’s current lease arrangements, which are entered into on an arm’s length basis and
which are comparable to those for similar properties in the same location, are taken into account.
Of the total investment property of £1,678 million (2013: £1,811 million), £1,298 million (2013: £1,455 million) is attributable to Africa and
£380 million (2013: £356 million) to the United Kingdom.
Old Mutual plc
Annual Report and Accounts 2014
205
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2014
F: Other statement of financial position notes continued
F2: Fixed assets continued
F2(c): Fair value hierarchy of the Group’s property
The fair value of the Group’s properties are categorised into Level 3 of the fair value hierarchy. The table below reconciles the fair value
measurements of the investment and owner-occupied property:
Balance at beginning of the year
Additions and acquisitions
Additions from business combinations
Disposals
Net gain from fair value adjustments
Impairments and depreciation
Foreign exchange and other movements
Transfer to non-current assets held for sale
Balance at end of the year
£m
Year ended
31 December
2014
Year ended
31 December
2013
2,243
60
5
(115)
77
(11)
(16)
(156)
2,087
2,470
57
10
(22)
140
(12)
(400)
–
2,243
These gains and losses have been included in other income.
The following table shows the valuation techniques used in the determination of the fair values for investment and owner-occupied properties,
as well as the unobservable inputs used in the valuation models.
Type of property
Valuation approach
Key unobservable inputs
Inter-relationship between unobservable inputs
and key fair value measurement
■ Commercial, retail and
industrial properties
■ Owner-occupied
property
■ Discounted cash flow (market related
rentals achievable for the property,
discounted at the appropriate discount
rate)
■ Rental income per square metre
■ The estimated fair value would increase/
and capitalisation rates
■ Long-term net operating margin
and capitalisation rates
(decrease) if:
– net rental income increases/(decreases) or
– capitalisation rates decrease/(increase)
■ Vacancies
■ the estimated fair value would increase/(decrease)
if:
– long term operating margin increase/
(decrease); or
– capitalisation rates decrease/(increase)
■ Holiday accommodation
■ Residential property
■ Average of market
comparable valuations
■ Replacement cost
■ Land value
■ Price per square metre
■ The estimated fair value would increase/
(decrease) if price per square metre increase/
(decrease).
■ Land
■ According to the existing zoning and
town planning scheme at the date of
valuation, with exceptions made by the
valuer for reasonable potential of a
successful re-zoning
■ Recent sales of land in the area
and local government valuation
rolls adjusted for estimated cost
of demolition
■ Recent sales and local government valuation rolls
provide an indication of what the property may be
sold for
■ Near vacant properties
■ Land value less the estimated cost of
demolition
■ Recent sales of land in the area
and local government valuation
rolls adjusted for estimated cost
of demolition
■ Recent sales and local government valuation rolls
provide an indication of what the property may be
sold for
F3: Deferred acquisition costs
Insurance contracts
Investment contracts
Asset management
At 31 December
2014
2013
Balance at beginning of the year
New business
Amortisation
Disposal of interests in subsidiaries
Foreign exchange and other movements
Transfer to non-current assets held for sale
Balance at end of the year
48
5
(3)
–
(6)
–
44
54
2
(3)
–
(5)
–
48
2014
1,073
141
(162)
(261)
(33)
(17)
741
2013
1,107
161
(186)
–
(9)
–
1,073
2014
90
15
(28)
–
–
–
77
2013
127
14
(45)
–
(6)
–
90
2014
1,211
161
(193)
(261)
(39)
(17)
862
Disposal of investment contracts and transfer to non-current assets held for sale relate to the disposal of Old Mutual Wealth’s European
businesses, as discussed in note A2.
£m
Total
2013
1,288
177
(234)
–
(20)
–
1,211
206 Old Mutual plc
Annual Report and Accounts 2014
For the year ended 31 December 2014 For the year ended 31 December 2014
F4: Trade, other receivables and other assets
Debtors arising from direct insurance operations
Amounts owed by policyholders
Amounts owed by intermediaries
Other
Debtors arising from reinsurance operations
Outstanding settlements
Reinsurance treaties
Post-employment benefits
Other receivables
Accrued interest and rent
Trading securities and spot positions
Prepayments and accrued income
Other assets
£m
At
31 December
2014
At
31 December
2013
84
44
34
162
38
361
273
161
812
162
116
110
167
95
56
77
228
30
475
319
119
707
281
187
75
162
Total trade, other receivables and other assets
2,362
2,583
Based on the maturity profile of the above assets, £1,278 million (2013: £1,469 million) is regarded as current and £1,084 million (2013: £1,114
million) as non-current. No significant balances are past due or impaired.
F5: Provisions and accruals
Year ended 31 December 2014
Balance at beginning of the year
Unused amounts reversed
Charge to profit or loss
Utilised during the year
Transfer from other liabilities
Foreign exchange and other movements
Balance at end of the year
Compensation
provisions Restructuring
Provision for
donations
Other
43
–
39
(4)
18
(2)
94
27
(4)
–
(4)
–
1
20
69
–
–
–
–
6
75
56
–
7
(3)
18
17
95
£m
Total
195
(4)
46
(11)
36
22
284
Compensation provisions totalled £94 million (2013: £43 million), with £42 million (2013: £28 million) relating to regulatory uncertainty and multiple
causal events. £16 million (2013: £14 million) relates to ongoing resolution of claims as a result of mis-selling guarantee contacts and £19 million
has been provisioned for separation costs associated with the sale of US Life in April 2011. In addition, £17 million relates to the provision for
claw-back of prescribed claims that has been transferred from other liabilities. This provision is held to allow for the possible future payment of
claims that have been previously reversed. Due to the nature of the provision, the timing of the expected cash outflows is uncertain. Estimates are
reviewed annually and adjusted as appropriate for new circumstances.
Of the total compensation provisions, £58 million (2013: £30 million) is estimated to be payable after more than one year.
Provisions and accruals in relation to restructuring were £20 million (2013: £27 million), primarily in respect of ongoing restructuring of the
Old Mutual Wealth business. The restructuring provision is expected to be utilised within the next three years.
The provision for donations is held by Emerging Markets in respect of commitments made by the South African business to the future funding
of charitable donations. The funds were made available on the closure of the Group’s unclaimed shares trusts which were set up as part of
the demutualisation in 1999 and closed in 2006. £75 million (2013: £69 million) is estimated to be payable after more than one year due to the
long-term nature of the agreements in place.
Other provisions include long-term staff benefits and amounts for the resolution of legal uncertainties and the settlement of other claims raised by
contracting parties. These provisions are generally small in nature.
Where material, provisions and accruals are discounted at discount rates specific to the risks inherent in the liability. The timing and final amounts
of payments in respect of some of the provisions, particularly those in respect of litigation claims and similar actions against the Group, are
uncertain and could result in adjustments to the amounts recorded. Of the total provisions recorded above, £168 million (2013: £135 million) is
estimated to be payable after one year.
Old Mutual plc
Annual Report and Accounts 2014
207
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
F: Other statement of financial position notes continued
F6: Deferred revenue
Life and Savings
Asset Management
Property & Casualty
Banking
Year ended 31 December
Balance at beginning of the year
Fees and commission income deferred
Amortisation
Acquisition of subsidiaries
Disposal of subsidiaries
Foreign exchange and other movements
Transfer to non-current liabilities held
for sale
Balance at end of the year
2014
560
26
(53)
–
(229)
(8)
(18)
278
2013
586
31
(61)
–
–
4
–
560
2014
57
–
(21)
–
–
–
–
36
2013
93
–
(35)
–
–
(1)
–
57
2014
2013
2014
2013
11
–
–
–
–
–
–
11
10
3
–
–
–
(2)
–
11
–
–
–
5
–
–
–
5
–
–
–
–
–
–
–
–
2014
628
26
(74)
5
(229)
(8)
(18)
330
£m
Total
2013
689
34
(96)
–
–
1
–
628
Disposal of deferred revenue in life and savings relates to the disposal of Old Mutual Wealth’s European businesses, as discussed in note A2.
F7: Deferred tax assets and liabilities
Deferred income taxes are calculated on all temporary differences at the tax rate applicable to the jurisdiction in which the timing differences arise.
(a) Deferred tax assets
The movement on the deferred tax assets account is as follows:
Year ended 31 December 2014
Tax losses carried forward
Accelerated capital allowances
Other temporary differences
Policyholders tax
Deferred fee income
Netted against liabilities
Year ended 31 December 2013
Tax losses carried forward
Accelerated capital allowances
Other temporary differences
Policyholders tax
Deferred fee income
Netted against liabilities
At
beginning
of the year
87
2
295
66
134
(281)
Income
statement
(charge)/
credit
(24)
(1)
31
(7)
(11)
5
Acquisition/
disposal of
subsidiaries
(1)
–
–
–
(103)
110
Foreign
exchange
and other
movements
2
1
(5)
(2)
(4)
(11)
£m
At
end of the
year
64
2
321
57
16
(177)
303
(7)
6
(19)
283
At
beginning
of the year
Income
statement
(charge)/
credit
Acquisition/
disposal of
subsidiaries
Foreign
exchange
and other
movements
121
1
317
68
153
(315)
345
(34)
1
1
14
(22)
17
(23)
–
–
–
–
–
–
–
–
–
(23)
(16)
3
17
(19)
£m
At
end of the
year
87
2
295
66
134
(281)
303
Deferred tax assets are recognised for tax losses carried forward only to the extent that realisation of the related tax benefit is probable, being
where on the basis of all available evidence it is considered more likely than not that there will be suitable taxable profits against which the
reversal of the deferred tax asset can be deducted. The amounts for which no deferred tax asset has been recognised comprise:
Unrelieved tax losses
Expiring in less than a year
Expiring in the second to fifth years inclusive
Expiring after five years
Accelerated capital allowances
Other timing differences
208 Old Mutual plc
Annual Report and Accounts 2014
31 December 2014
31 December 2013
Gross amount
Tax Gross amount
Tax
£m
31
209
1,869
2,109
163
587
2,859
2
29
353
384
32
122
538
39
172
2,127
2,338
158
489
2,985
4
11
377
392
31
103
526
For the year ended 31 December 2014 (b) Deferred tax liabilities
The movement on the deferred tax liabilities account is as follows:
Year ended 31 December 2014
Accelerated tax depreciation
Deferred acquisition costs
Leasing
PVIF
Other acquired intangibles
Available-for-sale securities
Other temporary differences
Capital gains tax
Fee income receivable
Policyholder tax
Netted against assets
Year ended 31 December 2013
Accelerated tax depreciation
Deferred acquisition costs
Leasing
PVIF
Other acquired intangibles
Available-for-sale securities
Other temporary differences
Capital gains tax
Fee income receivable
Policyholder tax
Netted against assets
At beginning
of the year
Income
statement
(credit)/
charge
Credited
to equity
Acquisition/
disposal of
subsidiaries
Foreign
exchange
and other
movements
At end
of the year
£m
49
151
1
99
12
6
152
187
34
81
(281)
491
(1)
(14)
–
(9)
(4)
–
25
5
(5)
16
5
18
–
–
–
–
–
5
–
–
–
–
–
5
–
(89)
–
(41)
8
(9)
(1)
–
(27)
–
110
(49)
1
(25)
(1)
(5)
–
–
68
(34)
(1)
(3)
(11)
(11)
49
23
–
44
16
2
244
158
1
94
(177)
454
£m
At beginning
of the year
Income
statement
(charge)/
credit
Charged
to equity
Acquisition/
disposal of
subsidiaries
Foreign
exchange
and other
movements
At end
of the year
43
158
1
118
20
7
212
64
44
52
(315)
404
13
(12)
–
(21)
(9)
–
(29)
114
(11)
46
17
108
–
–
–
–
–
(1)
18
3
–
–
–
20
–
–
–
–
–
–
–
–
–
–
–
–
(7)
5
–
2
1
–
(49)
6
1
(17)
17
(41)
49
151
1
99
12
6
152
187
34
81
(281)
491
As the Group is able to control the reversal of temporary differences in respect of investments in subsidiaries and branches and it is probable that
these temporary differences will not reverse in the foreseeable future, there is no need to provide for the associated deferred tax liabilities. The
aggregate amount of temporary differences on which further tax might be due if these temporary differences reversed is estimated at £3.2 billion
(2013: £2.7 billion).
