Annual financial statements. Contents. Page. 2 to 10. Corporate governance. Directors' responsibility for annual financial statements

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2 Annual financial statements Contents Page Corporate governance Directors' responsibility for annual financial statements Report by Company Secretary Report of the independent auditors Directors' report Report of the Statutory Actuary Income statement Balance sheet Statement of changes in equity shareholders' fund Cash flow statement Notes to the annual financial statements 2 to and to 47 Registration no. 1999/004643/06 1

3 Corporate governance The Group is committed to the objective of achieving high standards of corporate governance and internal control. The Board of Directors endorses the code of corporate practice and conduct recommended in the King Report on corporate governance for South Africa and endeavours to conduct its affairs in the best interests of all its stakeholders, in so far as it may be applicable and relevant to a whollyowned subsidiary whose ultimate holding company is required to comply with listing requirements of various stock exchanges. The Board of Directors Role and composition The Company has a unitary board of 17 directors, the majority of whom are independent of management. The Board currently comprises 13 nonexecutive directors, two of whom are executive directors of the ultimate holding company, and four executive directors. Full details are set out in the directors' report. The selection and appointment of directors is a matter for the Board as a whole, assisted by recommendations from the Corporate Governance and Nomination Committee. Emphasis is placed on achieving a balance of skills, experience and knowledge. A formal orientation programme exists to familiarise incoming directors with the Company's operations, senior management and its business environment and to induct them in their fiduciary duties and responsibilities. New directors may hold office only until the next annual general meeting at which they retire and become available for reelection by shareholders on the recommendation of the Corporate Governance and Nomination Committee and of the Board. All directors are subject to retirement by rotation and reelection by shareholders at least once every three years. Executive directors have no fixed term of appointment, but are subject to shortterm notice periods. They retire from the Board at age 61, while nonexecutive directors retire at age 70. The Board meets regularly, having met six times in including sessions devoted to strategy and business planning. Selfevaluation reviews are conducted at appropriate intervals. It may also meet as and when required to deal with specific matters that may arise between scheduled meetings. All directors have access to management, including the Company Secretary, and to such information as is needed to carry out their duties and responsibilities fully and effectively. The Company Secretary provides support to the Board to ensure its effective functioning and proper administration of board proceedings. Chairman and Managing Director The roles of the Chairman and Managing Director are separate. The Board is led by the Chairman, Mr Levett, a nonexecutive director, and Mr Clewlow, also a nonexecutive director, as Deputy Chairman. The executive management of the Company is the responsibility of the Managing Director, Mr Sparks, and his Deputy Managing Directors, Messrs de Beyer, Hanratty and Moyo. Board Committees All Board committees have formally delegated terms of reference and report to the Board and to the respective board committees of the ultimate holding company as required. The committees are chaired by independent or nonexecutive directors, supported by the Company Secretary, and are free to take independent professional advice as and when necessary. Audit, Risk and Compliance Committee This committee, chaired by Dr Konar, an independent director, and comprising only nonexecutive directors, met four times during the year with senior management, which included the Managing Directors, senior executive management, the Statutory Actuary, the Chief Internal Auditor, the Compliance Officer and the Risk Manager. The independent auditors and internal auditors attend these meetings and have unrestricted access to the committee and to its chairman. The committee serves in an advisory capacity to the Board and assists the directors to discharge their duties relating to the safeguarding of assets, the operation of adequate systems, risk management and controls, the review of financial information and the preparation of the annual financial statements. This includes satisfying the Board that adequate internal, operating and financial controls are in place and that material corporate risks have been identified and are being effectively managed and monitored. The committee also evaluates the adequacy and efficiency of the actuarial valuation process. 2

