Chief Executive's review

Our vision

Our vision is to be a premier international savings and wealth management business. This vision is built on a solid foundation of asset management and asset gathering expertise for which we have a heritage of over 150 years in both South Africa and Sweden.

Our primary objective as a Group is to look after people's money well. Our value proposition is built on offering our customers and their advisers access to top-quartile investment returns and excellent service through business models that offer choice and value for money.

Our strategy

Our strategy is based on growing value through diversified product offerings and operations. Our decentralised operating model allows a quick, relevant and effective response to changing customer needs, as well as industry regulation, at a local level. Centralised capital management and disciplined risk control bind together a powerful set of engines designed to deliver consistent growth for customers and shareholders.

The nature of the savings industry - and the Company's philosophy - is a long-term one. The transformation of the Company from a dominant South African life assurer to an internationally competitive, customer-focused financial services organisation has been a purposeful and thought-through journey that is by no means finished. As we continue along this path, the growing diversity of our business allows us to draw widely on our own experience and transfer solutions from one part of the Group to another, quickly and efficiently.

Following our acquisition of Skandia in 2006, our portfolio of businesses is now well placed to take advantage of four global trends that are shaping financial services markets internationally.

Transparency, choice and flexibility

The first of these is the move to greater choice, transparency and lower costs for customers. More than ever, customers are faced with a wide array of alternative investment products. The power of consumer choice for financial services puts pressure on us to respond appropriately with solutions most relevant to our customers' needs. The purchase of Skandia has given us access to its pioneering and leading open-architecture platform, specifically in the UK, Europe and Latin America, which strategically and technologically provides us with a competitive advantage.

Our strategy is based on disciplined organic and acquisitive growth, building value through diversity.

Changing demographics

These consumer needs are being driven predominantly by a second trend, which is the increasing longevity of many populations and the growing proportion of older people within those populations - the so-called 'baby-boomers'. Strategies for savings and wealth accumulation are changing globally as customers prepare for different lifestyles resulting from longer retirements. Old Mutual aspires to meet these changing needs and continues to offer new and innovative products to address these requirements.

Shifting investment philosophy

The third trend is the move away from traditional life products towards other investment solutions. Our affiliate model in the United States and our boutique asset management structure in South Africa (which has adopted the US approach) position us well to respond this trend. Increasingly, Old Mutual sees itself as an asset manager - looking after and growing clients' money, whether in the form of life-wrapped or straight investment products. Our experience across all product lines enables us to respond quickly and imaginatively and to manage margins effectively.

Outsourcing

Pressure on margins has reinforced the fourth trend, which is towards outsourcing. The Company has a strategy of 'being the best or buying the best'. If we are not able to deliver a core service or product at a competitive price, we will either build that capability internally (if that makes economic sense) or outsource the service or product concerned in order to benefit from scale and competence provided by best-of-breed third party suppliers.

Investment performance

These trends, while challenging, provide us with opportunities. Asset gathering and management increasingly depend on solutions that best serve the needs of customers. The essential ingredient that underpins our asset management business, is the delivery of market-beating investment performance. Old Mutual dedicates time and capital to creating environments that encourage and reward performance excellence. The result is positive net client cash flow - in our view the key measure of growth within our industry.

The combined effect of positive net client cash flow and good investment performance is a rise in the level of assets under management. Our business profits are produced as a result of the level of assets under management multiplied by margins on those assets less our expenses.

Our declared strategy when we listed on the London Stock Exchange in 1999 was to diversify our business geographically to avoid over-reliance on any one region. Life sales in Europe now account for 61% of our volumes, while 76% of our funds under management are today located in the United States and the UK. Although earnings are still predominantly generated in South Africa, profit streams from the United States and the UK are beginning to reflect our strategy.

We are not pursuing geographic diversity at any cost and we work constantly to identify those markets that are growing and profitable, and where demographics and the propensity to save are clearly evident.

Our Group strategy is expressed through five main themes that serve to rally our diverse businesses towards our vision of building a premier international savings and wealth management business:

1. Growth in assets

Our growth aspiration is underpinned by a belief that size is not a prerequisite for success, but rather an outcome that is ultimately aimed at benefitting our customers. By growing our assets we aim to be able to provide our customers with the best investment returns, as growth provides a larger base for spreading corporate costs. Our shareholders should also benefit, since greater funds under management allow us to borrow capital more cheaply. Superior investment performance is crucial for achieving strong net client cash flows, which in turn build our funds under management, the cornerstone of our performance metrics.