Old Mutual plc
Annual Report and Accounts 2014
209
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
F: Other statement of financial position notes continued
F8: Trade, other payables and other liabilities
Amounts payable on direct insurance business
Funds held under reinsurance business ceded
Amounts owed to policyholders
Amounts owed to intermediaries
Other direct insurance operation creditors
Accounts payable on reinsurance business
Accruals and deferred income
Post-employment benefits
Liability for long-service leave
Share-based payments – cash-settled scheme liabilities
Short trading securities, spot positions and other
Trade creditors
Outstanding settlements
Total securities sold under agreements to repurchase
Obligations in relation to collateral holdings
Other liabilities
£m
At
31 December
2014
At
31 December
2013
154
386
45
6
591
51
292
57
42
112
247
410
641
283
438
1,112
175
419
61
11
666
35
333
64
41
91
256
480
642
204
558
930
4,276
4,300
Included in the amounts shown above are £3,829 million (2013: £3,746 million) that are regarded as current, with the remainder regarded as
non-current.
F9: Equity
(a) Share capital
Financial instruments issued are classified as equity when there is no contractual obligation to transfer cash, other financial assets or issue a
variable number of own equity instruments. Incremental costs directly attributable to the issue of equity instruments are shown in equity as a
deduction from the proceeds, net of tax.
Issued ordinary shares of 11³⁄ 7 p (2013: 11³⁄ 7 p)
(b) Perpetual preferred callable securities
£m
At
31 December
2014
At
31 December
2013
561
560
In addition to the Group’s senior and subordinated debt, the Group has issued two separate tranches of perpetual preferred callable securities
with a total carrying value of £526 million at 31 December 2014 (2013: £526 million). In accordance with IFRS accounting standards these
instruments are classified as equity and disclosed within equity shareholders’ funds.
£273 million (2013: £273 million) Tier 1 perpetual notes. These are unsecured and subordinated to the claims of senior creditors and the holders of
any priority preference shares. For an initial period until 24 March 2020 interest is payable at a fixed rate of 6.4% per annum annually in arrears.
From 24 March 2020 interest is reset semi-annually at 2.2% per annum above the sterling inter-bank offer rate for six month sterling deposits and
is payable semi-annually in arrears. Coupon payments may be deferred on each interest payment date at the Group’s discretion for the duration
of the instrument subject to giving appropriate notice. Deferred coupons shall become due on the earliest of the date on which the securities are
redeemed, or the date upon which the securities are substituted for alternative qualifying Tier 1 or Upper Tier 2 securities, or the commencement
of a winding-up of the issuer. Other than in the case of a winding-up, the deferred coupon may only be settled by means of an Alternative
Coupon Satisfaction Mechanism. The perpetual preferred callable securities are redeemable at the discretion of the Group at their principal
amount from 24 March 2020. £350 million of these bonds were issued In November 2005 with £2 million repurchased in December 2012 via an
open market repurchase and a further £75 million were repurchased in November 2013 via a Modified Dutch Auction tender.
€374 million (£253 million) (2013: €374 million (£253 million)) Upper Tier 2 perpetual notes. These are unsecured and subordinated to the claims of
senior creditors. For an initial period to 4 November 2015 the notes pay interest at a fixed rate of 5.0% per annum, annually in arrears. After this
date the interest is reset semi-annually at 2.63% per annum above six month EURIBOR and is payable semi-annually in arrears. Coupon payments
may be deferred on each interest payment date at the Group’s discretion for the duration of the instrument, subject to giving appropriate notice.
Deferred coupons shall become due on the earliest date of either; the date on which a resolution for the winding-up of the issuer is passed; or the
date set for any redemption or purchase of the notes by or on behalf of the issuer; or at the election of the issuer, providing not less than 14 days’
notice is given. The perpetual preferred callable securities are redeemable at the discretion of the Group at their principal amount from
4 November 2015. €500 million of these bonds were issued In November 2005 with €5 million repurchased in December 2012 via an open market
repurchase and a further €121 million were repurchased in November 2013 via a Modified Dutch Auction tender.
210 Old Mutual plc
Annual Report and Accounts 2014
For the year ended 31 December 2014 F10: Non-controlling interests
(a) Profit or loss
(i) Ordinary shares
The non-controlling interests’ share of profit for the financial year has been calculated on the basis of the Group’s effective ownership of the
subsidiaries in which it does not own 100% of the ordinary equity. The principal subsidiaries where a non-controlling interest exists is Nedbank,
the Group’s banking business in South Africa and OM Asset Management plc, the Group’s asset management business. For the year ended
31 December 2014 the non-controlling interests attributable to ordinary shares was £252 million (2013: £259 million).
(ii) Preferred securities
Nedbank
R3,560 million non-cumulative preference shares
(iii) Non-controlling interests – adjusted operating profit
£m
At
31 December
2014
At
31 December
2013
18
19
The following table reconciles non-controlling interests’ share of profit for the financial year to non-controlling interests’ share of adjusted
operating profit:
Reconciliation of non-controlling interests’ share of profit for the financial year
The non-controlling interests share is analysed as follows:
Non-controlling interests – ordinary shares
Income attributable to Black Economic Empowerment trusts of listed subsidiaries
Attributable to Institutional Asset Management equity plans
Other items
Non-controlling interests share of adjusted operating profit
£m
Year ended
31 December
2014
Year ended
31 December
2013
252
24
2
2
280
259
20
–
–
279
The Group uses adjusted weighted average effective ownership interests when calculating the non-controllable interest applicable to the adjusted
operating profit of its Southern African banking businesses. These reflect the legal ownership of this business following the implementation for
Black Economic Empowerment (BEE) schemes in 2005. In accordance with IFRS accounting rules the shares issued for BEE purposes are deemed
to be, in substance, options. Therefore the effective ownership interest of the minorities reflected in arriving at profit after tax in the consolidated
income statement is lower than that applied in arriving at adjusted operating profit after tax. In 2014 the increase in adjusted operating profit
attributable to non-controlling interests as a result of this was £24 million (2013: £20 million).
(b) Statement of financial position
(i) Ordinary shares
Reconciliation of movements in non-controlling interests
Balance at beginning of the year
Non-controlling interests’ share of profit
Non-controlling interests’ share of dividends paid
Disposal of non-controlling interests in OM Asset Management plc
Acquisition of businesses
Net disposal of interests
Foreign exchange and other movements
Balance at end of the year
£m
At
31 December
2014
At
31 December
2013
Notes
A2
H8
1,502
252
(127)
163
53
39
(15)
1,867
1,684
259
(117)
–
–
20
(344)
1,502
Old Mutual plc
Annual Report and Accounts 2014
211
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
F: Other statement of financial position notes continued
F10: Non-controlling interests continued
(ii) Preferred securities
Nedbank
R3,560 million non-cumulative preference shares
£m
At
31 December
2014
At
31 December
2013
272
265
R3,560 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 or 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.
Preferred securities at 31 December 2014 are held at the value of consideration received less unamortised issue costs and are stated net of
securities held by Group companies.
G: Interests in subsidiaries, associates, and joint arrangements
G1: Subsidiaries
In the current year, the consideration of the accounting treatment of investments in entities has been a key judgemental area (note A3(d)).
Information on structured entities is included in note G3. There have been no additional circumstances or facts that have occurred in the current
year that have resulted in a change in the entities that the Group consolidates.
(a) Principal subsidiaries and Group enterprises
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, are held indirectly by the Company.
Name
Old Mutual Group Holdings (SA) (Pty) Limited
Acadian Asset Management LLC1
AIVA Holding Group S.A.
Barrow, Hanley, Mewhinney & Strauss LLC
Faulu Kenya DTM LTD
Mutual & Federal Insurance Company Limited
Nedbank Group Limited2
Nedbank Limited3
Old Mutual (Africa) Holdings (Pty) Limited
Old Mutual (Bermuda) Limited
Old Mutual (Netherlands) B.V.
OMAM Inc.
Old Mutual Emerging Markets Limited
Old Mutual Finance (Pty) Ltd
Old Mutual Investment Group (Pty) Limited
Old Mutual Investment Group Holdings (Pty) Limited
Old Mutual Life Assurance Company (Namibia) Limited
Old Mutual Life Assurance Company (South Africa) Limited
Old Mutual Wealth Management Limited
Old Mutual Zimbabwe Limited
OM Asset Management plc4
OM Group (UK) Limited
Rogge Global Partners plc
OM Latin America Holdco UK Limited
Old Mutual Wealth Life Assurance Limited
Nature of business
Holding company
Asset management
Holding company
Asset management
Lending
General insurance
Banking
Banking
Holding company
Life assurance
Holding company
Holding company
Holding company
Lending
Asset management
Holding company
Life assurance
Life assurance
Holding company
Life assurance
Holding company
Holding company
Asset management
Holding company
Life assurance
Percentage
holding
100
100
86
100
66
100
57
57
100
100
100
100
100
75
100
100
100
100
100
75
80
100
81
100
100
Country of incorporation
Republic of South Africa
Delaware, USA
Panama
Delaware, USA
Kenya
Republic of South Africa
Republic of South Africa
Republic of South Africa
Republic of South Africa
Bermuda
Netherlands
Delaware, USA
Republic of South Africa
Republic of South Africa
Republic of South Africa
Republic of South Africa
Namibia
Republic of South Africa
England and Wales
Zimbabwe
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
1 The Group holds 100% Class A shares and 85.71% Class B shares in Acadian Asset Management. The remaining 14.29% Class B shares are held by the employees as described in
note H2(c)
2 Nedbank Group Limited is a publicly listed company, with its primary listing on the JSE (Johannesburg, South Africa)
3 Nedbank is a 100% subsidiary of Nedbank Group Limited
4 OM Asset Management plc is a publicly listed company, with its primary listing on the New York Stock Exchange
212 Old Mutual plc
Annual Report and Accounts 2014
For the year ended 31 December 2014 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 and their financial results have been incorporated and are included in the Group financial statements from the effective date that
the Group controls the entity.
There are certain funds in which the Group owns more than 50% of the equity but does not consolidate these because of certain management
contracts which give other parties the power to control these funds. These management contracts may include that the ability to control is
delegated to a third party with no rights of removal on similar types of contractual agreements.
(b) Non-controlling interests in subsidiaries
The following table summarises the information relating to the Group’s subsidiaries that have material non-controlling interests:
At 31 December 2014
Non-controlling share of statement of financial position
Total assets
Total liabilities
Net assets
Non-controlling interests
Non-controlling share of income
Total revenue
Profit before tax
Income tax expense
Profit after tax for the financial year
Profit allocated to non-controlling interests
Emerging
Markets
Nedbank
Institutional
Asset
Management
443
(336)
107
107
21,207
(19,349)
1,858
1,858
68
11
(3)
8
8
1,849
348
(88)
260
260
302
(128)
174
174
75
4
(2)
2
2
Further information on total assets and total liabilities of the above business units can be found in note B4.
At 31 December 2013
Non-controlling share of statement of financial position
Total assets
Total liabilities
Net assets
Non-controlling interests
Non-controlling share of income
Total revenue
Profit before tax
Income tax expense
Profit after tax for the financial year
Profit allocated to non-controlling interests
Emerging
Markets
Nedbank
Institutional
Asset
Management
216
(166)
50
50
64
16
(3)
12
12
19,897
(18,180)
1,717
1,717
1,944
358
(91)
266
266
–
–
–
–
–
–
–
–
–
£m
Total
21,952
(19,813)
2,139
2,139
1,992
363
(93)
270
270
£m
Total
20,113
(18,346)
1,767
1,767
2,008
374
(94)
278
278
(c) Restrictions on the Group’s ability to obtain funds from its subsidiaries
Statutory and regulatory restrictions in terms of the South African Reserve Bank controls and solvency restrictions imposed by the Financial
Services Board in South Africa to comply with statutory capital requirements restrict the amount of funds that can be transferred out of South
Africa to the Group. In addition, the banking subsidiary companies are restricted by Basel regulations and prudential requirements with regard
to the distributions of funds to their holding company. Regulated entities may only be permitted to remit dividends in terms of local capital
requirements and/or permission being obtained from the regulator to distribute such funds.
The non-controlling interests do not have any ability to restrict the cash flows to the Group.