4 Corporate governance (continued) The Board of Directors (continued) Board Committees (continued) Remuneration Committee The Remuneration Committee, chaired by Mr Clewlow, a nonexecutive director, and comprising only nonexecutive directors, meets as often as necessary, and met three times during the year. The committee determines the remuneration, incentive arrangements, profit participation and benefits of the Deputy Managing Directors and executive management. It makes recommendations on the remuneration of nonexecutive directors and on the grant of awards under the share incentive scheme. The remuneration of the Managing Director is determined by the Remuneration Committee of Old Mutual plc. Specific emphasis is placed on incentive payments and longerterm remuneration structures. In order to promote an identity of interests with shareholders, share incentives are considered to be an integral and vital element of remuneration structures. At all times attention is paid to the retention of key executives. Corporate Governance and Nomination Committee This committee, chaired by Prof van Wyk, an independent nonexecutive director, meets as often as necessary and met twice during the year. Its function is to regularly review the structure, size, composition and mix of skills and experience of the Board and its committees and to make recommendations to the Board. The committee identifies and nominates candidates to fill board and committee vacancies, reviews the continuation in service of any director who has reached the end of their term of office or retirement age and considers directors retiring by rotation for reelection. The committee also assists the Board in ensuring that an adequate and effective process of corporate governance is established and maintained. Environment Committee This committee provides input into the development of business strategy in respect of external stakeholders, in particular government relations and transformation issues. It plays an important role at the time of strategy and plan creation, and is expected to review and input into the consideration of the customer, government and regulatory environment. It is chaired by Prof Gerwel, an independent nonexecutive director, and includes executive and nonexecutive directors. It met four times during the past year. Strategic Projects Management Committee This committee, chaired by Mr van Niekerk, a nonexecutive director, provides input on strategic initiatives, reviews their progress, provides input at the time of strategy and business plan creation and acts as a sounding board for management s ideas. The committee includes executive directors and meets on an ad hoc basis as the requirements of the projects within its scope require, and met four times during. Other Committees The board has in the past appointed ad hoc committees to deal with specific matters as the need has arisen. Such a committee was established during to consider a matter involving policyholders interests. It was chaired by Prof van Wyk, an independent nonexecutive director, and comprised only nonexecutive directors. It met three times and was then disbanded. 3

5 Corporate governance (continued) The Board of Directors (continued) Directors' emoluments R' 000 Directors' emoluments Nonexecutive directors Fees Executive directors Basic salaries Bonuses and performance related payments Retirement, medical and other benefits Total directors' emoluments Fees paid to nonexecutive directors were as follows: W A M Clewlow G J Gerwel P G Joubert D Konar R C M Laubscher M J Levett C F Liebenberg A A Maule M Morobe W A Mgoqi P F Nhleko J V F Roberts J H Sutcliffe G S van Niekerk A H van Wyk Basic salaries Bonuses and performance related payments Retirement, medical and other benefits Total emoluments Executive directors' total emoluments comprise: R J A Sparks P G de Beyer M P Moyo

6 Corporate governance (continued) R '000 Directors' emoluments (continued) Basic salaries Bonuses and performance related payments Retirement, medical and other benefits Total emoluments R J A Sparks P G de Beyer M P Moyo Directors' interests under Employee Share Plans Details of the interests under Employee Share Plans of nonexecutive directors of the Company who are also directors of Old Mutual plc are dealt with in the Annual Report of Old Mutual plc. Details of the executive directors' share interests arising from the OMGA Share Incentive Scheme and outstanding at 31 December are set out below: Offer price Number of shares outstanding Date of grant Gains on current year settlements Executive directors R J A Sparks /01/ /06/ /10/ /10/ /04/1999 P G de Beyer /08/ /10/ /10/ /10/1998 M P Moyo /10/ /08/ /10/ /10/ Rights under the Old Mutual Group Achievements Share Incentive Scheme (OMGA) were awarded based on grade level and annual pensionable earnings, but are not linked to future performance criteria. The major assets of OMGA are two endowment policies with the Company and listed shares in Old Mutual plc. Delivery or disposal of the shares is only permitted at the earliest, as to one third at the end of each of three, four and five years from, and must in any event take place within six years from, the date of grant. 5

7 Corporate governance (continued) R '000 Directors' interests under Employee Share Plans (continued) The following share entitlements in Old Mutual plc were outstanding in favour of executive directors of the Company under the Company's participation in the Old Mutual plc Group's Share Option and Deferred Delivery Plan at 31 December : Offer price Number of shares outstanding Dates deliverable Gains on current year settlements Executive directors R J A Sparks /03/ 14/03/ /10/ 16/10/ /03/ /03/ /03/ /03/ /02/ /02/2009 P G de Beyer M P Moyo /03/ 14/03/ /10/ 16/10/ /03/ /03/ /03/ /03/ /02/ /02/ /03/ 14/03/ /10/ 16/10/ /03/ /03/ /03/ /03/ /02/ /02/ Subject to the fulfilment of escalating offer prices/performance targets prescribed by the Remuneration Committee, under which: the price at delivery for shares granted on 14 March and 16 October 2000, is the offer price escalated by 6.5% per annum, compounded monthly, until the date of delivery. share entitlements granted on 8 March 2001 will only be deliverable if the Old Mutual plc Group's earnings per share increases by prescribed factors of between 9% and 15% in excess of UK RPI over the period between 1 January 2001 and 31 December. The basic factor of 9% over UK RPI applies to multiples of up to one times basic salary, with a sliding scale applicable to multiples of up to three times basic salary. 50% of the share entitlements granted on 4 March will only be deliverable if the Old Mutual plc Group's earnings per share increases by prescribed factors of between 9% and 15% in excess of UK RPI over the period between 1 January and 31 December 2004, and 50% of the allocation of the share entitlements granted on 4 March will only be deliverable if the Old Mutual plc Group's earnings per share expressed in SA Rands increases by prescribed factors of between 9% and 15% in excess of SA CPI over the period between 1 January and 31 December The basic factor of 9% over UK RPI and SA CPI applies to multiples of up to one times basic salary, with a sliding scale applicable to multiples of up to three times basic salary. 50% of the share entitlements granted on 26 February will only be deliverable if the Old Mutual plc Group's earnings per share increases by prescribed factors of between 9% and 15% in excess of UK RPI over the period between 1 January and 31 December 2005, and 50% of the allocation of the share entitlements granted on 26 February will only be deliverable if the Old Mutual plc Group's earnings per share expressed in SA Rands increases by prescribed factors of between 9% and 15% in excess of SA CPI over the period between 1 January and 31 December The basic factor of 9% over UK RPI and SA CPI applies to multiples of up to one times basic salary, with a sliding scale applicable to multiples of up to three times basic salary. 6

