Wealth Management

Principal Activities

Wealth Management (WM) operates a diverse portfolio of financial services businesses. It provides financial planning, insurance, superannuation and investment solutions to both retail and corporate customers and portfolio implementation systems and infrastructure services to financial advisers. The businesses operate across four regions of Australia, Great Britain, Ireland, New Zealand and Asia. WM's primary areas of focus during the year were the integration of the National's Australian WM businesses, the expansion and development of its distribution capability and the leveraging of WM's capabilities across its international businesses, which are at different stages of financial services evolution.

Financial Performance

Statement of Financial Performance (1)	Half Year to		Year to		Favourable / (Unfavourable) Change on Sep 00
	Sep 01 $m	Mar 01 $m	Sep 01 $m	Proforma Sep 00(2) $m	%
Net premium income and other revenue	800	741	1,541	1,378	11.8
Investment revenue	(964)	79	(885)	3,724	large
Net decrease /(increase) in net policy liabilities	1,109	209	1,318	(2,862)	large
Claims, administration and other expenses	(956)	(884)	(1,840)	(1,667)	(10.4)
Operating profit/(loss) before income tax and revaluation profit	(11)	145	134	573	(76.6)
Income tax (expense)/benefit	180	30	210	(270)	large
Operating profit after income tax and before revaluation profit	169	175	344	303	13.5
Revaluation profit	237	273	510	182	large
Income tax expense	(93)	(84)	(177)	(50)	large
Revaluation profit after tax	144	189	333	132	large
Net profit before significant items	313	364	677	435	55.6
Significant items - provision for integration after tax	-	-	-	(71)	large
Net profit	313	364	677	364	86.0
Outside equity interests in operating profit after tax	(1)	(4)	(5)	(7)	28.6
Net profit after outside equity interests	312	360	672	357	88.2

Sources of Operating Profit	Half Year to		Year to		Favourable / (Unfavourable) Change on Sep 00
	Sep 01 $m	Mar 01 $m	Sep 01 $m	Proforma Sep 00(2) $m	%
Life company - planned profit margins	121	119	240	220	9.1
Life company - experience profit/(loss)	3	4	7	(17)	large
New business losses	(1)	-	(1)	(3)	66.7
Operating margins	123	123	246	200	23.0
Operating profits from shareholders' funds and other businesses	48	35	83	27	large
Investment earnings on shareholders' retained profit and capital	(3)	13	10	69	(85.5)
Significant items - provision for integration after tax	-	-	-	(71)	large
Revaluation profit after tax	144	189	333	132	large
Net profit after outside equity interests	312	360	672	357	88.2

Key Performance Measures	Half Year to		Year to
	Sep 01	Mar 01	Sep 01	Proforma  Sep 00(2)
Sales ($ billion)	8.6	7.0	15.6	12.8

	As at		As at
	Sep 01	Mar 01	Sep 01	Sep 00
Funds under Management and Administration ($bn) (3)	63.8	64.1	63.8	59.1
Market Share Ranking - Retail Funds Mgt (4)	2	2	2	2
Market Share - Net Retail Inflows Year (4)	2	2	2	2
Market Share Ranking - Retail Risk Insurance (5)	3	3	3	3
New Retail Risk Annual Premiums (5)	2	2	2	3
Number of Financial Advisers (6) Bank Channels Aligned Dealerships	3,745  773  2,972	3,348  693  2,655	3,745  773  2,972	3,236  641  2,595
Number of FTEs	4,229	4,077	4,229	3,850

1. The statement of financial performance above has been prepared based on disclosure requirements under Accounting Standard AASB 1038: Life Insurance Business. As a result revenue and expense items include both policyholder and shareholder components.
2. Proforma results (unaudited) represent the combined results of the National's funds management and life insurance businesses, the general insurance business of the Group's banks in Great Britain and Ireland and the MLC Group. The proforma result for 30 September 2000 reflects the MLC Group full year result to 30 June 2000. The three month results for the MLC Group reflected in the National's September 2000 results have been excluded to ensure consistent durations in accounting periods. The MLC Group results are in line with the former balance dates of the MLC Group prior to acquisition by the National.
3. Funds under Management and Administration for September 2000, have been restated to reflect the exclusion of Funds Under Management of $2.4bn relating to the discontinued business of Michigan National.
4. Source: ASSIRT Market Share Reports as at June 2001 and December 2000.
5. Source: Rice Kachor Research Reports, retail risk insurance includes term, trauma and disability insurance at December 2000 and September 2000.
6. Wealth Management sources significant business from Independent Financial Advisers (IFAs). Wealth Management currently has active relationships with over 1,200 IFAs.