(d) Guarantees provided by the Group to subsidiaries
No significant guarantees have been provided by the Group during the financial year.
The Group provides financial support in certain cases where funds require seed capital and also provides liquidity funding in the case of large
divestments from unit trust funds.
(e) Loss of control of subsidiaries
There has been no loss of control of any major subsidiaries during the course of the current and previous year.
Old Mutual plc
Annual Report and Accounts 2014
213
Financials
GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2014
G: Interests in subsidiaries, associates, and joint arrangements continued
G2: Investments in associated undertakings and joint ventures
(a) Investments in associated undertakings and joint ventures
The Group’s investments in associated undertakings and joint ventures accounted for under the equity and fair value methods and excluding
the majority of private equity associates, are as follows:
At 31 December 2014
Masingita Property Investment Holdings (Pty) Ltd (A)1
S.B.V. Services (Pty) Ltd (A)1
South African Bankers Services Company (A)1
Aard Minning Equipment (Pty) Ltd
Odyssey Developments (Pty) Ltd (A)1
Curo Fund Services (J)1
African Infrastructure Investment Managers (Pty) Ltd (J)1
Heitman LLC (J)2
Kotak Mahindra Old Mutual Life Insurance Ltd (A)3
Old Mutual-Guodian Life Insurance Company Ltd (J)4
Banco Único (J)5
Ecobank Transnational Incorporated (A)6
All other associated undertakings and joint ventures7
Type of business
Property development
Financial services
Financial services
Manufacturing
Property development
Asset management
Asset management
Asset management
Life assurance
Life assurance
Lending
Lending
At 31 December 2013
Masingita Property Investment Holdings (Pty) Ltd (A)1
S.B.V. Services (Pty) Ltd (A)1
South African Bankers Services Company (A)1
Odyssey Developments (Pty) Ltd (A)1
Old Mutual Finance (Pty) Ltd (J)1
Curo Fund Services (J)1
African Infrastructure Investment Managers (Pty) Ltd (J)1
Heitman LLC (J)2
Kotak Mahindra Old Mutual Life Insurance Ltd (A)3
Old Mutual-Guodian Life Insurance Company Ltd (J)4
All other associated undertakings and joint ventures
Type of business
Property development
Financial services
Financial services
Property development
Lending
Asset management
Asset management
Asset management
Life assurance
Life assurance
Key:
(J): joint venture; (A): associate investment
Percentage
interest held
Carrying
value
Group share of
profit/(loss)
£m
Basis of
accounting
35%
23%
25%
49%
49%
50%
50%
50%
26%
50%
36%
21%
7
5
8
10
3
3
1
19
28
36
16
346
36
518
–
Fair value
– Equity method
– Equity method
– Equity method
Fair value
–
1 Equity method
– Equity method
4 Equity method
4 Equity method
(2) Equity method
– Equity method
8 Equity method
11
26
Percentage
interest held
Carrying
value
Group share of
profit/(loss)
35%
23%
25%
49%
50%
50%
50%
50%
26%
50%
5
5
7
5
21
6
2
17
24
32
44
168
–
1
1
–
9
–
(4)
3
8
(6)
9
21
£m
Basis of
accounting
Fair value
Equity method
Equity method
Fair value
Equity method
Equity method
Equity method
Equity method
Equity method
Equity method
Country of operation:
1 Republic of South Africa
2 USA
India
3
4 China
5 Mozambique
6 Togo
7
Included in the Group share of profit of £26 million is £7 million relating to Old Mutual Finance (Pty) Ltd (OMF) for the period that it was equity accounted for as a joint venture.
From 1 September 2014, following the acquisition of an additional 25% stake, the financial results and position of OMF have been consolidated. Refer to note A2 for further information
Of the total carrying value of associates and joint ventures, £50 million (2013: £49 million) relates to those which are measured at fair value and
£468 million (2013: £119 million) relates to those which have been equity accounted.
All of the joint ventures are strategic in the Group’s underlying operating model.
The joint ventures are evaluated according to the Groups’ contractual rights to jointly control the entity.
214 Old Mutual plc
Annual Report and Accounts 2014
For the year ended 31 December 2014 For the year ended 31 December 2014
(b) Aggregate financial information of material investments in associated undertakings and joint ventures
The aggregate financial information for material investments in associated undertakings and joint ventures is as follows:
31 December
Fair-value of investment in Ecobank Transnational Incorporated
based on the closing quoted price on the Nigerian Stock Exchange
Statement of comprehensive income
Revenue
Profit/(loss) from continuing operations
Post-tax profit/(loss) from discontinued operations
Other comprehensive income/(loss)
Total comprehensive income
Statement of financial position
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Ecobank Transnational
Incorporated¹
Banco Único, S.A.
£m
2014
305
986
194
(1)
(58)
134
8,294
6,401
6,821
6,365
2013
2014
2013
–
–
–
–
–
–
–
–
–
–
–
19
–
–
–
–
139
101
116
100
–
–
–
–
–
–
–
–
–
–
1 The information provided for Ecobank Transnational Incorporated has been based on the latest available financial information, being the financial results for the nine months
ended 30 September 2014
(c) Aggregate financial information of other investments in associated undertakings and joint ventures
The aggregate financial information for all other investments in associated undertakings and joint ventures is as follows:
Total assets
Total liabilities
Total revenues
(d) Aggregate Group investment in associated undertakings and joint ventures
The aggregate amounts for the Group’s investment in associated undertakings and joint ventures are as follows:
Balance at beginning of the year
Net additions of investment in associated undertakings and joint ventures
Share of profit after tax
Dividends paid
Foreign exchange and other movements
Balance at end of the year
The above table includes those investments that are carried at fair value.
Year ended
31 December
2014
3,122
(2,723)
666
£m
Year ended
31 December
2013
2,803
(2,412)
798
Year ended
31 December
2014
£m
Year ended
31 December
2013
168
341
26
(5)
(12)
518
152
61
21
(13)
(53)
168
The Group has no significant investments in which it owns less than 20% of the ordinary share capital that it accounts for using the equity method.
(e) Restriction on the Group’s ability to obtain funds from its associate undertakings and joint arrangements
Statutory and regulatory restrictions in terms of the South African Reserve Bank controls and solvency restrictions imposed by the Financial
Service Board in South Africa to comply with statutory capital requirements restrict the amount of funds that can be transferred out of the country
to the Group. In addition, the banking subsidiary companies are restricted by Basel regulations and prudential requirements with regard to the
distributions of funds to their holding company. Regulated entities may only be permitted to remit dividends in terms of local capital requirements
and/or permission being obtained from the regulator to distribute such funds.
No significant guarantees were provided by the Group during the financial year.
(f) Contingent liabilities and commitments
At 31 December 2014 and 31 December 2013, the Group had no significant contingent liabilities or commitments relating to investments in
associated undertakings and joint ventures.
(g) Other Group holdings
The above does not include companies whereby the Group has a holding of more than 20%, but does not have significant influence over these
companies by virtue of the Group not having any direct involvement in decision-making or the other owners possessing veto rights.
Old Mutual plc
Annual Report and Accounts 2014
215
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
G: Interests in subsidiaries, associates, and joint arrangements continued
G3: Structured entities
(a) Group’s involvement in structured entities
The table below summarises the types of structured entities the Group does not consolidate, but may have an interest in:
Type of structured entity
Nature
■ Securitisation vehicles for loans
and advances
■ Finance the Group’s own assets
through the issue of notes to
investors
Purpose
■ Generate:
– Funding for the Group’s
lending activities
– Margin through sale of assets
to investors
– Fees for loan servicing
Interest held by the Group
■ Investment in senior notes issued
by the vehicles
■ Investment funds
■ Securitisation vehicles for
third-party receivables
■ Manage client funds through the
investment in assets
■ Generate fees from managing
assets on behalf of third-party
investors
■ Investments in units issued by
the fund
■ Finance third party receivables
and are financed through loans
from third party note holders
and bank borrowing
■ Generate fees from arranging
the structure. Interest income
may be earned on the notes held
by the Group
■ Interest in these vehicles is
through notes that are traded
in the market
■ Security vehicles
■ Hold and realise assets as a
result of the default of a client
■ These entities seek to protect the
collateral of the Group from the
default of a loan
■ Ownership interest will be in
proportion of the lending. At
31 December 2014, the Group
held no value in security vehicles
■ Clients investment entities
■ Hold client investment assets
■ Generates various sources of
■ None
income for the Group
■ Black Economic Empowerment
■ Fund the acquisition of shares by
■ Generates interest on the
■ None
(BEE) funding
a BEE partner
funding provided.
As at 31 December 2014, the Group held £46 million (2013: £48 million) in unconsolidated investment funds which are included in investment
and securities.
(b) Consolidation considerations for structured entities
In structured entities voting rights are not the predominant factor in deciding who controls the entity but rather the Group’s exposure to the
variability of returns from these entities. The Group acts as fund manager to a number of investment funds. Determining whether the Group
controls such an investment fund usually focuses on the assessment of decision making rights as fund manager, the investor’s rights to remove the
fund manager and the aggregate economic interests of the Group in the fund in the form of interest held and exposure to variable returns.
In most instances the Group’s decision-making authority, in its capacity as fund manager, with regard to these funds is regarded to be well-
defined. Discretion is exercised when decisions regarding the relevant activities of these funds are being made. For funds managed by the Group
where the investors have the right to remove the Group as fund manager without cause, the fees earned by the Group, are considered to be
market related. These agreements include only terms, conditions or amounts that are customarily present in arrangements for similar services and
level of skills negotiated on an arm’s length basis. The Group has concluded that it acts as agent on behalf of the investors in all instances.
The Group is considered to be acting as principal where the Group is the fund manager and is able to make the investment decisions on behalf of
the unit holders, earn a variable fee and there are no kick out rights that would remove the Group as fund manager.
This is considered to be a critical accounting judgment and is discussed in A3(d). There have been no changes in facts or circumstances which
have changed the Group’s conclusion on the consolidation of funds.
The Group has not provided any non-contractual support to any consolidated or unconsolidated structured entities. The Group has committed
to providing certain liquidity facilities for certain securitisation vehicles.
(c) Securitisation vehicles consolidated in the Group’s statement of financial position
Nedbank Securitisations
The Group through Nedbank uses securitisation primarily as a funding diversification tool and to add flexibility in mitigating structural liquidity
risk. Nedbank currently has four active securitisation transactions:
■ Synthesis Funding Limited (Synthesis), an asset-backed commercial paper (ABCP) programme launched in 2004
■ GreenHouse Funding (RF) Ltd, Series 2 (GreenHouse), a residential mortgage-backed securitisation programme
■ GreenHouse Funding III (RF) Ltd Series 3 (GreenHouse 3), a residential mortgage-backed securitisation programme and
■ Precinct Funding 1 (RF) Ltd (Precinct), a commercial mortgage-backed securitisation programme.
These vehicles are the full extent of the Group’s current securitisation exposure.
216 Old Mutual plc
Annual Report and Accounts 2014
For the year ended 31 December 2014 The following table shows the carrying amount of securitised assets together with the associated liabilities1:
At 31 December
Loans and advances to customers
Residential mortgage loans
Commercial mortgage loans
Other financial assets
Corporate and bank paper
Other securities
Commercial paper
Total
Carrying amount of assets
Associated liabilities
£m
2014
139
88
111
72
–
410
2013
152
128
–
–
183
463
2014
100
112
161
131
–
504
2013
114
146
–
–
292
552
1 The value of any derivative instruments taken out to hedge any financial asset or liability is adjusted against such instrument in this disclosure
The table above presents the gross balances within the securitisation schemes and does not reflect any elimination of intercompany and cash
balances held by the various securitisation vehicles.
Old Mutual plc
Annual Report and Accounts 2014
217
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
H: Other notes
H1: Post-employment benefits
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.