8 Corporate governance (continued) R '000 Directors' interests under Employee Share Plans (continued) The following share awards in Old Mutual plc were outstanding in favour of executive directors of the Company under the Company's participation in the Old Mutual plc Group's Restricted Share Plan at 31 December : Number of shares outstanding Dates exercisable Gains on current year settlements Executive directors M P Moyo /02/ /02/2008 Total In, executives were entitled to elect to receive contingent awards of shares, subject to a three year waiting period, as an alternative to grants under the Deferred Delivery Plan. Internal controls The Board acknowledges its overall responsibility for the Company's system of internal control and for reviewing its effectiveness, whilst executive management is accountable to the Board for monitoring the system of internal control and for providing assurance to the Board that it has done so. Executive management has implemented an internal control system designed to facilitate effective and efficient operation of the Company aimed at enabling management to respond appropriately to significant business, operational, financial, compliance and other risks to achieving the Company's business objectives. These include protecting policyholders' interests, safeguarding shareholders' investments, safeguarding assets from inappropriate use or from loss and fraud, and ensuring that liabilities are identified and managed. The system of internal control also helps to ensure the quality of internal and external reporting, compliance with applicable laws and regulations, and internal policies with respect to the conduct of business. The Company's internal control system is designed to manage, rather than eliminate, the risk of failure to achieve the Company's business objectives, and can only provide reasonable, and not absolute, assurance against material misstatement or The Company has an internal audit function. It has a specific mandate from the Audit, Risk and Compliance Committee and independently appraises the Company's internal controls and accounting records, reporting its findings to management as well as to the Audit, Risk and Compliance Committee. As part of the system of internal control, the Company's internal audit function conducts operational, financial and specific audits and coordinates audit coverage with the independent auditors. The key components of the Company's overall system of internal control currently in operation and the process of review by the directors are set out below: Actuarial Review Committee The Actuarial Review Committee has been constituted as a subcommittee of the Old Mutual plc Audit Committee, and consists of nonexecutive and executive directors of Old Mutual plc. The Statutory Actuary also attends its meetings. It reviews the suitability of the actuarial valuation basis and the accuracy of the published financial results. A separate report on the actuarial bases and results is submitted to and reviewed by this committee, and by the Audit, Risk and Compliance Committee. Credit Committee The Company has established policies, procedures and standards to limit the concentration of credit risk to any counterparty and to ensure that overall credit risk is maintained at an acceptable level. Credit exposures are continuously monitored and are subject to a formal quarterly review by a Credit Committee, which comprises senior management from asset management, legal, banking and corporate operations of the Old Mutual (South Africa) Limited Group of companies. 7