The WM business produced an excellent result for the MLC Group's first full year of contribution, achieving profit (after outside equity interests) of $672 million. Of this, $339 million was generated through operations and $333 million from revaluation profits, driven largely through the strong performance of WM's Australian businesses.

Financial highlights supporting the strong operating profit result include:

• Retail Investments, Corporate and Insurance achieved significant Australian new business sales growth over the prior year (21%, 73% and 32% respectively), supported by increased distribution capability.
  
  
• Rapid growth in the Australian Insurance business combined with favourable claims experience. 36% of the full year results was contributed by the Australian Insurance business.

• Funds Under Management and Administration growth of 8% over the prior year, (excluding the impact of Michigan National of $2.4 billion). This includes the impact of a $2 billion investment loss for the full year, including the impact of the US events in September 2001.
  
  
• Investment returns on shareholders' invested assets contributed $10 million after tax. An efficient capital and reserving structure combined with the use of both subordinated debt financing and reinsurance arrangements reducing reserve requirements, and minimised the earnings impact from the decline in global investment markets on shareholders assets. Comparatively the September 2000 proforma result reflects the 30 June 2000 position of the MLC Group at a time when investment market performance was strong.
  
  
• Strategic investment of over $190 million during the year. Investments include the development of an innovative investment service offering in Great Britain and Ireland, the expansion of distribution capacity through the acquisition of Deutsche Bank's Australian financial planning and portfolio management businesses and increased specialist asset consultant capabilities through the acquisition of John A Nolan & Associates.
  
  
• Disciplined expense management combined with tactical expense reductions resulted in significant reinvestment of operational expenditure in growth initiatives. This included the development of the MLC MasterKey Business Super product offering designed to capture a greater share of the growing corporate superannuation market, and the development of the MLC Implemented Consulting offering, providing an asset consulting and implementation service to large corporate superannuation funds.
  
  
• WM's international operations contributed 14% of the full year result. Across all international regions, uncertain economic conditions, volatile investment markets, subdued investor sentiment and sales pressures impacted these businesses. In Great Britain and Ireland the first half result included approximately $11 million in respect to the receipt of profit commission on Creditors Insurance business relating to the prior year. Additionally, the second half result included the impact of $4m after tax of operational expenditure associated with the development of the new investment service offering in Great Britain and Ireland.
  
  
• Emergence of $61 million of pre-tax annualised integration synergy benefits, $9 million ahead of the first year forecast.
  
  
• Alignment to Group accounting policies positively influenced the full year operating result by $37 million after tax in the MLC Group's first full year of contribution to the Australian Wealth Management result.

Revaluation profits contributed significantly to the full year result and are discussed at length later within this section.

Good progress has been made towards WM's key strategic objectives

WM's businesses experienced significant growth during a year of unprecedented levels of change driven largely by a demanding program of strategic development and business activity. Considerable progress has been made towards WM's key strategic objectives. The highlights are outlined below:

WM's accelerated integration program is on track to deliver anticipated benefits

The integration of the MLC Group with National's Wealth Management businesses was accelerated and is scheduled for completion in December 2001, with many major projects already completed. The focus of integration was on the consolidation of the Australian Wealth Management businesses. Major achievements to date include:

• The consolidation of WM's services and offerings, which include the MLC MasterKey, FlexiPlan and MLC's Life Insurance offerings and National's General Insurance offerings in the retail segments and MLC's Corporate Solutions for the business and corporate segments.
  
  
• Relaunch and re-positioning of the MLC brand for WM's Insurance and Investment solutions, including linkage with the National Group.
  
  
• The successful introduction of WM's portfolio implementation systems and servicing capabilities to the National's financial planning channels which service the banking customer base. These channels are now supported by common systems and services (investment portfolio systems of MLC MasterKey and FlexiPlan, MLC's insurance services, coupled with financial planning support services and infrastructure through ThreeSixty), facilitating the delivery of quality advice based financial planning services to customers.
  