(a) Liability for defined benefit obligations
Pension plans
£m
Other post-retirement
benefit schemes
Year ended 31 December
Changes in projected benefit obligation
Projected benefit obligation at beginning of the year
Benefits earned during the year
Interest cost on benefit obligation
Measurement losses/(gains)
Benefits paid
Foreign exchange and other movements
Projected benefit obligation at end of the year
Change in plan assets
Plan assets at fair value at beginning of the year
Actual return on plan assets
Company contributions
Employee contributions
Benefits paid
Foreign exchange and other movements
Plan assets at fair value at end of the year
Net asset/(liability) recognised in statement of financial position
Funded status of plan
Unrecognised assets
Other amounts recognised in statement of financial position
Net amount recognised in statement of financial position
Disclosed as follows:
– Within trade, other receivables and assets
– Within trade, other payables and other liabilities
2014
490
4
28
27
(27)
(8)
514
573
76
9
1
(27)
(11)
621
107
(1)
(1)
105
121
(16)
105
2013
567
5
31
(13)
(25)
(75)
490
606
78
8
1
(25)
(95)
573
83
(1)
–
82
97
(15)
82
2014
189
5
15
1
(6)
(17)
187
163
15
15
–
(6)
(1)
186
(1)
–
–
(1)
40
(41)
(1)
2013
221
6
15
(10)
(7)
(36)
189
173
18
–
–
(7)
(22)
162
(27)
–
–
(27)
22
(49)
(27)
218 Old Mutual plc
Annual Report and Accounts 2014
For the year ended 31 December 2014 (b) Expense/(income) recognised in the income statement
Year ended 31 December
Current service costs
Net interest (income)/cost
Other post retirement plan costs
Total (included in staff costs)
Pension plans
2013
5
(4)
–
1
2014
4
(7)
–
(3)
£m
Other post-retirement
benefit schemes
2014
5
2
1
8
2013
6
3
1
10
Actuarial assumptions used in calculating the projected benefit obligation are based on mortality estimates relevant to the economic countries
in which they operate, with a specific allowance made for future improvements in mortality which is broadly in line with that adopted for the
92 series of mortality tables prepared by the Continuous Mortality Investigation Bureau of the Institute of Actuaries.
The effect to the Group’s obligation of a 1% increase and 1% decrease in the assumed health cost trend rates would be an increase of £27 million
and decrease of £21 million (2013: increase of £24 million and decrease of £19 million) respectively.
Total contributions expected to be paid to the Group pension plans for the year ending 31 December 2014 are £9 million (subject to any
reassessments to be completed in the year).
(c) Plan asset allocation
At 31 December
Equity securities
Debt securities
Property
Cash
Annuities and other
2014
30.8
40.2
3.4
4.2
21.4
100.0
Pension plans
2013
30.9
37.3
3.1
4.0
24.7
100.0
£m
Other post-retirement
benefit schemes
2014
41.3
23.5
4.0
21.7
9.5
100.0
2013
48.8
19.2
2.8
20.4
8.8
100.0
Pension and other retirement benefit plan assets include ordinary shares issued by the Company with a fair value of £nil (2013: £nil).
Old Mutual plc
Annual Report and Accounts 2014
219
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
H: Other notes continued
H2: Share-based payments
(a) Reconciliation of movements in options
During the year ended 31 December 2014, the Group had a number of share-based payment arrangements. The movement in the options
outstanding under these arrangements during the year is detailed below:
Options over shares in Old Mutual plc (London Stock Exchange)
Outstanding at beginning of the year
Granted during the year
Forfeited during the year
Exercised during the year
Expired during the year
Outstanding at end of the year
Exercisable at 31 December
Year ended 31 December 2014
Year ended 31 December 2013
Number of
options
14,365,731
5,184,763
(778,444)
(9,437,844)
–
9,334,206
162,914
Weighted
average
exercise
price
£0.79
£1.63
£1.43
£0.49
–
£1.51
£1.13
Number of
options
18,131,593
1,602,254
(757,309)
(4,558,629)
(52,178)
14,365,731
1,534,854
Weighted
average
exercise
price
£0.72
£1.63
£1.06
£0.77
£1.08
£0.79
£0.71
The options outstanding at 31 December 2014 have an exercise price in the range of £0.35 to £1.63 (2013: £0.35 to £1.63) and a weighted
average remaining contractual life of 1.8 years (2013: 0.5 years). The weighted average share price at date of exercise for options exercised
during the year was £1.99 (2013: £1.99).
Options over shares in Old Mutual plc (Johannesburg
Stock Exchange)
Outstanding at beginning of the year
Forfeited during the year
Exercised during the year
Expired during the year
Outstanding at end of the year
Exercisable at 31 December
Year ended 31 December 2014
Year ended 31 December 2013
Number of
options
19,499,597
(299,316)
(13,592,622)
(27,367)
5,580,292
5,580,292
Weighted
average
exercise
price
R14.14
R15.35
R14.59
R14.81
R13.21
R13.21
Number of
options
33,951,884
(853,157)
(13,410,557)
(188,573)
19,499,597
6,031,192
Weighted
average
exercise
price
R13.67
R14.83
R12.88
R9.57
R14.14
R11.07
The options outstanding at 31 December 2014 have an exercise price in the range of R7.45 to R15.80 (2013: R7.45 to R15.80) and a weighted
average remaining contractual life of 1.5 years (2013: 2.9 years). The weighted average share price at date of exercise for options exercised
during the year was R34.60 (2013: R28.54).
Options over shares in Nedbank Group Ltd
Outstanding at beginning of the year
Granted during the year
Forfeited during the year
Exercised during the year
Expired during the year
Outstanding at end of the year
Exercisable at 31 December
Year ended 31 December 2014
Year ended 31 December 2013
Number of
options
11,633,340
–
(222,712)
(1,014,872)
(3,432)
10,392,324
262,330
Weighted
average
exercise
price
R161.64
–
R126.23
R107.07
R82.47
R167.55
R107.53
Number of
options
12,842,067
125,291
(312,208)
(1,018,097)
(3,713)
11,633,340
347,913
Weighted
average
exercise
price
R156.12
R189.90
R116.32
R106.99
R110.98
R161.64
R120.30
The options outstanding at 31 December 2014 have an exercise price in the range of R116.75 to R282.58 (2013: R113.93 to R282.58) and a
weighted average remaining contractual life of 1.7 years (2013: 2.1 years). The weighted average share price at date of exercise for options
exercised during the year was R226.87 (2013: R192.24).
(b) Measurements and assumptions
The fair value of services received in return for share options granted are measured by reference to the fair value of share options granted.
The estimate of the fair value of share options granted is measured using a Black-Scholes option pricing model.
Share options are granted under a service and non-market based performance condition. Such conditions are not taken into account in the grant
date fair value measurement of the share options granted. There are no market conditions associated with the share option grants.
The grant date for the UK and South African plan awards is deemed to be 1 January in the year prior to the date of issue. As such the Group is
required to estimate, at the reporting date, the number and fair value of the options that will be granted in the following year. The fair value of
awards expected to be granted in 2015 which will have an IFRS 2 grant date of 1 January 2014, is shown separately below. The grant date for
all other awards is the award issue date.
220 Old Mutual plc
Annual Report and Accounts 2014
For the year ended 31 December 2014 (c) Share-based payment arrangements relating to Institutional Asset Management
During the year ended 31 December 2014, OM Asset Management plc had the following share-based payment arrangements:
Initial public offering (IPO) Incentive Plan
During 2011, a share-based compensation plan was implemented for certain key employees of OM Asset Management plc in connection with the
stated intention of exploring a potential IPO of the business. The plan was designed to reward participants for achievement of strategic objectives
and metrics and value creation over the period of exploring an IPO. The awards consisted of a mix of cash, payable and paid in the first quarter
of 2014, and restricted shares in Old Mutual plc, which were granted during the second quarter of 2014, and vest ratably over three years from
that date. At grant date, the stock awards under this plan had an aggregate value of $4 million. The total expense recognised during 2014 in
relation to this plan was $1 million (2013: $4 million and 2012: $2 million).
OM Asset Management plc Equity Incentive Plan
In connection with the IPO, certain employees who held unvested Old Mutual plc restricted shares were given the opportunity to exchange
their Old Mutual plc restricted shares for restricted shares of OM Asset Management plc, with vesting conditions similar to those to which they
were currently subject to. These restricted shares were awarded to employees as part of a one-time arrangement. This exchange program
was intended to provide employees who elected to participate with restricted share awards of OM Asset Management plc ordinary shares of
equivalent value to the Old Mutual plc restricted shares they currently held. The exchange valued OM Asset Management plc ordinary shares
at the price sold to investors in the IPO. The exchange valued Old Mutual plc’s ordinary shares using the weighted-average sale price over
the three consecutive trading days on the London Stock Exchange up to and including the date of the exchange. The exchange occurred
following the effectiveness of the OM Asset Management plc registration statement on 8 October 2014. OM Group (UK) Limited transferred
1,212,766 OM Asset Management plc ordinary shares (equivalent to 5,914,981 Old Mutual plc restricted shares) to employees as part of this
exchange programme.
In connection with the conversion of these restricted shares, an equity incentive plan was implemented at OM Asset Management plc. The plan
is intended to encourage ownership of stock by employees and to provide additional incentive for them to promote the success of OM Asset
Management plc’s business through the grant of awards of or pertaining to shares of OM Asset Management plc’s stock. The grant date fair
value per share, calculated based on the closing share price as quoted on the New York Stock Exchange on the measurement date, is used
to determine the fair value of restricted shares granted to employees. There is a mechanism at OM Asset Management plc to ensure sufficient
shares are available under the plan for grants issued. Restricted shares under the plan generally have a vesting period of three years.
OM Asset Management plc Affiliate Equity Plans
Equity granted during the year to employees of firms participating in the OM Asset Management plc Affiliate Equity Plans vests three to four years
from the date of grant, conditional upon continued employment over this period. Equity purchased by employees vested immediately. Grant date
fair value and fair value used for reassessment was determined based on a multiple of prior year earnings. Under the terms of the arrangements,
participating employees may sell their equity back to OM Asset Management plc (which acts as a buyer of last resort) at a fixed multiple of prior
year earnings, subject to certain restrictions. Accordingly, the schemes are accounted for as cash-settled share-based payments, despite the fact
the initial purchase and/or grants of equity are settled in equity instruments.
The following summarises the fair value of instruments purchased from and granted by OM Asset Management plc during the year:
Instruments granted and purchased during the year
Percentage of affiliate equity
Fair value of instruments ($m)¹
Affiliate
share
purchases
0.10%
0.03%
–
–
Affiliate
share
grants
2.69%
1.87%
$17m
$11m
Affiliate
shares
forfeited
(10.75%)
(0.50%)
–
–
2014
2013
2014
2013
Total
non-
controlling
interest in
affiliate
(7.96%)
1.40%
–
–
¹ Represents fair value in excess of consideration received for affiliate share purchases
OM Asset Management plc annual bonus awards
The OM Asset Management plc Affiliate Equity Plans are incorporated into annual bonus awards of employees at participating firms, which are
to be settled partly in cash and partly in equity. The level of bonus is contingent upon current year financial and individual performance, therefore
the vesting period for bonus equity to be granted during 2015 in respect of the 2014 financial year has been determined to commence from
1 January 2014.
It is anticipated that instruments with a fair value of $10 million (2013: $15 million and 2012: $11 million) will be granted during 2015 to firms
participating in the OM Asset Management plc Affiliate Equity Plans based on 2014 financial performance.
Old Mutual plc
Annual Report and Accounts 2014
221
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
H: Other notes continued
H2: Share-based payments continued
Acadian Asset Management (AAM)
Class B equity interests in AAM acquired by employees during 2007 entitled the participating employees to 28.57% of the earnings of AAM
in excess of $120 million, and to a liquidation preference proportionate to their shareholding. In consideration for the equity acquired, the
participating employees agreed to forego a portion of existing long-term incentive payments owed. The difference between the carrying amount
of this consideration and the fair value of the interest acquired was treated as share-based compensation expense in 2007. Fair value was
determined based on the discounted projected future cash flows of AAM.
Effective 1 April 2011, certain terms of the plan were modified to provide for greater participation by Class B interest holders in Acadian’s profits
and cash distributions. In addition, provisions were added to provide greater liquidity and transferability for the holders of Class B interests. The
plan has since included a feature whereby participating employees may sell their equity back to OM Asset Management plc based on a multiple
of prior 12 month earnings above a Class A equity holders’ minimum preference amount, subject to certain restrictions. The surrender-date fair
value of the Class B interests prior to these modifications amounted to $7 million, and this amount was reclassified from non-controlling interests to
cash-settled share-based payments liabilities as a result of the liquidity features added. The excess of the fair value of the modified award over its
pre-modification fair value was $21 million, and was accounted for as incremental cash-settled share-based payments compensation expense
and liability. As the implementation of the modifications were subject to a two year vesting period, the incremental cash-settled share-based
payments compensation expense and subsequent revaluations of the liability each period to its fair value, along with the reclassification of the
$7 million pre-modification fair value of the award from non-controlling interests as a liability, were recognised rateably over that period
commencing 1 April 2011. The remaining $35 million of the initial fair value of the equity-settled plan that was surrendered by Class B interest
holders was transferred to controlling interest equity at the conclusion of the vesting period.