9 Corporate governance (continued) Internal controls (continued) Management structures The Company has an appropriate organisational structure for planning, executing, controlling and monitoring its business operations in order to achieve the strategic business objectives approved by the Board. The management of the Company is delegated to the executive directors in accordance with the articles of association of the Company, which also governs the conduct of executive managers of the underlying operations of the Company. The executive managers are accountable for the control, conduct and performance of their businesses within the agreed business strategy. Business planning The Board regularly reviews the Company's strategic direction and the executive directors consider the strategy for the individual lines of business with executive management on a planned basis. Annual budgets and threeyear strategic plans are prepared, with performance targets for each line of business set by the executive directors in conjunction with executive managers. The overall business plan for the Company is then reviewed by the Board and the Board of Old Mutual plc in light of the Company and the Old Mutual plc Group's objectives. Performance against plan is regularly monitored at Board level. Forecasts are done on a regular basis to combine the business plan and actual figures to give the Board a better reflection of the Company's financial position, and what can be expected for the remaining portion of the year. This will also give the Board a clear indication of what needs to be done in order to meet the Company's objectives. Monitoring of controls The Board has reviewed the effectiveness of the system of internal control during the year. The key processes supporting the Board's regular and annual review processes are summarised below. The executive directors, together with executive management, report to the Board on behalf of their respective businesses on major changes in the business and the external environment that affect their respective businesses. The Board receives monthly performance information, which includes key performance and risk indicators. As part of the Board's annual review process, each executive director is asked to complete a letter of assurance confirming compliance throughout the year and up to the date of approval of the Old Mutual plc Group Annual Report with the Old Mutual plc Group's Scheme of Delegated Authority and with the risk management and control policies. The results of these letters are reported to the Audit, Risk and Compliance Committee. These letters of assurance are supported by regularly updated risk profiles of each business unit, combined with a process of control selfassessment. Management teams in each business unit have applied the Criteria of Control Model (CoCo) developed by the Canadian Institute of Chartered Accountants, and have produced a control integrity profile for each business unit. This process is coordinated and facilitated by the Risk Function. The Company's internal audit function carries out regular riskfocused reviews of the system of internal control. The internal audit function operates independently of executive management, reporting, for daytoday operational purposes only, to the Executive General Manager Finance, with unrestricted access to the Chairman of the Audit, Risk and Compliance Committee. An Internal Audit Charter, reviewed and approved by the Old Mutual plc Audit Committee, governs internal audit activity within the Company and the Group. Progress against the plan is reported regularly to the Audit, Risk and Compliance Committee. Control failures are reported in terms of an escalation protocol to the appropriate level of risk and audit committee, where rectification procedures and progress are closely monitored. Planned corrective actions are independently monitored for timely completion by internal audit and, as appropriate, by the Audit, Risk and Compliance Committee and Board. Employment policies The internal controls are based on established policies and procedures, are applied by trained, skilled personnel with an appropriate segregation of duties and are monitored throughout the Company. All employees are required to maintain the highest ethical standards in ensuring that the Company's business practices are conducted in a manner which in all reasonable circumstances is above reproach. The Company's employment policies take the abovementioned into consideration and are regularly reviewed and updated to ensure their appropriateness. They are further designed to promote a working environment which supports the recruitment and retention of highly effective employees with a high ethical and moral standard. 8

10 Corporate governance (continued) Employment policies (continued) The following key human resource values and policies are promoted throughout the Company: the Company considers that the establishment of the right priorities and environment for its people is essential for their performance and development and to the future of the Company; employees are recruited and promoted on the basis of their suitability for the job, without discrimination in terms of race, religion, national origin, colour, gender, age, marital status, sexual orientation or disability unrelated to the task at hand. This principle is balanced against the requirement to address the issues of employment equity, and the Company's practices are cognisant of this; the Company values the involvement of its employees and continues to keep them informed on matters affecting them as employees and factors relevant to the performance of the Company. Employee involvement and consultation are managed in a number of ways, including inhouse publications, briefings, road shows and intranet. In many parts of the business employee representatives are consulted regularly on a wide range of issues affecting their current and future interests. Where this is not the case, change management processes and capability are being developed to ensure the inclusion of staff in changes affecting them; the efforts of the individual in helping to create the success of the Company should be appropriately recognised. Remuneration systems are structured to recognise both the contribution of individuals and the performance of the sector of the business in which they work; the training and development of all employees, including the directors, remains a priority. The Old Mutual Business School was founded, because the process of developing business staff and leaders requires a holistic learning experience that is aligned with core competencies, business objectives and Company strategies, thereby ensuring that the growth and development of the organisation remains sustainable. Risk management and compliance Executive management is responsible for the identification, evaluation and management of the risks applicable to their areas of business. These risks are assessed on a regular basis and may be associated with a variety of internal and external sources. Executive Management reports to the Audit, Risk and Compliance Committee and to the Old Mutual plc Group Compliance and Risk Management Committee on significant risks to the achievement of the Company's business objectives and instances of significant control failures. Life assurance Underwriting risk is controlled by underwriting principles governing product repricing procedures and authority limits. The underwriting process takes into account actual and prospective mortality, morbidity and expense experience. The impact of HIV/AIDS is mitigated wherever possible by writing products that allow for repricing on a regular basis or are priced to allow for the expected effects of AIDS. The Company also conducts HIV and other tests for lives insured above certain values and offers reduced premiums for those willing to undergo regular testing. For fixed annuities, market risks are managed by investing in fixed interest securities with a duration closely corresponding to those liabilities. Market risks on policies where the terms are guaranteed in advance and the investment risk is carried by the shareholders, principally reside in the South African guaranteed nonprofit annuity book, which is closely matched with gilts and semigilts. Other nonprofit policies are also suitably matched through comprehensive investment guidelines. Market risks on withprofit policies, where investment risk is shared, are minimised by appropriate bonus declaration practices. Equity price risk and interest rate risk (on value of securities) are modelled by the Company's risk based capital practices, which require sufficient capital to be held by the Company in excess of the statutory minimum to allow the Company to manage significant equity exposures. Credit risk is monitored by Credit Committee covering life and third party funds, which have established appropriate exposure limits. Governance of Smoothed Bonus policyholder funds Smoothed bonus products constitute a significant proportion of the Company's business. Because of the nature of this business, specific steps are taken to ensure that policyholder funds in respect of smoothed bonus business are managed in the interests of the policyholders concerned. 9