  
• Introduction of an Enterprise Agreement covering all WM employees aligning the organisational culture with underlying reward and recognition programs.
  
  
• Restructuring of the business to deliver organisational efficiencies has been completed.
  
  
• Further progress was made in aligning to MLC's strategic positioning of a Manager of Manager's investment approach through the restructuring of National Asset Management during 2001 and the successful divestment of County Investment Management in January 2001.

Integration benefits are beginning to flow through with annualised pre-tax synergies of $61 million realised at the year-end, $9 million ahead of the first year forecast. Synergies realised during the year were generated primarily from expenditure reduction initiatives including organisational restructure and scale efficiencies, with anticipated revenue synergies and additional expense synergies to emerge in future years.

Pre-tax annualised synergy benefits of $61 million for the current year reflects the profit impact from the expenditure reduction and other integration related initiatives had they been in place for the full year. Integration initiatives completed during the year emerged throughout the period, with only a partial impact on the current year's result, these initiatives contributed $21 million in post tax integration benefits to the full year result.

The integration program remains on track to deliver $140 million in annualised pre-tax synergy benefits by 30 September 2003. The costs of integrating the WM operations are estimated to be $108 million, this amount was fully provided for in the prior year results, and at 30 September 2000 the balance of the integration provision stood at $77 million. This provision refers to integration related expenditure to be incurred during 2001 to 2002. During the current year $53 million of costs were charged against this provision.

Growth in WM's Australian distribution and advice capability has contributed to significant sales growth

WM's Australian businesses achieved significant sales growth over the prior year. This growth demonstrates the strength of WM's multi channel distribution approach across the retail and corporate segments.

Retail

In the retail segment, with over 1,600 aligned and salaried financial advisers across eight dealerships, WM's comprehensive and diversified distribution and advice capabilities are market leading and were further enhanced through the following activities:

• Deutsche Banks' Australian financial planning and portfolio management businesses were acquired during April 2001. The Deutsche financial planning business has been integrated successfully with the Godfrey Pembroke financial planning operations, which now has over 180 advisers servicing premium, high net worth customers. The portfolio management business is in the process of being integrated with MLC MasterKey.

• National Personal Client Services distribution channel was launched during April 2001 as part of leveraging new capabilities brought to the National via the MLC acquisition. Over 100 financial advisers have now been recruited, trained and deployed, focused on servicing the National's Australian retail bank customer base.
  
  
• WM's "Adviser Campus" was established in July this year to recruit and train financial advisers for WM's growing adviser base. Its objective is to provide a competitive advantage in attracting and retaining high quality financial advisers by offering innovative services to both dealerships and advisers within the group.
  
  
• Over 260 additional advisers were successfully acquired and recruited into WM's Australian dealerships, reflecting WM's attractiveness to advisers seeking career development, flexibility in business structure, and access to business systems focused on business efficiency.

WM continued to enhance the range of services provided to both clients and financial advisers throughout the period as evidenced by:

• MLC MasterKey was relaunched during July 2001 to the Australian retail market through the MLC MasterKey Horizon Series. The aim of the relaunch was to further enhance MLC MasterKey's position as the premier portfolio implementation system, which enables advisers to offer their clients, a standardised, fully implemented, fully maintained portfolio solution through investment across a range of comprehensive risk/return profiles. MLC MasterKey Horizon Series is built on MLC's proven multi-manager investment process, giving investors' broad diversification across all asset classes and a comprehensive and complementary range of investment management styles.
  
  
• WM's Australian Insurance offerings through the MLC Personal Protection Portfolio received Personal Investor Magazine's 2001 Gold and Silver awards for its competitiveness, high quality features and consistency of pricing. WM's disciplined underwriting and claims management processes have contributed to the quality, competitiveness and profitability of the insurance business.

The impact of these activities strengthened WM's Australian market share positions. Highlights include:

• WM captured over 24% of the retail funds management market's quarterly net funds flow and 17% of annual net fund flows to June 2001, and holds a current assets under management market share of 14.5%. (Source: latest ASSIRT Market Share Report June 2001).
  