During 2014, employees sold Class B equity interests of 14.29% back to OM Asset Management plc. Class B equity interests of 14.29% remain
outstanding at 31 December 2014.
(d) Forfeitable/Restricted share grants
The following summarises the fair value of restricted shares granted by the Group during the year:
Instruments granted and purchased during the year
Shares in Old Mutual plc (London Stock Exchange)
Shares in Old Mutual plc (Johannesburg Stock Exchange)
Shares in Nedbank Ltd
Number granted
11,047,898
9,933,597
13,350,717
16,585,998
4,225,723
4,206,027
2014
2013
2014
2013
2014
2013
Weighted
average
fair value
£2.02
£1.95
R35.35
R27.71
R201.11
R185.09
The share price at measurement date was used to determine the fair value of the restricted shares. Expected dividends were not incorporated into
the measurement of fair value where the holder of the restricted share is entitled to dividends throughout the vesting period.
(e) Annual bonus awards
The UK and South Africa Plan Awards give rise to annual bonus awards. The level of annual bonus awards is contingent upon the satisfactory
completion of individual and company performance targets, measured over the financial year prior to the date the employees receive the award.
The accounting grant date for the South African and UK annual bonus plans (other than the new joiner and newly qualified grants) has therefore
been determined as 1 January in the year prior to the date of issue of the grants.
The Group anticipates awards under the South African scheme of 10,022,998 restricted shares (2013: 9,331,684). The restricted shares have been
valued using a share price of R34.70 (2013: R32.79).
The Group estimate of the total fair value of the annual bonus expected to be paid in the form of options and forfeitable shares is outlined below.
The fair value is determined by making an estimate of the level of bonus to be paid out following the attainment of personal and company
performance conditions.
UK Plans
(f) Financial impact
Expense arising from equity settled share and share option plans
Expense arising from cash settled share and share option plans
Closing balance of liability for cash settled share awards
222 Old Mutual plc
Annual Report and Accounts 2014
Year ended 31 December 2014
Year ended 31 December 2013
Total fair
value
£m
Vesting
period
Total fair
value
£m
Vesting
period
10
4.2 years
13
4.2 years
Year ended
31 December
2014
54
61
115
112
£m
Year ended
31 December
2013
59
40
99
91
For the year ended 31 December 2014 For the year ended 31 December 2014
H3: Related parties
The Group provides certain pension fund, insurance, banking and financial services to related parties. These are conducted on an arm’s length
basis and are not material to the Group’s results.
(a) Transactions with key management personnel, remuneration and other compensation
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the
Group, directly or indirectly, including any director (whether executive or otherwise) of the Group. Details of the compensation paid to the Board
of directors as well as their shareholdings in the Company are disclosed in the Remuneration Report on pages 94 to 117.
(b) Key management personnel remuneration and other compensation
Directors’ fees
Remuneration
Cash remuneration
Short-term employee benefits
Long-term employee benefits
Share-based payments
Share options
Outstanding at beginning of the year
Leavers
New appointments
Granted during the year
Exercised during the year
Outstanding at end of the year
Restricted shares
Outstanding at beginning of the year
Leavers
New appointments
Granted during the year
Exercised during the year
Vested during the year
Effect of share exchange in connection with the
OM Asset Management plc IPO
Outstanding at end of the year
Year ended 31 December 2014
Year ended 31 December 2013
Number of
personnel
11
12
12
12
11
Number of
personnel
12
13
13
13
11
Value
£’000
1,366
22,593
4,931
7,879
343
9,440
23,959
Value
£’000
1,313
25,301
4,944
9,700
373
10,284
26,614
Year ended 31 December 2014
Year ended 31 December 2013
Number of
personnel
Number of
options/shares
’000s
Number of
personnel
Number of
options/shares
’000s
5
–
1
5
1,103
–
7
22
(1,084)
48
6
2
1
5
1,770
(178)
9
–
(498)
1,103
Year ended 31 December 2014
Year ended 31 December 2013
Notes
Number of
personnel
Number of
options/shares
’000s
Number of
personnel
Number of
options/shares
’000s
10
1
1
10
20,495
(4,230)
112
6,041
(421)
(4,942)
(3,283)
13,772
14
5
1
–
10
22,557
(2,121)
576
5,439
(1,505)
(4,451)
–
20,495
H2(c)
Old Mutual plc
Annual Report and Accounts 2014
223
Financials
GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2014
H: Other notes continued
H3: Related parties continued
(c) Key management personnel transactions
Key management personnel and members of their close family have undertaken transactions with Old Mutual plc and its subsidiaries, joint
ventures and associated undertakings in the normal course of business, details of which are given below. For current accounts positive values
indicate assets of the individual whilst for credit cards and mortgages positive values indicate liabilities of the individual.
Year ended 31 December 2014
Year ended 31 December 2013
Current accounts
Balance at beginning of the year
Net movement during the year
Balance at end of the year
Credit cards
Balance at beginning of the year
Net movement during the year
Balance at end of the year
Mortgages
Balance at beginning of the year
Net movement during the year
Balance at end of the year
Property & casualty contracts
Total premium paid during the year
Claims paid during the year
Life insurance products
Total sum assured/value of investment at end of the year
Pensions, termination benefits paid
Termination benefits paid
Value of pension plans as at end of the year
Number of
personnel
4
5
2
4
1
5
4
2
10
–
10
Value
£000s
2,535
(100)
2,435
24
5
29
143
322
465
15
7
25,739
–
4,889
Number of
personnel
4
4
4
2
2
1
3
–
11
1
10
Value
£000s
1,204
1,331
2,535
18
6
24
219
(76)
143
13
–
24,498
608
4,838
Various members of key management personnel hold or have at various times during the year held, investments managed by asset management
businesses of the Group. These include unit trusts, mutual funds and hedge funds. None of the amounts concerned are material in the context of
the funds managed by the Group business concerned, and all of the investments have been made by the individuals concerned either on terms
which are the same as those available to external clients generally or, where that is not the case, on the same preferential terms as were available
to employees of the business generally.
H4: Contingent liabilities
Guarantees and assets pledged as collateral security
Irrevocable letters of credit
Secured lending
Other contingent liabilities
£m
At
31 December
2014
At
31 December
2013
1,325
181
455
6
2,052
184
304
30
The Group, through its South African banking business, has pledged debt securities amounting to £767 million (2013: £703 million) as collateral for
deposits received under re-purchase agreements. These amounts represent assets that have been transferred but do not qualify for derecognition
under IAS 39. These transactions are entered into under terms and conditions that are standard industry practice to securities borrowing and
lending activities.
Contingent liabilities – tax
The Revenue authorities in the principal jurisdictions in which the Group operates (South Africa, the United Kingdom and the United States)
routinely review historic transactions undertaken and tax law interpretations made by the Group. The Group is committed to conducting its tax
affairs in accordance with the tax legislation of the jurisdictions in which they operate. All interpretations made by management are made with
reference to the specific facts and circumstances of the transaction and the relevant legislation.
There are occasions where the Group’s interpretation of tax law may be challenged by the Revenue authorities. The financial statements include
provisions that reflect the Group’s assessment of liabilities which might reasonably be expected to materialise as part of their review. The Board is
satisfied that adequate provisions have been made to cater for the resolution of tax uncertainties and that the resources required to fund such
potential settlements are sufficient.
Due to the level of estimation required in determining tax provisions amounts eventually payable may differ from the provision recognised.
224 Old Mutual plc
Annual Report and Accounts 2014
For the year ended 31 December 2014 For the year ended 31 December 2014
South Africa
During the course of 2014 discussions have been ongoing with the South African Revenue Services (SARS) in relation to the tax treatment of
investments supporting Fixed Bond products sold by OMLAC(SA) between 2004 and 2013. SARS has submitted an assessment for amounts due.
OMLAC(SA) has appealed the assessments and discussions regarding the merits of the OMLAC(SA) treatment of these items are continuing with
SARS.
Nedbank litigation
There are a number of legal or potential claims against Nedbank Group Ltd and its subsidiary companies, the outcome of which cannot be
foreseen at present.
As previously disclosed, the largest of these potential actions are claims in the High Court against Nedbank by certain shareholders in Pinnacle
Point Group Ltd, alleging that Nedbank had a legal duty of care to them arising from a share swap transaction. In 2013 two of these claims of
R147 million and of R802 million were dismissed by the North Gauteng High Court. The only claim remaining is for R355 million.
Originally these shareholders and others lodged proceedings with the Securities Regulation Panel (SRP) for an order declaring that an affected
transaction took place. The SRP ruled that no affected transaction took place. The last remaining claimant brought an application to the South
Gauteng High Court for the review of the SRP ruling. This application was dismissed with costs on 15 November 2013. The applicant filed a
notice to apply for leave to appeal this judgment, and on 16 July 2014 the Supreme Court of Appeal ruled in Nedbank’s favour by refusing
the application.
During 2011 further actions were instituted against Nedbank by other stakeholders for R210 million and by Absa Bank Limited for R773 million. In
both these actions Nedbank have filed exceptions against the claims. On 25 August 2014, the R210 million claim was withdrawn.
Nedbank and its legal advisers remain of the opinion that the remaining claims are ambitious, and that the remaining claimants will have great
difficulty succeeding.
Consumer protection
Old Mutual is committed to treating customers fairly and supporting its customers in meeting their lifetime goals and treating customers fairly
is central to how our businesses operate. We routinely engage with customers and regulators to ensure that we meet this commitment, but there
is the risk of regulatory intervention across various jurisdictions, giving rise to the potential for customer redress which can result in retrospective
changes to policyholder benefits, penalties or fines. The Group monitors the exposure to these actions and makes provision for the related costs
as appropriate.
H5: Commitments
Capital commitments
The Group’s capital commitments are detailed in the table below. The Group’s management is confident that future net revenues and funding will
be sufficient to cover these commitments.
Investment property
Property, plant and equipment
£m
At
31 December
2014
At
31 December
2013
76
86
85
52
Commitments to extend credit to customers
The following table presents the contractual amounts of the Group’s financial instruments not included in the statement of financial position that
commit it to extend credit to customers.
Original term to maturity of one year or less
Original term to maturity of more than one year
Other commitments, note issuance facilities and revolving underwriting facilities
£m
At
31 December
2014
At
31 December
2013
1,428
1,891
2,101
2,139
1,413
1,709
Assets are pledged as collateral under repurchase agreements with other financial institutions and for security deposits relating to local futures,
options and stock exchange memberships. Mandatory reserve deposits are also held with local Central Banks in accordance with local statutory
requirements. These deposits are not available to finance the Group’s day-to-day operations.
Commitments under the Group’s operating lease arrangements are described in note H6.
Old Mutual plc
Annual Report and Accounts 2014
225
Financials GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
H: Other notes continued
H6: Operating lease arrangements
(a) The Group as lessee
At 31 December 2014
At 31 December 2013
£m
Outstanding commitments under non-cancellable
operating leases, fall due as follows:
Banking
Non-
banking
Within one year
In the second to fifth years inclusive
After five years
(b) The Group as lessor
Assets subject to operating leases
Land
Buildings
Investment property
56
123
144
323
9
20
28
57
Future undiscounted minimum lease payments of contracts with tenants
Within one year
In the second to fifth years inclusive
After five years
H7: Fiduciary activities
Total
65
143
172
380
Banking
58
138
154
350
Non-
banking
9
28
33
70
Total
67
166
187
420
£m
At
31 December
2014
At
31 December
2013
7
1
1,678
1,686
6
35
1,811
1,852
£m
At
31 December
2014
At
31 December
2013
64
140
65
269
55
134
62
251
The Group provides custody, trustee, corporate administration and investment management and advisory services to third parties that involve the
Group making allocation and purchase and sale decisions in relation to a wide range of financial instruments. Those assets that are held in a
fiduciary capacity are not included in these financial statements. Some of these arrangements involve the Group accepting targets for benchmark
levels of returns for the assets under the Group’s care. These services give rise to the risk that the Group will be accused of misadministration or
under-performance.