11 Corporate governance (continued) Governance of Smoothed Bonus policyholder funds (continued) The following are some of the steps that are taken: There is a clear separation of shareholder and policyholder funds. The assets within the shareholder and policyholder funds are managed by different portfolio managers, in terms of different investment mandates. The portfolio manager responsible for the policyholder funds has been clearly instructed that all investment decisions taken within the policyholder funds are to be in the longerterm best interest of policyholders, within the constraints of specified investment mandates. Each product portfolio has an investment mandate, that sets out the mandate for that product portfolio, based on the nature of that product s liability, particularly the nature of any investment guarantees that are provided. Amongst others, the mandate specifies which asset classes may be held, and in what proportions. For products with fully guaranteed benefits (such as the level annuity portfolio) particular care is taken to ensure that assets match liabilities as closely as possible. In addition to the limitation specified in the Longterm Insurance Act Investment Regulations, there are further selfimposed limits on investments in associated companies of the Old Mutual Group within each policyholder portfolio. Major investments in Old Mutual Group companies (such as in Nedcor and Mutual & Federal) and loans to other companies in the Group (such as to Old Mutual plc) are predominantly held in shareholder funds. Policyholder funds may, from time to time, have some limited exposure to such investments as part of their normal portfolio investments. All potential conflicts of interest arising out of proposals that policyholder funds invest in a company or fund in which shareholders could have an interest that could conflict with the policyholders interest, are disclosed to the Statutory Actuary, and if material are approved by the Board. Any such transactions are conducted on armslength terms, and only when it is clearly demonstrated that such investments are in the interests of policyholders. The portfolio manager produces a monthly report covering amongst others the structure of each portfolio relative to its mandate, investment performance relative to benchmarks, purchases and sales, any special investment opportunities that arose and how these were equitably allocated between portfolios, any potential conflicts of interest that arose and how these were dealt with, and any investment activity in associated companies. The method of allocation of profits and investment returns between policyholders and shareholders is clearly specified, and smoothed bonus policyholder funds are credited (via bonus stabilisation reserves) with the full investment return earned on their funds, less specified charges. Any profit allocated to shareholder funds is only transferred from policyholder funds on the recommendation of the Statutory Actuary, following an actuarial valuation. Such transfers are always subject to the assets in the policyholder funds remaining sufficient to cover all the corresponding liabilities as determined by the Statutory Actuary on the valuation date. These liabilities include provision for any guarantees that may apply. With each actuarial valuation, a detailed analysis of profit is done, which confirms that there are no material errors or inconsistencies in the valuation, and that valuation assumptions are appropriate. The Company pays particular attention to ensuring that the declaration of bonuses is done in a responsible manner, such that sufficient reserves are retained for bonus smoothing purposes, and that sufficient reserves and capital are maintained to meet policy benefits. The way in which the Company manages these products, ensures that information is produced on the financial strength of its smoothed bonus funds, and their ability to pay bonuses at an individual fund level. This information is carefully considered whenever bonuses are declared, and is monitored regularly throughout the year. All investment returns credited to policyholder funds that are not declared as bonuses are retained in bonus stabilisation reserves, which may only be used to support subsequent bonus declarations. Going concern The Board has satisfied itself that the Company has adequate resources to continue in operation for the foreseeable future. The Company's financial statements have accordingly been prepared on a going concern basis. Corporate citizenship and nonfinancial reporting The broader Old Mutual Group in South Africa publishes a separate annual corporate citizenship report on its social, transformation, ethical, safety, health and environmental policies and practices. This report also covers the financial benefits delivered to customers, employees, government and shareholders. The Group subscribes to a code of ethics which is included in the corporate citizenship report. 10