  
• WM's Discretionary Master Trust offerings (FlexiPlan and National All in One) captured 19% of the market's annual net funds flows to June 2001, relative to an assets under administration market share of 12.5% (Source: latest ASSIRT Market Share Report June 2001).
  
  
• Retail life insurance captured a 13.9% market share of annual sales to December 2000 relative to a 12.7% market share of in-force premiums. (Source: latest Rice Kachor Research December 2000).
  
  
• Group life insurance captured a 15.1% market share of annual sales to December 2000 relative to a 9.8% market share of in-force premiums. (Source: latest Rice Kachor Research December 2000).

In each of the above categories, WM is experiencing stronger growth than its incumbent market share position - an encouraging indicator of the strength of WM's Australian Retail businesses.

Corporate

The re-positioning of WM's Corporate Solutions business to a comprehensive advice and implementation service provider continues and was enhanced by the following activities throughout the period:

• In November 2000, WM acquired leading corporate advice provider and asset management consultant John A. Nolan and Associates.
  
  
• Launch of MLC Implemented Consulting Services, enabling corporate clients to outsource the selection, implementation and ongoing monitoring of a comprehensive range of investment management styles across all asset classes for their superannuation funds.
  
  
• Launch of MLC MasterKey Business Super, an innovative corporate superannuation solution for small to medium size enterprises. MLC MasterKey Business Super is the first in the market to provide a fully integrated solution that meets a comprehensive range of needs through one consolidated portfolio implementation.
  
  
• The above initiatives combine with WM's existing Corporate advice and service businesses of AdvantEdge (a workplace distribution business offering an employee care suite of services) and Plum (a corporate superannuation joint venture with Vanguard) further enhancing WM's capability to provide a complete advice and service solution to Corporate clients.

Sales growth of 73% over the prior year was achieved through these combined businesses.

Leveraging WM's capabilities to build the international businesses

Performance of WM's Great Britain, Ireland, Hong Kong, and New Zealand businesses was affected by uncertain economic conditions, volatile investment markets, subdued investor sentiment and lower sales. Each of these businesses and the markets they operate in are at different stages of financial services evolution. Strategies to enhance the performance of these businesses include the development of distribution capabilities, the introduction of competitive offerings and the leveraging of capabilities from the more developed businesses within Australia.

Great Britain and Ireland

In Great Britain and Ireland, an innovative investment service offering is on track for launch in November 2001 and has been operating under the program development name of Endeavour. This represents the first major international initiative that leverages capabilities brought to the National via the acquisition of the MLC Group. The initiative includes:

• The creation of an investment portfolio implementation system based on the successful multi-manager investment approach pioneered in Australia by MLC over 15 years ago. The offering is based on the Australian MLC MasterKey solution.
  
  
• Re-engineering of the financial planning capability currently in place within the National's existing banking franchises. This leverages experience, financial planning systems and transformation capability from Australia.
  
  
• Launch of the MLC brand in Great Britain and Ireland.
  
  
• Re-engineering and business transformation of the existing WM operations in Great Britain and Ireland including enhancing the processes and infrastructure of the investments, insurance and financial planning businesses.

The National Group has a substantial presence in Great Britain and Ireland through its ownership of regional banks, Clydesdale and Yorkshire Banks, and Northern and National Irish Banks. The investment service will initially target premium and business bank customers. Significant attention has been given to the advice proposition underpinning the investment service to enhance the customer relationship and experience, particularly the relationship between the adviser and customer. Combined with the Manager of Managers investment approach, and the National's existing bank customer base, it will provide a source of competitive differentiation to support the growth of a quality, sustainable business.

Asia

MLC Hong Kong's business is 58.65% owned by MLC through a joint venture arrangement, major partners include the Cheung Kong Group and CIBC Asia Limited. During the year, growth initiatives continued to evolve and included:

• The appointment of a Principal Investment Adviser as part of a strategic move to a Manager of Managers investment approach.
  
  
• The closure of non-profitable business lines.
  
  
• The development of a new salaried distribution channel based upon MLC's Private Client Services dealership operating in the Australian market.
  
  
• The ongoing development and recruitment of its adviser force; and

• The launch of a new investment linked offering to capture a share of Hong Kong's fastest market growth segment.