226 Old Mutual plc
Annual Report and Accounts 2014
For the year ended 31 December 2014 H8: Businesses acquired during the year
(a) Acquisition of subsidiaries during the year
The Group continued to expand operations through the following completed acquisitions:
Acquiree
Country
Nature of business
Faulu Kenya DTM LTD
Intrinsic Financial Services
Old Mutual Finance (Pty) Ltd South Africa
Kenya
United Kingdom
Banking
Financial adviser network
Lending
Consideration
£m
20
98
63
Shares
acquired
67%
100%
75%
Effective date
1 April 2014
1 July 2014
1 September 2014
The results from the above acquisitions have been consolidated for the 31 December 2014 financial year.
The table below sets out the consolidated assets and liabilities acquired as a result of these acquisitions:
Assets
Intangible assets
Property, plant and equipment
Loans and advances
Cash and cash equivalents
Trade, other receivables and other assets
Total assets
Liabilities
Borrowed funds
Amounts owed to bank depositors
Deferred tax liabilities
Trade, other payables and other liabilities
Total liabilities
Total net assets acquired
Total value of the business
Consideration
Fair value of stake in investment already held
Non-controlling interests recognised
Goodwill recognised
Acquirees’
carrying
amount
5
20
498
75
15
613
(335)
(69)
–
(130)
(534)
79
£m
Fair
value
100
20
498
75
15
708
(335)
(69)
(8)
(129)
(541)
167
322
181
88
53
155
£171 million of the £181 million consideration was paid in cash.
Goodwill of £155 million has been recognised on these acquisitions. Goodwill arose on the acquisition of these businesses due to their ability
to add to the distribution footprint of the Group. These acquisitions are expected to facilitate the cross selling of Group markets into the client
base of the acquirees. A control premium of £19 million was paid on the acquisition of Old Mutual Finance (Pty) Ltd as it allows the full integration
of the business into the Group. The goodwill is not expected to be deductible for tax purposes. Refer to note F1 for further analysis of the
goodwill recognised.
The carrying value of assets and liabilities in the entities’ statement of financial position on acquisition date approximates the fair value of these
items determined by the Group, with the exception of loans and advances and intangible assets.
The loans and advances recognised by the Group have been fair valued by £28 million, based on forecasted cash flows and a risk adjusted
interest rate curve, taking into account the nature of the loans and advances.
Additional intangible assets of £67 million have been recognised and relate to customer distribution channels (£41 million) and other intangible
assets (£26 million). The value of the intangible assets was determined by applying cash flows to standard industry valuation models. An
indemnification asset of £9 million has been recognised due to warranties granted by the sellers for future claims based on previous business
conducted.
Non-controlling interests of £53 million have been recognised as a result of the acquisition based on the full fair value of all the businesses
acquired. The Group has included £13 million in net profit attributable to equity holders of the parent since the effective date of the acquisitions
of the subsidiaries.
(b) Disposals of subsidiaries during the year
As discussed in note A2, Old Mutual Wealth disposed of a number of its European businesses during the year. The principal assets and liabilities
that were disposed of were goodwill (£86 million), intangible assets (£130 million), investments and securities (£4,469 million) and long-term
business policyholder liabilities (£4,438 million). In addition, the businesses disposed held cash of £76 million at the date of disposal.
Old Mutual plc
Annual Report and Accounts 2014
227
Financials
GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2014
H9: Events after the reporting date
Acquisition of UAP Holdings Limited
On 9 January 2015, the Group announced that it acquired a 23.3% stake in UAP Holdings Limited (UAP), an investment, retirement and insurance
group that operates in East Africa, for a consideration of KES 9 billion (£64 million). UAP will be treated as an associated undertaking from
9 January 2015.
Subsequently, on 26 January 2015, the Group announced it acquired an additional 37.3% (second tranche) of UAP for a consideration of KES 14
billion (£103 million), subject to regulatory approval. The transaction will increase the Group’s total holding to 60.7% and will result in the Group
consolidating UAP. The acquisition of the second tranche is expected to be completed in the first half of 2015.
Disposal of Skandia France and Luxembourg
On 2 February 2015, the Group announced that it had completed the disposal of Skandia France and Luxembourg. These businesses have been
treated as held for sale for year-end reporting purposes. Refer to note A2 for further information.
Acquisition of Quilter Cheviot
On 25 February 2015, the Group announced that it had completed the acquisition of Quilter Cheviot. The transaction was initially announced on
17 October 2014. There have been no significant changes to the terms initially announced and the Group awaits the transaction completion
financial statements of Quilter Cheviot in order to finalise its purchase price accounting.
Maturity of the Nedbank BEE schemes
The various BEE schemes that reached their maturity dates on 1 January 2015 will be rationalised through a specific repurchase of Nedbank
Group shares. The repurchased shares will not have a significant impact on the consolidated financial position of the Group and will be delisted,
cancelled and reinstated as authorised but unissued shares. Following this, the Community Trust, which matures in 2030, will subscribe for
Nedbank Group shares to maintain its shareholding in the Group.
Maturity of the Old Mutual South Africa (including Mutual & Federal) BEE schemes
The various BEE schemes that reached their maturity dates on 1 January 2015 will be concluded through the settlement of the notional loan
accounts. Furthermore, certain other schemes will reach their maturity dates on 1 May 2015 and will be concluded in a similar way. The treatment
of the shares will not have a significant impact on the consolidated financial position of the Group, however the Group expects to receive cash on
the settlement of these loans.
I: Discontinued operations and disposal groups held for sale
I1: Discontinued operations
Amounts disclosed in relation to discontinued operations relate to the sale, in 2012, of the Group’s Swedish, Danish and Norwegian life businesses
(Nordic) and in 2011 of US Life. The Nordic disposal was completed on 21 March 2012 and the US Life disposal was completed on 7 April 2011.
The Group continued to incur costs directly related to the sale of these businesses relating to the transition of IT and other services, legal costs and
intellectual property.
Income statement from discontinued operations
Loss before tax from discontinued operations – trading activities (expenses)
(Loss)/profit on disposal
(Loss)/profit before tax from discontinued operations
Income tax credit
(Loss)/profit after tax from discontinued operations
I2: Non-current assets and liabilities
Year ended
31 December
2014
£m
Year ended
31 December
2013
(35)
(19)
(54)
4
(50)
(26)
27
1
2
3
On 2 February 2015, the Group announced that it had completed the sale of Skandia France and Luxembourg, part of the Old Mutual Wealth
business. These businesses have been classified as held for sale at reporting date due to the imminence of the disposal. Total assets to the value of
£1,319 million (including £1,259 million of investments and securities), and total liabilities to the value of £1,285 million, (including £1,263 million of
long-term business policyholder liabilities) have been classified as held for sale.
A further loss of approximately £6 million will be reported on the disposal of the business as the proceeds received will be insufficient to recover
the net asset values of the businesses.
On 12 January 2015, the Group agreed to dispose of the remaining portion of the Menlyn Shopping Centre in South Africa for £156 million
(R2,800 million). This transaction is subject to Competition Commission approval and transfer by the South African Deeds Office. As part of the
transaction the Group agreed to acquire the remaining share of the Cavendish Shopping Centre for £61 million (R1,100 million). These assets form
part of the policyholder assets and therefore this transaction has no impact on profit or loss of the Group.
228 Old Mutual plc
Annual Report and Accounts 2014
FINANCIAL STATEMENTS OF THE COMPANY
COMPANY STATEMENT OF FINANCIAL POSITION
At 31 December 2014
Assets
Investments in Group subsidiaries
Investments and securities
Investments in associated undertakings and joint ventures
Trade, other receivables and other assets
Derivative financial instruments – assets
Cash and cash equivalents
Total assets
Liabilities
Borrowed funds
Provisions
Trade, other payables and other liabilities
Derivative financial instruments – liabilities
Total liabilities
Net assets
Equity
Equity attributable to equity holders of the parent
Total equity
At
31 December
2014
Notes
Restated
At
31 December
2013
2
3
4
5
6
7
8
9
6
5,729
347
26
4,172
71
652
5,760
153
26
4,263
62
391
10,997
10,655
679
–
4,403
1
5,083
5,914
5,914
5,914
643
2
4,299
–
4,944
5,711
5,711
5,711
The Company’s financial statements on pages 229 to 237 were approved by the Board of Directors on 28 February 2015.
Julian Roberts
Group Chief Executive
Ingrid Johnson
Group Finance Director
Old Mutual plc
Annual Report and Accounts 2014
229
Financials
FINANCIAL STATEMENTS OF THE COMPANY
COMPANY STATEMENT OF CASH FLOWS
For the year ended 31 December 2014
Profit before tax
Recognition of impairment losses
Fair value movement on derivatives and borrowed funds
Foreign exchange movement on assets and liabilities
Non-cash movements in profit before tax
Other operating assets and liabilities
Changes in working capital
Net cash inflow from operating activities
Acquisition of interests in subsidiaries, associates and strategic investments
Disposal of interests in subsidiaries, associates and joint ventures
Other investing cash flows
Net cash (outflow)/inflow from investing activities
External interest received
External interest paid
Intercompany interest (paid)
Dividends paid to:
Ordinary shareholders of the Company
Equity minority interests and preferred shares
Net proceeds from issue of ordinary shares
Net purchase of treasury shares
Other debt repaid
Loan financing received from Group companies
Net cash inflow/(outflow) from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of the period
Cash and cash equivalents at end of the year
Year ended
31 December
2014
Year ended
31 December
2013
399
108
28
(15)
121
(98)
(98)
422
(89)
23
(193)
(259)
38
(60)
(152)
(184)
(33)
12
(17)
–
494
98
261
391
652
15
–
11
(2)
9
274
274
298
–
158
16
174
38
(65)
(149)
(162)
(47)
11
(14)
(156)
150
(394)
78
313
391
230 Old Mutual plc
Annual Report and Accounts 2014
FINANCIAL STATEMENTS OF THE COMPANY
COMPANY STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2014
Year ended 31 December 2014
Shareholders’ equity of the
Company at beginning of the
year
Profit for the year
Items that will not be reclassified
subsequently to profit and loss
Actuarial gain on defined benefit plan
Total comprehensive income for
the year
Dividends for the year
Merger reserve realised
Net purchase of treasury shares
Other movements in share capital and
share-based payment reserve
Fair value of equity settled share options
Shareholders’ equity of the
Company at end of the year
Millions
Number of
shares
issued and
fully paid
Share
capital
Share
premium
Other
Reserves
Retained
earnings*
Perpetual
preferred
callable
securities
4,896
–
560
–
845
–
1,832
–
1,948
399
–
–
–
–
–
10
–
–
–
–
–
–
–
–
–
–
–
–
–
12
–
–
–
–
(375)
–
–
16
(2)
397
(217)
375
(17)
12
–
526
33
–
33
(33)
–
–
–
–
£m
Total
5,711
432
(2)
430
(250)
–
(17)
24
16
4,906
560
857
1,473
2,498
526
5,914
*Included within retained earnings of £2,498 million (2013: £1,948 million) are distributable reserves of £2,495 million (2013: £1,928 million)
Millions
Number of
shares
issued and
fully paid
4,892
–
–
–
–
–
4
–
Share
capital
Share
premium
Other
Reserves
Retained
earnings*
559
–
–
–
–
–
1
–
835
–
–
–
–
–
10
–
1,815
–
–
–
–
–
–
17
2,174
15
3
18
(209)
(35)
–
–
Perpetual
preferred
callable
securities
682
47
–
47
(47)
(156)
–
–
£m
Total
6,065
62
3
65
(256)
(191)
11
17
4,896
560
845
1,832
1,948
526
5,711
Year ended 31 December 2013
Shareholders’ equity of the
Company at beginning of the
year – restated
Profit for the year
Actuarial loss on defined benefit plan
Total comprehensive income for
the year
Dividends for the year
Preferred securities purchased
Other movements in share capital and
share-based payment reserve
Fair value of equity settled share options
Shareholders’ equity of the
Company at end of the year
Other reserves
Merger reserve
Share-based payment reserve
Cancellation of treasury shares
Attributable to equity holders of the Company at the end of the year
£m
At
31 December
2014
At
31 December
2013
1,342
107
24
1,473
1,717
91
24
1,832
Old Mutual plc
Annual Report and Accounts 2014
231
Financials FINANCIAL STATEMENTS OF THE COMPANY
NOTES TO THE COMPANY FINANCIAL STATEMENTS
1 Financial assets and liabilities
Company statement of financial position
The Company is principally involved in the management of its investments in subsidiaries, with its risks considered to be consistent with those in the
operations themselves. Full details of the financial risks are provided in the Group financial statements, note E1. The most important components
of financial risk for the Company itself are interest rate risk, currency risk, liquidity risk and credit risk. These risks arise from open positions in
interest rate, currency and equity products, all of which are exposed to general and specific market movements.