12 Directors' responsibility for the annual financial statements The directors are responsible for monitoring the preparation and integrity of the annual financial statements and related information included in this annual report. In order for the Board to discharge its responsibilities, management has developed and continues to maintain a system of internal control. The Board has ultimate responsibility for the system of internal control and reviews its operation, primarily through the Audit, Risk and Compliance Committee and various other risk monitoring committees. The annual financial statements are prepared in accordance with statements of South African Generally Accepted Accounting Practice and incorporate disclosure in line with the accounting and corporate governance philosophy of the Company. They are based on appropriate accounting policies consistently applied and supported by reasonable and prudent judgements and estimates. The Board has satisfied itself that the Company has adequate resources to continue in operation for the foreseeable future. The Company's annual financial statements have accordingly been prepared on a going concern basis. The annual financial statements set out on pages 13 to 47 were approved by the Board of Directors on 13 February 2004 and are signed on its behalf by: M J Levett R J A Sparks Chairman Managing Director Report by the Company Secretary I hereby certify that, to the best of my knowledge and belief, the Company has lodged with the Registrar of Companies all such returns as are required of it in terms of section 268G(d) of the Companies Act 1973, as amended, for the year ended 31 December and that all such returns are true, correct and up to date. J L Cowburn Company Secretary 13 February

13 Report of the independent auditors To the members of We have audited the annual financial statements of set out on pages 13 to 47. These annual financial statements are the responsibility of the Company's directors. Our responsibility is to express an opinion on these annual financial statements based on our audit. Scope We conducted our audit in accordance with statements of South African Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance that the financial statements are free of material misstatement. An audit includes: examining, on a test basis, evidence supporting the amounts and disclosures in the annual financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. Audit opinion In our opinion, the annual financial statements fairly present, in all material respects, the financial position of the Company at 31 December and the results of its operations and cash flows for the year then ended in accordance with South African statements of Generally Accepted Accounting Practice, and in the manner required by the Companies Act in South Africa. KPMG Inc. Registered Accountants and Auditors Chartered Accountants (SA) Cape Town T H Bashall Director 13 February

14 Directors' report The directors of have pleasure in submitting their report on the annual financial statements. Business activities The principal activity of the Company is the transaction of all classes of life assurance and retirement funding business. Results of operations The operating results and financial position of the Company are set out in the income statement, balance sheet, statement of changes in equity shareholders' fund, cash flow statement and accompanying notes. Consolidated annual financial statements Consolidated annual financial statements have not been prepared as the Company is a whollyowned subsidiary of another South African company. The Company is ultimately whollyowned by Old Mutual plc, which is itself registered in South Africa as an external company and produces consolidated financial statements which incorporate the results of the Company and its subsidiaries. These consolidated financial statements can be obtained directly from Old Mutual plc, registered office, 5th floor, Old Mutual Place, 2 Lambeth Hill, London, EC4V 4GG, United Kingdom. Holding company The Company is a whollyowned subsidiary of Old Mutual Life Holdings (South Africa) Limited. The ultimate holding company is Old Mutual plc, which is incorporated in the United Kingdom and listed on the London, Malawi, Namibia and Zimbabwe stock exchanges and on the JSE Securities Exchange South Africa. Subsidiaries Details of the Company's interest in its principal subsidiaries are set out in note 25. Share capital There was no change in the authorised or issued ordinary or preference share capital of the Company. Dividends Ordinary shares Dividends on ordinary shares amounting to R1 035 million ( : R900 million) were declared during the year. Preference shares Dividends on preference shares amounting to R959 million ( : R100) were declared during the year. Post balance sheet event Details relating to a post balance sheet event which occurred on 20 January 2004 are set out in note

15 Directors' report (continued) Directors Mr Joubert retired as a director on 24 July, on 8 December, Mr Laubscher resigned as a director. Mr Hanratty was appointed Deputy Managing Director from 1 January The directors currently holding office are: Nonexecutive directors M J Levett (Chairman) * W A M Clewlow (Deputy Chairman) * C F Liebenberg * J V F Roberts (British) * J H Sutcliffe (British) * G S van Niekerk Executive directors R J A Sparks (Managing Director) P G de Beyer (Deputy Managing Director) P B Hanratty (Deputy Managing Director) (Irish) M P Moyo (Deputy Managing Director) Independent nonexecutive directors G J Gerwel D Konar Member of the Audit, Risk and Compliance Committee A A Maule Member of the Remuneration Committee W A Mgoqi Member of the Corporate Governance and Nomination Committee M Morobe Member of the Environment Committee P F Nhleko Member of the Strategic Projects Management Committee A H van Wyk * Director of Old Mutual plc In terms of the Company's Articles of Association, Prof Gerwel and Messrs Clewlow, Hanratty, Levett, Morobe, Roberts and Sparks retire at the forthcoming Annual General Meeting but, being eligible, and recommended by the Board, offer themselves for reelection. Company Secretary Mr J L Cowburn is the Company Secretary. Business address: Mutualpark Postal address: PO Box 66 Jan Smuts Drive Cape Town Pinelands