This sequence becomes the driver of our profit model: profit is generated through revenue (assets times our margins) less expenses. This simple yet effective model is starting to be recognised by analysts as an effective way of understanding the Group. It also keeps our management focused on what we believe our key drivers to be.

Over the past four years we have achieved strong international growth. We are confident that we can continue along this path over the long term by a combination of organic growth and acquisitions in current and new geographies. We have a solid base and strong brands in South Africa and the Nordic region on which to build. In the United Kingdom, Europe and the United States we are building robust and high-growth businesses by applying our strong investment management capabilities.

We are also investing in emerging markets that we believe will become substantial contributors to future growth and in particular are looking to grow our presence in Asia.

2. Business performance

Our shareholders require a fair return for their investment, so we balance growth in assets with a focus on our capital allocation and profitability. Enhancing our business performance also entails improved risk management and a drive to raise individual businesses' performance.

3. Knowledge-sharing

As indicated above, the world in which we operate is characterised by rapid change, both in economic terms and in terms of our customers' needs. We are responding to this by sharing knowledge, technologies and best practice across the Group. This allows our local businesses to adapt quickly to our clients' emerging needs and changes in the local and global environment.

Our Group is well positioned in terms of capabilities in both boutique and proprietary asset management and asset gathering models. It also has expertise in a diverse range of distribution approaches, many of which are reusable in different markets in which we do business.

4. Reputation

Our reputation is built upon our desire to be respected members of the communities in which we live and work. We express this desire through our corporate values, through the way we interact with our customers, investors, regulators, suppliers and each other. This is further supported through our active investment in the upliftment of our communities and care and preservation of our natural environments. These activities take place at a local level where we operate and in many cases actively involve our staff in their personal capacities.

Mindful of our role and responsibilities in the communities in which we do business, we have sharpened our focus on Corporate Responsibility and see this as a key area for further progress during 2008. For example, we launched the Masisizane (helping each other) Trust under the stewardship of Old Mutual South Africa during 2007. The Trust was funded with some of the proceeds of the sale of shares unclaimed after the demutualisation in 1999 and is aimed at supporting small and women-led businesses.

There is increasing interest in the Group's approach to the environment, human rights and social responsibility and it is clear that these factors are starting to play a growing role in our clients' investment decisions. We are putting in place practices and processes to ensure that our product solutions and management activities with respect to these critical environmental issues are relevant and appropriate. We describe our 2007 programme in more detail in the Corporate Responsibility section later in this report.

Locally, we monitor customer satisfaction in our operating businesses to ensure that we are providing proper levels of service. Our products are also regularly assessed to ensure that clients are receiving value for money.

5. Learning

Our business is built on the strength of our staff. We aim to employ, develop and retain the best people available in each of our markets. We invest in our people and particularly focus on building a deep and wide pipeline of management and leadership talent that reflects the diversity of our geographies.

Group Executive

In addition to the Chief Executive and the Group Finance Director, there are four other members of the Group Executive, who are shown on the right. The Group Executive meets regularly to address strategic issues, to review the Group's progress against its business plan for the year and to discuss other high-level matters affecting the Group's performance or prospects.

From left to right

Jim Sutcliffe Chief Executive
Jonathan Nicholls Group Finance Director
Rosie Harris Group Risk Director
Bob Head Group Director, Southern Africa
Scott Powers Chief Executive, Old Mutual US
Julian Roberts Chief Executive, Skandia

Business performance

Full details of the Group's financial performance during the year are contained in the Group Finance Director's report, which follows, but let me highlight some of the key developments and achievements of the past year.

Old Mutual implemented a programme of investment during 2007 to develop the Group and place the business on a sound footing for future growth. A significant amount was achieved in building scale and market share, and steps were taken to remain at the forefront of innovation and competitive within our markets.

Strong net client cash flow, a key indicator of business performance and a measure being increasingly adopted as a reporting yardstick by the financial services industry, was a feature of each of our businesses in 2007, in particular at US Asset Management.