(a) Categories of financial instruments
The financial instruments of the Company consist of derivative assets and liabilities, both of which are treated as held-for-trading, other assets and
cash and cash equivalents which are treated as loan and receivables, borrowed funds of which £565 million is designated as fair value through
the income statement and £114 million at amortised cost (2013: £531 million and £112 million respectively) and other liabilities which are also
measured at amortised cost. For financial assets and liabilities measured at fair value through the income statement, the hierarchy classification
(as detailed in the Group financial statements, note E1(p)) of derivative assets and liabilities is level 2 and borrowed funds level 1.
(b) Capital risk management
Old Mutual plc is the holding company of the Group and is responsible for the raising and allocation of capital in line with the Group’s capital
management policies set out in note E1 to the consolidated financial statements and for ensuring the operational funding and regulatory capital
needs of the holding company and its subsidiaries are met at all times.
(c) Currency risk
The Company is exposed to effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows
through the impact that currency movements have on its derivatives. The principal foreign currency risk arises from the fact that the Company’s
functional currency is Pounds Sterling, whereas the functional currencies of its principal operations are South African rand, US dollar and Euro.
The exposure of the Group to currency risk is disclosed in the Group financial statements, note E1(s). The Company hedges some of this currency
translation risk through currency swaps, currency borrowings and forward foreign exchange rate contracts. Exchange rate exposures are
managed within approved policy parameters utilising forward exchange contracts and currency swap agreements. A 10% deterioration in the
values of the major currencies the Company is exposed to in relation to GBP would result in a decrease in the Company’s equity holders’ funds
of £66 million (2013: increase of £63 million).
(d) Credit risk
The Company is principally exposed to credit risk through its derivative asset positions, investments and securities, holdings of cash and cash
equivalents and the ability of its subsidiaries to repay amounts due to the Company, which it holds to back shareholder liabilities. The exposure of
the Group to credit risk is disclosed in the consolidated financial statements, note E2. Credit risk is managed by placing limits on exposures to any
single counterparty, or groups of counterparties and to geographical and industry segments. Credit risk is monitored with reference to established
credit rating agencies with limits placed on exposure to below investment grade holdings or the financial position of companies within the Group.
Of the Company’s financial assets bearing credit risk, derivative assets, investment and securities, bonds and cash and cash equivalents are rated
as investment grade (being AAA to BBB for Standard & Poor’s or an equivalent). The other financial assets bearing credit risk are not rated.
(e) Interest rate risk
Interest rate risk is the risk that fluctuating interest rates will unfavourably affect the Company’s earnings and the value of its assets, liabilities and
capital.
The Company employs currency and interest rate swap transactions to mitigate against the impact of changes in the fair values of its borrowed
funds. Details of the arrangements in place are shown in the Group financial statements note E7 (Hedge accounting).
(f) Liquidity risk
Liquidity risk is the risk that cash may not be available to pay obligations when due at a reasonable cost. Ultimate responsibility for liquidity risk
management rests with the Board of Directors, which has built an appropriate liquidity risk management framework for the management of the
Company’s short, medium and long-term funding and liquidity management requirements. The Company has net current assets of £387 million
(2013: £429 million), all of which represent liabilities to other Group companies. The Company manages liquidity risk by maintaining adequate
reserves, banking facilities and continuously monitoring forecast and actual cash flows of both the Company and its subsidiaries.
The key information reviewed by the Company’s executive directors and Executive Committee, together with the Capital Management Committee,
is a detailed management report on the Company’s current and planned capital and liquidity position. Forecasts are updated regularly based on
when new information is received, and as part of the annual business planning cycle. The Company’s liquidity and capital position and forecast is
presented to the Company’s Board of Directors on a regular basis.
Further information on liquidity and the Company’s cash flows is contained in other sections of this Annual Report, for example the business review
and Group Finance Director’s statement.
232 Old Mutual plc
Annual Report and Accounts 2014
For the year ended 31 December 2014 2 Principal subsidiaries
Balance at beginning of the year
Additions
Disposal
Impairments
Balance at end of the year
£m
At
31 December
2014
At
31 December
2013
5,760
102
(23)
(110)
5,729
8,151
17
(2,370)
(39)
5,760
On 14 April 2014, the Company sold 970,384 shares of its investment in Old Mutual Wealth Management Limited to Old Mutual Wealth
JSOP Trust No 1, for £15 million.
On 4 April 2014, the Company received a return of capital from Old Mutual Plc Brands AB of £8 million.
On 19 May 2014, the Company purchased an additional 88,900,000 ordinary shares of £1 each in OM Group (UK) Limited for cash.
During 2014, the Company impaired its investments in Skandia UK Limited, Old Mutual Europe GmbH and Old Mutual Plc Brands AB by
£5 million, £103 million and £2 million respectively.
Included within additions is the Company’s investment in subsidiary undertakings in respect of movements on the share-based payments
(£13 million).
The principal subsidiary undertakings of the Company are as follows:
At 31 December 2014
OM Group (UK) Ltd
Old Mutual Wealth Management Ltd
Old Mutual Europe GmbH
Old Mutual PLC Brands AB
Country of incorporation
Class of shares
% interest held
England and Wales
England and Wales
England and Wales
Sweden
Ordinary
Ordinary
Ordinary
Ordinary
100
100
100
100
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.
3 Investments and securities
Government and government-guaranteed securities
Other debt securities, preference shares and debentures
Total investment and securities
£m
At
31 December
2014
At
31 December
2013
50
297
347
55
98
153
The government and government-guaranteed securities above are all rated AAA. The intention is to hold these investments to maturity.
Other debt securities, preference shares and debentures are all rated AAA-BBB. The intention is to hold these investments to maturity.
4 Investments in associated undertakings
The Company holds the following interest in associated undertakings:
Kotak Mahindra Old Mutual Life Insurance Limited
Country of
operation
% interest
held
At
31 December
2014
At
31 December
2013
India
26
26
26
£m
Old Mutual plc
Annual Report and Accounts 2014
233
Financials FINANCIAL STATEMENTS OF THE COMPANY
NOTES TO THE COMPANY FINANCIAL STATEMENTS
5 Other assets
Year ended 31 December 2014
Other receivables
Corporation tax receivable
Accrued interest and rent
Other prepayments and accrued income
Amounts owed by Group undertakings
Amounts falling due within one year
Amounts falling due after one year
Total other assets
£m
At
31 December
2014
At
31 December
2013
–
3
3
5
49
4,112
4,172
12
3
3
3
231
4,011
4,263
6 Derivative financial instruments
The following tables provide a detailed breakdown of the fair values of the Company’s derivative financial instruments outstanding at the year
end. These instruments allow the Company to transfer, modify or reduce foreign exchange and interest rate risks.
The Company undertakes transactions involving derivative financial instruments with other financial institutions. Management has established
limits commensurate with the credit quality of the institutions with whom it deals, and manages the resulting exposures such that a default by any
individual counterparty is unlikely to have a materially adverse impact on the Company.
At 31 December 2014
At 31 December 2013
Fair values
Fair values
Assets
Liabilities
Assets
Liabilities
£m
Exchange rate contracts
Swaps
Forwards
Total
Interest rate contracts
Swaps
Total
3
1
4
67
71
–
1
–
–
1
11
12
23
39
62
The contractual maturities of the derivative liabilities held are as follows:
At 31 December 2014
Derivative financial liabilities
At 31 December 2013
Derivative financial liabilities
Balance
sheet
amount
Less than
3 months
More than
3 months
less than
1 year
Between
1 and 5
years
More than
5 years
No
contractual
maturity
date
1
–
1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
£m
Total
1
–
234 Old Mutual plc
Annual Report and Accounts 2014
For the year ended 31 December 2014 7 Borrowed funds
Senior debt securities and term loans
Subordinated debt securities
Total borrowed funds
Fair valued through income statement
Amortised cost
Total borrowed funds
£m
At
31 December
2014
At
31 December
2013
114
565
679
112
531
643
£m
At
31 December
2014
At
31 December
2013
565
114
679
531
112
643
£m
The following table is a maturity analysis of liability cash flows based on contractual maturity dates for borrowed funds. Maturity analysis is
undiscounted and based on year end exchange rates. In addition to the contractual cash flows detailed below, the Company is obligated to
make interest payments on borrowed funds, details of which are in the Group financial statements in note E9.
Greater than 1 year and less than 5 years
Greater than 5 years
Borrowed funds
Additional details of these borrowings and undrawn facilities are included in the Group financial statements in note E9.
At
31 December
2014
At
31 December
2013
112
500
612
112
500
612
8 Provisions
Post employment benefits
Total provisions
£m
At
31 December
2014
–
At
31 December
2013
2
Notes
7
–
2
9 Post employment benefits
The Company holds a provision in respect of the Old Mutual Staff Pension Fund Defined Benefit pension scheme, which provides benefits based
on final pensionable pay for members within the Group. The assets of the scheme are held in separate trustee administered funds. Pension costs
and contributions relating to the scheme are assessed in accordance with the advice of qualified actuaries. Actuarial advice confirms that the
current level of contributions payable to the scheme, together with existing assets, are adequate to secure members’ benefits over the remaining
lives of participating employees. The scheme is reviewed on a triennial basis. In the intervening years the actuary reviews the continuing
appropriateness of the assumptions applied. During the year two employees (2013: two) were directly employed by the Company. The costs for
these Directors and ex-Directors are disclosed within the Remuneration Report on pages 94 to 117.
Old Mutual plc
Annual Report and Accounts 2014
235
Financials FINANCIAL STATEMENTS OF THE COMPANY
NOTES TO THE COMPANY FINANCIAL STATEMENTS
Liability for defined benefit obligation
Change in projected benefit obligation
Projected benefit obligation at beginning of the year
Interest cost on benefit obligation
Benefits paid
Actuarial losses/(gains)
Projected benefit obligation at end of the year
Change in plan assets
Plan assets at fair value at beginning of the year
Actual return on plan assets
Benefits paid
Company contributions
Plan assets at fair value at end of the year
Net liability recognised in balance sheet
Funded status of plan
Net amount recognised in balance sheet
Expense recognised in the income statement
£m
Pension plans
At
31 December
2014
At
31 December
2013
68
3
(2)
8
77
66
9
(2)
4
77
–
–
(1)
68
3
(1)
(2)
68
60
3
(1)
4
66
2
2
(1)
Actuarial assumptions used in calculating the projected benefit obligation are based on relevant mortality estimates, with a specific allowance
made for future improvements in mortality which is broadly in line with that adopted for the 92 series of mortality tables prepared by the
Continuous Mortality Investigation Bureau of the Institute of Actuaries. The expected returns on plan assets have been determined on the basis of
long-term expectations, the carrying value of the assets and the market conditions at the balance sheet date specific to the relevant locations.
The detailed actuarial assumptions can be viewed on the Group’s website at www.oldmutual.com.
%
Pension plans
At
31 December
2014
At
31 December
2013
35
64
1
46
52
2
£m
At
31 December
2014
At
31 December
2013
19
17
706
3,661
4,403
19
15
396
3,869
4,299
Equity securities
Debt securities
Other investments
10 Other liabilities
Accruals and deferred income
Corporation tax
Amounts owed to Group undertakings:
Amount falling due within one year
Amount falling due after one year
Total other liabilities
236 Old Mutual plc
Annual Report and Accounts 2014
For the year ended 31 December 2014 11 Contingent liabilities
In February 2008, the Company issued a guarantee to a third party over a subsidiary’s (Old Mutual Bermuda Limited) obligations under the
reinsurance contracts relating to the offshore investment products sold by a third party. The maximum payment under this guarantee is
$250 million. This guarantee is accounted for as an insurance contract and payments will only arise should Old Mutual Bermuda be unable
to meet its obligations under the relevant reinsurance contracts as they fall due.