16 Report of the Statutory Actuary I have conducted an actuarial review of the Company as at 31 December, according to applicable guidelines issued by the Actuarial Society of South Africa. In particular, the valuation was performed using the Financial Soundness Valuation method, assets and liabilities have been valued on bases that are consistent with each other and policyholders reasonable benefit expectations have been taken into account in valuing policy liabilities. Further notes to this report, including a description of the valuation basis, are provided in note 2 to the annual financial statements, which can be found on pages 25 to 28. Actuarial balance sheet Total assets per balance sheet Total value of liabilities Actuarial value of policy liabilities Provisions and current liabilities Excess of assets over liabilities Statutory capital adequacy requirements Ratio of excess assets to statutory capital adequacy requirements The change in the excess assets has arisen from the following main sources: Investment income on excess assets Realised and unrealised gains and losses on excess assets Operating profit before tax (excl. the effect of changes in the valuation basis) Changes in valuation basis Taxation Deferred taxation net capital (losses)/gains Total earnings Dividends ( ) ( ) (5 796) (3 959) ( 116) (1 070) ( 212) ( 606) (1 994) ( ) ( ) (5 881) (5 620) (1 299) 624 (1 575) ( 900) Total decrease in excess assets (2 600) (2 475) Certification of financial position I hereby certify that: the valuation of the Company as at 31 December, the results of which are summarised above, has been conducted in accordance with the Actuarial Society of South Africa s Professional Guidance Note 104 and related Addendum; the valuation of liabilities includes a reserve for Minimum Investment Return Guarantees in accordance with the Actuarial Society of South Africa s Professional Guidance Note 110; this Statutory Actuary s Report has been produced in accordance with the Actuarial Society of South Africa s Professional Guidance Note 103; this Statutory Actuary s report, read together with the annual financial statements, fairly presents the financial position of the Company as at the valuation date; and the Company was financially sound as at the valuation date, and in my opinion is likely to remain financially sound for the foreseeable future. G S Palser Statutory Actuary BBusSc (Hons), FIA, FASSA Cape Town 13 February

17 Income statement Notes Revenue Operating profit Other shareholder income Operating income before taxation and investment income Investment income Profit on ordinary activities before taxation Taxation 6 (1 070) (1 299) Profit for the year

18 Balance sheet at 31 December Assets Notes Noncurrent assets Investments Investments in group undertakings Other financial investment assets Investment property Property, plant and equipment Intangible assets Reinsurer's share of liabilities in respect of contracts with policyholders Deferred taxation asset Current assets Net outstanding premiums, accrued investment income and other debtors Amounts due by group companies Cash and cash equivalents Total assets Equity and liabilities Equity shareholders' fund Share capital and premium Revaluation reserve (1 245) Distributable reserve Noncurrent liabilities Liabilities in respect of contracts with policyholders Insurance contracts Investment contracts Provisions Current liabilities Outstanding claims, policyholders' benefits and other creditors Amounts due to group companies Taxation Total equity and liabilities

19 Statement of changes in equity shareholders' fund Share capital and premium Revaluation reserve Distributable reserve Total Equity shareholders' fund at beginning of year Unrealised revaluation reserve Deferred taxation net capital losses Profit for the year Dividends (3 109) ( 212) (1 994) (3 109) ( 212) (1 994) Equity shareholders' fund at end of year (1 245) Equity shareholders' fund at beginning of year Unrealised revaluation reserve Deferred taxation net capital gains Profit for the year Dividends (5 862) ( 900) (5 862) ( 900) Equity shareholders' fund at end of year

20 Cash flow statement Notes Net cash outflow from operating activities (1 146) (3 875) Cash generated by operations Taxation paid 17 (1 457) (2 077) Dividends paid 18 (1 994) (1 884) Net cash inflow from investing activities Investments in group undertakings 817 (5 857) Other financial investment assets Investment properties Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year