In Thailand through Advance MLC, (a joint venture with the Soon Hua Seng group), the business is successfully implementing an innovative distribution model to build a full-time professional distribution force of salaried advisers, rather than the part-time agency forces which dominate the market. The model again leverages MLC's Australian Private Client Services dealership expertise. With over 300 advisers, Advance MLC is well positioned for future growth.

In Indonesia, despite a challenging economic and social environment, the PT MLC Life Indonesia business owned 80% by MLC, achieved significant growth with an increase in sales of 40% over the prior year. This result was achieved with a restructured distribution model and refreshed product lines.

New Zealand

In New Zealand, WM operates in the life, general insurance and investment management markets, under the brand of BNZ. Increasing the penetration of the broader BNZ customer base combined with leveraging the existing Australian MLC capabilities have been key focus areas within this region.

Valuation and revaluation profit

WM recorded a revaluation profit of $510 million before tax ($333 million after tax) for the year to September 2001. Revaluation profits reflect the movement in the excess of net market value over the net assets of subsidiaries owned by National Australia Financial Management Limited (NAFM), adjusted for capital. Values shown are Directors' valuations based on Discounted Cash Flow (DCF) valuations determined by Tillinghast - Towers Perrin.

NAFM Subsidiaries Market Value Summary	Net  Assets (1)	Value of Inforce Business	Embedded Value	Value of Future New Business	Value of Future Synergy Benefits	Market Value
Market Value at 30 September 2000(2)	785	1,773	2,558	1,499	1,306	5,363
Operating profits after tax of Life Company Subsidiaries (3)	215	-	215	-	-	215
Net capital transfers (4)	(97)	-	(97)	-	-	(97)
Increase/(decrease) in shareholders net assets	118	-	118	-	-	118
Revaluation profit components before tax:
Roll forward of DCF (5)	-	66	66	181	143	390
Assumption & experience changes and movements between components	-	(53)	(53)	81	-	28
Value of imputation credits	-	(58)	(58)	-	-	(58)
Transfers of business	-	130	130	20	-	150
Recognition of expected synergies	-	140	140	842	(982)	-
Revaluation profit before tax (6)	-	225	225	1,124	(839)	510
Excess of net acquisitions (7)	(193)	140	(53)	53	-	-
Market Value at 30 September 2001	710	2,138	2,848	2,676	467	5,991

Revaluation profits exclude any movement in the value of NAFM, or the WM international business in Great Britain, Ireland and New Zealand. NAFM being the parent life entity is not permitted to report a revaluation uplift in respect to its own business, the international businesses in Great Britain, Ireland and New Zealand are not currently held as subsidiaries of NAFM and are held outside of the mark to market environment.

Entities held within the mark to market environment include WM operations in both Australia and Asia. Distribution of value by both region and entity type is summarised below:

NAFM Subsidiaries Market Value Summary	Net  Assets (1)	Value of Inforce Business	Embedded Value	Value of Future  New Business(8)	Value of Future Synergy Benefits	Market Value
Market Value Summary by Region
Australia	588	2,013	2,601	2,504	467	5,572
Asia	122	125	247	172	-	419
Market Value at 30 September 2001	710	2,138	2,848	2,676	467	5,991
Market Value Summary by Entity Type
Life Companies	434	1,667	2,101	2,232	406	4,739
Funds Management/Administration	169	496	665	444	61	1,170
Other Entities	107	(25)	82	-	-	82
Market Value at 30 September 2001	710	2,138	2,848	2,676	467	5,991