12 Related parties
Old Mutual plc enters into transactions with its subsidiaries in the normal course of business. These are principally related to funding of the
Group’s businesses and head office functions. Details of loans, including balances due from/to the Company accounts are set out below.
Disclosures in respect of the key management personnel of the Company are included in the Group accounts related parties disclosures in
note G3.
There are no transactions entered into by the Company with associated undertakings.
Balances due from subsidiaries
Balances due to subsidiaries
Balances due from other related parties – Fairbarn Trust Company Limited
Income statement information
£m
At
31 December
2014
At
31 December
2013
4,161
(4,367)
2
4,242
(4,264)
2
£m
At 31 December 2014
Subsidiaries
Year ended 31 December 2014
Year ended 31 December 2013
Interest paid
Ordinary
dividends
received
Other
amounts
paid
Interest paid
23
632
(31)
(31)
Ordinary
dividends
received
147
Other
amounts
paid
(99)
Old Mutual plc
Annual Report and Accounts 2014
237
Financials SHAREHOLDER
INFORMATION
Listings and shares in issue
The Company’s shares are listed on the London, Malawi, Namibian and Zimbabwe Stock Exchanges and on the JSE Limited (JSE). The primary
listing, which is known as a premium listing, is on the London Stock Exchange and the other listings are all secondary listings. The Company’s
secondary listing on the Stockholm Stock Exchange ended in September 2007, but the Company’s shares may still be traded on the Xternal list
of the Nordic Exchange in Stockholm.
The ISIN number of the Company’s ordinary shares of 113⁄7p each is GB00B77J0862 and the SEDOL is B77J086.
The 113⁄7p nominal value of the Company’s shares reflects the seven-for-eight share consolidation that took place in April 2012. If your
shareholding is certificated and you have not yet surrendered your old certificate for shares of 10p each for replacement by a certificate
representing your consolidated shareholding, please contact our share registrars, whose details are set out later in this section.
The high and low closing prices of the Company’s shares during 2014 and 2013 on the two main markets on which they are listed were as follows:
London Stock Exchange
JSE
High
209.4p
R37.10
2014
Low
169.5p
R30.00
High
221.6p
R33.89
2013
Low
170.8p
R24.49
At 31 December 2014, the Company had approximately 470,000 underlying shareholders. Many of our retail shareholders hold their shares
through Company-sponsored nominee arrangements, as described in the footnote to the second table below.
In more detail, the geographical analysis and shareholder profile of the Company’s share register at 31 December 2014 were as follows:
Register
UK
South Africa
Zimbabwe
Namibia
Malawi
Total
Source: Equiniti/Link Market Services
Size of holding
1-1,000
1,001-10,000
10,001-100,000
100,001-250,000
250,001+
Total
Source: Equiniti/Link Market Services
Total shares
% of whole
2,062,335,185
2,772,451,849
54,734,804
12,484,143
4,614,238
4,906,620,219
42.03
56.50
1.12
0.25
0.10
100
Total shares
% of whole
19,530,617
21,635,333
31,091,763
30,555,361
4,803,807,145
4,906,620,219
0.40
0.44
0.63
0.62
97.91
100
Number
of holders
10,367
27,831
29,179
515
4,521
72,413
Number
of holders
62,572
8,213
1,031
196
401
72,413
Note
The registered shareholdings on the South African branch register included PLC Nominees (Pty) Limited, which held a total of 2,752,729,732 shares, including 260,745,806 shares
held for the Company’s sponsored nominee, Old Mutual (South Africa) Nominees (Pty) Limited, for the benefit of 386,762 underlying beneficial owners. The registered shareholdings
on the Zimbabwe branch register included Old Mutual Zimbabwe Nominees (Pvt) Limited, which held a total of 678,313 shares as nominee for 3,466 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 5,766,202 shares as
nominee for 6,702 underlying beneficial owners. The registered shareholdings on the Malawi branch register included Old Mutual (Blantyre) Nominees Limited, which held a total
of 55,179 shares as nominee for 136 underlying beneficial owners.
238 Old Mutual plc
Annual Report and Accounts 2014
Registrars
The Company’s share register is administered by the Global Share
Alliance in conjunction with local representatives in various jurisdictions.
The Global Share Alliance replaced the Company’s previous share
registrars, Computershare Investor Services, with respect to the UK and
South African registers, from 1 September 2014. The following are the
relevant contact details:
UK
Equiniti Limited
Aspect House, Spencer Road, Lancing
West Sussex BN99 6DA
Tel no: 0871 384 2878 (if calling from the UK)
Tel no: +44 121 415 0833 (from overseas)
Website for shareholder information and queries: www.shareview.co.uk
South Africa
Link Market Services South Africa (Pty) Ltd
13th Floor Rennie House, 19 Ameshoff Street
Braamfontein, Johannesburg 2001
PO Box 10462, Johannesburg, 2000
Tel no: +27 (0)86 140 0110
Email: oldmutualenquiries@linkmarketservices.co.za
Malawi
National Bank of Malawi
Legal Department
Cnr Victoria Avenue & Henderson Street
Blantyre
(PO Box 1438, Blantyre, Malawi)
email: nbminvestment@natbankmw.com
Tel: +265 182 0622/0054
Namibia
Transfer Secretaries (Pty) Limited
4 Robert Mugabe Avenue, Windhoek
(PO Box 2401, Windhoek)
Tel: +264 (0)61 227647
Fax: +264 (0)61 248531
email: ts@nsx.com.na
Zimbabwe
Corpserve Registrars (Pvt) Ltd
2nd Floor, ZB Centre
Cnr 1st Street and K. Nkrumah Avenue
Harare
(PO Box 2208, Harare, Zimbabwe)
Tel: +263 (0)4 751559/61
Fax: +263 (0)4 752629
email: enquiries@corpserve.co.zw
Dealings in the Company’s shares on the JSE
All transactions in the Company’s shares on the JSE are required to be
settled electronically through Strate, and share certificates are no
longer good for delivery in respect of such transactions. Shareholders
who have any enquiries about the effect of Strate on their holdings in
the Company should contact Link Market Services in Johannesburg on
+27 (0)86 140 0110.
Dealings in the Company’s shares on the Zimbabwe Stock
Exchange
With effect from 2 March 2015, all transactions in the Company’s
shares on the Zimbabwe Stock Exchange will be required to be settled
in dematerialised form, and share certificates will no longer be good
for delivery in respect of such transactions. The Company will shortly be
sending a circular to its registered shareholders on the Zimbabwe
branch register explaining the consequences of this and inviting them to
demateralise their certificated shareholdings through an Issuer-
Sponsored Nominee Programme. Shareholders on the Zimbabwe
branch register who have any enquiries about dematerialising their
holdings in the Company should refer to this circular (which is also
available on the Company’s website) or, in case of doubt, contact
Corpserve Registrars on +263 (0)4 751559/61.
Electronic communications and electronic
proxy appointment
The Company wrote to shareholders on its South African branch
register and on the principal and Namibian sections of its UK register
in November 2012 to inform them that it was moving to e-comms as
the default form of communication, in line with provisions in the UK
Companies Act 2006 and the Company’s Articles of Association.
Shareholders who wished to continue to receive physical copies of
shareholder communications, rather than accessing these from the
Company’s website, were required to notify the Company’s registrars
of their election to do so by 4 January 2013. A similar process was
followed, with different applicable dates, for new shareholders who
bought shares between November 2012 and 15 August 2014. Such
mailings will now take place for new shareholders annually.
A further exercise to extend these arrangements to shareholders on the
Malawi branch register took place during 2014. For the time being,
these arrangements have not been extended to apply to shareholders
on the Zimbabwe branch register, but the Company plans to keep the
possibility of doing so under review.
If you are currently still receiving documents by post, but would like to
receive notification of future communications from the Company by
email, please log on to our website, www.oldmutual.com, select
‘Investor Relations’, then ‘Shareholder Centre’, then click on
‘Shareholder investor centre’ and follow the instructions to log into the
Investor Centre. 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. Before you register, you will be asked to agree to the Terms
and Conditions for Electronic Communications 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.
Any election to receive documents electronically will generally remain in
force until you contact the Company’s Registrars (via the applicable
online address set out earlier in this section of the Report or otherwise)
to terminate or change such election.
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, which can be accessed in the AGM section
of the Shareholder Information part of our website.
Final dividend for the year ended 31 December 2014 and
timetable for payment
The Board is recommending a final dividend (the ‘Final Dividend’) for
the year ended 31 December 2014 of 6.25p per share, which will be
paid on 29 May 2015, subject to being approved by shareholders at
the Company’s 2015 Annual General Meeting. Shareholders on the
South African, Zimbabwe and Malawi branch registers and the
Namibian section of the principal register will be paid their local
currency cash equivalents of the Final Dividend under dividend access
trust or similar arrangements established in each country. Shareholders
who hold their shares through Euroclear Sweden AB, the Swedish
nominee, will be paid the cash equivalent of the Final Dividend in
Swedish kronor. Local currency cash equivalents of the Final Dividend
for all five territories will be determined by the Company using
exchange rates prevailing at the close of business on 9 April 2015 and
will be announced by the Company on 10 April 2015.
A scrip dividend alternative is not being made available in relation to
the Final Dividend and it will be settled wholly in cash.
Old Mutual plc
Annual Report and Accounts 2014
239
SHAREHOLDER
INFORMATION
continued
The full timetable for the Final Dividend is set out below.
Currency conversion date
Exchange rates announced
Last day to trade cum dividend for
shareholders on the branch registers in
South Africa, Malawi and Zimbabwe
and on the Namibian section of the
principal register
Ex-dividend date for shareholders on the
branch registers in South Africa, Malawi
and Zimbabwe and on the Namibian
section of the principal register
Transfers suspended between registers
Last day to trade cum dividend for
shareholders on the UK register
Ex-dividend date for shareholders on the
UK register
Record date (all locations)
Transfers between registers recommence
Annual General Meeting
Final Dividend Payment Date
Thursday, 9 April 2015
Friday, 10 April 2015
Friday, 17 April 2015
Monday, 20 April 2015
opening of business on
Monday, 20 April 2015
Wednesday, 22 April 2015
Thursday, 23 April 2015
close of business on
Friday, 24 April 2015
opening of business on
Monday, 27 April 2015
or (for South Africa)
Tuesday, 28 April 2015
Thursday, 14 May 2015
Friday, 29 May 2015
Share certificates for shareholders on the South African register may
not be dematerialised or rematerialised between 20 and 24 April 2015,
both dates inclusive, and transfers between the registers may not take
place during that period.
Financial calendar for the rest of 2015
The Company’s financial calendar for the rest of 2015 is as follows:
Annual General Meeting and First Quarter
Interim Management Statement
Interim results
Interim dividend payment date
Third Quarter Interim Management Statement
Final results for 2015
14 May 2015
6 August 2015
30 October 2015
4 November 2015
March 2016
240 Old Mutual plc
Annual Report and Accounts 2014
Forward-looking statements
This report contains certain forward-looking statements with respect to
Old Mutual plc’s and its subsidiaries’ plans and expectations relating to
their financial condition, performance and results. By their nature,
forward-looking statements involve risk and uncertainty because they relate
to future events and circumstances that are beyond Old Mutual plc’s control,
including, among other things, UK domestic and general economic and
business conditions, market-related risks such as fluctuations in interest
rates and exchange rates, policies and actions of regulatory authorities,
the impact of competition, inflation, deflation, the timing and impact of
other uncertainties or of future acquisitions or combinations within relevant
industries, as well as the impact of tax and other legislation and regulations
in territories where Old Mutual plc or its subsidiaries operate.
As a result, Old Mutual plc’s or its subsidiaries’ actual future financial
condition, performance and results may differ materially from the
plans and expectations set forth in such forward-looking statements.
Old Mutual plc undertakes no obligation to update any forward-looking
statements contained in this Report or any other forward-looking
statements that it may make.
Acknowledgements
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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
Millennium Bridge House
2 Lambeth Hill
London EC4V 4GG
www.oldmutual.com