21 Notes to the annual financial statements 1 Accounting policies The financial statements incorporate the principal accounting policies set out below, which are consistent with those adopted in the previous financial year, other than in respect of the introduction of AC133, as described below. 1.1 Statement of compliance The financial statements are prepared in accordance with South African statements of Generally Accepted Accounting Practice and the requirements of the South African Companies Act, The financial statements have been restated to reflect the introduction of Statement of Generally Accepted Accounting Practice AC133 Financial Instruments: Recognition and Measurement, which is applicable for all accounting periods ending on or after 1 July. With regard to the recognition and measurement of financial assets and noninsurance financial liabilities, the Company had previously adopted the principles in AC133 in prior year financial statements and therefore the impact of implementation was limited to presentational issues only. With regard to the recognition of liabilities arising under contracts with policyholders, certain of the Company s insurance contracts have been reclassified as investment contracts, in accordance with the guidance issued by the South African Institute of Chartered Accountants on the application of AC133 to liabilities arising from longterm insurance contracts, together with the Addendum to PGN104 issued by the Actuarial Society of South Africa. With regard to the measurement of liabilities under contracts with policyholders the following valuation approach has been adopted: With respect to insurance contracts and investment contracts with discretionary participating contracts, these continue to be valued using the Financial Soundness Valuation method, in accordance with PGN104 issued by the Actuarial Society of South Africa; With respect to other investment contracts, these are valued at fair value, as set out in AC133 and the Addendum to PGN104. A draft international financial reporting standard on insurance contracts (ED5) was issued by the International Accounting Standards Board in July. ED5 proposes limited improvements to insurance companies' existing accounting practices for insurance contracts for the timebeing in the absence of a full international recognition and measurement standard. ED5 contains guidance on the definition of insurance contracts in IAS32 and 39, and the application of IAS39 to those contracts which are classified as investment contracts. The guidance issued by the South African Institute of Chartered Accountants and the Actuarial Society of South Africa was prepared taking account of the guidance that was anticipated to be contained within ED5, but with reference to the fact that the exposure draft would not be expected to be issued in final form until 2004 and could be subject to significant change. The Company's future financial statements could therefore be significantly impacted as a result. 1.2 Basis of preparation The annual financial statements incorporate the assets, liabilities and results of the Company. No consolidated financial statements are presented on the basis that the Company is a wholly owned subsidiary. Shares in subsidiaries and associates are treated as financial instruments and accounted for in accordance with the policy for financial instruments set out below. For the purpose of the analysis of financial assets, investments in the shares of subsidiaries are reclassified according to the underlying assets held by those subsidiaries. 1.3 Revenue Revenue comprises amounts receivable in respect of insurance contracts. 1.4 Premium income and benefits paid The presentation of amounts received and paid in respect of contracts with policyholders has changed from prior years. 20

22 1 Accounting policies (continued) 1.4 Premium income and benefits paid (continued) Premiums in respect of insurance contracts are recognised as revenue when they are receivable. Those that are classified as investment contracts are treated as deposits. Benefits paid on insurance contracts, and withdrawals on investment contracts, reflect the cost of all claims arising in the year. Death claims and surrenders represent those notified up to the balance sheet date, and maturities and annuities are recognised as they fall due for payment. Premiums and benefits are shown net of reinsurance. 1.5 Investment income Dividends receivable are recognised as income on the exdividend date. Interest is recorded on the effective yield basis and net rental income from property investments is recorded on an accrual basis. Shares received in terms of capitalisation share awards, including those where there is an option to receive a cash dividend, are accounted for as dividend income. 1.6 Employee benefits Retirement benefit costs Contributions to the Company s defined contribution scheme are recognised as an expense as they are incurred. In respect of the Company s defined benefit scheme, the Projected Unit Credit Method is used to determine the present value of the defined benefit obligations and the related current service cost, and where applicable, past service cost. The current service cost is recognised as an expense. Past service costs are recognised as an expense on a straightline basis over the average period until the benefits become vested. To the extent that benefits are already vested, past service costs are recognised immediately Post retirement benefits other than pensions The expected cost of postretirement benefits other than pensions is charged against income so as to spread the cost of the benefits over the services lives of employees entitled to those benefits. Costs are assessed in accordance with the advice of qualified actuaries. Liabilities for employee benefits, which are not expected to be settled within 12 months, are discounted using market yields, at the balance sheet date, based on high quality bonds with terms that closely match the terms of the maturity of the related benefits Actuarial gains and losses Actuarial gains and losses arising in respect of the defined benefit scheme and postretirement benefit arrangements are included in the income statement in the year in which they arise. 1.7 Financial instruments Recognition and derecognition of financial instruments Financial instruments are recognised when, and only when, the company becomes a party to the contractual provisions of the particular instrument. Financial assets are derecognised when, and only when, the company loses control of the contractual rights that comprise the asset, for instance where those rights are realised, expire or are surrendered. Financial liabilities are derecognised when, and only when, the obligations under the contract are discharged, cancelled or expire. All financial instruments are recognised and derecognised using trade date accounting. 21