1. Net assets represent the shareholder capital reserves and retained profits. A portion of these net assets is non-distributable as it is required to support regulatory capital requirements. The cost of this capital support is reflected in the value of inforce business.
2. The present value of expected revenue and expense synergies arising from the integration of the MLC and NAFM operations, which amounts to $140 million per annum to be achieved by 2003, was reflected in the opening net market value at 30 September 2000.
3. Operating profit after income tax before revaluations shown in this table, excludes operating profits of entities outside the market value accounting environment; i.e the operating profits after tax from NAFM's own business, and other WM entities not owned by NAFM.
4. Net capital transfers represent movement in value that do not impact on the revaluation and operating profit, such as the payment of dividends, capital injections, and the acquisition/divestment of subsidiaries.
5. The roll forward represents the growth over the period at the valuation discount rate over and above that represented by operating profit.
6. The revaluation profit before tax does not include revaluation uplift in respect of NAFM's own business. AASB 1038 requires assets of a life company to be valued at net market value; since NAFM is the parent life entity, the change in market value of its own life business is not brought to account.
7. Representing the excess of net market value over the net assets of businesses or subsidiaries acquired/divested, including the divestment of County Investment Management, and the acquisitions of Deutsche Bank's Australian financial planning and portfolio management businesses and John A. Nolan and Associates.
8. For some smaller entities the projection of future new business and inforce business is combined for the purposes of valuation. For these entities the value of future new business is reflected in the embedded value.

The valuation of businesses held within the mark to market environment increased by $628 million from 30 September 2000. This increase in value comprised $118 million from growth in shareholders' net assets and $510 million ($333 million after tax) from other components over and above the increase in net assets which are reported as revaluation profits.

The components that contributed to the reported revaluation profits comprised:

• The expected increases arising from the rolling forward of the DCF valuations at the discount rate.
  
  
• Assumption and experience changes included a reduction of 1% in the discount rate applied in the DCF valuation for Australian life companies. This reduction together with a commensurate reduction in the rate of future expected investment earnings on funds under management and a reduction in future inflation and business growth rates, reflected a decrease in the 10 year bond yield since 30 September 2000. Experience items included recognition of the impact of the investment earnings being less than expected including the volatility in the September quarter. These combined assumption and experience changes contributed to an increase of $28 million in revaluation profits.
  
  
• The passing of benefit associated with imputation credits of $58 million on the payment of dividends to shareholders during the period.
  
  
• During the year an agreement was established to reinsure the NAFM protection business with MLC Lifetime. This arrangement resulted in the transfer of business into the mark to market environment and released capital for more efficient use elsewhere within the business; this transaction increased the valuation by $150 million before tax.
  
  
• As synergy benefits are recognised from the integration of the MLC Group with the National's WM businesses, the value associated with synergies recognised will transfer to increased values of inforce business and future new business. Since 30 September 2000 the value of synergies expected to be realised amounted to $982 million. This has reduced the value of synergy benefits as a separate component of the valuation.

Assumptions applied in determination of market value

Assumptions applied in the determination of market values for WM businesses held within the mark to market environment are summarised as follows:

Assumptions applied in determination of Market Value at 30 September 2001	New Business Multiplier(1)	Risk Discount Rate (2)	Franking Credit Assumption(3)
Australian Life Insurance Companies	8.8 - 10.5	11.0%	70.0%
Other Australian Companies (4)	10.0	12.25%	70.0%
Asia
Hong Kong	9.4		-
- US$ business		12.5%
- HK$ business		12.5%
Indonesia	7.5
- US$ business		11.5%
- Rupiah business		20.5%

Assumptions applied in determination of Market Value at 30 September 2000	New Business Multiplier (1)	Risk Discount Rate (2)	Franking Credit Assumption(3)
Australian Life Insurance Companies	8.8 - 10.0	12.0%	70.0%
Other Australian Companies (4)	9.5	13.0%	70.0%
Asia
Hong Kong	9.4		-
- US$ business		13.0%
- HK$ business		14.0%
Indonesia	7.4		-
- US$ business		11.5%
- Rupiah business		20.5%

1. New business multipliers represent the multiple of value arising from 2000 & 2001 new business experience respectively that equates to the value of future new business. It reflects the risk discount rate, anticipated new business growth and expected industry growth rates thereafter, together with an allowance for the expected pressure to reduce profit margins in the future. The change in the multipliers for the Australian companies over the year also reflects the impact of the transfer of a component of the inclusion of realised synergies.
2. Risk discount rates are gross of tax and have been derived using the Capital Asset Pricing Model.
3. The valuations of Australian entities comprise the present value of estimated future distributable profits after corporate tax, together with the present value of 70% of the attaching imputation credits. The valuations of international entities comprise the present values of estimated future distributable profits after corporate tax.
4. Other Australian companies comprise, National Corporate Investment Services Limited, MLC Investments Limited and National Australia Fund Management Limited.