While mutual fund sales were adversely affected by unfavourable market conditions in the second half, life sales overall were good.

Notwithstanding planned infrastructural investment, tight control on costs continued, leading to an increase in IFRS adjusted operating profit of 11%. Earnings per share grew by 12% and we produced a solid return on equity of 13.2%.

Our end-2008 target of £300 billion in funds under management remains firmly on track, with Group funds under management increasing by 18% to £279 billion during 2007 despite the problems that beset the markets toward the end of the year.

Regional review

Our European businesses showed impressive growth, and 2008 will mark the conclusion of the programme to integrate Skandia. The platform business in the UK continued to go from strength to strength, continuing to attract assets through its well-established Independent Financial Adviser (IFA) network. Skandia Europe and Latin America (ELAM) also benefitted from its portfolio approach designed to share practices across like regions, which resulted in strong unit-linked sales. While the competitive environment in Sweden continued to hamper margins, the latter part of the year saw a positive turnaround in sales. Overall, we believe that, with synergy targets on track, Skandia has been a very successful, value-accretive investment for the Group.

Investment in the retail distribution system, improvements in our retail offering and new marketing initiatives all helped drive sales at Old Mutual South Africa. With a strong stock market in the early part of the year, IFRS adjusted operating profit at this business grew by a healthy 23%. Corporate sales dropped slightly after some large single outflows relating to changing client investment mandates and some hesitancy over the introduction of the new boutique asset management model.

2007 was a milestone year for Nedbank. Management successfully achieved the company's four-year recovery targets in the first half, and established a revitalised working environment through investment in people, culture and values. This has provided Nedbank with a solid foundation on which to sustain its business performance and its credit and expense management in the more difficult trading conditions that are likely to prevail during the current year.

Mutual & Federal (M&F) suffered from a downturn in the underwriting cycle and a reduction in investment income. Although M&F is a solid business, we have stated that it is not core to our asset gathering and asset management strategy in South Africa and, toward the end of 2007 we announced that the Group was in discussions with Royal Bafokeng Holdings to sell Old Mutual's 75% stake in the company. The discussions continue and we hope to conclude them during the course of 2008.

Strong investment performance in the USA again delivered powerful net client cash flow, and asset management earnings grew strongly. Acadian Asset Management led the way, but there were also strong performances from Barrow, Hanley, Mewhinney & Strauss, Dwight Asset Management Company and Rogge Global Partners, and performance fees were particularly good at Campbell. The US Life business enjoyed exceptionally strong variable annuity sales in the second half at its Bermuda business and earnings showed a pleasing increase on the underlying trend in the first half. The US business was cash generative as planned.

Our Asia Pacific businesses continue to reflect the impressive growth of the region. Sales, the value of new business and the level of funds under management have grown strongly, and our increased focus on the region, including the recent establishment of a regional headquarters in Hong Kong, stands us in good stead for the medium term.

Our operating model

Our strategy is executed as near to the customer as possible, but within the guidelines of common Group-wide themes. Our businesses are empowered to decide the products, pricing and distribution options that best meet local customers' needs. They are also encouraged to grow strong local brands where appropriate, but aligned to and endorsed by the Old Mutual brand and its values.

At the centre we identify and facilitate cross-business synergies and knowledge-sharing opportunities and provide a Group-wide framework for governance, capital allocation, risk management, brand and talent management which sets common parameters for the local businesses.

Our values

All our businesses subscribe to the Group values of Integrity, Respect, Accountability and Pushing Beyond Boundaries. These values form the glue that helps to bind the Group together and we also expect all our employees to practise and be judged by these values.

Summary and outlook

During 2007, in conditions that became very challenging during the second half of the year, we focused on building our capabilities across our international portfolio. I am delighted that during this period of investment we were able to produce strong earnings growth. Particularly pleasing was the continued delivery of excellent investment performance across the Group. This stimulated good growth in net client cash flows and funds under management, which will stand us in good stead going forward.

Looking ahead, while currency movements and the continued turbulent state of global markets will have an impact on earnings, diversity in product mix and geography, coupled with our robust capital position and operating momentum in our businesses, give me confidence that we will deliver a resilient performance in 2008.

Jim Sutcliffe
Chief Executive
27 February 2008